U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                      For the Year Ended December 31, 1996
                         Commission File No. 33-20432-FW

                           WHITESTONE INDUSTRIES, INC.
                 (Name of Small Business Issuer in Its Charter)


          Delaware                                              75-2228828
   -------------------------------                          -------------------
   (State or Other Jurisdiction of                           (I.R.S. Employer
   Incorporation or Organization)                           Identification No.)


    702 Marshall Street, Suite 500, Redwood, California            94063
--------------------------------------------------------------------------------
        (Address of Principal Executive Offices)                (Zip Code)

                                                                    
                                 (415) 364-7030
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


Securities registered under Section 12(b) of the Exchange Act:  None

                                            Name of Each Exchange
Title of Each Class                         on Which Registered

__________________________________         _____________________________________

__________________________________         _____________________________________


Securities registered under Section 12(g) of the Exchange Act:        None
                                                               

________________________________________________________________________________
                                (Title of Class)

     Check whether the issuer (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter  period that the issuer was required to file such  reports,  and (2) has
been subject to such filing requirements for the past 90 days.

                                Yes_____      No __X__

                    This report contains a total of __ pages.

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained, to the best of issuer'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. __X__

     State issuer's revenues for its most recent fiscal year: $-0-

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked prices of such stock, as of a specified date 

<PAGE>

within the past 60 days.

     Common Stock,  par value $.0001 per share  ("Common  Stock"),  was the only
     class of voting stock of the Registrant outstanding on April 1, 1996. Based
     on the closing bid price of the Common Stock on the National Association of
     Securities  Dealers,  Inc. OTC  Bulletin  Board as reported on May 31, 1997
     ($.10),  the aggregate  market value of the 2,984,320  shares of the Common
     Stock held by persons other than  officers,  directors and persons known to
     the  Registrant to be the  beneficial  owner (as that term is defined under
     the rules of the  Securities  and  Exchange  Commission)  of more than five
     percent of the Common Stock on that date was approximately $298,432. By the
     foregoing  statements,  the Registrant does not intend to imply that any of
     these  officers,  directors  or  beneficial  owners are  affiliates  of the
     Registrant or that the  aggregate  market  value,  as computed  pursuant to
     rules of the Securities and Exchange  Commission,  is in any way indicative
     of the amount which could be obtained for such shares of Common Stock.

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS

     Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by a court.

                               Yes _____       No __X__

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest practicable date.

     5,924,320 shares of Common Stock, $.0001 par value, as of May 31, 1997.


                                        2

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Introduction

         Whitestone  Industries,   Inc.  (the  "Company"  or  "Whitestone")  was
incorporated  as a  Delaware  corporation  on  April  19,  1988  under  the name
"Fortunistics  Inc."  as a  "blind  pool"  or  "blank  check"  company  to  seek
acquisition  possibilities,  make  acquisitions  or enter  into  other  business
endeavors.  Currently, the Company, through its wholly-owned subsidiary,  Golden
Bear  Entertainment  Corporation  ("Golden Bear"),  is engaged in developing and
marketing electronic,  interactive,  pre-school children's games and educational
products.  In particular,  the Company has developed  prototypes of its products
and is negotiating  marketing outlets,  primarily with large, national toy store
chains. Accordingly, the Company is considered to be a development stage company
for accounting purposes.

Proposed Transactions

         As a result of the  inability of the Company to implement its strategic
program for the  development  of its Golden Bear  subsidiary,  and the desire to
secure a possible operating base so that the Company's  stockholders may receive
a satisfactory  return on their investment,  the Company and its President,  Mr.
Donald Yu, entered into an Agreement on June 16, 1997 with Royal  Capital,  Inc.
("Royal")  whereby Royal (i) acquired 100,000 shares of the Company's  Preferred
Stock held by Mr. Yu; and (ii) acquired the voting proxy of 1,120,000  shares of
Common Stock. The consideration paid to Mr. Yu was $100,000.  As a result, Royal
obtained a voting majority of the Company's capital stock.

         On June 24, 1997, the Company,  Royal and  Proformix,  Inc., a Delaware
company  ("Proformix"),  entered  into a stock  exchange  agreement  whereby the
Company  will  acquire all or  substantially  all of the  outstanding  shares of
capital stock of Proformix. In order to enter into the aforesaid agreement,  the
Company's  Board  of  Directors  has  authorized  a 137:1  reverse  split of its
outstanding  shares of Common Stock (including shares of Common Stock underlying
the Company's outstanding Preferred Stock). The Company then intends to exchange
one share of its Common Stock for every 3.4676  shares  Proformix  common stock.
The aforesaid  acquisition will not include Golden Bear. The Company's Board has
authorized a 5% stock dividend of the Common Stock of Golden Bear to the current
shareholders of the Company.

         Proformix  is a  research  based  ergonomics  company  focusing  on the
computerized  workplace.  Computer ergonomics optimized the design of technology
that  allows  persons to  successfully  interact  with  computers.  The  Company
believes  that the  acquisition  of  Proformix  is in the best  interests of the
Company's shareholders and should result in increased shareholder value.

Background

         Effective  October 11,  1988,  the Company  issued a stock  dividend or
"spun-off"  to its then  stockholders,  2,500,000  shares of its  common  stock,
$.0001 par value  ("Common  Stock")  (83,333  shares  after  giving  effect to a
one-for thirty (1:30) reverse stock split effective January 18, 1993 of its then
outstanding  Common  Stock  


                                       1
<PAGE>

(the "Reverse Stock Split")  described  below in  "Acquisition by The Whitestone
Group, Ltd."),  together with an equal amount of the Company's Class A and Class
B Common Stock Purchase Warrants.  The distribution of these securities was made
pursuant to a Registration  Statement on Form S-18 filed with the Securities and
Exchange  Commission,  which  became  effective  October 11,  1988.  None of the
Company's Class A or Class B Warrants were exercised.

         Following  completion  of the  Company's  initial  public  offering  of
certain of its  securities and stock  dividend,  the Company's  activities  were
limited to managing its limited resources and investigating  potential  business
opportunities.   On  November  15,  1988,  Mr.  Bill  Myers  ("Myers")  acquired
13,000,000 shares of Common Stock (4,333,333 shares post Reverse Stock Split) of
the Company from Halter Venture Corporation, the former principal stockholder of
the Company.  Subsequently, on May 1, 1989, in exchange for shares of its Common
Stock,  the Company  received a commitment or option to acquire up to 10,000,000
shares of common stock of Videoactive  Company, a media production and marketing
company  with limited  operations.  Thereafter,  on December 31, 1991,  Mr. Bill
Myers,  also the principal  shareholder  of  Videoactive  Company in addition to
being a principal  shareholder of the Company,  received  10,000,000  additional
shares of Common  Stock  (3,333,334  post  Reverse  Stock  Split.  Additionally,
1,000,000  shares of Common  Stock  (33,334  post  Reverse  Stock  Split) of the
Company were issued to Mr. Myers in exchange for Mr.  Myers'  agreeing to assume
various ongoing expenses and other  liabilities of the Company during the period
in which  the  Company  was  seeking  an  acquisition  candidate  or  developing
prospective business operations.

         On January 18, 1993, the Company, its principal  stockholder,  Mr. Bill
Myers,  and The  Whitestone  Group,  Ltd.,  a  British  Virgin  Islands  limited
partnership  ("WGL"),  entered into a Stock Purchase Agreement pursuant to which
(i) WGL agreed to purchase  297,143,860  shares of the Common  Stock  (9,904,762
shares post Reverse Stock Split) in consideration  of $10,000;  (ii) the Company
agreed to undertake a  one-for-thirty  (1:30)  Reverse  Stock  Split;  (iii) the
Company  agreed  to  file a  Certificate  of  Amendment  to its  Certificate  of
Incorporation  to (A) change its name from  "Fortunistics,  Inc." to "Whitestone
Industries, Inc.," (B) reduce its authorized capitalization to 20,000,000 shares
of Common Stock ($.0001 per share) and 1,000,000 shares of preferred stock ($.01
per share), (C) provide for certain management matters including indemnification
of  officers,  directors  and  agents,  limitation  of  liability  for breach of
fiduciary duty by a director,  and (D) eliminate the  application of Section 203
of the  General  Corporation  Law of the  State  of  Delaware  (which  prohibits
transactions between stockholders and a corporation); (iv) Myers agreed to grant
to  Inmobiliaria  Nueva York S.A.,  an  affiliate  of WGL, an option to purchase
23,139,990  shares of Common Stock (771,333  shares post Reverse Stock Split) of
Myers'  24,000,000  shares of Common Stock (800,000  shares)  exercisable for an
aggregate purchase price of $2,500 at any time or prior to January 19, 1995; and
(v) all officers and directors of the Company resigned,  and Mr. Hernan Saide, a
principal of WGL, and an affiliate of Inmobiliaria Nueva York, S.A., was elected
as the Company's sole Director,  President,  Chief Executive Officer,  Secretary
and  Treasurer  and served in these  capacities  until  December  7, 1995.  Upon
closing,  WGL owned 9,904,762 shares of the total of 10,971,429 shares of Common
Stock of the  Company  outstanding  or  approximately  90.3% of the  outstanding
shares, giving effect to the Reverse Stock Split.

Operations

         From April 30, 1993, to October 16, 1995 (but  effective July 1, 1995),
the  Company  was  engaged in the  acquisition  and  development  of oil and gas
properties,  interests  and  production  and the  sale and  disposition  


                                       2
<PAGE>

of such  properties.  During  that time,  the  Company's  management  focused on
prospective  operations on the purchase and  development of existing oil and gas
production  properties at a time when major oil and gas companies were divesting
themselves  of their  continental  oil  production.  In  management's  judgment,
activities  of major oil and gas  companies  generated  an abundance of purchase
opportunities following a decline in the price of petroleum production.

         In connection with (i) the issuance of 9,904,762 shares of Common Stock
to WGL  pursuant  to the  Agreement  previously  described  above,  and (ii) the
assumption of WGL's related bank debt, the Company  acquired WGL's 75% ownership
in an oil and gas limited  liability  company (the "LLC") whose primary asset is
oil  and gas  properties  located  predominantly  in  Oklahoma  and  Texas.  The
management  company who owned 25% of the LLC later merged with Magnum  Petroleum
(see discussion below). The oil and gas properties  acquired by the Company were
recorded at WGL's historical cost  (approximately  $1,112,000 before adjustments
for receipt of pre-acquisition net revenues).  For financial reporting purposes,
the  operation of the oil and gas  properties  are included in the  accompanying
consolidated financial statement effective on May 1, 1993. Pursuant to the LLC's
operating  agreement,  75% of the net  revenue  of the LLC,  after  all  monthly
operating  expenses have been paid, may be  distributed to the Company  provided
the assets of the LLC exceed all liabilities of the LLC.

         Between  July 13 and July 18,  1994,  the Company  acquired  all of the
capital stock of Entertainment & Gaming International, Inc. ("EGI") and MegaPot,
Inc.  ("MegaPot"),  pursuant to an  Agreement  and Plan of  Reorganization,  and
acquired a 55% majority  interest in HICO,  N.V.  ("HICO"),  pursuant to a Stock
Purchase  Agreement.  At that time,  EGI, a Florida  corporation,  conducted its
operations  under the name "Sport Shop  Television,"  and was a shopping network
that markets, through television,  sports-related goods, memorabilia,  garments,
collectibles  and  equipment;  MegaPot,  a  Nevada  corporation,   designed  and
manufactured  software and hardware for video slot machines utilized in casinos;
and HICO,  a Curacao  corporation,  owned and  operated the Las Palmas Hotel and
Casino in Curacao.

         The Company then briefly changed its name from "Whitestone  Industries,
Inc." to "Entertainment & Gaming  International,  Inc." However,  as a result of
the failure of  consideration by EGI, the acquisitions of Entertainment & Gaming
International,  Inc. and HICO, Inc. have been rescinded and annulled and, in the
case of MegaPot, Inc., the principals of the respective parties, determined that
it would be in the interest of the  respective  parties that the  transaction be
rescinded, and that all parties return the shares of capital stock received. All
other  preliminary  agreements and letters of intent relative to the acquisition
of additional  companies as previously described in the Company's press releases
have been terminated, due to misrepresentations on the part of EGI, MegaPot, and
HICO. In light of the  cancellation  of all of these  transactions,  the Company
filed an amendment to its Certificate of Incorporation to change the name of the
Company back to Whitestone Industries, Inc. (effective January 25, 1995).

         On March 31, 1995, the Company entered into a licensing  agreement with
DieHard Marketing Group, Inc. ("DieHard").  In consideration for the issuance of
1,250,000 of its shares of Common  Shares and $50,000,  the Company  received an
exclusive  worldwide license (the "DieHard  License") in and to certain products
and proprietary  rights with respect to video software to be used in video games
and computer systems. The license has an initial period of ten years, subject to
automatic  renewal for  additional  ten year  periods,  unless the  agreement is
terminated for cause, as defined in the agreement.


                                       3
<PAGE>

         On June 1,  1995,  Whitestone  Games,  Inc.  ("Whitestone  Games")  was
incorporated in the State of Florida and became a wholly owned subsidiary of the
Company on June 7, 1995. On June 7, 1995, the Company assigned all rights in and
to the DieHard License to Whitestone Games.

         In October 1995 (but effective July 1, 1995),  the Company sold its oil
and gas  business  (including  all  related  assets and  liabilities)  to Magnum
Petroleum,  Inc.  ("Magnum")  in exchange for (i) $300,000 in cash,  (ii) 85,131
shares of Magnum  common stock.  and (iii) options to purchase  50,000 shares of
Magnum  common  stock at prices from $4.00 to $4.50.  Substantially  all of this
consideration was subsequently  transferred to Whitestone Group, Ltd., a British
Virgin  Islands  corporation  ("WGL"),  whose sole  stockholder is the Company's
former  president  and majority  stockholder,  Hernan  Saide,  in  settlement of
amounts  owed to WGL by the Company and for WGL's  assumption  of all  remaining
liabilities  of the Company  outstanding  as of July 1, 1995.  Accordingly,  the
results of the oil and gas  properties  are shown on the Company's  accompanying
financial statements separately as "discontinued operations." Additionally,  the
Company's 1994 financial  information has been  reclassified to conform with its
1995 presentation.

         In October 1995, the Company also spun off Whitestone Games to the then
stockholders  of the  Company,  in  proportion  to each  stockholder's  pro-rata
interest  in the  Company as of the record date  (September  6, 1995),  which is
accounted for as a dividend.  The shares of Whitestone  Games stock is currently
being  held in escrow  for the  benefit  of the  stockholders  until such time a
registration  statement to be filed with the Securities and Exchange  Commission
to register the Whitestone Games stock is effective.  The registration statement
will be prepared by Hernan Saide, the Company's former President, and Amy Habie,
a consultant to Whitestone Games.

         On December 7, 1995, the Company,  WGL,  Golden Bear, a newly organized
California  corporation,  and Mr. Donald Yu, the sole shareholder of Golden Bear
and the Company's current President, CEO, CFO and Chairman, entered into a Stock
Purchase and Exchange Agreement (the "Agreement") which was effective as of that
date.  Pursuant to the Agreement,  WGL contributed back to the Company its right
and interest in and to 6,700,000 shares of its 8,700,000 shares of the Company's
Common  Stock in  exchange  for the  Company's  interest  in certain  securities
(85,131 shares of Magnum Petroleum Common Stock and options).  Prior to December
7, 1995, WGL owned approximately 64.2% of the outstanding capital stock interest
of the Company.  Upon consummation of the transaction,  WGL owned  approximately
5.9% of the outstanding capital stock interest of the Company.

         Pursuant  to the  Agreement,  the Company  acquired  all of the capital
stock of Golden Bear in exchange for the distribution to Mr. Yu of (i) 3,200,000
shares of  restricted  Common  Stock of the Company and (ii)  500,000  shares of
newly  issued  shares of Series A  Convertible  Preferred  Stock (the  "Series A
Preferred Stock") convertible into 24,000,000 shares of Common Stock (subject to
certain anti-dilution  provisions).  The Common Stock and the series A Preferred
Stock  issued  to Mr. Yu  represents  approximately  79.89%  of the  outstanding
capital stock interest of the Company. A Statement of Designation was filed with
the State of  Delaware  on December  7, 1995,  setting  forth the  designations,
preferences, rights and limitations of the Series A Preferred Stock.

         Effective  December 7, 1995,  Mr. Donald Yu was appointed the Company's
Chief Executive Officer,  President,  Chief Executive Officer and Chairman,  and
Mr.  George P. Eshoo and Mr.James  Koo (who later  


                                       4
<PAGE>

resigned) were appointed as Directors of the Company and the former officers and
directors resigned from their respective offices.

         Effective   December  7,  1995,   Golden  Bear  became  a  wholly-owned
subsidiary  of  the  Company.  Golden  Bear  was  organized  by  Donald  Yu,  an
experienced toy and electronic  executive,  to develop,  market,  distribute and
sell educational and innovative toys incorporating  high technology  electronics
that provide color recognition,  voice and "surround-sound."  Golden Bear is the
licensee for certain  technology  in connection  with two of the products  being
developed and marketed by the Company as described below.

         On January 22, 1996,  Mr. Yu converted  400,000  shares of the Series A
Preferred Stock into 19,200,000 shares of Common Stock. On January 29, 1996, the
Company  amended its  Certificate  of  Designation  to provide that the Series A
Preferred  Stock are not subject to  adjustment  in the event of a reverse stock
split of the Company's Common Stock.

         Subsequently,  on January 31, 1996,  the Company filed a Certificate of
Amendment to its Certificate of Incorporation  whereby the Company increased the
number  of its  authorized  shares  of  Common  Stock,  par  value  $.0001  from
20,000,000 shares to 30,000,000 shares. The Company also increased the number of
authorized  shares of preferred stock from 1,000,000  shares to 3,000,000 shares
and changed the par value of the Company's  preferred stock from $.01 to $.0001.
Furthermore, the Company effectuated a one for ten (1:10) reverse stock split of
the Company's common stock. Pursuant to the NASD, the reverse stock split became
effective on February 2, 1996.

The Toy Industry

         There are  hundreds of  millions  of children in the world  between the
ages of two and twelve years old. In the United States alone,  there are over 40
million children in this age group. Retail sales in the United States in 1993 of
non-video  game toys was  estimated  at $17.5  billion by the Toy  Manufacturers
Association, an industry trade group. According to this trade group, the largest
toy markets by size are: United States,  Japan and Western Europe.  The industry
is dominated by large American toy manufacturers such as Mattel,  Hasbro,  Tyco,
Fisher-Price and Playskool.  These large companies primarily sell their products
using in house sales  personnel.  Other smaller  companies  typically sell their
products through independent manufacturers' representatives.

Business Strategy

         Management believes that currently,  there has been minimal integration
of  electronics  into toys,  but the success of Nintendo and SEGA indicates that
the toy  market is prime for  other  entries  to this  market.  Because  the toy
industry  is  highly  fragmented,  Management  believes,  but  there  can  be no
assurances,  that it will be able to grow rapidly with only a limited  number of
products.

         The Company,  through  Golden Bear, has developed  various  electronic,
interactive,  pre-school children's games and educational products (for purposes
of this section  which  describes  the Company's  business,  the term  "Company"
refers to Golden  Bear).  The  Company's  activities  to date have  consisted of
developing  prototypes  of  its  products  and  negotiating  marketing  outlets,
primarily  with large,  national toy store  chains.  Accordingly,  


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<PAGE>

the financial statement  presentation is that of a development stage enterprise.
Upon reaching a full operating stage, the Company envisions  contracting out the
manufacture of its products to third parties.

Products

         Beginning in October,  1995, Donald Yu, the Company's President,  Chief
Executive  Officer,  Chief  Financial  Officer,  and Chairman (as of December 7,
1995),  Joseph Whitaker,  the Company's Executive Vice President (as of February
5, 1996), Marketing,  and Lawrence Aledort, the Company's Senior Vice President,
Sales met with major toy buyers  (including Toys R Us, Kaybee,  J.C.  Penney) to
preview the  Company's  initial  product line to determine the viability of each
product  described  below  and  buyer's  responses  to each of  these  products.
Subsequently,  in mid-January 1996, the initial product line described below was
displayed  at the Hong Kong Toy Fair,  primarily  to the major  domestic  import
buyers and the  international  trade.  The Company  also  presented  its initial
product line to major buyers  representing a large cross section of U.S. outlets
including Toys R Us, KayBee, Target, Hills, Bradlees, JC Penney, FAO Schwarz, at
the Official  93rd American  International  Toy Fair in New York. As a result of
these initial  responses,  the Company was able to obtain  significant  purchase
orders from several major retailers,  including Toys 'R Us. However, due to lack
of proper  financing,  the Company was not able to fulfill these orders and were
subsequently cancelled by the buyers.

         Additionally,  the  Company  has met with  representatives  many of the
significant  international  countries which represent large  distribution  world
wide  including  Canada,  France,  Italy,  Germany and the United  Kingdom.  The
Company plans to secure exclusive  distributorships in these and other countries
for early 1997 to rapidly  expand its world wide  position.  See  "Marketing and
Sales."

         The Company's product line currently consists of the following:

         Catch the Beat is a  stylized  FM  Radio/Cassette  Tape  Player  with a
         built-in  antenna  and full  stereo  ear  phones.  On the  game-playing
         surface  consists  of a 16 raised and  lighted  (in  different  colors)
         buttons (similar to raised telephone numbers on a touch-tone telephone)
         that light up when music is played  through the Tape Cassette  Play. By
         incorporating certain proprietary  technology,  each button is randomly
         assigned  a note or tone.  The  object  of the game is to listen to the
         beat,  hit which  flashing  buttons  a player  believes  appears  to be
         assigned the various notes or tones and to score points. The faster the
         beat of the music, the harder the game is.

         Smart  Fun - Sounds So Real  Story  Teller  is a moving  picture  story
         system  with  "Wrap-Around"   sound  that  incorporates  a  proprietary
         3-dimensional  stereo sound  system.  Each Story Teller  consists of 16
         full-color  story  frames  that  advance   automatically,   a  built-in
         backlight for nighttime reading, and color effects with exclusive story
         cartridges  that  are  easy  to  load.  The  sound  track  incorporates
         technology using "Surround Sound," giving an impression that certain of
         these sounds may be coming from overhead,  behind,  nearby, or far away
         or are traveling.

Manufacturing

         The Company's  strategy is to manufacture  the majority of its products
through  unaffiliated  contract  manufacturers with facilities in Hong Kong, the
People's  Republic of China and other  developing  countries  in 


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the  Pacific Rim region  which  offers  labor cost  advantages.  Management  has
significant  experience and contacts in the  subcontracting of toy manufacturing
and particularly, in this region of the world. See "Management." Over the years,
Management has established close  relationships with several  subcontractors and
has  developed  product and  manufacturing  standards,  production  planning and
quality assurance functions with the ability to monitor costs, quality assurance
and oversight of  manufacturing  processes.  Some of the  Company's  products or
components  may be  manufactured  in the United  States,  depending  on cost and
related matters.

Marketing and Sales

         To conduct domestic sales and follow up on sales leads generated at the
toy fairs,  the  Company  will use an  established  network of  experienced  toy
industry sales  representative  organizations which have been used previously or
are known and  well-respected  by Management.  The Company  believes that use of
outside sales  representatives will allow the Company to maintain a low overhead
in  its  sales  operations  while,  at the  same  time,  to  take  advantage  of
professional  sales  persons with  considerable  influence in the toy  industry.
Sales  commissions paid to these  representative  groups will be consistent with
industry  standard  practices,  which is typically 5% of net sales.  Certain key
retailers will be closely monitored by headquarters  sales management in Irvine,
California,  and  consideration  given to  converting  such  retailers to "House
Account" status as that becomes economically viable.

         The  Company  will sell its  products  in this  manner  to major  North
American  retailers  of toys,  toy-related  and  consumer  electronic  products.
Accounts that the management  has previously  sold to or will make efforts to be
part of its customer base include:

         Toys R Us                 Sears                     Walmart
         Kay Bee Toys              K-Mart                    Service Merchandise
         Price Club                Costco                    Hudson Bay
         Target                    Best Buy                  Venture
         Caldor                    Ames                      Bradlee's
         Best Products             BJ's Wholesale            AAFES

         At the international level, the Company anticipates that it will set up
exclusive  distribution  agreements  in the  major  international  markets.  The
Company's  strategy is to manufacture  products for  international  distributors
once the Company  has  received a firm order  accompanied  by a letter of credit
issued by the  distributor in favor of the Company.  The Company  believes,  but
there can be no  assurances,  that  this  approach  will  help to  substantially
eliminate  most of the  capital  commitment  that may be required of the Company
prior to the  manufacture of products.  The Company does not intend to carry any
inventory for the  international  market,  thus eliminating all associated costs
including  storage,   overhead,   insurance,  and  inventory  related  expenses.
International  distributors  will be managed from the Company's  headquarters in
Irvine,  California.  The  Company  believes  that  it  is  important  that  its
distributors be local to each country,  based upon the Company's belief that the
propensity  to buy local and this  inclination  will  also help the  Company  to
obtain local input regarding  packaging,  product  positioning,  pricing and new
product  ideas which would appeal to a specific  country.  The  Company's  local
distributor  will be responsible  for all of the marketing and selling  expenses
for each of their respective markets.


                                       7
<PAGE>

Competition

         The  toy  industry  is  highly  competitive.  Competitors  include  toy
companies,  divisions  of large  diversified  companies,  publishing  companies,
manufacturers of video and voice communication  products and consumer electronic
companies.  The products  envisioned  by the Company will compete in a number of
different  markets with a number of different  competitors.  The Company's  main
competitors  include Mattel,  Hasbro,  Tyco,  Fisher-Price,  Playskool and Video
Technology  Industries  who are  considerably  larger  than the Company and have
substantial financial and creative resources.  Nonetheless, the Company believes
that it will be able to compete  favorably  with other toy  companies by product
innovation  incorporating  advanced technology and through focused marketing and
promotion in targeted niche markets.

License Agreements

         On December 5, 1995,  Golden Bear entered into a license agreement with
James  Wickstead  Design  Associates,  which grants  Golden Bear the  exclusive,
worldwide right and license to use the proprietary  technology  during the lives
of the proprietary  rights in connection with the Smart Fun - Musical Color Disc
Player and related  products to be developed,  in exchange for royalty  payments
ranging from 3% to 6% of net sales. Other forms of consideration received by the
Company in connection with the license are shared equally with the licensor.

         On December 5, 1995,  Golden Bear also entered into a license agreement
with  Diece-Lisa  Industries,  Inc.  which  grants  Golden  Bear the  exclusive,
worldwide  right and  license to the  proprietary  rights  relating  to the game
"Catch  the  Beat,"  all  merchandising  rights),  and  all  related  rights  to
manufacture, use and sell the "Catch the Beat" and related products, in exchange
for royalty  payments  ranging  from 4% to 6% of net sales.  The initial term of
this  license is one year,  and is  automatically  renewed  if  certain  minimum
royalty  amounts  ($15,000  per year) are paid.  Additionally,  the  Company and
Diece-Lisa  Industries,  Inc.  will  share  equally in the gross  revenues  from
sublicenses granted to third parties.

         These licenses have since reverted back to the respective inventors due
to Company's inability to maintain the minimum royalty payment amounts.

Employees

         The Company currently employs one full-time  employee who is engaged in
both executive and administrative  capacities. At present, none of the Company's
employees are receiving any salaries or benefits.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's executive offices are located at 19200 Von Karman Avenue,
Suite 500, Irvine, CA 92715. These premises, which consists of approximately 350
square feet of space,  and is subject to a lease  agreement  with DBS,  Inc. The
lease is on a six month  basis,  beginning  March 1, 1996,  at a base  rental of
$1450 per month. The Company considers these facilities to be temporary.


                                       8
<PAGE>

         The Company  has  temporarily  moved its  executive  facilities  to 702
Marshall Street,  Suite 500, Redwood City,  California  94063.  These facilities
have been made available by Mr. George Eshoo, who is a Director and Secretary of
the Company,  at no charge.  The use of such  facilities  may be  terminated  on
notice by either Mr. Eshoo or the Company.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not engaged in a material legal proceeding.  The Company
is aware of a lawsuit  filed by AJ Robbins,  P.C. on November 15, 1995,  but the
Company  has not yet  been  served  on the  Company.  The  lawsuit  is  based on
accountants'  fees  allegedly due by the Company.  The former  management of the
Company,  and specifically  Hernan Saide, has indemnified the present management
and the Company  against any actions that occurred or accrued period to December
7, 1995.  The  Company has  resolved  this  lawsuit  through  assignment  to the
Plaintiff  of  certain  indemnification  rights  received  previously  from  Mr.
Saide[?].

         The  Company is a  Plaintiff  in a lawsuit  filed in the U.S.  District
Court  for the  Northern  District  of  California,  (Donald  Yu and  Whitestone
Industries,  Inc.  vs.  Alex  Vilnis,  Baltic  Trust  Company  et al;  Case  No.
C97-0484MHP)  against Mr. Alex Vilnis,  Vilnis Laurins, The Baltic Trust Company
and the International  Exchange Co. Ltd. of Latvia.  Both of these companies are
controlled by Mr. Alex Vilnis. The Company is alleging fraud and is also seeking
to obtain equitable relief involving the cancellation of 2,183,750 shares of its
Common Stock issued to International Exchange Co. Ltd. The Company had sought to
enter into a loan and stock sale  financing  agreement with Baltic Trust Co. and
subsequently  ascertained  that the  transaction  involved a scheme  pursuant to
which the  Company  would  not  receive  the  negotiated  consideration  for the
issuance  of its  shares.  As a result of the  initiation  of the  lawsuit,  the
Company has been  successful  in  obtaining a temporary  restraining  order with
regard to any possible transfer of the shares at issue, and is in the process of
obtaining a default  judgment  against the above  defendants.  While the Company
anticipates  that it will be difficult to obtain and enforce any damages awarded
to the  Company,  it  believes  that it would be in a position  to  successfully
preempt any effort by the Defendants to transfer or liquidate the shares.

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

         Not applicable.


                                       9
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS

         The Company's Common Stock commenced  trading on the OTC Bulletin Board
on January 6, 1994 under the symbol "WHST."  Subsequently,  on February 2, 1996,
the NASD advised the Company that its trading symbol had been changed to "WHSN."
The following  table sets forth the high and low bid  quotations  for the Common
Stock  for the  periods  indicated.  These  quotations  reflect  prices  between
dealers,  do not include retail  mark-ups,  mark-downs or commission and may not
necessarily represent actual transactions.

                                              High                 Low
                                              ----                 ---
         March 31, 1994                        (1)                 (1)
         June 30, 1994                         (1)                 (1)
         September 30, 1994                    (1)                 (1)
         December 31, 1994                     (1)                 (1)
         March 31, 1995                        (1)                 (1)
         June 30, 1995                       .685                .625
         September 30, 1995                  .875                .640
         December 31, 1995                   .250                .250
         March 31, 1996                      5.00                2.37
         June 30, 1996                       2.50                1.75
         September 30, 1996                   .50                1.00
         December 31, 1996                    .50                1.00
         March 31, 1997                       .25                 .50
         May 31, 1997                         .10                 .25

--------------
(1) No trading activities during these periods.

         As of May 31, 1997, there were 1,062 holders of record of the Company's
common stock.  The closing bid price quoted on the pink sheets for the Company's
Common Stock at May 30, 1997, was $0.10.

         The Company has never declared or paid, and has no present intention to
pay, cash dividends on its Common Stock.  Any future  dividends will necessarily
depend upon the  Company's  future  earnings,  capital  requirements,  financial
condition and other factors.


                                       10
<PAGE>

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

         The  following  discussion  should  be read  in  conjunction  with  the
consolidated financial statements of the Company and the Notes thereto appearing
elsewhere on this Report.

General

         The Company  currently is in the business of  developing a product line
of toys focused on  incorporating  the latest advances in electronic  technology
into new, as well as previously accepted styles of toys.

Results of Operations

         Prior  January  1993  the  Company  was  not  engaged  in   significant
operations.  From April 1993 to October  1995,  the  Company  was engaged in the
acquisition and development of oil and gas properties, interests and production,
and the sale and  disposition  of such  properties.  In October 1995 the Company
sold its oil and gas interests.  From 1995 to the present, the Company,  through
its wholly  owned  subsidiary  Golden  Bear,  the  Company  has been  developing
educational  and  innovative  electronic  games and toys.  The  Company  has not
realized any sales revenues to date in such development.

Year ended December 31, 1996
compared to year ended December 31, 1995

         No true  comparison  can be made  between the years ended  December 31,
1996 and December  31, 1996.  The business in which the Company had been engaged
in the previous year was subsequently  discontinued in 1995. The Company entered
into a new line of business  commencing December 1995 and continues to be in the
development stage of operations.  The Company did not realize any sales revenues
from its new activities in 1996. In 1996 the Company incurred expenses from both
the research and  development  of its current  product line and through a failed
financing effort. This resulted in net operating losses to the Company.

Revenues

         As discussed above, the Company is a development  stage company and has
not produced any sales  revenues as of December 31, 1996.  At December 31, 1996,
the Company had net operating loss  carryforwards of approximately  $2.0 million
expiring in the years 2007 and 2009.  At December 31, 1996,  the Company's had a
deferred tax asset of  approximately  $806,000 related to the net operating loss
carryforwards.  The Company  has  provided a  valuation  allowance  for the full
amount of this deferred tax asset.

         The  Company  is  committed  under  two  perpetual   license  agreement
connected to the development of its products.  These agreements call for royalty
payments of from 4-6% of all such product sales. The Company was required to pay
advance  royalties  aggregating  $45,000 upon entering these agreements in 1995.
Such payments were initially recorded as prepaid royalties.  However,  they have
been  written  off in 1996  upon the  


                                       11
<PAGE>

Company's reevaluation of their future economic benefit.

Costs and Expenses

         Costs and expenses  related to research and development at December 31,
1996 were $252,820.  This plus general and administrative  expenses of $480,624,
mostly  incurred  in  the  Company's  failed  financing,  comprised  70%  of the
Company's total costs and expenses.

Liquidity and Capital Resources

         As of December 31, 1996, the Company is in a development  stage and has
a  working  capital  deficit  of  approximately  ($300,000).  As a result of the
inability of the Company to implement its strategic  program for the development
of its Golden  Bear  subsidiary,  and the desire to secure a possible  operating
base so that the Company's  stockholders  may receive a  satisfactory  return on
their investment,  the Company and its President, Mr. Donald Yu, entered into an
Agreement on June 16, 1997 with Royal Capital,  Inc. ("Royal") whereby Royal (i)
acquired  100,000  shares of the Company's  Preferred  Stock held by Mr. Yu; and
(ii)  acquired  the  voting  proxy of  1,120,000  shares  of Common  Stock.  The
consideration paid to Mr. Yu was $100,000.  As a result, Royal obtained a voting
majority of the Company's capital stock.

         On June 24, 1997, the Company,  Royal and  Proformix,  Inc., a Delaware
company  ("Proformix"),  entered  into a stock  exchange  agreement  whereby the
Company  will  acquire all or  substantially  all of the  outstanding  shares of
capital stock of Proformix. In order to enter into the aforesaid agreement,  the
Company's  Board  of  Directors  has  authorized  a 137:1  reverse  split of its
outstanding  shares of Common Stock (including shares of Common Stock underlying
the Company's outstanding Preferred Stock). The Company then intends to exchange
one share of its Common Stock for every 3.4676  shares  Proformix  common stock.
The aforesaid  acquisition will not include Golden Bear. The Company's Board has
authorized a 5% stock dividend of the Common Stock of Golden Bear to the current
shareholders of the Company.

ITEM 7.  CONSOLIDATED FINANCIAL STATEMENTS

         The financial statements are included under Item 13(a) of this Report.

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

         Not applicable.


                                       12
<PAGE>

                                    PART III

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

         The following  table sets forth the names,  ages and positions with the
Company of the executive  officers and directors of the Company.  Directors will
be elected at the Company's  annual  meeting of  stockholders  and serve for one
year or until their successors are elected and qualify.  Officers are elected by
the Board and  their  terms of office  are,  except to the  extent  governed  by
employment contract, at the discretion of the Board.

  Name                     Age        Position
  ----                     ---        --------
Donald Yu                  59         President, Chief Executive
                                      Officer, Chief Financial Officer, Director

George P. Eshoo            59         Director and Secretary

         The officers are elected  annually by the Board of Directors  and serve
at the discretion of the Board of Directors.

         DONALD  YU has  served  as the  President,  CEO and a  Director  of the
Company since December 7, 1995. From August, 1995 to December,  1995, Mr. Yu was
an  independent  consultant,  developing  what  are  now the  Company's  current
products.  Since its  inception in December  1995,  Mr Yu also has served as the
sole officer and director of Golden Bear,  now a wholly owned  subsidiary of the
Company.  From  October,  1994 to August,  1995,  Mr. Yu was President and Chief
Executive  Officer  of  Q-Sound  Electronics,   Inc.  (QSL),  a  Newport  Beach,
California  based company  specializing  in the design,  manufacture  and market
consumer  products  utilizing  proprietary  three-dimensional  audio,  "surround
sound" technology.  From October,  1993, to October,  1994, Mr. Yu had served as
President  and CEO of Dynamic  Life  Products of Newport  Beach,  California,  a
manufacturer  and distribute of bath safety  products.  From September,  1990 to
July,  1992, Mr. Yu was President of Catalina Toys, Inc., a manufacturer of high
tech toys.

         GEORGE P.  ESHOO has been  senior  partner of the law firm of George P.
Eshoo,  P.A.  since 1966.  Mr Eshoo  attended the  University  of  California at
Berkeley,  where he received a Bachelor of Science  degree in 1961, and received
his J.D. in 1966 from the  University of California at San  Francisco,  Hastings
College of Law and received his Juris Doctor.

ITEM 10. EXECUTIVE COMPENSATION

Compensation

         The Company did not compensate any of its officers and directors during
the year ended December 31, 1996.


                                       13
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets  forth,  as of June 9, 1997,  the record and
beneficial  ownership  of  Common  Stock  of the  Company  by each  officer  and
director,  all officers and  directors as a group,  and each person known to the
Company to own beneficially or of record five percent or more of the outstanding
shares of the Company:

                                        Shares
Officers, Directors and                 Beneficially      Percent of Shares
Principal Stockholders                  Owned             Beneficially Owned (1)

Donald R. Yu                            4,800,000(2)            44.8%
George Eshoo                            85,000(3)                1.4%
Marianne Rossi                          20,000                   **
                              
International Exchange Ltd.             2,183,750(4)            36.9%
 c/o Baltic Trust Co., Ltd.
 Matisa Iela 65-4
 LV-10009 Riga, Latvia

Jean Yu                                 1,120,000               18.9%

All directors,                          4,905,000               45.7%
executive officers
as a group (3 persons)

   ** Less than 1%

(1)  For purposes of this table,  a person or group of persons is deemed to have
     "beneficial  ownership" of any shares of Common Stock which such person has
     the  right to  acquire  within 60 days of June 9,  1997.  For  purposes  of
     computing the percentage of outstanding shares of Common Stock held by each
     person or group of persons named above,  any security  which such person or
     persons  has or have the right to acquire  within such date is deemed to be
     outstanding  but is  not  deemed  to be  outstanding  for  the  purpose  of
     computing the percentage ownership of any other person. Except as indicated
     in the  footnotes  to this  table  and  pursuant  to  applicable  community
     property laws, the Company  believes based on information  supplied by such
     persons,  that the  persons  named  in this  table  have  sole  voting  and
     investment  power with  respect to all  shares of Common  Stock  which they
     beneficially own.

(2)  Represents  shares  of  Common  Stock  underlying  100,000  shares  of  the
     Company's Series A Convertible Preferred Stock.

(3)  Includes  50,000  shares  beneficially  owned by Eshoo Corp.,  of which Mr.
     Eshoo is President.


                                       14
<PAGE>
   
(4)  These shares of Common Stock are  currently in dispute as to ownership  and
     the  transfer  of these  shares  has been  enjoined  by the  United  States
     District Court for the Northern District of California pending  resolution.
     The Company has challenged the record owner's  entitlement to the shares in
     question.


                                       15
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In January 1996,  George P. Eshoo, a director of the Company,  received
35,000 shares of Common Stock in consideration  for legal services  performed on
behalf of the Company.  In addition,  in August 1996, Mr. Eshoo received  50,000
shares of Common Stock of the Company for services as an officer and director of
the Company.

         On December 26, 1995, Spiro Pappas, Trustee, received 200,000 shares of
Common Stock from the Company in consideration for $99,985.  In August 1996, Mr.
Pappas received 200,000 shares in exchange for various  consulting and strategic
planning services provided to the Company.

         On December 7, 1995, the Company,  WGL,  Golden Bear, a newly organized
California  corporation,  and Mr. Donald Yu,  ("Yu"),  the sole  shareholder  of
Golden Bear and the Company's current President, CEO, CFO and Chairman,  entered
into a Stock  Purchase  and  Exchange  Agreement  (the  "Agreement")  which  was
effective as of that date.  Pursuant to the Agreement,  WGL contributed  back to
the Company its right and interest in and to 6,700,000  shares of its  8,700,000
shares of the Company's  Common Stock in exchange for the Company's  interest in
certain securities (85,131 shares of Magnum Petroleum Common Stock and options).
Prior to  December 7, 1995,  WGL owned  approximately  64.2% of the  outstanding
capital stock interest of the Company. Upon consummation of the transaction, WGL
owned  approximately  5.9% of the  outstanding  capital  stock  interest  of the
Company (See discussion below).

         Pursuant  to the  Agreement,  the Company  acquired  all of the capital
stock of Golden Bear in exchange  for the  distribution  to Mr. Yu of  3,200,000
shares of  restricted  Common  Stock of the Company and (ii)  500,000  shares of
newly  issued  shares of Series A  Convertible  Preferred  Stock (the  "Series A
Preferred Stock") convertible into an 24,000,000 shares of Common Stock (subject
to  certain  anti-dilution  provisions).  The  Common  Stock  and the  series  A
Preferred  Stock  issued  to  Mr.  Yu  represents  approximately  79.89%  of the
outstanding  capital stock  interest of the Company.  A Statement of Designation
was filed with the State of  Delaware on  December  7, 1995,  setting  forth the
designations,  preferences,  rights and  limitations  of the Series A  Preferred
Stock.

         On  January  22,  19Mr.  Yu  converted  400,000  shares of the Series A
Preferred Stock into 1,920,000  shares of Common Stock. On January 29, 1996, the
Company  amended its  Certificate  of  Designation  to provide that the Series A
Preferred  Stock are not subject to  adjustment  in the event of a reverse stock
split of the Company's Common Stock.

         Subsequently,  on January 31, 1996,  the Company filed a Certificate of
Amendment to its Certificate of Incorporation  whereby the Company increased the
number  of its  authorized  shares  of  Common  Stock,  par  value  $.0001  from
20,000,000 shares to 30,000,000 shares. The Company also increased the number of
authorized  shares of preferred stock from 1,000,000  shares to 3,000,000 shares
and changed the par value of the Company's  preferred stock from $.01 to $.0001.
Furthermore, the Company effectuated a one for ten (1:10) reverse stock split of
the Company's common stock which became effective on February 2, 1996.


                                       16
<PAGE>


         In October 1995 (but effective July 1, 1995),  the Company sold its oil
and gas  business  (including  all  related  assets and  liabilities)  to Magnum
Petroleum,  Inc.  ("Magnum")  in exchange for (i) $300,000 in cash,  (ii) 85,131
shares of Magnum  common stock.  and (iii) options to purchase  50,000 shares of
Magnum  common  stock at prices from $4.00 to $4.50.  Substantially  all of this
consideration was subsequently  transferred to Whitestone Group, Ltd., a British
Virgin  Islands  corporation  ("WGL"),  whose sole  stockholder is the Company's
former  president  and majority  stockholder,  Hernan  Saide,  in  settlement of
amounts  owed to WGL by the Company and for WGL's  assumption  of all  remaining
liabilities of the Company outstanding as of July 1, 1995.

         As discussed  above,  in exchange for 6,700,000  shares of is 8,700,000
shares of the  Company's  Common  Stock,  WGL received  85,131  shares of Magnum
Petroleum Common Stock and options.

         Pursuant to an  agreement  with Ms.  Jean King,  the former wife of Mr.
Donald Yu, the Company's President, CEO, CFO, and Chairman, Ms. King is entitled
to one-half of Mr. Yu's (i) capital stock of the Company and (ii) earnings. As a
result,  Mr. Yu  transferred  1.12  million  shares of Common Stock to Ms. King.
Additionally,  Ms.  King  will  be  assigned  all  rights  to  one-half  of  any
compensation received or accrued by or on behalf of Mr. Yu in the future.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

         (a)  The  financial   statements  listed  on  the  index  to  financial
statements on page F-1 are filed as part of this Form 10-KSB.

         (b) Reports on Form 8-K

         The Company filed Form 8-K reports dated  February 9, 1996 (Items 5 and
7).


                                       17
<PAGE>

                                    SIGNATURE

         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 on this 22nd day of July, 1997.

                                           WHITESTONE INDUSTRIES, INC.

                                           By: /s/ Donald Yu
                                               ---------------------------------
                                           Donald Yu, chairman of the Board
                                           and Chief Executive Officer

         In accordance  with the Exchange,  this Report has been signed below by
the following  person on behalf of the Registrant,  and in the capacities and on
the date indicated.

                              SIGNATURES

                          Chairman of the Board,
                          President, Principal
/s/Donald Yu              Executive, and Principal Financial
-----------------------   and Accounting Officer                 July 22, 1997
Donald Yu                 



/s/George P. Eshoo        Director                               July 22, 1997
-----------------------
George P. Eshoo

                                       18
<PAGE>


                   WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

                        (A DEVELOPMENT STAGE ENTERPRISE)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1996

                                                                     Page Number
                                                                     -----------
                                                                    
Independent Auditors' Report                                             F-2

Consolidated Balance Sheet at December 31, 1996                          F-3

Consolidated Statements of Operations                                    F-4
  for the period  cumulative  December 7, 1995 (inception)          
  to December 31, 1996, and years ended December 31, 1996 and 1995 

Consolidated Statement of Changes in Stockholders' Equity (Deficit)      F-5
  for the years ended December 31, 1996 and 1995                         

Consolidated Statements of Cash Flows                                    F-6 
  for the years ended December 31, 1996 and 1995            
                             
Notes to Consolidated Financial Statements                             F-7-13

                                                                   
                                       F-1

<PAGE>

                   [LETTERHEAD OF FELDMAN RADIN & CO., P.C.]

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
    and Stockholders
Whitestone Industries, Inc. and Subsidiary
Boca Raton, Florida

     We have audited the accompanying  consolidated  balance sheet of Whitestone
Industries,  Inc. and Subsidiary (A Development Stage Enterprise) as of December
31, 1996,  and the related  consolidated  statements of  operations,  changes in
stockholders' equity (deficit) and cash flows for the period cumulative December
7, 1995  (inception) to December 31, 1996, and two years ended December 31, 1996
and 1995.  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.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  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 Whitestone  Industries Inc.
and Subsidiary (A Development Stage Enterprise) as of December 31, 1996, and the
results of its operations and cash flows for the period  cumulative  December 7,
1995 (inception) to December 31, 1996, and two years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.


                                       /S/ Feldman Radin & Co., P.C.
                                       Certified Public Accountants

July 8, 1997
New York, N.Y.


                                       F-2

<PAGE>

                   WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

                        (A DEVELOPMENT STAGE ENTERPRISE)

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1996

                                     ASSETS

PATENTS                                                             $    13,704
                                                                    -----------
                                                                    $    13,704
                                                                    ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
     Accounts payable                                               $    84,145
     Bank debt                                                          103,254
     Stockholder's loan                                                 126,425
                                                                    -----------
         TOTAL CURRENT LIABILITIES                                      313,824
                                                                    -----------
STOCKHOLDERS' EQUITY:
     Preferred stock, $ .01 par value; 3,000,000 shares;
         authorized, 100,000 shares issued and outstanding                  100
     Common stock, $ .0001 par value; 30,000,000 shares
         authorized, 5,899,643 shares issued, 5,229,643
         shares outstanding and 670,000 shares in treasury                  590
     Additional paid-in capital                                       2,242,926
     Accumulated deficit                                             (2,543,736)
                                                                    -----------
         TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                          (300,120)
                                                                    -----------
                                                                    $    13,704
                                                                    ===========

                 See notes to consolidated financial statements


                                       F-3
<PAGE>

                   WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

                        (A DEVELOPMENT STAGE ENTERPRISE)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  Cumulative
                                                 December 7,
                                                     1995
                                                (Inception) to     Year ended December 31,
                                                  December 31,    --------------------------
                                                     1996            1996           1995
                                               ----------------- -----------    -----------
<S>                                             <C>              <C>            <C>      
REVENUES:                                                       
     Sales                                      $      --        $      --      $      --
     Other                                          107,545          107,545           --
                                                -----------      -----------    -----------
         Total revenues                             107,545          107,545           --
                                                                
COSTS AND EXPENSES:                                                                                           
     General and administrative                     480,624          419,391         61,233
     Direct expenses                                 10,140             --           10,140
     Payroll                                        122,750          122,750           --
     Research and development                       252,820          151,117        101,703
     Amortization of unearned consulting fees       162,500          162,500           --
                                                -----------      -----------    -----------
         Total costs and expenses                 1,028,835          855,759        173,076
                                                                
LOSS FROM CONTINUING OPERATIONS                    (921,290)        (748,214)      (173,076)
                                                                
LOSS FROM DISCONTINUED OPERATIONS                      --               --         (220,091)
                                                -----------      -----------    -----------
NET LOSS                                        $  (921,290)     $  (748,214)   $  (393,167)
                                                ===========      ===========    ===========
LOSS PER COMMON SHARE:                                          
     Continuing operations                      $     (0.23)     $     (0.18)   $     (0.14)
     Discontinued operations                           --               --            (0.18)
                                                -----------      -----------    -----------
NET LOSS PER COMMON SHARE:                      $     (0.23)     $     (0.18)   $     (0.32)
                                                ===========      ===========    ===========
WEIGHTED AVERAGE NUMBER OF COMMON                               
     SHARES OUTSTANDING                           4,010,604        4,186,101      1,242,963
                                                ===========      ===========    ===========
                                                                
</TABLE>

                 See notes to consolidated financial statements


                                       F-4
<PAGE>

                   WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

                        (A DEVELOPMENT STAGE ENTERPRISE)

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                    Preferred Stock      Common Stock                          
                                                   -----------------   -------------------    Additional   Accumulated
                                                   Shares     Amount    Shares     Amount  Paid-in Capital   Deficit        Total
                                                   ------     ------    ------     ------  ---------------   -------        -----
<S>                                                <C>         <C>     <C>           <C>       <C>        <C>             <C>      
BALANCE - DECEMBER 31, 1994                          --        $--     1,173,443    $117     $ 862,141    $  (846,625)    $  15,633
     Net loss                                        --         --          --       --           --         (393,167)     (393,167)
     Proceeds from sale of shares                    --         --        30,000       3        78,747           --          78,750
     Shares issued for services and debt             --         --        26,200       3       160,897           --         160,900
     Shares issued for Diehard license               --         --       125,000      12       399,988           --         400,000
     Distribution of Whitestone Games as                                                                
       dividend                                      --         --          --       --           --         (555,730)     (555,730)
     Capital contribution                            --         --          --       --        120,538           --         120,538
     Proceeds from sale of shares                    --         --       200,000      20        99,965           --          99,985
     Common shares issued for Golden Bear                                                               
       stock                                         --         --       320,000      32           (32)          --            --
     Preferred shares issued for Golden                                                                 
       Bear stock                                 500,000        500        --       --           (500)          --            --
     Conversion of preferred to common           (400,000)      (400)  1,920,000     192           208           --            --
                                                 --------       ----   ---------     ---      --------    -----------      --------
                                                                                                                         
BALANCE - DECEMBER 31, 1995                       100,000       $100   3,794,643    $379    $1,721,952    $(1,795,522)    $ (73,091)
     Net loss                                        --         --          --       --           --         (748,214)     (748,214)
     Proceeds from sale of shares                    --         --       325,000      33       187,452           --         187,485
     Shares subject of litigation                    --         --       700,000      70           (70)          --            --
     Shares issued for services                      --         --     1,080,000     108       333,592           --         333,700
                                                 --------       ----   ---------     ---     ---------    -----------     ---------
BALANCE - DECEMBER 31, 1996                       100,000       $100   5,899,643    $590    $2,242,926    $(2,543,736)    $(300,120)
                                                 ========       ====   =========    ====    ==========    ===========     =========
</TABLE>
                                        
                 See notes to consolidated financial statements


                                      F-5

<PAGE>

                   WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

                        (A DEVELOPMENT STAGE ENTERPRISE)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                  Cumulative
                                                                  December 7,
                                                                     1995
                                                                  (Inception)      Year Ended December 31,
                                                                to December 31,   -------------------------
                                                                     1996            1996           1995
                                                                  ---------       ---------      ----------
<S>                                                               <C>             <C>            <C>        
CASH FLOWS FROM CONTINUING OPERATIONS:
     Loss from continuing operations                              $(921,290)      $(748,214      $ (173,076)
            Amortization of unearned consulting fees                162,500         162,500            --
            Common stock issued for services                        171,200         171,200            --
         Changes in assets and liabilities:
            (Increase) decrease in prepaid expenses                    --            45,000         (45,000)
            (Increase) in patents                                   (13,704)        (13,704)           --
            Increase (decrease) in accounts payable                  84,145         (35,080)        119,225
                                                                   --------        --------        --------
NET CASH (USED IN) CONTINUING OPERATIONS                           (517,149)       (418,298)        (98,851)

CASH FLOWS FROM DISCONTINUED OPERATIONS:
     Loss from discontinued operations                                 --              --          (220,091)
     Shares issued for services                                        --              --           160,900
     Changes in assets and liabilities of
       discontinued business                                           --              --           106,053
                                                                   --------        --------        --------

NET CASH PROVIDED BY DISCONTINUED OPERATIONS                           --              --            46,862
                                                                   --------        --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                              --              --          (155,730)
     Increase in organization costs                                    --              --            (2,003)
                                                                   --------        --------        --------
NET CASH (USED IN) INVESTING ACTIVITIES                                --              --          (157,733)
                                                                   --------        --------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Sale of common stock                                           287,470         187,485         178,735
     Stockholder's loan                                             126,424         126,424            --
     Bank debt                                                      103,255         103,255            --
                                                                   --------        --------        --------
CASH PROVIDED BY FINANCING ACTIVITIES                               517,149         417,164         178,735
                                                                   --------        --------        --------
NET (DECREASE) IN CASH                                                 --            (1,134)        (30,987)

CASH AT BEGINNING OF PERIOD                                            --             1,134          32,121
                                                                   --------        --------        --------
CASH AT END OF PERIOD                                              $   --          $   --          $  1,134
                                                                   ========        ========        ========
</TABLE>

  NON-CASH FINANCING AND INVESTING ACTIVITIES:

     (1)  During 1995, net debt and payables  totalling $120,538 were assumed by
          a  former  major  stockholder.  This  has  been  accounted  for  as  a
          contribution to capital.

     (2)  During 1995, assets with a net value of $555,730 were distributed as a
          dividend in connection with the spin-off of Whitestone Games, Inc.


                 See notes to consolidated financial statements


                                       F-6
<PAGE>



                   WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1996

1.       BUSINESS

                  Whitestone  Industries,  Inc.  (the  "Company"),  through  its
         wholly-owned subsidiary, Golden Bear Entertainment Corporation ("Golden
         Bear"),  is  currently  engaged in the  development  and  marketing  of
         electronic,  interactive,  pre-school  children's games and educational
         products.

                  The Company's  activities to date have consisted of developing
         prototypes of the products and negotiating marketing outlets, primarily
         with large,  national  toy store  chains.  Accordingly,  the  financial
         statement presentation is that of a development stage enterprise.  Upon
         reaching a full operating stage, the Company envisages  contracting out
         the manufacture of its products.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          a.   Basis of  Presentation - The  consolidated  financial  statements
               include  the  accounts of the  Company  and its  subsidiary.  All
               material   intercompany   transactions  and  balances  have  been
               eliminated.

          b.   Securities  Issued for Services - The Company  accounts for stock
               and options  issued for  services by reference to the fair market
               value of the  Company's  stock on the date of stock  issuance  or
               option  grant.  Compensation  expense  is  recorded  for the fair
               market value of the stock issued, or in the case of options,  for
               the difference  between the stock's fair market value on the date
               of grant and the option exercise price.

               Effective  January 1, 1996,  the  Company  adopted  Statement  of
               Financial  Accounting  Standards (SFAS) No. 123,  "Accounting for
               Stock-based Compensation".  The statement generally suggests, but
               does not require,  employee stock-based compensation transactions
               be  accounted  for based on the fair  value of the  consideration
               received  or the fair  value of the  equity  instruments  issued,
               whichever  is  more  reliably  measurable.  As  permitted  by the
               statement,  the  Company  has  elected to  continue to follow the
               requirements  of  Accounting  Principles  Board  Opinion  No. 25,
               "Accounting  for  Stock  Issued  to  Employees",  which  does not
               require


                                       F-7

<PAGE>

               compensation to be recorded if the  consideration  to be received
               is at least equal to the fair value at the measurement  date. The
               adoption  of SFAS No. 123 does not have a material  impact on the
               financial  statements.  The  Company  has not made  the  required
               proforma  disclosures  in  accordance  with SFAS No. 123  because
               there were no stock options or warrants  outstanding  at December
               31, 1996 and 1995.

          c.   Loss Per Share - Loss per share is based on the weighted  average
               number of  common  shares  and  dilutive  securities  outstanding
               during  the  periods,  after  giving  retroactive  effect  to the
               recapitalization.

          d.   Reorganization  - On December 7, 1995,  the  Company,  Whitestone
               Group,  Ltd.,  a  British  Virgin  Islands  limited   partnership
               organized  under  the laws of  British  Virgin  Islands  ("WGL"),
               Golden Bear, a newly formed California  corporation and Donald Yu
               entered  into  a  Stock  Purchase  and  Exchange  Agreement  (the
               "Agreement"),  which was effective on December 7, 1995.  Pursuant
               to the Agreement,  WGL contributed back to the Company its rights
               and  interest  in  670,000  shares of its  870,000  shares of the
               Company's  common  stock.  Prior to December  7, 1995,  WGL owned
               approximately  64.2% of the outstanding capital stock interest of
               the Company.  Upon  consummation  of the  transaction,  WGL owned
               approximately  5.9% of the outstanding  capital stock interest of
               the Company.

               Pursuant  to  the  Agreement,  the  Company  acquired  all of the
               capital stock of GBEC in exchange for the distribution to Mr. Yu,
               the sole stockholder of GBEC, of (I) 320,000 shares of restricted
               common  stock of the  Company  and (ii)  500,000  shares of newly
               issued  shares  of  Series A  Convertible  Preferred  Stock  (the
               "Series A Preferred Stock") that were convertible into 24,000,000
               shares of common stock of the Company.  In January  1996,  Mr. Yu
               converted  400,000 of his preferred shares into 19,200,000 common
               shares (subsequently  reduced to 1,920,000 shares in the February
               1996 reverse stock split).  This conversion is presented as if it
               had occurred at December 31, 1995.  The remaining  100,000 shares
               of preferred  stock are  nondividend  paying,  have a liquidation
               preference  of the  greater  of $.01 per  share  or 48 times  the
               liquidation  payment of the common  stock and remain  convertible
               into an aggregate of 4,800,000 shares of common stock.

          e.   Stock Split - In February  1996,  the Company  effected a one for
               ten reverse stock split. All common share data in these financial
               statements is retroactively restated to reflect this transaction.

          f.   Estimates  - The  preparation  of  the  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  


                                      F-8
<PAGE>

               results could differ from those estimates.

3.       DISCONTINUED OPERATIONS

                  In October 1995 (effective July 1, 1995), the Company sold its
         oil and gas business  (including all related assets and liabilities) to
         Magnum  Petroleum,  Inc.  ("Magnum")  in exchange for $300,000 in cash,
         85,131  shares of Magnum  common  stock and 50,000  options to purchase
         Magnum  common  stock at prices from $4.00 to $4.50.  Accordingly,  the
         results  of  the  oil  and  gas  properties  are  shown  separately  as
         "discontinued operations." The Company's 1994 financial information has
         been  reclassified  to conform with the 1995  presentation.  The Magnum
         securities  were  valued  at  $300,000.   Substantially   all  of  this
         consideration  was  subsequently  transferred  to WGL in  settlement of
         amounts owed to the Company's then  president and majority  stockholder
         and for his  assumption  of all  remaining  liabilities  of the Company
         outstanding as of that date. The excess of the  liabilities  assumed or
         settled  over the assets  distributed,  which  amount to  $120,538,  is
         recorded as a contribution to capital.

                  Revenues of the discontinued business were $422,002 for 1995.

4.       INCOME TAXES

                  At December  31,  1996,  the Company  had net  operating  loss
         carryforwards of approximately  $2.0 million expiring in the years 2007
         through  2009. On December 7, 1995,  the Company  experienced a greater
         than 50% change in ownership.  Section 382 of the Internal Revenue Code
         limits  the  availability  of  pre-ownership   change  losses  in  such
         situations.  Approximately  $1.4  million of such losses are limited to
         approximately $250,000 of annual utilization in any one year.

                  At December 31, 1996,  the Company has a deferred tax asset of
         approximately $806,000 related to the net operating loss carryforwards.
         The  full  amount  of  such  asset  has  been  reduced  by a  valuation
         allowance.

                  The (provision)  benefit for income taxes differs from amounts
         computed using the statutory federal rate as follows:

                                                           December 31,
                                                  ----------------------------
                                                     1996              1995
                                                  ---------         ----------
         Computed (provision) benefit             $ 254,000         $  134,000
         Permanent differences                     (113,000)           (68,000)
         Tax benefit not recognized                (141,000)           (66,000)
                                                  ---------         ----------
                                                  $    --           $    --
                                                  =========         ==========

                                      F-9
<PAGE>

5.       BANK DEBT

                  In April 1996, the Company obtained a $50,000 overdraft credit
         line from its  commercial  bank with an interest  rate that is 5% above
         the bank's prime rate (13.25% at December 31, 1996).  In December 1996,
         the Company obtained a $67,254 note from the same bank with an interest
         rate that is 3% above the bank's  prime rate  (11.25% at  December  31,
         1996).  This note has not been paid since its due date of  January  21,
         1997. The Company had aggregate  outstanding borrowing of $103,254 from
         the bank as of December 31, 1996.

6.       EQUIPMENT

                  In March 1996, the Company had specialized  tooling  developed
         to be used in its manufacturing  process.  The cost of this tooling was
         $270,000,  none of the cost of which was paid. During the quarter ended
         September  30,  1996,  the Company  returned  the  tooling  back to the
         manufacturer   after  it  decided   not  to   commence   manufacturing.
         Consequently,  the Company reduced its accounts payable by $270,000 and
         reversed the recording of the equipment.

7.       RESEARCH AND DEVELOPMENT EXPENSES

                  In  December  1995,  the  Company   contracted   with  several
         sub-contract  manufacturers  in Hong  Kong and  Taiwan to assist in the
         research and  development  activities of its product line of electronic
         toys. Since then, the Company accrued most of the engineering  efforts,
         including  the costs for  design,  graphics,  software,  and  prototype
         samples.  In  November  1996,  when it was evident  that the  necessary
         financing  to begin  production  would  not be  received,  the  Company
         renegotiated  the amounts due to these vendors.  Payables in the amount
         of $107,545  were settled in exchange for the transfer of rights to the
         products  being  developed  as  well as the  assignment  of some of the
         Company's  designs  and  software  programs.  Such  transfer  has  been
         recorded as other income.

8.       STOCK OPTION PLANS

                  During 1993, the Company adopted a nonqualifying  stock option
         plan for its Board of Directors.  Each board member  received an option
         to purchase  2,500 shares of the Company's  common stock at $0.05.  The
         options are exercisable over a two year period,  exercisable 25% of the
         total options at six month intervals  expiring  September 1995.  During
         1995,  the Company issued options to acquire 11,000 shares at $0.25 per
         share, all of which were exercised during 1995.

                  During 1993, the Company issued a  nonqualifying  stock option
         plan to one of its  noteholders  and  stockholders  to  purchase  1,000
         shares of the  Company's  common stock at $0.05 per share.  The options
         are exercisable over a two year period, exercisable 25% of the


                                      F-10

<PAGE>

         total options at six month intervals expiring September 1995.

                  At December 31, 1996 and 1995, no options were outstanding.

9.       SPIN-OFF OF SUBSIDIARY

                  During 1995, the Company spun-off its wholly-owned subsidiary,
         Whitestone  Games,  Inc.  to  its  shareholders.  This  transaction  is
         accounted  for as a dividend.  The total amount  recorded was $555,730.
         This consists of net tangible assets  totaling  $155,730 and a $400,000
         intangible asset related to a license to certain video games, which the
         Company acquired in June 1995 in exchange for 125,000 shares of Company
         common stock.

10.      COMMITMENTS

                  A. License Agreements - The Company is committed under the two
         perpetual  license  agreements  connected  to  the  development  of its
         products.  The agreements call for royalty payments of from 4-6% of all
         such product sales. The agreements are automatically renewable, subject
         to meeting annual minimum royalty  payments,  which aggregate  $60,000.
         The Company was required to pay advance royalties  aggregating  $45,000
         upon entering into these  agreements  in December  1995.  Such payments
         were initially recorded as prepaid royalties.  However,  they have been
         written off in 1996 upon the  Company's  reevaluation  of their  future
         economic benefit.

                  B.  Financial  Consulting  Agreement - In December  1995,  the
         Company  entered into a twelve  month  financial  consulting  agreement
         which terminates in December 1996. As consideration for the services to
         be provided under this agreement,  the Company issued 650,000 shares of
         common stock in February 1996.  Such shares were valued at an aggregate
         of $162,500, which amount was amortized to expense over the term of the
         agreement.

11.      STOCKHOLDERS' EQUITY

                  In January  1996,  the  Company  amended  its  Certificate  of
         Incorporation  to increase the number of authorized  common shares from
         20,000,000  to  30,000,000,  and to increase  the number of  authorized
         preferred  shares from  1,000,000 to  3,000,000.  This  amendment  also
         changed the par value of the preferred stock from $.01 to $.001.

                  In February  1996,  the Company sold 200,000  shares of common
         stock at $.50 per share. In March 1996, the Company sold 125,000 shares
         at $.74 per share.  Aggregate  net  proceeds  from stock  sales,  after
         expenses, were $187,485.

                  In May 1996, the Company issued 130,000 shares of common stock
         to various individuals for consulting services.  These shares have been
         valued  at  $.74  per  share,   resulting  in  a  non-cash  expense  of
         approximately $96,000.


                                      F-11

<PAGE>

                  In October  1996,  the Company  issued  700,000  shares of its
         common stock under a  subscription  agreement  for an  aggregate  sales
         price of $500,000.  The Company is currently suing to regain the shares
         upon the non-payment of amounts due under the subscription agreement.

                  In November  1996, the Company issued 300,000 shares of common
         stock to various  individuals for consulting and legal services.  These
         shares  have been  valued at $.25 per  share,  resulting  in a non-cash
         expense of approximately $75,000.

12.      LITIGATION

                  A. In October 1996, the Company entered into an agreement with
         a Latvian  company to obtain  certain  financing.  The Latvian  company
         agreed to buy 700,000 shares of Company's common stock for $500,000 and
         to  additionally  provide loan financing of $400,000,  to be secured by
         1,483,750 shares of stock owned by certain shareholders.  Subsequent to
         the issue and transfer of the  2,183,750  shares,  the Company  learned
         that the agreed to funds were not provided.

                  In February 1997, the Company filed lawsuit as to ownership of
         the 2,183,750  shares  transferred.  Since then, these shares have been
         enjoined by the United States District Court for the Northern  District
         of California pending resolution. The Company has challenged the record
         owner's entitlement to the shares in question.

                  B. In June 1997,  the Company was named,  among other parties,
         in  a  lawsuit  by  a   shareholder.   The  Company   believes  it  has
         jurisdictional  defenses in this matter,  and does not believe that any
         loss would be material.

13.      SUBSEQUENT EVENTS

                  On June 16, 1997, Royal Capital, Inc.("Royal") entered into an
         agreement  with the Company and its  president,  Donald R. Yu,  whereby
         Royal (i) acquired 100,000 shares of the Company's preferred stock held
         by Mr. Yu; and (ii)  acquired the voting  proxy of 1,120,000  shares of
         common  stock.  The  consideration  paid to Mr. Yu was  $100,000.  As a
         result,  Royal  obtained a voting  majority  of the  Company's  capital
         stock.

                  On June 24, 1997, the Company,  Royal and  Proformix,  Inc., a
         Delaware company  ("Proformix")  entered into an acquisition  agreement
         whereby  the  Company  will  acquire  all or  substantially  all of the
         outstanding  shares of capital  stock of  Proformix,  Inc.  In order to
         enter into the aforesaid  agreement,  the Company's  Board of Directors
         authorized a 137:1  reverse split of its  outstanding  shares of Common
         Stock.  The Company  then  intends to exchange  one share of its Common
         Stock  with  3.4676  shares   Proformix  common  stock.  The  aforesaid
         acquisition  will not include Golden Bear,  the Company's  wholly owned
         

                                      F-12

<PAGE>

          subsidiary.  The Company's  Board has  authorized a 5% stock  dividend
          consisting  of  the  Common  Stock  of  Golden  Bear  to  the  current
          shareholders of the Company.

                                      F-13