SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

                   For the Fiscal Year Ended December 31, 1997

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

        For the transition period from ______________ to _______________.

                           Commission File No. 1-12293

                         NATURAL WAY TECHNOLOGIES, INC.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

            Nevada                                      87-0394313
--------------------------------         ---------------------------------------
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)

            Rm. 2211-2215, Science and Technology Building, No. 1001
                Shangbuzhong Road, Fution District Shenzhen, PRC
            ---------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Include Area Code: 011-07-55-369-9588

Securities Registered Pursuant to Section 12(b) of the Act:

          Title of Each Class        Name of Each Exchange on Which Registered
          --------------------       -----------------------------------------
                  None                                 None

Securities Registered Pursuant to Section 12(g) of the Act:

                          Common Stock, $.001 par value
                         -------------------------------
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past twelve (12) months (or
for such shorter  period that the registrant was required to file such reports);
and (2) has been  subject to such filing  requirements  for the past ninety (90)
days. Yes No X

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation S-B is not contained in this form, and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]

     The issuer's revenues for its most recent fiscal year were $0.

     As of February 1, 2000,  3,500,000 shares of common stock of the Registrant
were  outstanding.  As of such date,  the  aggregate  market value of the common
stock  held by  non-affiliates,  based  on the  closing  bid  price  on the NASD
Bulletin Board, was approximately $0.

                       DOCUMENTS INCORPORATED BY REFERENCE

             Transitional Small Business Disclosure Format: Yes  No   X
                                                               --   ----
<PAGE>


                                TABLE OF CONTENTS

                                                                          Page
                                                                         ------
PART I

         ITEM 1.  DESCRIPTION OF BUSINESS................................  1
         ITEM 2.  DESCRIPTION OF PROPERTIES..............................  2
         ITEM 3.  LEGAL PROCEEDINGS .....................................  2
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
                  OF SECURITY HOLDERS....................................  2

PART II

         ITEM 5.  MARKET FOR COMMON EQUITY AND
                  RELATED STOCKHOLDER MATTERS............................. 2
         ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.................... 3
         ITEM 7.  FINANCIAL STATEMENTS.................................... 3
         ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE.................. 3

PART III

         ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
                  AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION 16(a) OF THE EXCHANGE ACT....................... 4
         ITEM 10. EXECUTIVE COMPENSATION.................................. 5
         ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT................................... 5
         ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 5
         ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K........................ 6

                  SIGNATURES.............................................. 7

                  FINANCIAL STATEMENTS...................................F-1
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

     Natural Way Technologies, Inc. was incorporated under the laws of the State
of Nevada on May 4, 1988. The Company was formed to review and make  investments
or such business opportunities in any industry.

     On June 30, 1996,  the Company  entered into an agreement  with  Beautimate
Group Limited ("BGL"; a company  incorporated in the British Virgin Islands) and
Ongoing Limited ("OL"; a company  incorporated in the British Virgin Islands) to
acquire from them 100% interest in China  Medical  Development  Company  Limited
("CMDC";  a company  incorporated  in the British Virgin Islands) by agreeing to
issue to (i) BGL  7,000,000  shares of common stock and (ii)  100,000  shares of
Series B supervoting  preferred stock. In addition BGL received 7,000,000 shares
of Class A warrants,  7,000,000  shares of Class B warrants and 7,000,000 shares
of Class C warrants. The warrants however, were subsequently canceled.

     On March 6, 1996,  CMDC entered into a joint venture  agreement with Dunhua
Huakang  Pharmaceutical Plant ("DHPP") to establish a sino-foreign joint venture
in the People's  Republic of China ("the PRC") - Dunhua  Huakang  Pharmaceutical
Co. Ltd. ("DHPC").  Pursuant to this joint venture agreement,  CMDC was required
to contribute to DHPC cash of $4,200,000 as its capital  contribution  for a 70%
equity  interest  in DHPC,  while DHPP was  required to  contribute  to DHPC its
production  plant,  including  buildings and machinery,  with an agreed value of
$1,800,000 as its capital  contribution for a 30% equity interest in DHPC. As of
June  30,  1996,  CMDC  had  contributed  $3,000,000  into  DHPC as its  capital
contribution while the remaining $1,200,000 was to be paid on or before March 5,
1997.

     DHPC succeeded to the business of manufacturing formulated Chinese medicine
which was previously undertaken by DHPP. In connection with the establishment of
DHPC,  DHPP  delivered to CMDC a guarantee  that the annual net income after tax
(as determined  under  generally  accepted  accounting  principles in the United
States of America) of DHPC for each of its first four years of operations  would
not be less than 25% of the net assets  employed by DHPC.  In the event that the
net income of DHPC was below the  guaranteed  amount,  DHPP agreed to reallocate
all or a portion  of its  entitlement  to the net income of DHPC to CMDC or make
payment to CMDC so as to cover any shortfall with respect to CMDC's share of the
net income.  In addition,  DHPP transferred to DHPC additional  operating assets
and liabilities with an estimated value of  approximately  $4,288,000 for a note
receivable  which bears  interest  at an annual  rate of 5.5%.  DHPP also gave a
guarantee to CMDC to transfer DHPP's accounts receivable as of December 31, 1995
back to DHPP if such accounts  receivable  were not realized in cash by June 30,
1997.

     The other key provisions of the joint venture agreement included:

     *    The joint venture period is 30 years from March 1996 to March 2026;

     *    The  profit  and loss  sharing  ratio  is the  same as the  respective
          percentage of equity and interest; and

     *    The Board of Directors consists of seven members, with four designated
          by CMDC and three designated by DHPP.

     In  addition  to the  foregoing,  a deposit of  $1,400,000  was paid by the
Company to China Food and Beverage  Industrial  Co. Limited  ("CFBI";  a related
company  which is owned  and  controlled  by Yiu Yat  Hung,  a  director  of the
Company) to allow the Company an exclusive right to ascertain the feasibility of
acquiring  not less than 50% of the  share  capital  of CFBI.  The  Company  was
required to make an investment decision by March 31, 1997. In the event that the
Company  decided  not to  invest,  CFBI  agreed  to repay the  deposit  in full,
together with accrued interest commencing from January 1, 1997 at 8% per annum.

     During the year ended December 31, 1996, the Company issued 6,000 shares of
Series A convertible and redeemable  preferred stock, par value $0.001 each, for
$6,000,000.  Each share of the Series A  convertible  and  redeemable  preferred
stock is convertible  into the lesser of (i) 1,000 shares or (ii) $1,000 divided
by the average  closing market price of the Company's  common stock for the five
days immediately preceding the date of conversion,  of shares of common stock of
the Company.  The  outstanding  convertible  and redeemable  preferred  stock is
redeemable  at the option of the Company at any time after  December 31, 1997 by
giving ten days  notice at a price  equal to $1,000  per share plus any  accrued
dividend.  In 1997,  2,300 Series A convertible and redeemable  preferred shares
were converted into common stock.

                                       1
<PAGE>

     On June 6, 1997, the Company executed a Termination Agreement retroactively
effective to January 1, 1997  whereby the Company  divested its interest in CMDC
in  exchange  for the  return of the  7,000,000  shares of common  stock and the
100,000 shares of Series B supervoting  preferred stock originally issued in the
Exchange.  This  transaction has been accounted for as a discontinued  operation
and the results of operations have been excluded from  continuing  operations in
the statements of operations for calendar years 1996 and 1997.

     Although the Company  currently  has no assets or  operations,  the Company
believes that it will again be able to find a suitable  candidate  with which to
merge or acquire.

ITEM 2.  DESCRIPTION OF PROPERTIES

     The Company's executive offices were located in 3,315 square feet of office
space  located at One World Trade  Center,  Suite 7865,  New York,  New York. On
April 1, 1997 the Company relocated to a similar suite located on the 53rd floor
of Central Plaza, 18 Harbour Road, Wanchai,  Hong Kong. The Company now operates
from an office  suite at Rm. 2211 2215,  Science and  Technology  Building,  No.
1001, Shangbuzhong Road, Fution District, Shenzhen, PRC.

     The  Company  believes  that its  properties  are  adequate  to support its
current operations.

ITEM 3.  LEGAL PROCEEDINGS

     Management is not aware of any pending or threatened litigation against the
Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the Company's  stockholders  through
the  solicitation  of proxies,  or otherwise,  during the fourth  quarter of the
Company's fiscal year ended December 31, 1997.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

     The  Company's  Common Stock is traded in the over-the  counter on the NASD
Electronic  Bulletin Board.  Trading in the Company's  Common Stock is extremely
limited and sporadic, and there is no current market in the Company's stock. The
Company's stock trades under the symbol NWYT.

Record Holders

     As of February 1, 2000, there were  approximately  297 record owners of the
Common Stock of the Company.

Dividends

     The  Company  has never  declared  or paid any cash  dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.


                                       2
<PAGE>

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Material Changes in Results of Operations

     Because the Termination  Agreement was effective  retroactive to January 1,
1997,  the  Company  had no  operations  other than the search for a business to
acquire or with which to combine for the year ended December 31, 1997. Since all
operations  were  discontinued,  comparison  with the prior  fiscal  year is not
relevant.

Material Changes in Financial Condition, Liquidity and Capital Resources

     A deposit of $1,400,000 was paid to China Food and Beverage  Industrial Co.
Limited  ("CFBI";  a related  company  which is owned and  controlled by Yiu Yat
Hung, a director of the Company) to allow the Company an exclusive  right to the
ascertain  feasibility  of  acquiring  not less than a 50% interest in the share
capital of CFBI.  The  Company had to make an  investment  decision by March 31,
1997.  In the event that the Company  decided not to invest,  CFBI has agreed to
repay the deposit in full together with accrued interest commencing from January
1, 1997 at 8% per annum.

     During the year ended December 31, 1996, the Company issued 6,000 shares of
Series A convertible and redeemable  preferred stock, par value $0.001 each, for
$6,000,000.  Each share of the Series A  convertible  and  redeemable  preferred
stock is convertible  into the lesser of (i) 1,000 shares or (ii) $1,000 divided
by the average  closing market price of the Company's  common stock for the five
days immediately preceding the date of conversion,  of shares of common stock of
the Company.  The  outstanding  convertible  and redeemable  preferred  stock is
redeemable  at the option of the Company at any time after  December 31, 1997 by
giving ten days  notice at a price  equal to $1,000  per share plus any  accrued
dividend. During 1997, 2,300 Series A convertible and redeemable preferred stock
was converted into common stock.

     On June 6, 1997, the Company executed a Termination Agreement retroactively
effective to January 1, 1997  whereby the Company  divested its interest in CMDC
in  exchange  for the  return of the  7,000,000  shares of common  stock and the
100,000 shares of Series B supervoting  preferred stock originally issued in the
Exchange.  This  transaction has been accounted for as a discontinued  operation
and the results of operations have been excluded from  continuing  operations in
the statements of operations for calendar years 1996 and 1997.

     Although the Company has no assets or operations, the Company believes that
it will be able to find a suitable candidate with which to merge or acquire.

ITEM 7.  FINANCIAL STATEMENTS

     The  consolidated  financial  statements of the Company,  together with the
independent auditors' report thereon of Blackman Kallick Bartelstein LLP appears
on pages F-2 through F-25 of this report.  See Index to Financial  Statements on
page F-1 of this report.

ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

     Following  the  acquisition  of CMDC by the Company on July 31,  1996,  the
Company's Board of Directors  selected Arthur Andersen & Co. to serve as its new
independent  accountants  and  dismissed  D.  Brian  Macbeth,  Certified  Public
Accountant, of Spring, Texas who previously served as the independent accountant
for the Company.


                                       3
<PAGE>

     D. Brian Macbeth's  reports on the financial  statements of the Company for
the fiscal years ended December 31, 1994 and 1995  contained no adverse  opinion
or disclaimer  of opinion and were not qualified or modified as to  uncertainty,
audit scope, or accounting principles.  In connection with his audits for fiscal
years 1994 and 1995 and through July 31, 1996, there were no disagreements  with
D. Brian Macbeth on any matter of accounting principles or practices,  financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of D. Brian Macbeth,  would have caused him to make
reference thereto in his reports on the financial statements for such years.

     Arthur Andersen & Co. served as the principal accounting firm for DHPP with
respect to the  financial  statements  of such company for fiscal years 1994 and
1995.

     The information described above regarding the Company's decision to dismiss
D. Brian Macbeth as its independent  accountant and select Arthur Andersen & Co.
as its new  independent  accountants,  along with a letter from D. Brian Macbeth
stating that he agrees with the above information regarding the Company's change
of accountants, was fully disclosed in a Form 8-K filed with the SEC.

     Following  the  execution of the  Termination  Agreement,  Arthur  Andersen
resigned  as  independent  accountants  and the  Company's  Board  of  Directors
selected Blackman Kallick Bartelstein LLP as its new independent accountant.

     Arthur  Andersen & Co.  reports on the financial  statements of the Company
for the fiscal years ended December 31, 1995 and 1996 contain no adverse opinion
or disclaimer  of opinion and were not qualified or modified as to  uncertainty,
audit scope, or accounting principles.  In connection with its audits for fiscal
years 1995 and 1996 there were no  disagreements  with Arthur  Andersen & Co. on
any  matter  of  accounting   principles  or  practices,   financial   statement
disclosure, or auditing scope or procedure,  which disagreements if not resolved
to the  satisfaction  of Arthur  Andersen  & Co.  would  have  caused it to make
reference thereto in its reports on the financial statements for such years.

     The  information  described  above  regarding  the  resignation  of  Arthur
Andersen  & Co. as its  independent  accountant  and select  Blackman  Kallick &
Bartelstein  LLC as its new  independent  accountants,  along with a letter from
Arthur  Andersen  & Co.  stating  that it  agrees  with  the  above  information
regarding the Company's change of accountants, was fully disclosed in a Form 8-K
filed with the SEC.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

     Information Regarding Present Directors and Executive Officers

     The following table sets forth the names and ages of the present  executive
officers and directors of the Company and the positions held by each.

  Name               Age                 Title
--------            -----               -------
Yao Yi On            43         Chairman, Chief Executive Officer and Director
Ma Ding Jie          62         Chief Financial Officer and Director
Jin Hui Juan         41         Director

     Each of the  directors  has been  elected  to serve  until the next  annual
meeting  of  the  directors  by  the  shareholders  or  until  their  respective
successors have been duly elected and shall have qualified.

     Yiu Yat On is a co-founder of Guang Hui Highway Project Company Limited and
has served as Vice President,  Treasurer and a Director of the Company since the
acquisition of Guang Hui by the Company in December of 1996. Since June of 1997,
Mr. Yiu has served as the Company's  Chief Executive  Officer and Chairman.  Mr.
Yiu is also a co-founder of China  Medical  Development  Company  Ltd.,  and has
served as Vice-Chairman  and Vice President of Natural Way since the exchange in
June of 1996.  For  over  twenty  years,  Mr.  Yiu has  served  as a  management
consultant to various companies in the PRC and has operated various companies in
the PRC. Mr. Yiu has a graduate degree in business administration.

                                       4
<PAGE>

     Ma Ding  Jie  has  many  years  experience  in  production  management  and
warehousing  operations.  Mr. Ma is presently the assistant  general  manager of
HongHua Building Material Company in Shenzhen.

     Jin Hui Juan is a chemical  engineer with the Shanghai  Chemistry  Research
Institute and is the assistant  general  manager of HongHui  Printing and Dyeing
Company. He has also served as general manager of Hong Kong Hongda Company.

Information Regarding Nominees for Election as Directors

     All of the  present  directors  have  been  nominated  for  re-election  as
directors at the Company's next annual shareholders' meeting.

ITEM 10. EXECUTIVE COMPENSATION

     No  compensation  has been paid to any officer,  director or control person
during the prior three years.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table is  furnished  as of  February  1, 2000,  to indicate
beneficial  ownership by the Company's  common stock by (1) each  shareholder of
the Company who is known by the Company to be a beneficial owner of more than 5%
of the Company's  common stock (2) each  director,  nominee and named officer of
the Company,  individually, and (3) all officers and directors of the Company as
a group.  The  information  set out in the following  table was supplied by such
persons.

Name and address of                 Number of Shares
Beneficial Owner (1)                Beneficially Owned (2)            Percent
--------------------                ----------------------            -------
Yiu Yat On (2)                           6,900,000                    67.6%
Ma Ding Jie                                      0                       0
jin Hui Juan                                     0                       0
All officers and directors
as a group (3 persons)                   6,900,000                    67.6%
Beautimate Group Limited (2)             6,900,000                    67.6%
Suite 5301, Central Plaza
18 Harbour Road, Wanchai, Hong Kong

1.   Unless  otherwise  noted,  each person or group  identified  possesses sole
     voting and  investment  power with respect to the shares shown opposite the
     name of such person or group.

2.   Beautimate  Group  Limited  is  controlled  by Yiu Yat On, an  officer  and
     director  of  the  Company.  Such  individuals  may  be  deemed  to be  the
     beneficial owners of the shares held by Beautimate Group Limited.  However,
     such individual  disclaims  beneficial ownership of the shares indicated as
     held by Beautimate Group Limited.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On June 28,  1996,  the  Company  entered  into a  Conditional  Acquisition
Agreement with China Food and Beverage  Industrial  Company Limited ("China Food
and Beverage") and its shareholders pursuant to which the Company would have the
right to acquire not less than 50% of the shares of China Food and  Beverage for
a price not to exceed  eight  times  earnings.  Pursuant to such  agreement,  as
amended,  the  Company had until June 30,  1997 to conduct  due  diligence  with
respect to the potential  acquisition  of China Food and  Beverage.  The Company
deposited  $1,400,000  with China Food and Beverage which was refundable in full
with interest at 8% commencing on January 1, 1997 if the Company  elected not to
consummate such acquisition. If the Company elected to pursue the acquisition of
China Food and Beverage the deposit was to be applied toward the purchase price.

                                       5
<PAGE>

     China Food and  Beverage  was  involved  in efforts to form a  sino-foreign
joint  venture which owned and operated an almond juice  manufacturing  business
presently  operated  by a PRC  government  controlled  entity.  China  Food  and
Beverage  is owned and  controlled  by Yiu Yat Hung,  a former  director  of the
Company.

     The Company has,  from time to time,  borrowed  funds from New Silver Eagle
Holdings  Limited,  a  company  controlled  by Yiu Yat Hung and  family a former
director of thee Company.

                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

  (a)  Exhibits

  Exhibit
  Number                    Description of Exhibit

   2.1  Acquisition Agreement dated June 3, 1996 between Energy Systems, Inc.
        and China Medical Development Co. Ltd. (1)
   3.1  Amended and Restated Articles of Incorporation (2)
   3.2  Bylaws, as amended to date (2)
   4.1  Certificate of Designation for Series A Convertible Preferred Shares (2)
   4.2  Certificate of Designation for Series B Convertible Preferred Shares (2)
   4.3  Certificate of Designation for Series C Convertible Preferred Shares (2)
  10.1  Conditional Acquisition Agreement between Natural Way Technologies, Inc.
        and China Food and Beverage Industrial Company Limited (2)
  10.2  Letter of Intent dated May 15, 1996 between Natural Way Technologies,
        Inc. and Simple Win Investment Ltd.
  10.3  Termination Agreement dated June 6, 1997 between Natural Way
        Technologies, Inc. and China Medical Development Company (3)
  16.1  Letter from D. Brian Macbeth relating to change of independent
        accountants (1)
  21.1  Subsidiaries of Registrant
  27.1* Financial Data Schedules

--------
*        Filed herewith

(1)  Incorporated  by  reference  to the  respective  exhibits  filed  with  the
     Company's Current Report on Form 8-K/A dated June 30, 1996.
(2)  Incorporated  by  reference  to the  respective  exhibits  filed  with  the
     Company's  Quarterly  Report on Form 10-QSB for the quarter ended September
     30, 1996.
(3)  Incorporated  by  reference  to the  respective  exhibits  filed  with  the
     Company's  Quarterly  Reports on Form 10-QSB for the quarter ended June 30,
     1997.

(b)  Reports on Form 8-K

     1.   Resignation  of Arthur  Andersen  & Co. as the  Company's  independent
          accountant and the selection of Blackman  Kallick & Bartelstein LLP as
          its new accountant.


                                       6
<PAGE>

                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                                NATURAL WAY TECHNOLOGIES, INC.



                                               By: /s/ Yiu Yat Hung
                                                  -------------------------
                                                  Yiu Yat Hung
                                                  Chief Executive Officer

Dated: February 9, 2000

     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.


    Signature           Title                                         Date
   -----------         -------                                       ------
 /s/ Yat On        President and Director                       February 9, 2000
-----------------
  Yiu Yat On


 /s/ Jin Hui Juan  Secretary and Director                       February 9, 2000
-----------------
  Jin Hui Juan


 /s/ Yao Su Zhen   Director                                     February 9, 2000
-----------------
  Yao Su Zhen


 /s/ Ma Ding Jie   Chief Financial Officer and Director         February 9, 2000
-----------------  (Principal Financial and Accounting Officer)
  Ma Ding Jie

                                       7
<PAGE>

                 NATURAL WAY TECHNOLOGIES, INC. AND SUBSIDIARIES

                   Index to Consolidated Financial Statements


                                                                      Page
                                                                      ----
Report of Independent Public Accountants                               F-2

Consolidated Balance Sheets as of December 31, 1996 and 1995       F-3-F-4

Consolidated Statements of Operations for the Years Ended
 December 31, 1996, 1995 and 1994                                      F-5

Consolidated Statements of Cash Flows for the Years Ended
 December 31, 1996, 1995 and 1994                                  F-6-F-7

Statements of Changes in Shareholders' Equity for the Years
 Ended December 31, 1996, 1995 and 1994                                F-8

Notes to Financial Statements                                     F-9-F-25

                                      F-1
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT


Stockholders and the Board of Directors
Natural Way Technologies, Inc.


We have audited the accompanying balance sheet of Natural Way Technologies, Inc.
("the  Company")  as of  December  31,  1997,  and  the  related  statements  of
operations,  cash flows and  changes in  stockholders'  equity for the year then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.  The financial  statements of the Company for the
years ended  December 31, 1995 and 1996,  were audited by other  auditors  whose
report,  dated  April  11,  1997,  expressed  an  unqualified  opinion  on those
financial statements.

We conducted our audit in accordance with generally  accepted auditing standards
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Natural Way Technologies,  Inc.
as of December 31, 1997,  and the results of its  operations  and its cash flows
for the year ended  December 31, 1997, in  conformity  with  generally  accepted
accounting principles in the United States of America.

The accompanying  financial  statements have been prepared  assuming Natural Way
Technologies,  Inc. will continue as a going concern. As more fully described in
Note 2, the Company  ceased  operations in 1996.  The lack of operations  raises
substantial  doubt about the Company's  ability to continue as a going  concern.
Appropriate  disclosures have been made and our opinion is not qualified in this
respect.

Also,  as  discussed  in Notes 1, 17 and 19, the  Company  has  recorded  deemed
dividends  in 1997  primarily in  conjunction  with the  termination  of a joint
venture interest and the misappropriations of a deposit.





Chicago, Illinois
October 15, 1999                             Blackman Kallick Bartelstein, LLP


                                       F-2
<PAGE>

                         NATURAL WAY TECHNOLOGIES, INC.

                                 BALANCE SHEETS
                        AS OF DECEMBER 31, 1996 AND 1997

                                     ASSETS
                                                 1996             1997
                                                ------           ------
                                                Rmb'000    Rmb'000     US$'000
Current assets:
   Cash                                         10,017        -            -
Accounts receivable, net                        73,533        -            -
Due from a related company                       4,159        -            -
Due from a director                                 75        -            -
Prepayments and deposits                         2,607        -            -
Inventories, net                                 5,618        -            -
                                               --------    -----        -----
         Total current assets                   96,009        -            -
                                               --------    -----        -----







Investment deposits                             31,548        -            -
Deferred value added tax recoverable             1,011        -            -
Property, plant and equipment, net              23,526        -            -
                                              --------    -------       ------
         Total assets                          152,094        -            -
                                              ========    =======       ======


   The accompanying notes are an integral part of these financial statements.

                                       F-3
<PAGE>

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                     1996            1997
                                                    ------          ------
                                                    Rmb'000   Rmb'000    US$'000
Current liabilities:
Accounts payable                                      9,016        -          -
Accrued expenses and other payables                   7,762        -          -
Due to a related company                              3,412        -          -
Taxation payable                                     13,648        -          -
                                                    --------   ------    -------
         Total current liabilities                   33,838        -          -

Payable to a joint venture partner                   35,450        -          -
                                                    --------   ------    -------
         Total liabilities                           69,288        -          -
                                                    --------   ------    -------
Minority interest                                    22,450        -          -
                                                    --------   ------    -------
Stockholders' equity (deficit):
Preferred stock, Series A convertible
and redeemable, par value US$0.001;
issued and outstanding - 6,000 shares
as of December 31, 1996 and 3,700 shares
as of December 31, 1997                                   -        -          -

Preferred stock, Series B supervoting,
par value US$0.001; issued and outstanding
- 100,000 shares as of December 31, 1996 and
nil as of December 31, 1997

Preferred stock, Series C convertible and
redeemable, par value US $0.001; issued and
outstanding - nil as of December 31, 1996 and 1997       -        -          -

Common stock, par value US$0.001; issued and
 outstanding - 8,200,000 shares as of December 31,
 1996 and 3,500,000 shares as of December 31, 1997       68       29         3

Additional paid-in capital                           43,611   49,214      5,929
Dedicated capital                                     1,752        -          -
Retained earnings (accumulated deficit)              14,901  (49,243)    (5,932)
Cumulative translation adjustment                        24        -          -
                                                    --------   ------    -------
         Total stockholders' equity                  60,356        -          -
                                                    --------   ------    -------
         Total liabilities, minority interest
          and stockholders' equity                  152,094        -          -
                                                    ========   ======    =======


                                       F-4
<PAGE>

                         NATURAL WAY TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>

                                      1995           1996             1997
                                     ------         ------          --------
                                    Rmb '000      Rmb '000   Rmb '000      US$ '000
<S>                                <C>           <C>        <C>            <C>

Net sales                                -            -         -               -
Cost of goods sold                       -            -         -               -
                                   --------      -------    ------        -------
     Gross profit                        -            -         -               -
General and administrative
 expenses                              (66)        (181)        -               -
Interest expense                         -           (5)        -               -
Bad debt expense                         -         (947)        -               -
Foreign exchange gain                    -            -        24               3
                                   --------      -------    ------        -------
     (Loss) income from
       continuing operations           (66)      (1,133)       24               3
Discontinued operations
     Income from operations before
      minority interest                  -       25,352         -               -
                                   --------      -------    ------        -------
         Net (loss) income before
            minority interest          (66)      24,219        24               3
Minority interest                        -       (7,510)        -               -
                                   --------      -------    ------        -------

Net (loss) income                      (66)      16,709        24               3
                                   ========      =======    ======        =======
Earnings (loss) per common share-

Basic
     Continuing operations               -        (.14)       .02
     Discontinued operations
       Income from operations before
        minority interest                -        3.09          -
Minority interest                        -        (.91)         -
                                   --------      -------    ------
     Total-Basic                         -        2.04        .02
                                   ========      =======    ======
Diluted
     Continuing operations               -        (.08)       .02
     Discontinued operations
       Income from operations before
         minority interest               -        1.85          -
Minority interest                        -        (.55)         -
                                   --------      -------    ------
     Total-Diluted                       -        1.22        .02
                                   ========      =======    ======
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                       F-5
<PAGE>

                         NATURAL WAY TECHNOLOGIES, INC.

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>

                                          1995         1996               1997
                                         ------       ------             ------
                                        Rmb '000     Rmb '000    Rmb '000      US$ '000
                                        --------     --------    --------      --------
<S>                                     <C>          <C>         <C>           <C>

Cash flows from operating activities:
Net (loss) income                         (66)        16,709          24             3
Adjustments to reconcile net
 (loss) income to net cash
 provided by operating activities
 Provision for doubtful debts               -            947           -             -
Write-back of allowance for
  obsolete and slow-moving inventory        -           (527)          -             -
 Depreciation of property, plant
  and equipment                             -            965           -             -
 Minority interest                          -          7,510           -             -
 (Increase) decrease in operating
 assets-
  Accounts receivable, net                  -        (18,293)          -             -
  Due from a related company                -          4,593           -             -
  Due from stockholders                     -             84           -             -
  Due from a director                       -            (75)          -             -
  Prepayments and deposits                  -            930           -             -
  Inventories, net                          -            399           -             -
  Deferred value added tax
   recoverable                              -            338           -             -
Increase (decrease) in operating
 liabilities-
  Accounts payable                          -          2,240           -             -
  Accrued expenses and other
   payables                                66        (17,241)        (18)           (2)
  Due to related  company                   -          3,032           -             -
 Taxation payable                           -          1,432           -             -
                                        --------     -------       ------        ------
Net cash provided by operating
 activities                                 -          3,043           6             1
                                        --------     -------       ------        ------
</TABLE>


                                      F-6                  (To be continued)
<PAGE>
                         NATURAL WAY TECHNOLOGIES, INC.

                        STATEMENTS OF CASH FLOWS (CONT'D)
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
                                          1995          1996                1997
                                         -----         ------             --------
                                        Rmb '000      Rmb '000     Rmb '000       US$ '000
                                        --------      --------     --------       --------
<S>                                     <C>           <C>          <C>            <C>

Cash flows from investing activities:
Investment deposits                                   (31,548)           -              -
Acquisition of property, plant and
 equipment                                   -         (8,218)           -              -
Establishment of joint venture               -          3,111            -              -
Effect of translation adjustments            -             24          (24)            (3)
                                        --------     --------        ------        -------
  Net cash used in investing activities      -        (36,631)         (24)            (3)
                                        --------     --------        ------        -------
Cash flows from financing activities:
Issuance of common stock                     -              2            -              -
Loan, subsequently capitalized by
  issuance of preferred stock                -         49,920            -              -
Cost of issuance of stock                    -         (8,131)           -              -
Diminution of cash due to
 disposal of subsidiary                      -                      (9,999)        (1,205)
Forgiveness of interest by a joint
  venture partner                            -          1,814            -              -
                                        --------     --------        ------        -------
    Net cash provided by (used in)
     financing activities                    -         43,605       (9,999)        (1,205)
                                        --------     --------        ------        -------
   Net increase (decrease) in cash           -         10,017      (10,017)        (1,207)
Cash as of beginning of year                 -              -       10,017          1,207
                                        --------     --------        ------        -------
Cash as of end of year                       -         10,017            -              -
                                        ========     ========        ======        =======
</TABLE>



   The accompanying notes are an integral part of these financial statements.

                                       F-7
<PAGE>

                         NATURAL WAY TECHNOLOGIES, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>

                                 Series A
                                Convertible       Series B
                              and Redeemable     Supervoting                                                (Accumulated
                              Preferred Stock   Preferred Stock       Common Stock     Additional            Deficit)    Cumulative
                            Number of           Number of             Number of         Paid-in   Dedicated   Retained   Translation
                            Shares     Amount   Shares      Amount   Shares     Amount  Capital    Capital    Earnings   Adjustments
                            --------   ------   --------    -------  --------   ------  --------  ---------  ---------- -----------
                                        Rmb                 Rmb                 Rmb      Rmb '000  Rmb '000   Rmb '000   Rmb '000
<S>                           <C>       <C>      <C>        <C>       <C>      <C>       <C>        <C>        <C>         <C>

Balance as of December 31,
1994                              -         -    100,000   832    8,000,000    66,560       8           -           10       -
Net loss                          -         -          -     -            -         -       -           -          (66)      -

Balance as of December 31,
1995                              -         -    100,000   832    8,000,000    66,560       8           -          (56)      -
Issuance of Series A
preferred stock               6,000        50          -     -            -         -  49,920           -            -       -
Issuance of common stock          -         -          -     -      200,000     1,664       -           -            -       -
Issuance costs                    -         -          -     -            -         -  (8,131)          -            -       -
Forgiveness of interest by
a joint venture partner           -         -          -     -            -         -   1,814           -            -       -
Net income                        -         -          -     -            -         -       -           -       16,709       -
Transfer from retained
earnings to dedicated capital     -         -          -     -            -         -       -       1,752       (1,752)      -
Translation adjustments           -         -          -     -            -         -       -           -            -      24

Balance as of December 31,
1996                          6,000        50    100,000   832    8,200,000    68,224  43,611       1,752       14,901      24
Conversion of Series A
 preferred stock to common
stock                        (2,300)      (19)         -     -    2,300,000    19,136     (19)          -            -        -
Redemption and cancellation
of Series B preferred stock       -         -   (100,000) (832)           -         -       1           -            -        -
Assumption of liabilities and
 contribution to capital          -         -          -     -            -         -   5,563           -            -        -
Redemption and cancellation
of common stock                   -         -          -     -   (7,000,000)  (58,240)     58           -            -        -
Transfer back to retained
earnings from dedicated
capital                           -         -          -     -            -         -       -      (1,752)       1,752        -
Deemed dividend-terminated
joint venture interest            -         -          -     -            -         -       -           -      (54,198)       -
Deemed dividend -
misappropriated funds             -         -          -     -            -         -       -           -      (11,648)       -
Deemed dividend - forgiveness
 of accounts receivable           -         -          -     -            -         -       -           -          (74)       -
Net income                        -         -          -     -            -         -       -           -           24        -
Translation adjustments           -         -          -     -            -         -       -           -            -       (24)

Balance as of December
31, 1997                      3,700        31          -     -    3,500,000    29,120  49,214           -      (49,243)       -
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       F-8

<PAGE>
                         NATURAL WAY TECHNOLOGIES, INC.

                          NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Natural Way Technologies,  Inc. ("the Company") was incorporated in the State of
Nevada,  United  States  of  America  on May 4,  1988  under  the name of Energy
Systems,  Inc. On June 26,  1996,  the  Company  changed its name to Natural Way
Technologies, Inc.

a.   Acquisition of subsidiary

     On June 30, 1996,  the Company  entered into an agreement  with  Beautimate
     Group Limited ("BGL"; a company incorporated in the British Virgin Islands)
     and Ongoing  Limited  ("OL"; a company  incorporated  in the British Virgin
     Islands) to acquire from them a 100% interest in China Medical  Development
     Company  Limited  ("CMDC";  a company  incorporated  in the British  Virgin
     Islands) by issuing to (i) BGL 6,900,000  shares of common  stock,  100,000
     shares of Series B supervoting preferred stock, 7,000,000 Class A warrants,
     7,000,000  Class B warrants  and  7,000,000  Class C warrants,  and (ii) OL
     100,000  shares of common stock.  BGL is owned by New Silver Eagle Holdings
     Limited (a company  incorporated in the British Virgin  Islands),  which is
     beneficially owned by Yat-hung Yiu, former director and CEO and Yat-on Yiu,
     current CEO and  director of the Company and brother of Yat-hung  Yiu,  and
     certain  family members of Yat-hung and Yat-on Yiu. OL is owned by Wu Guan,
     a director of CMDC.

b.   CMDC and its joint venture

     On March 6, 1996,  CMDC entered into a joint venture  agreement with Dunhua
     Huakang  Pharmaceutical  Plant ("DHPP"; a PRC state-owned company under the
     Dunhua Municipal  Government) to establish a sino-foreign  joint venture in
     Dunhua, Jilin Province, the People's Republic of China ("the PRC") - Dunhua
     Huakang  Pharmaceutical Co. Ltd.  ("DHPC").  Pursuant to this joint venture
     agreement,  CMDC was required to contribute  into DHPC cash of US$4,200,000
     (equivalent to approximately Rmb34,860,000,  determined at an exchange rate
     of US$1 for Rmb8.30) as its capital  contribution for a 70% equity interest
     in DHPC,  while DHPP was required to  contribute  into DHPC the  production
     plant, including buildings and machinery,  with a valuation of US$1,800,000
     (equivalent to approximately Rmb14,940,000,  determined at an exchange rate
     of US$1 for Rmb8.30) as its capital  contribution for a 30% equity interest
     in DHPC.  As of December 31,  1996,  CMDC and DHPP had fully paid up all of
     their capital  contributions - CMDC's  contribution in cash of US$4,200,000
     was verified by a certified  public  accountant in the PRC according to PRC
     regulations  whereas  DHPP's  contribution  was yet to be subject to such a
     verification.  CMDC's contribution primarily came via the Company's initial
     cash investment in CMDC of US$4,207,100.

     DHPC has  succeeded  to  certain  business  of  manufacturing  and sales of
     formulated  Chinese  medicine in the PRC previously  undertaken by DHPP. In
     connection  with  the  establishment  of  DHPC,  DHPP  delivered  to CMDC a
     guarantee  that the  annual  net  income  after  tax (as  determined  under
     generally accepted  accounting  principles in the United States of America)
     of DHPC for each of its first  four years of  operations  would not be less
     than 25% of the net  assets  employed  by DHPC.  In the event  that the net
     income of DHPC was below the guaranteed  amount,  DHPP agreed to reallocate
     all or a portion  of its  entitlement  to the net income of DHPC to CMDC or
     make payments to CMDC so as to cover any  shortfall  with respect to CMDC's
     share of the net income. In addition, DHPP transferred into DHPC additional
     operating  assets and liabilities  with an estimated value of approximately
     Rmb35,450,000  in return for an unsecured  receivable from DHPC, which bore
     interest at 5.5% per annum.  DHPP also gave a guarantee to CMDC to transfer
     DHPP's  accounts  receivable  as of December  31, 1995 back to DHPP if such
     accounts receivable were not realized in cash by June 30, 1997.

                                       F-9

<PAGE>

1.   ORGANIZATION AND PRINCIPAL ACTIVITIES (cont'd)

     c.   Discontinued operations - Disposal of subsidiary

     The cooperation  between DHPP and CMDC was for DHPP to research and produce
     new products and to develop the local market.  CMDC's part was to raise the
     necessary  capital in 1996 to inject into the joint  venture to  accomplish
     these tasks.  However,  the Company encountered problems in raising capital
     in the US  stock  market,  which  in turn  contributed  to the  lack of new
     product and local  market  development  by DHPP.  These  events led to both
     parties of the joint venture not contributing the agreed-upon  capital into
     the joint venture as originally called for by the agreement.  Therefore, by
     signed agreement between CMDC and DHPP both parties agreed to terminate the
     joint venture as of January 1, 1997. In conjunction  with the  termination,
     the  Company  terminated  its  ownership  of CMDC and its joint  venture in
     exchange for the return of the 7,000,000 shares of common stock and 100,000
     shares of Series B supervoting  preferred  stock  originally  issued in the
     exchange. Due to the related party nature of the transaction, the Company's
     net equity in the joint  venture as of January 1, 1997 has been recorded as
     a deemed  dividend to BGL. All of the shares were  cancelled by the Company
     prior to December 31, 1997. In addition, all 7,000,000 Class B warrants and
     7,000,000 Class C warrants were cancelled  during 1997 in conjunction  with
     the termination agreement.

     This transaction has been accounted for as a discontinued operation and the
     results of operations have been excluded from continuing  operations in the
     statements of operations for 1996.

2.   GOING CONCERN

The accompanying  financial statements are prepared in accordance with generally
accepted accounting  principles on a going-concern basis which contemplates that
the Company will be able to realize its assets and discharge its  liabilities in
the normal course of business for the foreseeable future.

The Company ceased  operations in 1996 via the  termination of ownership of CMDC
and its joint venture.

The Company has the intention of acquiring other operating  ventures in the near
future.  Management  expects that these efforts will result in  maintaining  the
liquidity  necessary for the foreseeable  future.  However, no assurances can be
given that the Company will be successful  in  accomplishing  these  objectives.
Further,  there can be no assurance that the Company will achieve profitability.
The Company's continuation as a going concern is dependent upon obtaining future
profitable  operations  and upon its ability to maintain  adequate  financing or
capital.

3.   BASIS OF PRESENTATION

The  acquisition  of CMDC by the  Company  on June  30,  1996 was  treated  as a
recapitalization  of CMDC with CMDC as the acquirer  (reverse  acquisition).  On
this basis,  the  historical  consolidated  financial  statements of the Company
prior to June 30, 1996 are those of CMDC and the historical stockholders' equity
amounts of CMDC prior to 1996 have been  retroactively  restated  to reflect the
equivalent  number  of shares of common  stock of the  Company  issued  for this
acquisition.


                                      F-10
<PAGE>


3.   BASIS OF PRESENTATION (cont'd)

The  acquisition  of DHPC by CMDC on March 6, 1996 has been  accounted for using
the  purchase  method  of  accounting.  Accordingly,  the  assets  acquired  and
liabilities  assumed have been recorded at their estimated fair values,  and the
operations of DHPC are included in the financial  statements of the Company from
the date of acquisition.  The following is an unaudited pro forma summary of the
combined results of the Company and CMDC for the year ended December 31, 1996 as
if the  acquisition  had occurred as of January 1, 1996. The unaudited pro forma
summary is not necessarily  indicative  either of the results of operations that
would have occurred had the  acquisition  been made as of January 1, 1996, or of
the future results of operations of the combined companies.

                                                   Year ended December 31, 1996
                                                   ----------------------------
                                                     Rmb'000       US$'000

Pro forma net sales                                   86,380       10,382
Pro forma net income                                  18,028        2,167
Pro forma basic earnings per common share               1.40         0.17

4.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   Basis of consolidation

     The consolidated  financial  statements include the accounts of the Company
     and its subsidiaries.  All material  intra-group  balances and transactions
     have been eliminated on consolidation.

     b.   Inventories

     Inventories  are stated at the lower of cost, on a weighted  average basis,
     and market value. Costs of work-in-process  and finished goods are composed
     of  direct  materials,   direct  labor  and  an  attributable   portion  of
     manufacturing overheads.

     c.   Property, plant and equipment

     Property,  plant  and  equipment  are  stated  at  cost.  Depreciation  for
     financial  reporting  purposes is provided using the  straight-line  method
     over the estimated useful lives of the assets after taking into account the
     estimated  residual value. The estimated useful lives are as follows:  land
     use rights - 50 years,  buildings - 20 years,  machinery and equipment - 10
     years, motor vehicles - 5 years, furniture and office equipment - 10 years.
     Gains or losses on  disposals  are  reflected  in current  operations.  All
     ordinary repair and maintenance costs are expensed as incurred.

     Construction-in-progress  includes the costs of  construction  and interest
     charges  arising from  borrowings  used to finance  these assets during the
     period of construction.  There was no interest capitalized in 1995, 1996 or
     1997.


                                      F-11
<PAGE>

4.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

     d.   Net sales

     Net sales represent the invoiced value of goods (excluding value-added tax)
     supplied  to  customers,  net of sales  returns and  allowances.  Sales are
     recognized upon delivery of goods and passage of title to customers.

     All of the  Company's  sales  are  made in the PRC and are  subject  to PRC
     value-added tax at a rate of 17% ("output VAT"). Such output VAT is payable
     after offsetting VAT paid by the Company on purchases ("input VAT").

     There were no sales from  continuing  operations  for 1995 through 1997, as
     all Company sales were from its discontinued operations. See Note 1.

     e.   Income taxes

     Income taxes are provided  under the  provisions  of Statement of Financial
     Accounting Standards No. 109.

     f.   Foreign currency translation

     Foreign  currency  transactions   denominated  in  foreign  currencies  are
     translated  into Renminbi  ("Rmb") at the  respective  applicable  rates of
     exchange. Monetary assets and liabilities denominated in foreign currencies
     are translated  into Rmb at the applicable  rate of exchange at the balance
     sheet date. The resulting  exchange gains or losses are credited or charged
     to the statements of operations.

     Translation of amounts from Rmb into United States dollars  ("US$") for the
     convenience  of the reader has been made at the single  rate of exchange on
     December 31, 1997 of US$ 1.00 : Rmb$8.30.  No  representation  is made that
     the Rmb amounts  could have been, or could be,  converted  into US$ at that
     rate on the above dates or at any other date.

     g.   Earnings per common share

     Effective  December 31, 1997,  the Company  adopted  Statement of Financial
     Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires
     the Company to change the method used to compute earnings per share ("EPS")
     and to restate all prior periods presented. The presentation of primary and
     fully   diluted  EPS  has  been   replaced  with  basic  and  diluted  EPS,
     respectively.  Basic EPS is computed  using the weighted  average number of
     common shares outstanding during the period. The computation of diluted EPS
     would include the dilutive  effect of securities that could be exercised or
     converted into common stock.

     The weighted average number of shares outstanding for basic earnings (loss)
     per share  during the years ended  December  31,  1995,  1996 and 1997 were
     8,000,000,  8,200,000 and  1,200,000,  respectively.  The weighted  average
     number of shares  outstanding for diluted  earnings (loss) per share during
     the years ended December 31, 1995, 1996 and 1997 were 8,000,000, 13,661,202
     and 1,200,000, respectively.


                                      F-12
<PAGE>

4.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

     h.   Segment reporting

     In December 1998, the Company will adopt SFAS No. 131,  "Disclosures  About
     Segments of an Enterprise  and Related  Information."  The adoption of this
     statement  requires that reportable  segments are reported  consistent with
     how  management  assesses  segment  performance.  This  statement  requires
     disclosure of certain  information by reportable  segment,  geographic area
     and major customer.  The Company's only  operations  consisted of the joint
     venture,  DHPC, in 1996.  DHPC's only operating segment was the manufacture
     and sale of certain formulated Chinese medicines.

     i.   Management estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

5. ACCOUNTS RECEIVABLE

         Accounts receivable comprised:
                                                 1996            1997
                                                 ----           ------
                                               Rmb'000     Rmb'000    US$'000

              Trade receivables                 74,480        -          -
              Less: Allowance for doubtful
               accounts                           (947)       -          -
                                               --------   ------     ------
                                                73,533        -          -


6. PREPAYMENTS AND DEPOSITS

         Prepayments and deposits comprised:
                                                 1996            1997
                                                 ----           ------
                                               Rmb'000     Rmb'000    US$'000

              Advances to employees for
               business trips                   2,123        -           -
              Deposits for purchase of raw
               materials                          160
              Prepayments                         324        -           -
                                               ------    ------      ------
                                                2,607        -           -
                                               ======    ======      ======




                                      F-13

<PAGE>

7.   INVENTORIES

         Inventories comprised:
                                                    1996           1997
                                                   -----          ------
                                                  Rmb'000   Rmb'000     US$'000

              Raw materials                         3,190     -            -
              Work-in-process                         367     -            -
              Finished goods                        2,356     -            -

                                                    5,913     -            -

              Less:  Allowance for obsolete
               and slow-moving items                (295)     -            -
                                                  -------- -----       ------
                                                    5,618     -            -
                                                  ======== =====       ======

8. INVESTMENT DEPOSITS

Investment deposits comprised:
                                                     1996           1997
                                                   Rmb'000  Rmb'000     US$'000

              Deposit with China Food and
               Beverage Industrial Co. Limited
               (see Note 17)                       11,648     -            -
              Deposit with Simple Win
               Investment Limited (*)              19,900     -            -
                                                  -------   ----        -----
                                                   31,548     -            -
                                                  =======   ====        =====

(*)  This represents a deposit paid to Simple Win Investment  Limited ("SWI"; an
     unrelated  entity)  by DHPC  for  acquiring  100%  interest  in Asia  First
     Pharmaceutical  Investment  Ltd.  ("AFPI";  a company  incorporated  in the
     British Virgin  Islands),  which has a 90% equity  interest in Jilin Huajia
     Pharmaceutical   Company  Limited  ("JHP";  a  sino-foreign  joint  venture
     established  in Meihekou,  Jilin  Province,  the PRC).  JHP is  principally
     engaged in the  manufacturing  and sales of formulated  Chinese medicine in
     the PRC.  According  to a letter of intent  dated May 15, 1996  between the
     Company  and SWI,  the  Company  had an  option  through  June 30,  1997 to
     determine  whether it would  proceed or withdraw  from such an  acquisition
     after  conducting a due diligence  exercise.  In the event that the Company
     decided to withdraw  from the  acquisition,  the deposit  would be refunded
     without  interest.  In  accordance  with the Company's  termination  of its
     ownership  of CMDC and its joint  venture,  DHPC,  the  deposit was removed
     through a noncash transaction as of January 1, 1997. See Note 19.

     The  Company's  directors  consider  that the Company  could  realize  such
     deposits through investments in the aforementioned companies or the Company
     could  recover the  deposits if the  Company  decides to withdraw  from the
     acquisitions.


                                      F-14
<PAGE>


9. DEFERRED VALUE ADDED TAX RECOVERABLE

     Deferred value added tax ("VAT") recoverable arose from a change in the PRC
     tax system and regulations  effected January 1, 1994, and was determined at
     14% of the  balance of DHPP's  inventories  as of January 1, 1994.  This is
     part of the operating  assets  transferred  by DHPP into DHPC in connection
     with the establishment of DHPC (see Note 1). Pursuant to a directive issued
     by the PRC  State  Tax  Bureau,  the  amount of  deferred  VAT  recoverable
     outstanding  at January 1, 1995 can be  utilized  to offset net VAT payable
     over a period of five years,  with the exact  amount of annual  utilization
     varying from 15% to 20% of the balance outstanding as of January 1, 1995 as
     determined by individual local tax bureaus. The amount utilized in 1996 was
     approximately Rmb338,000.

10. PROPERTY, PLANT AND EQUIPMENT

    Property, plant and equipment comprised:

                                                   1996           1997
                                                  ------         ------
                                                 Rmb'000   Rmb'000    US$'000

              Land and buildings in the PRC      16,119      -            -
              Machinery and equipment             6,236      -            -
              Motor  vehicles                       916      -            -
              Furniture and office equipment        353      -            -
              Construction-in-progress:
               Buildings in the PRC                 867      -            -
                                                -------   -----        -----
                                                 24,491      -            -

              Less:  Accumulated depreciation      (965)     -            -
                                                -------   -----        -----
                                                 23,526      -            -
                                                =======   =====        =====

     The Group's  buildings  are located on land in the PRC granted under a land
     use right for a term of 50 years.


                                      F-15
<PAGE>

1. ACCRUED EXPENSES AND OTHER PAYABLES

     Accrued expenses and other payables comprised:

                                                 1996             1997
                                                ------           ------
                                               Rmb'000   Rmb'000        US$'000

              Accrual for operating expenses
                  Sales commissions               601      -               -
                  Advertising and promotional
                   expenses                     1,495      -               -
                  Salaries and wages              865      -               -
                  Interest expense                348      -               -
                  Legal fees                      269      -               -
                  Stock issuance costs          1,997      -               -
                  Other                         1,477      -               -

              Provision for funds
                  Salary and welfare fund(a)      472      -               -
                  Housing fund (b)                238      -               -
                                               -------  -----          ------
                                                7,762      -               -
                                               =======  =====          ======

(a)  Salary  and  welfare  fund is  provided  at 2% of net  income  of DHPC,  as
     determined by DHPC's board of directors  according to PRC regulations  (see
     Note 15).  The fund is for the  payment of  nonrecurring  bonus and welfare
     expenses of employees.

(b)  Housing  fund is  provided  at  Rmb98  per  employee  of DHPC in the PRC in
     accordance with PRC regulations. The fund is for the repair and maintenance
     of staff quarters.

12.  PAYABLE TO A JOINT VENTURE PARTNER

     This  represents  payable  by DHPC to DHPP  for the  operating  assets  and
     liabilities  transferred  into  DHPC  (see Note 1)  together  with  accrued
     interest  thereon.  The payable is unsecured and bears interest at 5.5% per
     annum.  Total  interest  accrued  on  this  payable  in  1996  amounted  to
     approximately  Rmb1,814,000.  DHPP has forgiven its entitlement to the 1996
     interest  of  Rmb1,814,000,  and such  forgiveness  is  accounted  for as a
     capital  contribution from DHPP and recorded as additional paid-in capital.
     In  addition,  DHPP has agreed not to demand  repayment  until the Group is
     financially capable to do so.

13.  CAPITAL STOCKS AND WARRANTS

a.   Common stock

     The Company's  authorized  common stock is 50,000,000 shares with par value
     of US$0.001 each. In 1996, the Company sold 200,000 shares of common stock,
     par value US$0.001 each, for US$200,  and issued 7,000,000 shares of common
     stock, par value US$0.001 each, in connection with its acquisition of CMDC.
     Effective  January 1, 1997,  these shares were tendered in conjunction with
     the  termination  of ownership of CMDC and its joint  venture and cancelled
     prior to December 31, 1997. See Note 1. During April of 1997,  2,300 shares
     of the Series A convertible  and redeemable  preferred stock were converted
     into 2,300,000 shares of common stock.


                                      F-16
<PAGE>

13.  CAPITAL STOCKS AND WARRANTS (cont'd)

     b.   Preferred stock

     Effective  from May 13,  1996,  the  Company  authorized  the  creation  of
     5,000,000  shares  of  preferred  stock  with par value  US$0.001  each and
     authorized  the  Company's  board of  directors  to assign  such  shares to
     different series and to fix the related  designation,  powers,  preferences
     and rights of the shares.

     (i)  Series A convertible and redeemable preferred stock

     In 1996,  the  Company  sold  6,000  shares  of  Series A  convertible  and
     redeemable  preferred  stock,  par value US$0.001  each,  for  US$6,000,000
     (equivalent of  Rmb49,920,000)  by  capitalizing a loan of the same amount.
     The  Series  A  convertible   and   redeemable   preferred   stock  carries
     preferential   rights  to  dividends  and  distributions   convertible  and
     redeemable  upon  liquidation.  Each share of the Series A convertible  and
     redeemable preferred stock is convertible into common stock with the number
     of shares of common stock  determined  by US$1,000  divided by a conversion
     factor.  The  conversion  factor  equals the lesser of the average  closing
     market price of the  Company's  common stock for the five days  immediately
     preceding  the date of notice of  conversion  or US$1.00.  The  outstanding
     Series A convertible  and redeemable  preferred  stock is redeemable at the
     option of the  Company at any time after  December  31,  1997 by giving ten
     days of notice at a price  equal to  US$1,000  per share  plus any  accrued
     dividends.  During  April 1997,  2,300 shares of Series A  convertible  and
     redeemable  preferred  stock was  converted to  2,300,000  shares of common
     stock.

     (ii) Series B supervoting preferred stock

     In 1996,  the  Company  issued  100,000  shares  of  Series  B  supervoting
     preferred   stock,   par  value  US$0.001  each,  in  connection  with  its
     acquisition  of CMDC. In connection  with the  termination of the Company's
     ownership of CMDC and its joint venture, the preferred shares were tendered
     and  cancelled  effective as of December 1, 1997.  The Series B supervoting
     preferred stock carried  preferential rights to dividends and distributions
     upon  liquidation.  These 100,000 shares of Series B supervoting  preferred
     stock also carried  superior voting rights,  which accounted for 30% of the
     total voting rights of the Company on all corporate matters, prior to their
     cancellation.

     (iii) Series C convertible and redeemable preferred stock

     The  Company  has  authorized  the  creation  of 10,000  shares of Series C
     convertible and redeemable  preferred  stock,  par value US$0.001 each. The
     Series C convertible and redeemable  preferred  stock carries  preferential
     rights to dividends and distributions  upon liquidation.  Each share of the
     Series C convertible  and redeemable  preferred  stock is convertible  into
     common stock with the number of shares of common stock  determined by 1,000
     divided  by a  conversion  factor.  The  conversion  factor is equal to the
     lesser of the average  closing  market price of the Company's  common stock
     for the five days immediately preceding the date of notice of conversion or
     US$3.00.  The  outstanding  Series C convertible  and redeemable  preferred
     stock  would be  redeemable  at the option of the Company at any time after
     December 31, 1997 by giving ten days of notice at a price equal to US$1,000
     per  share  plus  any  accrued  dividends.  No  Series  C  convertible  and
     redeemable preferred stock has been issued.


                                      F-17
<PAGE>


13.  CAPITAL STOCKS AND WARRANTS (cont'd)

     c.   Warrants

     In 1996, the Company issued  7,000,000 Class A warrants,  7,000,000 Class B
     warrants and 7,000,000  Class C warrants in connection with its acquisition
     of CMDC.  As part of the  termination  of  ownership  of CMDC and its joint
     venture,  the Class B and Class C warrants were cancelled  during 1997 (see
     Note 1). Each of the Class A warrants was exercisable at a price of US$3.00
     in exchange  for one share of common stock of the Company at any time up to
     June 30, 1998;  each of the Class B warrants was  exercisable at a price of
     US$4.00 in  exchange  for one share of common  stock of the  Company at any
     time up to June 30, 2000; and each of the Class C warrants was  exercisable
     at a price of  US$5.00  in  exchange  for one share of common  stock of the
     Company at any time up to June 30, 2002. The Company's  management believed
     that the exercise  prices of the warrants  issued  exceeded the fair market
     value  of the  Company's  common  stock  on the  date  of  issuance  of the
     warrants.  No warrants  were ever  exercised  prior to their  expiration or
     cancellation.

14.  TAXATION

The Company is subject to income taxes, on an entity basis, on income arising in
or derived from the tax  jurisdiction  in which it operates.  The British Virgin
Islands  subsidiary,  CMDC, is  incorporated  under the  International  Business
Companies Act of the British Virgin Islands and, accordingly,  was exempted from
payment of the British Virgin Islands income taxes. The joint venture enterprise
established  in the PRC,  DHPC,  is subject to PRC income taxes at a rate of 33%
(30%  state  unified  income tax and 3% local  income  tax).  However,  DHPC was
exempted  from  state-unified  income  tax and  local  income  tax for two years
starting from the first year of profitable  operations and then was subject to a
50%  reduction in state unified  income tax for the next three years.  The first
profitable year for DHPC was the year ended December 31, 1996.

If the tax holiday for DHPC did not exist,  the  Company's  income tax  expenses
(net  of  minority   interest)  would  have  been  increased  by   approximately
Rmb5,782,000 for the year ended December 31, 1996. Earnings per common share for
the year ended December 31, 1996 would have been approximately Rmb1.16.

The Company has not provided for income taxes on the  undistributed  earnings of
its international  subsidiaries  because the earnings are reinvested and, in the
opinion of management, will continue to be reinvested in the foreseeable future.

The  reconciliations  of the  United  States  federal  income  tax  rate  to the
effective income tax rate based on the income (loss) before provision for income
taxes stated in the statements of operations is as follows:

                                                       Year ended December 31,
                                                               1996
                                                               -----
                  U.S. federal income tax rate                  35%
                  Effect of different tax rates
                    in foreign jurisdictions                    (2)
                  Effect of tax exemption for DHPC             (33)
                                                              -----
                  Effective income tax rate                      -%
                                                              =====



                                      F-18
<PAGE>

14.  TAXATION (cont'd)

      Taxation payable comprised:
                                                                1996
                                                              --------
                                                               Rmb'000

                               Value added tax                 13,616
                               Other                               32
                                                               ------
                                                               13,648
                                                               ======

15.  DISTRIBUTION OF INCOME

For 1996,  substantially  all of the  Company's  income  came from its 70% owned
joint venture enterprise in the PRC, DHPC.

Income of DHPC as determined under generally accepted  accounting  principles in
the PRC was  distributable  to its joint venture  partner after  transfer to (i)
contributory  dedicated capital as required under PRC government regulations and
the Company's articles of association,  and (ii) discretionary dedicated capital
as  determined  by the  Company's  board of  directors.  Contributory  dedicated
capital  is a form  of  legal  reserve  fund.  Discretionary  dedicated  capital
includes  salary fund and staff welfare  fund.  Contributory  and  discretionary
dedicated  capital  is  not  distributable  in the  form  of  dividends.  In the
Company's  financial  statements  prepared under generally  accepted  accounting
principles in the United States of America,  amounts  designated for payments of
employee  salary  and  welfare  have  been  charged  to income  and the  related
provisions are reflected as accrued liabilities in the balance sheets.

The income of DHPC available for  distribution  to its joint venture  partner is
based on the income reported in its statutory  accounts prepared under generally
accepted accounting principles in the PRC. This differs from the amount reported
under generally accepted accounting  principles in the United States of America.
As of December 31, 1996, such difference was insignificant.

16.  RETIREMENT PLAN

As  stipulated  by  PRC  regulations,  DHPC  maintains  a  defined  contribution
retirement  plan for all of its  employees.  All retired  employees  of DHPC are
entitled to an annual  pension equal to their basic annual salary at retirement.
DHPC contributes to a state-sponsored retirement plan approximately 21.5% of the
basic salary of its  employees,  and has no further  obligations  for the actual
pension payments or  post-retirement  benefits beyond the annual  contributions.
The  state-sponsored  retirement  plan is  responsible  for the  entire  pension
obligations  payable  to  retired  employees.  The  contributions  made  in 1996
amounted to approximately Rmb282,000.



                                      F-19
<PAGE>

17. RELATED PARTY TRANSACTIONS

Name and relationship of related parties:

Name of related party             Existing relationship with the Company
---------------------             --------------------------------------
Mr. Yat-hung Yiu                  Former director and CEO of the Company

Mr. Yat-on Yiu                    Current director and CEO of the Company and
                                  brother of Mr. Yat-hung Yiu

China Food and Beverage           A company beneficially owned and controlled by
 Industrial Co. Limited (CFBI)    Mr. Yat-hung Yiu

New Silver Eagle Holdings Limited Stockholder of the Company and common
                                  directors with the Company (see Note 1)

Huakang Headquarters              Common directors with the joint venture
                                  partner, DHPP (see Note 1)

Beautimate Group Limited          Stockholder (see Note 1)

Ongoing Limited                   Stockholder (see Note 1)

Summary of related party balances and transactions is as follows:

                                     1995       1996              1997
                                    ------     ------            ------
                                   Rmb'000     Rmb'000    Rmb'000       US$'000

Due from a related company
 Huakang Headquarters                  -        4,159         -             -

Due from shareholders
-- Beautimate Group Limited           59            -         -             -
-- Ongoing Limited                    25            -         -             -

Due from a director
--Yat-hung Yiu                         -           75         -             -

Due to a related company
-- New Silver Eagle Holdings
    Limited - Hong Kong                -        3,412         -             -

Interest expense paid to
  related companies
- Huakang Headquarters                 -          283         -             -
- DHPP [Note 19(b)]                    -        1,814         -             -

Deemed dividend - forgiveness of
  accounts receivable from
  Mr. Yat-hung Yiu                     -            -        74             9


                                      F-20
<PAGE>

17. RELATED PARTY TRANSACTIONS (Cont'd)


                                     1995           1996              1997
                                    ------         ------            ------
                                   Rmb'000         Rmb'000      Rmb'000  US$'000

Deemed dividend -
 misappropriation of deposit
 with CFBI(*)                          -               -       11,648     1,403

Management fee paid to a
  related company
- Huakang Headquarters                 -           1,093            -         -

In 1996, DHPC and Huakang Headquarters  undertook a joint advertisement  program
with total advertising  expenses  amounting to approximately  Rmb17,874,000,  of
which  approximately  Rmb7,440,000  was  allocated  to and  absorbed  by Huakang
Headquarters.

See also Notes 1, 18 and 19 for additional related party disclosures.

(*)  During 1996 a deposit was paid to CFBI, an entity owned by the prior CEO of
     the Company,  for the  exclusive  right to  ascertain  the  feasibility  of
     acquiring  not less than a 50% equity  interest  in CFBI.  In the event the
     Company  decided  not to  invest,  CFBI  was to  return  the  deposit  with
     interest.  In 1997  Mr.Yat-on  Yiu,  the  brother of Mr.  Yat-hung  Yiu and
     current CEO, discovered the deposit, which was supposedly returned by CFBI,
     was never deposited into the Company's bank account.  Inquiry by Mr. Yat-on
     Yiu to his  brother  revealed  that  the  funds  had been  diverted  by Mr.
     Yat-hung  Yiu to  cover  professional  fees,  acquisition  costs,  rent and
     payroll expenses paid personally by him on behalf of the Company.  However,
     no documentation was ever provided to the Company to support his claims. As
     such,   the  Company  has  treated  the  diversion  of  the  deposit  as  a
     misappropriation  of funds  and,  due to the  related  party  nature of the
     transaction, as a reduction to equity or deemed dividend during 1997.

18.  SUBSEQUENT EVENT

On August 24, 1999,  the Board of Directors  approved the issuance of 10,530,500
shares to the Beautimate Group Limited in exchange for its capital  contribution
of at least US$200,000 to pay for professional fees incurred by the Company.

                                F-21
<PAGE>


19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

      a.  Cash paid (received) for interest comprised:
                                             1995      1996          1997
                                           Rmb'000    Rmb'000  Rmb'000   US$'000
           Interest paid                        -       65       -          -
                                            ======    ======   =====      =====
           Interest received                    -     (520)      -          -
                                            ======    ======   =====      =====

      b.  Supplementary disclosure of noncash investing activities:

         1996

          (i)  In  conjunction  with the  establishment  of DHPC,  the PRC joint
               venture partner, DHPP, transferred the following operating assets
               (liabilities) into DHPC:

                                                                     Rmb'000

                  Cash                                                3,111
                  Accounts receivable                                56,187
                  Due from related companies                          8,752
                  Prepayments and deposits                            3,537
                  Inventories                                         5,490
                  Deferred value added tax recoverable                1,349
                  Property, plant and equipment                      18,157
                  Short-term borrowings                                 (37)
                  Accounts payable                                   (6,776)
                  Accrued expenses and other payables               (24,900)
                  Due to related companies                             (380)
                  Taxation payable                                  (12,216)
                                                                  ----------
                                                                     52,274

                  Less:  Negative goodwill adjusted against
                   property, plant and equipment                     (1,884)
                                                                  ----------
                                                                     50,390
                                                                  ==========
                  Represented by - Capital contribution by DHPP
                   into DHPC (see Note 1)                            14,940

                  Payable to DHPP (see Note 1)                       35,450
                                                                  ----------
                                                                     50,390
                                                                  ==========
                  Cash inflow resulting from the establishment
                   of DHPC                                            3,111
                                                                  ==========



                                      F-22
<PAGE>

19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (cont'd)

          (ii) On June 30, 1996, the Company acquired a 100% interest in CMDC by
               issuing  7,000,000  shares of  common  stock,  100,000  shares of
               Series B supervoting preferred stock, 7,000,000 Class A warrants,
               7,000,000  Class B warrants and  7,000,000  Class C warrants (see
               Note 1). In addition, the Company capitalized a loan amounting to
               Rmb49,920,000 by issuance of 6,000 shares of Series A convertible
               and redeemable preferred stock [see Note 13 b (i)].

               In 1996,  interest  payable of Rmb1,814,000  from DHPC to DHPP, a
               joint venture  partner,  was forgiven by DHPP and  contributed to
               additional paid-in capital of the Company.

1997
----

In accordance  with the Company's  termination  of its ownership of CMDC and its
joint  venture  (see Note 1), the  following  balances  were  removed  through a
noncash transaction:

                                                           Rmb '000   US$ '000
                                                          ----------  ---------
   Cash                                                     9,999        1,205
   Receivables                                             73,533        8,859
   Amounts due from related companies                       4,159          501
   Prepayments, deposits and other                          2,607          314
   Inventories                                              5,618          677
   Investment deposits                                     19,900        2,398
   Deferred value-added tax recoverable                     1,011          122
   Property, plant and equipment                           23,526        2,834
   Accounts payable                                        (9,016)      (1,086)
   Accrued expenses and other payables                     (5,591)        (674)
   Income taxes payable                                   (13,648)      (1,644)
   Payable to a joint venture partner                     (35,450)      (4,271)
   Minority interest                                      (22,450)      (2,705)

   Deemed dividend - terminated joint venture interests    54,198        6,530




                                      F-23
<PAGE>

19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (cont'd)

In conjunction with the termination of the investment in subsidiary,  the shares
originally  issued  for  the  acquisition  were  returned.   These  shares  were
subsequently cancelled on December 1, 1997 (see Note 13). Rmb '000 US$'000

         Redemption and cancellation of common stock     (58)          (7)
         Redemption and cancellation of Series B
          supervoting preferred stock                     (1)           -
         Additional paid-in capital                       59            7

                                                           -            -


On December 31, 1997,  Rmb2,151,000  of accrued  expenses  and  Rmb3,412,000  of
amounts due to related  companies  were assumed by the  stockholder,  New Silver
Eagle Holdings  Limited.  The stockholders then contributed the total balance of
the liabilities assumed to additional paid-in capital.

20.  OPERATING RISKS

     a.   Dependence on strategic relationship

     The Company conducted its manufacturing  operations through a joint venture
     with DHPP, a PRC  state-owned  enterprise in 1996. The  termination of this
     strategic  relationship  had an  adverse  effect on the  operations  of the
     Company. See Note 1.

     b.   Limited product types

     Substantially  all of the  Company's  sales in 1996 were  derived  from two
     products, via its 70% ownership in DHPC, which was terminated on January 1,
     1997. No further operations existed for 1997.

     c.   Country risk

     As substantially all of the Company's  operations in 1996 were conducted in
     the PRC, the Company is subject to special  considerations  and significant
     risks not typically  associated  with companies  operating in North America
     and Western Europe.  These include risks associated with, among others, the
     political,  economic and legal  environments and foreign currency exchange.
     The Company's results may be adversely affected by changes in the political
     and social  conditions in the PRC, and by changes in governmental  policies
     with  respect  to laws and  regulations,  inflationary  measures,  currency
     conversion and remittance abroad, and rates and methods of taxation,  among
     other things.  In addition,  a significant  portion of the Company's  prior
     revenue  was  denominated  in  Rmb  which  must  be  converted  into  other
     currencies  before  remittance  outside the PRC. Both the conversion of Rmb
     into foreign  currencies  and the remittance of foreign  currencies  abroad
     require approvals of the PRC government.



                                      F-24
<PAGE>


21.  OPERATING RISKS (cont'd)

     d.   The Company had transactions  with customers in the PRC. The customers
          may settle their debts and distribute their dividends outside the PRC.
          The  remittances  are  subject  to control  because  Rmb is not freely
          convertible into foreign currencies.  Due to discontinued  operations,
          there were no continuing operations in 1995 through 1997. See Note 1.

          On January 1, 1994,  the PRC  government  introduced  a single rate of
          exchange as quoted daily by the People's  Bank of China (the  "Unified
          Exchange Rate").

          The quotation of the exchange rates does not imply free convertibility
          of Rmb into Hong Kong dollars or other foreign currencies. All foreign
          exchange  transactions  continue  to take  place  either  through  the
          People's  Bank of  China  or other  banks  authorized  to buy and sell
          foreign  currencies at the exchange  rates quoted by the People's Bank
          of China.  Approval of foreign currency  payments by the People's Bank
          of  China  or  other  institutions   requires   submitting  a  payment
          application form together with suppliers' invoices, shipping documents
          and signed contracts.

22.  OTHER SUPPLEMENTAL INFORMATION

                                      1995       1996                1997
                                     -----      -----               ------
                                    Rmb'000     Rmb'000      Rmb'000     US$'000

Provision for doubtful debts            -          947         -            -
Write-back of allowance for
 obsolete and slow-moving
 inventories                            -         (527)                     -
Advertising expense                     -       10,434         -            -




                                      F-25