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, 1998

[ ]  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 year 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, 1998.

                                     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 or 1998.

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 year 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          44       Chairman, Chief Executive Officer and Director
Ma Ding Jie        63       Chief Financial Officer and Director
Jin Hui Juan       42       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
-------------------
Ma Ding Jie          (Principal Financial and Accounting
                      Officer)


                                       7
<PAGE>

                         NATURAL WAY TECHNOLOGIES, INC.

                          Index to Financial Statements


                                                                          Page
                                                                         ------

Independent Auditor's Report                                               F-2

Balance Sheets as of December 31, 1997 and 1998                            F-3

Statements of Operations for the Years Ended
 December 31, 1996, 1997 and 1998                                          F-4

Statements of Cash Flows for the Years Ended
 December 31, 1996, 1997 and 1998                                      F-5-F-6

Statements of Changes in Stockholders' Equity for the Years
 Ended December 31, 1996, 1997 and 1998                                    F-7

Notes to Financial Statements                                         F-8-F-19


                                       F-1
<PAGE>
                          INDEPENDENT AUDITOR'S REPORT


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


We have audited the  accompanying  balance  sheets of Natural Way  Technologies,
Inc.  ("the  Company")  as of  December  31,  1997  and  1998,  and the  related
statements of operations, changes in stockholders' equity and cash flows for the
years ended  December  31, 1997 and 1998.  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  audits.  The  financial
statements of the Company for the year ended December 31, 1996,  were audited by
other  auditors  whose report,  dated April 11, 1997,  expressed an  unqualified
opinion on those financial statements.

We conducted our audits 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  audits  provide  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 1998, and the results of its operations and its cash
flows  for the years  ended  December  31,  1997 and 1998,  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, 9 and 11,  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, 1997 AND 1998

                                                1997               1998
                                               ------           -----------
                                               Rmb'000      Rmb'000     US$'000
ASSETS

     Total assets                                   -          -              -
                                               =======    =======        =======

LIABILITIES AND STOCKHOLDERS' EQUITY

     Total liabilities                              -           -             -
                                               -------    -------        -------
Stockholders' equity (deficit):
Preferred stock, Series A convertible
 and redeemable, par value US$0.001;
 issued and  outstanding  - 3,700 shares
 as of December 31, 1997 and 1998                   -           -            -

Preferred stock, Series C
convertible and redeemable,
par value US $0.001; issued
and outstanding - nil as of
December 31, 1997 and 1998                          -           -            -

Common stock, par value US$0.001;
 issued and outstanding - 3,500,000
 shares as of December 31, 1997 and 1998           29          29             3

Additional paid-in capital                     49,214      49,214         5,929
Accumulated deficit                           (49,243)    (49,243)       (5,932)
                                              -------     -------        -------
         Total stockholders' equity                 -           -             -
                                              -------     -------        -------

         Total liabilities and
              stockholders' equity                  -           -             -
                                              =======     =======        =======




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

                                       F-3
<PAGE>

                         NATURAL WAY TECHNOLOGIES, INC.
                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>


                                          1996                  1997                     1998
                                         ------                ------                  --------
                                        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                                (181)                    -              -                   -
Interest expense                             (5)                    -              -                   -
Bad debt expense                           (947)                    -              -                   -
Foreign exchange gain                         -                    24              -                   -
                                       --------            ----------      ---------          ----------
      Loss from continuing operations    (1,133)                   24              -                   -
Discontinued operations
    Income from operations before
      minority interest                  25,352                     -              -                   -
                                       --------            ----------      ---------          ----------
        Net income (loss) before
            minority interest            24,219                    24              -                   -
Minority interest                        (7,510)                    -              -                   -
                                       --------            ----------      ---------          ----------

Net income (loss)                        16,709                    24              -                   -
                                       ========            ==========      =========          ==========
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-4
<PAGE>
                         NATURAL WAY TECHNOLOGIES, INC.

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>

                                          1996         1997                1998
                                         ------       ------              ------
                                        Rmb '000     Rmb '000     Rmb '000       US$ '000
                                       ----------   ----------   ----------     ----------
<S>                                     <C>          <C>          <C>            <C>

Cash flows from operating activities:
Net income (loss)                         16,709         24            -              -
Adjustments to reconcile net
 income (loss) 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                              (17,241)       (18)           -              -
 Due to related  company                   3,032          -            -              -
 Taxation payable                          1,432          -            -              -
                                        --------      ------      -------       --------
Net cash provided by operating
activities                                 3,043          6            -              -
                                        --------      ------      -------       --------
</TABLE>

                                     F-5        (To be continued)

<PAGE>
                         NATURAL WAY TECHNOLOGIES, INC.

                        STATEMENTS OF CASH FLOWS (CONT'D)
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
                                          1996               1997                1998
                                         ------             ------              ------
                                        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)           -             -
                                         --------         --------      -------      --------
  Net cash used in investing activities   (36,631)            (24)           -             -
                                         --------         --------      -------      --------
Cash flows from financing activities:
Diminution of cash due to
 disposal of subsidiary                         -          (9,999)           -             -
Issuance of common stock                        2               -            -             -
Loan, subsequently capitalized by
  issuance of preferred stock              49,920               -            -             -
Cost of issuance of stock                  (8,131)              -            -             -
Forgiveness of interest by a joint
  venture partner                           1,814               -            -             -
                                         --------         --------      -------      --------
    Net cash provided by (used in)
         financing activities              43,605          (9,999)           -             -
                                         --------         --------      -------      --------
   Net increase (decrease) in cash         10,017         (10,017)           -             -
Cash as of beginning of year                    -          10,017            -             -
                                         --------         --------      -------      --------
Cash as of end of year                     10,017               -            -             -
                                         ========         ========      =======      ========
</TABLE>


   The accompanying notes are an integral part of these financial statements.
                                       F-6

<PAGE>
                         NATURAL WAY TECHNOLOGIES, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<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>


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 and 1998            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-7
<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.

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.

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-8
<PAGE>

1.   ORGANIZATION AND PRINCIPAL ACTIVITIES (cont'd)

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-9
<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 1996 accounts of the
          Company and its subsidiaries.  All material  intra-group  balances and
          transactions have been eliminated on consolidation.

     b.   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 1996 through 1998,
          as all company sales were from its discontinued  operations.  See Note
          1.

     c.   Income taxes

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

     d.   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.

                                      F-10
<PAGE>

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

Translation  of amounts  from Rmb into  United  States  dollars  ("US$") for the
convenience  of the  reader  has been made at the  single  rate of  exchange  on
December 31, 1998 of US$ 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.

     e.   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, 1996,  1997 and
          1998 were  8,200,000,  1,200,000,  and  2,743,835,  respectively.  The
          weighted  average number of shares  outstanding  for diluted  earnings
          (loss) per share during the years ended  December  31, 1996,  1997 and
          1998 were 13,661,202, 1,200,000, and 2,743,835, respectively.

     f.   Segment reporting

          In December 1998, the Company adopted 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.

     g.   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.   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-11
<PAGE>

5. 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-12
<PAGE>

5. 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.

6.  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-13
<PAGE>

7.  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.

8.  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.

9.  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)

                                      F-14
<PAGE>

9.  RELATED PARTY TRANSACTIONS (cont'd)

Summary of related party balances and transactions is as follows:

                                       1996      1997             1998
                                      ------    ------          ---------
                                     Rmb'000    Rmb'000    Rmb'000     US$'000

Interest expense paid to
  related companies
- Huakang Headquarters                   283           -         -           -
- DHPP [Note 11(b)]                    1,814           -         -           -

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

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

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, 10 and 11 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.

10.   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  their  capital
contribution of at least US$200,000 to pay for professional fees incurred by the
Company.

                                      F-15

<PAGE>

11.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

a.  Cash paid (received) for interest comprised:

                             1996             1997                  1998
                           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
         Account receivables                                   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-16
<PAGE>

11.  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 5 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
                                                            ========     =======

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 5).
                                                        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.

                                      F-17
<PAGE>

12.  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 and 1998.

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.

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 1996 through 1998. 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.

                                      F-18
<PAGE>

13.  OTHER SUPPLEMENTAL INFORMATION

                                             1996      1997          1998
                                            ------    ------        -------
                                           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-19