SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

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

                    For the Fiscal Year Ended March 31, 1998

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

        For the transition period from              to             .
                                       ------------    ------------

                           Commission File No. 0-22049

                                 S.W. LAM, INC.
                -----------------------------------------------
                (Name of registrant as specified in its charter)

              Nevada                                            62-1563911
  -------------------------------                         ----------------------
 (State or other jurisdiction of                          (I.R.S. Employer 
  incorporation or organization)                          Identification Number)



           Unit 25-32, Second Floor, Block B, Focal Industrial Centre,
                       Man Lok Street, Hunghom, Hong Kong
          ------------------------------------------------------------
               (Address of principal executive offices)(Zip code)

Registrant's telephone number, including area code:  (852) 2766 3688

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

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

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

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports);  and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes       No  X
                                                       -----   -----

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     As of  December  28,  1998,  12,800,000  shares  of  common  stock  of  the
Registrant were outstanding.  As of such date, the aggregate market value of the
voting and non-voting common equity held by non-affiliates, based on the average
bid and asked price, was approximately $2,950,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

         None.


<PAGE>
                                TABLE OF CONTENTS

                                                                           Page
                                                                          ------
PART I

         ITEM 1.  BUSINESS.................................................  1
         ITEM 2.  PROPERTIES ..............................................  7
         ITEM 3.  LEGAL PROCEEDINGS .......................................  8
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
                  OF SECURITY HOLDERS......................................  8

PART II

         ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
                  AND RELATED STOCKHOLDER MATTERS..........................  8
         ITEM 6.  SELECTED FINANCIAL DATA.................................. 10
         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS...................... 11
         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                  MARKET RISK.............................................. 17
         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............. 17
         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 18

PART III

         ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
                  AND CONTROL PERSONS OF THE REGISTRANT.................... 19
         ITEM 11. EXECUTIVE COMPENSATION................................... 20
         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT.................................... 22
         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS............................................. 23

PART IV

         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                  REPORTS ON FORM 8-K...................................... 24

                  SIGNATURES............................................... 25


<PAGE>

                                     PART I

     This Form 10-K contains  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The Company's actual results could differ  materially from
those set forth in the  forward-looking  statements.  Certain factors that might
cause such a difference are discussed in the section entitled  "Factors that May
Affect Future Results" beginning on page 14 of this Form 10-K.

     The Company  operates  through its various  subsidiaries,  all of which are
located outside of the United States.  Unless otherwise indicated or the context
otherwise  requires,  the term Company refers collectively to S.W. Lam, Inc. and
its  subsidiaries.  All  references  to  China  or the PRC  are to the  Peoples'
Republic of China.  The Company's  financial  statements are presented in United
States Dollars ("US$"). The Company's sales are principally in Hong Kong Dollars
("HK$") and Renminbi ("Rmb"). At March 31, 1998, the prevailing exchange rate of
US$ into HK$ and Rmb was US$1.00 = HK$7.7480 and US$1.00 = Rmb 8.27930.

ITEM 1.  BUSINESS

     S.W.  Lam,  Inc.  (the  "Company"),  a  Nevada  corporation,   through  its
subsidiaries,  is engaged in the design, manufacturing and marketing of gold and
silver  jewelry  products to  customers in Hong Kong,  the People's  Republic of
China  (the  "PRC" or  "China")  and other  parts of the  world.  The  Company's
operations are located in Hong Kong and the PRC.

History and Development of the Company

     The Company's  business began with the formation of an unincorporated  sole
proprietorship  by Lam Sai Wing ("Mr. Lam") to manufacture and market jewelry at
facilities in Dongguan, PRC in 1983.  Subsequently,  in 1987, Shenzhen Hang Fung
Jewellery Factory, a sole proprietorship formed by Mr. Lam, established a modern
manufacturing  facility in Shenzhen,  PRC (the  "Shenzhen  Facility").  In 1990,
Beijing Hang Fung Jewellery  Factory, a sole  proprietorship  formed by Mr. Lam,
entered into a sino-foreign  joint venture to manufacture  and market jewelry at
facilities  in  Beijing,  PRC  (the  "Beijing  Facility").   In  1991,  Mr.  Lam
transferred  operations of the facilities in Dongguan to an  unaffiliated  third
party, the Dongguan No. 2 Light Industry Jewelry Bureau.

     In April 1994, Mr. Lam  incorporated  Macadam Profits Limited  ("Macadam"),
Priestgill  Limited  ("Priestgill") and Soycue Limited ("Soycue") in the British
Virgin  Islands.   Whilst  Soycue  engaged  in  the  jewelry  manufacturing  and
distribution  business,  Macadam and Priestgill remained inactive since the date
of their  incorporation.  In  November  1994,  Mr.  Lam  incorporated  Hang Fung
Jewellery  Company Limited ("Hang Fung  Jewellery") in Hong Kong and transferred
operations of the Shenzhen Facility and Beijing Facility to Hang Fung Jewellery.
Certain other operations  previously  conducted by Mr. Lam were also transferred
to Hang Fung  Jewellery  in  September  1995.  Effective  April  1996,  Mr.  Lam
transferred operations of Soycue to Hang Fung Jewellery and ceased operations of
Soycue,  which has since  remained  dormant.  In December  1996, Mr. Lam and his
wife,  Chan Yam Fai,  Jane  ("Ms.  Chan")  transferred  ownership  of Hang  Fung
Jewellery,  Macadam,  Priestgill,  Soycue and Kai Hang Jewellery Company Limited
("Kai Hang  Jewellery"),  a Hong Kong corporation  engaged in jewelry  marketing
owned by Mr. Lam and Ms. Chan, to Quality Prince Limited ("Quality  Prince"),  a
holding  company  organized in the British  Virgin Islands and also owned by Mr.
Lam and Ms. Chan. (Hang Fung Jewellery, Kai Hang Jewellery, Macadam, Priestgill,
Quality Prince and Soycue are collectively  referred to herein as the "Hang Fung
Group").

     In December of 1996, Quality Prince completed a "reverse  acquisition" with
S.W. Lam, Inc.  pursuant to which the companies  comprising the Hang Fung Group,
representing  all  of  the  jewelry   manufacturing  and  marketing   operations
controlled  by Mr. Lam and Ms.  Chan became  wholly  owned  subsidiaries  of the
Company.  S.W. Lam, Inc. was originally  incorporated  in the State of Tennessee
under the name New Wine, Inc. ("New Wine"). New Wine was formed in April of 1994
to develop,  finance and produce record albums, cassette tapes and compact discs
and videotape and television  productions for domestic  distribution and foreign
licensing;  to operate a music  publishing firm; and, to engage generally in the
business of providing  personal  business  management  services for professional
entertainers.  New Wine  completed  an offering of common  stock in September of
1995  selling  225,000  shares  for  $45,000  pursuant  to Rule  504  under  the
Securities  Act of 1933,  as amended (the  "Act").  The  operations  of New Wine
proved  unsuccessful and were discontinued and New Wine began efforts to acquire
or  combine  with an  operating  business.  Pursuant  to  discussions  with  the
shareholders of Quality Prince,  New Wine  reincorporated in the state of Nevada
and changed its name to S.W.  Lam, Inc. in October of 1996. In December of 1996,
New Wine entered  into an  agreement  with the  shareholders  of Quality  Prince
pursuant to which New Wine agreed to issue 10,500,000 shares of common stock and
100,000  shares of Series A Preferred  Stock in exchange  for 100% of the issued
and  outstanding  shares of  Quality  Prince  (the  "Exchange").  Following  the
Exchange, management of the Hang Fung Group assumed control of management of the
Company and the  Company,  through  its  subsidiaries,  the Hang Fung Group,  is
continuing the operations of the Hang Fung Group.


                                       1
<PAGE>

Overview

     The  Company's  operations  include  the  manufacturing  of gold and silver
jewelry  and  ornamental  items in the PRC and Hong  Kong and the sales of those
products in the PRC, Hong Kong and other parts of the world.

     Because of regulatory  issues  relating to operations  and the marketing of
gold and silver in the PRC, the Company's production and marketing activities in
the PRC are conducted  pursuant to a series of agreements  with entities  having
operations or appropriate licenses in the PRC. The principal agreements pursuant
to which the Company carries on operations in the PRC are: (1) a sub-contracting
agreement  with Shenzhen  Crafts Import and Export Company  ("Shenzhen  Crafts")
pursuant to which gold and silver  products are produced in Shenzhen for export,
(2) an Agreement for Jewellery  Assembling with China Jewellery  Import & Export
Co. ("China  Jewellery")  pursuant to which China  Jewellery is responsible  for
gold and silver  assembly  operations  at facilities  jointly  operated with the
Company in Beijing,  (3) a Sales Agency Agreement with China Jewellery  pursuant
to which China  Jewellery acts as the Company's  agent in selling jewelry in the
PRC in  exchange  for an agency fee and the  Company  acts as China  Jewellery's
agent in selling  jewelry in Hong Kong in exchange for an agency fee, and (4) an
Agreement for Jewellery Assembling, Sales Agency Agreement and Sales Cooperation
Agreement with Tai Yuen Jewellery Crafts Factory ("Tai Yuen Jewellery") pursuant
to which Tai Yuen Jewellery  assembles and sells gold and silver products on the
Company's behalf in the PRC.

     Shenzhen Crafts and China Jewellery are each state-owned  enterprises,  and
Tai Yuen Jewellery is a collectively  owned enterprise  organized under the laws
of the PRC; and each holds  requisite  licenses to import,  export and sell gold
and silver products in the PRC. Both China Jewellery and Tai Yuen Jewellery have
agreed to pay Hang Fung  Jewellery's  PRC tax  liability  incurred in connection
with the respective operations of Hang Fung Jewellery pursuant to agreements for
jewelry assembling.

     The Company presently  markets its products  throughout the world including
Hong Kong,  the PRC,  the Middle  East,  Southeast  Asia,  Europe and the United
States. The Company has increased its sales to the Middle East,  Southeast Asia,
Europe,  and the  United  States  in the  last  year as a  result  of  increased
marketing.

Products

     The Company's  products consist of a broad array of gold and silver jewelry
products,  gold and silver  decorative  items,  semi-precious  stone jewelry and
other decorative  products.  Examples of the Company's products include, but are
not limited to, bracelets, chains, charms, rings, earrings,  ornamental plaques,
serving sets and decorative pieces.

     The Company  classifies  its products in four distinct  segments:  (1) fine
gold  products,  consisting of jewelry and ornamental  products  crafted from 24
carat  gold;  (2)  jewelry  products,  consisting  of a broad  array of  jewelry
including jewelry  incorporating  semi-precious stones; (3) other precious metal
products,  consisting  of a broad array of jewelry and  decorative or ornamental
items  otherwise  falling  within one of the other product  segments but crafted
from silver or other  precious  metals;  and (4) others,  consisting  of medals,
coins and miscellaneous  items such as gift boxes and gold surface watches.  The
Company's  products  range in  wholesale  price  from  approximately  $1 to over
$65,000.  The mean selling price of the  Company's  products is between $200 and
$220. The following table  illustrates  the typical range and average  wholesale
price of the Company's products by segment:


                                       2
<PAGE>


                                              Wholesale               Average
                                             Price Range         Wholesale Price
                                             -----------         ---------------

Fine gold products.....................      $10 to $38,000           $300
Jewelry products.......................      $25 to $26,000           $500
Other precious metal products..........       $1 to $65,000            $65
Others.................................        $6 to $100              $25

     For the two years ended March 31, 1998, sales by major product category and
as a percentage of sales (excluding subcontracting fees) were as follows:

                                             1997                      1998
                                      ----------------        ------------------
                                      Amount                  Amount
                                      $'000    Percent        $'000      Percent
                                      -------  -------        -------    -------
Fine gold products.................    32,149      87.3       40,457     69.8
Jewelry products...................     3,392       9.2        7,613     13.1
Other precious metal products......     1,122       3.1        8,593     14.8
Others.............................       162       0.4        1,331      2.3
                                       ------     ------      ------    ------
                                       36,825     100.0       57,994    100.0
                                       ======     ======      ======    ======
Product Design and Development

     The Company  maintains an in-house  product design and development  team in
its  Hong  Kong  offices  consisting  of  approximately  10 staff  members.  The
Company's product design staff continuously monitors jewelry trends and consumer
preferences and is engaged in ongoing efforts to design new products  consistent
with such  trends  and  preferences.  After  conceiving  of a new  product,  the
Company's  design  staff will  produce  detailed  design and drawings for use in
further production.  The Company's design staff currently creates  approximately
2,000 new designs annually.

Purchasing

     The  principal  material in the  manufacture  and assembly of the Company's
products is gold which typically represent  approximately 69% of the total costs
of purchases.

     The Company purchases gold primarily from suppliers in Australia,  England,
Germany  and Hong Kong.  Silver and color stone  purchases  are  primarily  from
suppliers in Hong Kong.

     The Company  maintains no long term  contractual  arrangements  to purchase
materials.  Although purchases of raw materials are made from a relatively small
number  of  suppliers,   management  believes  there  are  numerous  alternative
suppliers  for all  materials,  and that the failure of any  principal  supplier
would  not  have a  material  adverse  effect  on the  Company's  operations  or
financial condition.  To date, the Company has not experienced any difficulty in
securing materials.

     The  Company  does not  presently  engage in any  hedging  activities  with
respect to  possible  fluctuations  in the prices of raw  materials.  Management
believes  that the risk of not  engaging in such  activities  is minimal,  since
historically  the  Company  has been able to adjust  selling  prices as material
price fluctuations have occurred.

Manufacturing and Assembly

     The  Company's   principal   manufacturing  and  assembly   operations  are
undertaken at facilities located in Tai Yuen, Shenzhen and Beijing, PRC pursuant
to agreements with Tai Yuen Jewellery, Shenzhen Crafts and China Jewellery.


                                       3
<PAGE>

     The Company's  largest  manufacturing  operations take place at the Beijing
Facility  which  is  jointly  operated  with  China  Jewellery.  Pursuant  to an
Agreement for Jewellery Assembling entered into in November of 1994, formalizing
existing  manufacturing  operations which commenced in 1990, China Jewellery has
provided the factory  premises as well as labor supply,  water,  electricity and
other support services and the Company has provided equipment,  tools, technical
expertise and materials necessary to carry on jewelry manufacturing  operations.
Under the agreement,  China Jewellery is responsible for actual jewelry assembly
and  manufacturing.  The Company pays  assembling  fees to China Jewellery in an
amount  equal to  HK$1.00  (US$0.13)  per gram for fine  gold  jewelry,  HK$3.00
(US$0.39)  per gram for  karat-gold  jewelry and HK$0.60  (US$0.08) per gram for
silver  jewelry and gem  assembling.  The  agreement  also  provides  that China
Jewellery may perform jewelry  manufacturing  and assembly  operations for other
parties  using  the  Beijing  Facility  provided  that  such  operations  do not
interfere with the manufacturing and assembly operations and requirements of the
Company  and  provided  that such  products  are  manufactured  exclusively  for
domestic  consumption  within the PRC.  The Company is entitled to receive a fee
from China Jewellery with respect to all jewelry  manufactured for third parties
at the  Beijing  Facility  with the  amount of such fees to be  determined  on a
case-by-case  basis  ("Subcontracting  Fees").  China  Jewellery  has  agreed to
undertake  and pay for all of the  Company's  PRC tax  liabilities  relating  to
operations at the Beijing Facility.  The Agreement for Jewellery Assembling with
China Jewellery expires in November of 2004.

     The Company conducts similar jewelry  manufacturing and assembly operations
at facilities in Tai Yuen,  PRC (the "Tai Yuen Plant")  pursuant to an agreement
with Tai Yuen  Jewellery  which is  substantially  similar to the  manufacturing
arrangement  with China  Jewellery,  including  provision for the payment to the
Company of a fee with respect to all jewelry  manufactured  for third parties at
the Tai Yuen Plant and the  assumption  and payment by Tai Yuen Jewellery of all
of the  Company's  PRC tax  liabilities  relating to  operations at the Tai Yuen
Plant. Tai Yuen is paid  manufacturing  fees in amounts agreed upon from time to
time. The agreement with Tai Yuen Jewellery expires in April of 2006.

     The Company also conducts jewelry  manufacturing and assembly operations in
Shenzhen, PRC, (the "Shenzhen Facility") pursuant to a subcontracting  agreement
with Shenzhen Crafts which provides for use of the Shenzhen Facility exclusively
for   manufacturing   products  for  the  Company.   Shenzhen   Crafts  is  paid
manufacturing  fees in an amount equal to  approximately  $2,000 per month . The
rights and  obligations  of Shenzhen  Crafts were  transferred to and assumed by
Shenzhen Jia Yi Jewellery Co., Ltd. ("Shenzhen  Jewellery").  The subcontracting
agreement expires December 31, 1999.

     Actual  manufacturing  and  assembly  operations  are  performed by skilled
workers  under  the  supervision  of  a  team  of  technicians.   Before  actual
manufacturing or assembly  commences,  product  specifications  are established,
product design is undertaken and raw materials are purchased and inspected.  The
manufacturing  and  assembly  process is tailored to the  specifications  of the
items being manufactured. Chain jewelry manufacturing begins with the melting of
gold or silver into bars which are rolled and elongated on a press.  The process
is repeated a number of times until the bar is reduced to wire of  approximately
20mm in  diameter.  The wire is then  stretched to produce a finer wire which is
then cut and  swirled to form a spiral.  The spiral is then cut to rings,  which
are  sized  and  graded  and  soldered  together  afterwards  to  form a  chain.
Manufacturing of other jewelry items,  including ornaments which may be attached
to chains,  typically begins with the construction of a wax prototype.  A master
rubber mold is then  formed  from the wax  prototype.  An  unlimited  replica of
plaster molds are  eventually  produced from the master rubber mold.  Casting is
then  performed  by filling or  injecting  the plaster  mold with melted gold or
silver which has been mixed with appropriate alloys to achieve the desired level
of purity for forming the solid gold or silver  items.  The plaster mold is then
removed and the constituent jewelry parts are cleaned,  assembled,  soldered and
pre-polished.  As an alternative to the traditional  casting method, the Company
casts "electro-form"  jewelry utilizing a proprietary  technique to bond gold to
an  underlying  jewelry wax mold,  which is also derived from the master  rubber
mold.  Designs or  impressions  are affixed to  appropriate  component  parts by
stamping,  cutting or  grinding.  Component  parts are shaped and  assembled  to
specifications  in  accordance  with the  product  design.  Virtually  all final
assembly  is  performed  by hand at row tables at which all  necessary  tools to
perform fine assembly operations are available.


                                       4
<PAGE>

     In addition  to  manufacturing  undertaken  to fill the  Company's  product
requirements and manufacturing  undertaken by (1) China Jewellery at the Beijing
Facility;  (2) Tai  Yuen  Jewellery  at the Tai  Yuen  Plant;  and (3)  Shenzhen
Jewellery  at the  Shenzhen  Facility,  the Company  provides  contract  jewelry
manufacturing for certain customers who provide all product  specifications  and
raw  materials.   The  Company  is  paid  negotiated   subcontracting  fees  for
manufacturing such products (also, "Subcontracting Fees").

     The  Company  presently  has  adequate  facilities  and  support  staff  to
manufacture and assemble approximately 4,000,000 pieces of jewelry annually.

Quality Control

     Strict quality  control  procedures are followed  before and throughout the
manufacturing  process to assure that products are manufactured with the highest
degree of precision in  compliance  with the  Company's  design  specifications.
Before the commencement of  manufacturing,  all raw materials undergo a thorough
inspection to assure that materials purchased are of the right type, quality and
quantity.  Trained technicians monitor and test the purity of all gold to assure
the karat accuracy of all gold  produced.  Quality checks are carried out on all
products  at each  stage of  production  to ensure  that the  products  meet the
Company's quality standards.  To ensure the quality of all jewelry produced, all
production   workers  receive   production  and  quality  control  training  and
production  supervisors  are present and oversee all production  operations and,
finally,  all finished goods are checked by the Company's  quality  control team
before shipment to customers.

Inventory Policy and Control

     The Company  manufactures  products in accordance  with  customer  purchase
orders and sales forecasts of management.  The Company's  production schedule is
closely monitored by the production  management team. The Company's policy is to
manufacture  and maintain  approximately  80 days' stocks in inventory to ensure
customer's delivery schedules are met.

     Raw materials are normally purchased based on production  schedules and are
generally ordered 7 to 14 days before the production commences.  At the assembly
line,  workers  are  provided  only the raw  materials  required  for  scheduled
production.  Materials are weighed before and after each  production run and all
production  workers are  required to account for any losses of stones or gold or
silver over prescribed limits.

     Stocks of raw materials and finished products are stored in secure areas in
the  Company's  Hong Kong  offices,  where access is  restricted  to  authorized
personnel.

Sales and Marketing

     Marketing  of the  Company's  products  is  carried  out  by the  Company's
internal sales and marketing  force for all products sold outside of the PRC and
by China Jewellery and Tai Yuen Jewellery for all products sold within the PRC.

     The Company's  internal sales staff is located in the Company's  offices in
Hong Kong and carries out sales and marketing  activities  under the guidance of
senior management which oversees the sales staff and overall marketing strategy.
The  Company's  sales staff is  responsible  for  establishing  and  maintaining
relations  with  independent  sales  representatives  and  customers  as well as
marketing the Company's  products to potential  customers.  The Company's senior
management and marketing  staff regularly  attend major local and  international
jewelry  fairs to promote the  Company's  products  and  solicit new  customers.
Additionally, the Company periodically advertises in jewelry magazines and makes
direct mailings of new product catalogues.


                                       5
<PAGE>
     Marketing of products within the PRC is conducted exclusively through China
Jewellery and Tai Yuen Jewellery as agents for the Company.  Pursuant to a Sales
Agency  Agreement with China  Jewellery,  China Jewellery  markets the Company's
products  in the PRC in  exchange  for an agency  fee in the  amount of  fifteen
percent  (15%) of the sales price of fashion  jewelry,  ten percent (10%) of the
sales price of silver and karat gold jewelry and Rmb 1.00  (US$0.12) per gram on
fine gold jewelry.  The Company, in turn, acts as agent for China Jewellery with
respect to sales of China Jewellery products in Hong Kong, for which the Company
is entitled to agency fees in the same  amounts  payable by the Company to China
Jewellery.  The Sales Agency Agreement with China Jewellery  expires in November
of 2004.

     The  Company  also sells  jewelry  in the PRC  through  Tai Yuen  Jewellery
pursuant to  agreements  which are similar to the Sales  Agency  Agreement  with
China Jewellery. These agreements provide that the Company shall pay agency fees
on a case by case basis.

     Sales by region (excluding  subcontracting  fees) for the three years ended
March 31, 1998 have been as follows:

<TABLE>
                                     1996                  1997                    1998          
                              -----------------     -------------------     -----------------
                              Amount                Amount                  Amount
                              $,000     Percent     $,000      Percent      $,000     Percent
                              ------    -------     ------     -------      ------    -------
<S>                           <C>       <C>         <C>        <C>           <C>       <C>

Southeast Asia............      1,280      5.6        4,610      12.5        12,232      21.1
United States.............          -        -        1,305       3.5        10,211      17.6
PRC.......................      6,129     26.8        8,043      21.8        10,000      17.2
Middle East...............      3,288     14.3        5,744      15.6         9,317      16.1
Europe....................      2,149      9.4        1,506       4.1         5,886      10.2
Hong Kong.................     10,057     43.9       15,617      42.5        10,348      17.8
                               ------    ------      ------     ------       ------     ------
   Total..................     22,903    100.0       36,825     100.0        57,994     100.0
                               ======    ======      ======     ======       ======     ======
</TABLE>

     Over the past three years,  the Company has devoted  substantial  resources
and effort,  and has hired additional sales and marketing  personnel,  to expand
its  markets  outside  of the PRC and Hong Kong.  As a result of those  efforts,
sales outside of the PRC and Hong Kong have risen from $6.7 million, or 29.3% of
sales,  during the year ended March 31, 1996 to $37.6 million,  or 65% of sales,
during the year ended March 31, 1998.

Customers

     The Company's  customers consist  principally of a combination of wholesale
distributors  and  jewelry  retailers.  At  March  31,  1998,  the  Company  had
approximately  100 regular customers and its products were sold in approximately
1,800 retail  outlets.  The  Company's  five  largest  customers  accounted  for
approximately  23.2% of revenue  during the fiscal  year ended  March 31,  1998.
During fiscal 1998, the Company had only two customers  which accounted for more
than 5% of the Company's revenues: Chow Tai Fook Jewellery Co., Ltd and Sam Ming
Tong Jewellery Co., Ltd., which comprised 5.9% and 5.5% of revenue respectively.
The  Company  has no long  term  contracts  with  any  customers.  Chow Tai Fook
Jewellery  Co., Ltd. and Sam Ming Tong Jewellery Co., Ltd have been customers of
the Company for more than five years.

Competition

     The jewelry industry is highly  fragmented,  with little  significant brand
name  recognition  or consumer  loyalty.  Selection  is  generally a function of
design appeal, perceived high value and quality in relation to price.

     While  many  competitors  in  the  wholesale   jewelry   manufacturing  and
distribution  business  may  have a  wider  selection  of  products  or  greater
financial  resources,  the Company believes its competitive position is enhanced
by the  Company's  broad  customer  base,  experienced  management  team and the
Company's close relationship with its customers and vendors. Therefore, although
the  competition  is  intense,  management  believes  that the  Company  is well
positioned to compete in the jewelry industry.


                                       6
<PAGE>

Employees

     As of March 31,  1998,  the  Company  had  approximately  1,800  employees,
including 7 executive  officers,  48 other management  personnel,  27 persons in
administration,  1,638 persons in manufacturing and production and 80 persons in
sales and marketing. Of the Company's employees, approximately 128 staff members
are located in Hong Kong with the remaining  employees being located in the PRC.
None of the Company's employees is governed by collective  bargaining agreements
and the Company considers its relations with its employees to be satisfactory.

Certain Foreign Operation Considerations

     The  Company's  operations  are  conducted  in Hong Kong and the PRC.  As a
result, the Company's  business,  financial  condition and results of operations
may be influenced by the political, economic and legal environments in Hong Kong
and the PRC, and by the general state of the Hong Kong and the PRC economies.

     On July 1, 1997,  sovereignty  over Hong Kong  transferred  from the United
Kingdom to the PRC, and Hong Kong became a Special  Administrative Region of the
PRC (an "SAR"). As provided in the Sino-British  Joint  Declaration  relating to
Hong Kong and the  Basic Law of the Hong Kong SAR of the PRC,  the Hong Kong SAR
will have full  economic  autonomy and its own  legislative,  legal and judicial
systems for fifty  years.  The  Company's  management  does not believe that the
transfer  of  sovereignty  over Hong Kong  will  have an  adverse  impact on the
Company's  financial  and  operating  environments.  There can be no  assurance,
however,  that changes in political or other  conditions will not result in such
an adverse impact.

     The Company's  operations in the PRC are subject to special  considerations
and significant risks not typically associated with companies operating in North
America and Western Europe.  These include risks  associated  with, among other,
the political,  economic and legal  environments and foreign currency  exchange.
The Company's results may be adversely  affected by changes in the political and
social  conditions  in the PRC,  and by changes in  governmental  policies  with
respect to laws and regulations,  inflationary measures, currency conversion and
remittance  abroad,  and rates and  methods of  taxation,  among  other  things.
Additionally,  due to licensing  requirements  relating to the  manufacture  and
marketing  of gold  products in the PRC, the  Company's  ability to continue its
current  operations  in the PRC is  substantially  dependent  upon the Company's
ability to maintain  satisfactory  contractual  arrangements  with PRC  entities
possessing the requisite  licenses such as China  Jewellery,  Tai Yuen Jewellery
and  Shenzhen  Jewellery.  Further,  a  portion  of  the  Company's  revenue  is
denominated in Renminbi  ("Rmb") which must be converted  into other  currencies
before remittance  outside the PRC. Both the conversion of Renminbi into foreign
currencies and the remittance of foreign  currencies abroad require approvals of
the PRC government.

ITEM 2. PROPERTIES

     The Company's  executive  offices are located at Unit 25-32,  Second Floor,
Focal  Industrial  Centre,  Man Lok Street,  Hunghom,  Hong Kong.  This facility
consists of approximately 31,500 square feet of office space, and is leased from
an unaffiliated third party for approximately HK$3,362,000 (US$434,000) per year
pursuant to four leases which range in expiration  from March 1999, to May 2000.
This office space also houses certain marketing, product design and high quality
gold production operations.

     The Company also leased office space located at Unit 302-303A and Unit 410,
Fu Hang Industrial  Building,  1 Hok Yuen Street East, Hunghom,  Hong Kong. Such
facility  consists of  approximately  11,000 square feet of office  space.  Such
office space also housed certain marketing, product design and high quality gold
production  operations.  Unit  302-303A was leased from Ms. Chan, an officer and
director of the Company, for HK$1.35 million (US$174,000) per year pursuant to a
lease  expiring  March 31,  1998;  and Unit 410 was leased from an  unaffiliated
third party for  HK$300,000  (US$39,000)  per year pursuant to a lease  expiring
September 19, 1998. Both of these leases expired during 1998 and the Company has
relocated all  operations  from those  premises to its Focal  Industrial  Centre
facilities.

     The Company's principal  production  operations are conducted at facilities
located in Beijing,  Tai Yuen,  and Shenzhen,  PRC. The Company's  operations in
Beijing  occupy  approximately  60,000  square feet in the Beijing  Facility,  a
5-story  building,  which  facility is utilized  pursuant  to an  agreement  for
jewelry assembly with China Jewellery.


                                       7
<PAGE>

     The  Company's  operations in Tai Yuen occupy  approximately  30,000 square
feet in the Tai Yuen Plant,  a 6-story  industrial  building,  which facility is
utilized pursuant to a jewelry assemby agreement with Tai Yuen Jewellery.

     The Company's operations in Shenzhen occupy one floor, approximately 20,000
square feet, in the Shenzhen Facility, a multi-story industrial building,  which
facility  is utilized  pursuant to a jewelry  assemby  agreement  with  Shenzhen
Crafts.

     The Company  believes that its existing  facilities and facilities  will be
adequate to support the Company's operations for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

     The  Company  is from time to time a party to  lawsuits  incidental  to its
business.  The Company and its management are not presently aware of any pending
or threatened proceedings which,  individually or in the aggregate, are believed
to be material.

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

     No matters were submitted to a vote of the Company's  shareholders  through
the  solicitation  of proxies,  or otherwise,  during the fourth  quarter of the
Company's fiscal year ended March 31, 1998.

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

     While the Company's  Common Stock is listed on the OTC Electronic  Bulletin
Board under the symbol  "CHRM",  there is no  established  trading market in the
Company's  Common Stock and trading  therein is sporadic.  The last reported bid
price of the Company's Common Stock, as of December 28, 1998, was $0.4375.

Holders

     At March 31,  1998,  there were  approximately  134  record  holders of the
Company's Common Stock.

Dividends

     While the Hang Fung  Group paid a one-time  dividend  of $5 million  during
fiscal 1996, prior to the Exchange, the Company has not paid any dividends since
its  inception  and presently  anticipates  that all  earnings,  if any, will be
retained for development of the Company's  business and that no dividends on the
shares of Common Stock will be declared in the  foreseeable  future.  Any future
dividends will be subject to the discretion of the Company's  Board of Directors
and will depend upon,  among other things,  future  earnings,  the operating and
financial condition of the Company, its capital  requirements,  general business
conditions and other pertinent facts. Therefore,  there can be no assurance that
any dividends on the Common Stock will be paid in the future.


                                       8
<PAGE>

Sales of Unregistered Securities

     During the fiscal year ended March 31, 1998, the Company sold the following
unregistered  securities without the use of underwriters and without the payment
of any discounts or commissions, except as otherwise noted:

     On May 20, 1997, in consideration for a loan of $10,000,000 from Phenomenal
Limited  ("Phenomenal") to the Company's wholly owned subsidiary Quality Prince,
(1) Quality  Prince  executed a convertible  note ("Note") due March 20, 1998 in
the principal  amount of $10,000,000  and (2) the Company  issued  warrants (the
"Warrants") to purchase 5,263,158 shares of the Company's Common Stock. The Note
accrued interest at three percent (3%) per month,  compounded  monthly,  and was
convertible into 2,914 shares, or such other number of shares as will constitute
not less than 29.14%, of Quality Prince.

     The  Warrants  entitled  the  holder to  purchase  5,263,158  shares of the
Company's  common stock at a purchase price of $2.19,  exercisable  for a period
commencing  upon the date of the grant of the Warrants and ending on the earlier
of (1) May 31,  1998 or (2) the  closing  of a  consolidation  or  merger of the
Company (other than with its wholly-owned subsidiary), or the transfer of all or
substantially  all of the Company's assets to, another  corporation  (unless the
owners of the capital stock of the Company, prior to such transaction,  continue
to own a  majority  of the  capital  stock of the  surviving  corporation).  The
Warrants  were only  exercisable  in the event  that the Note was not  converted
pursuant to its terms.

     On June 4, 1998, the Company (and its subsidiaries) and Phenomenal executed
an  agreement  ("Deed  Amendment")  to  modify  the  terms  of the  Note and the
Warrants.  Pursuant  to the Deed  Amendment,  Phenomenal  agreed  to  waive  all
interest  accrued on the Note and to convert the Note into 5,263,788  redeemable
preferred  shares  (the  "Preferred  Shares")  of  the  Company's  wholly  owned
subsidiary,  Hang Fung  Jewellery.  The Deed  Amendment  evidences the Company's
intent to form a new holding company ("Listco") for the shares of the companies,
excluding Quality Prince,  comprising the Hang Fung Group (the "Restructuring").
The  Preferred  Shares  must  be  redeemed  and  a  minimum  US$10,000,000  from
redemption are subject to mandatory subscription into shares of common equity of
Listco  representing  29.14% of such  equity if, and only if,  the  Company  has
listed  the  shares of Listco  on The Stock  Exchange  of Hong Kong on or before
March 20, 1999. If the Restructuring has been completed but such listing has not
been completed on or before March 20, 1999,  Phenomenal  shall have the right to
either subscribe for shares of common equity of Listco or to cause the Preferred
Shares to be redeemed  for  $10,000,000  plus a dividend  accruing at 19.56% per
annum.

     Pursuant to the Deed Amendment,  the Warrants were extended to May 31, 1999
or the date of the proposed  listing,  whichever  is earlier,  and the number of
warrant shares was modified to reflect the accrual of dividends on the Preferred
Shares until the Warrants are exercised.

     By the terms of the Deed  Amendment,  Phenomenal  may  either  convert  the
Preferred  Shares  into equity of Listco or exercise  the  Warrants  but may not
avail itself of both such rights.  The  conversion  of the  Preferred  Shares or
exercise of the Warrants shall cause  Phenomenal to forfeit its rights under the
other.

     The issuance of the above securities to Phenomenal were deemed to be exempt
from  registration  under the  Securities Act in reliance on Section 4(2) of the
Securities  Act  based  on  the  limited  number  of  purchasers  and  based  on
representations from the purchasers that they were acquiring for investment only
and not with a view to or for sale and  restrictive  legends were affixed to the
share certificates issued in such transactions.


                                       9
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following tables present  selected  historical  consolidated  financial
data derived from the  consolidated  financial  statements  of the Company which
appear elsewhere herein.  Quality Prince was acquired by the Company in December
of 1996 in a transaction  accounted for as a recapitalization  of Quality Prince
with Quality  Prince as the acquirer (a "reverse  acquisition").  On this basis,
the  historical  consolidated  financial  statements  of the  Company  prior  to
December  31,  1996 are those of  Quality  Prince and its  subsidiaries  and the
historical  shareholders'  equity of the  Company as of March  31,1996  has been
retroactively restated to reflect the equivalent number of shares of the Company
issued for such acquisition.  The acquisition of the various members of the Hang
Fung Group by Quality  Prince in  December of 1996 has been  accounted  for as a
reorganization  of  entities  under  common  control,  similar  to a pooling  of
interests.   The  following  data  should  be  read  in  conjunction   with  the
consolidated financial statements of the Company included elsewhere herein.

<TABLE>

                                                                Year Ended March 31,
                                       -------------------------------------------------------------------
                                        1994          1995           1996            1997            1998
                                               (amounts stated in US$,000, except per share data)
<S>                                    <C>         <C>            <C>            <C>              <C>   

Income Statement Data:
Net sales......................       $13,197      $18,478         $22,903        $36,825         $57,974
Subcontracting fees............         3,481        4,902           3,965          4,133           4,308
  Total revenues...............        16,678       23,380          26,868         40,958          62,302
Gross profit...................         4,585        7,004           8,046         10,971          15,143
Operating income...............         2,262        4,335           4,402          6,190           8,207
Other income (expense), net....          (185)        (274)           (329)          (741)           (636)
Income before taxes............         2,077        4,061           4,073          5,449           7,571
Net income.....................       $ 1,311      $ 2,589         $ 3,393        $ 4,475         $ 6,285
Net income per share (1).......       $  0.12      $  0.22         $  0.32        $  0.40         $  0.49
Weighted average shares
 outstanding (1)...............    10,500,000   10,500,000      10,500,000     11,075,000      12,800,000

Balance Sheet Data:
Working capital................        $1,042       $3,011          $ 613         $ 2,768         $(1,170)
Total assets...................        14,288       17,517         15,676          21,409          45,667
Long-term debt, less
 current portion...............           338          299            879           1,834           4,405
Stockholders' equity (2).......         1,579        4,531          3,038           8,017          14,278

</TABLE>
                                     
(1)  Net income per share is computed  assuming (i) the 10,500,000 shares issued
     pursuant to the Exchange were outstanding for all periods  presented,  (ii)
     the 1,275,000  shares issued in  connection  with initial  formation of New
     Wine were issued  December 31, 1996 and (iii) the 225,000  shares issued by
     New Wine pursuant to a Rule 504 offering were issued December 31, 1996.

(2)  Stockholders'  equity at March 31, 1996  reflects the payment of a dividend
     in the amount of $5,000,000 by the Hang Fung Group prior to the acquisition
     of the Hang Fung Group by the Company.



                                       10
<PAGE>

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     This Form 10-K contains  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The Company's actual results could differ  materially from
those set forth in the  forward-looking  statements.  Certain factors that might
cause such a difference are discussed in the section entitled  "Factors that May
Affect Future Results" beginning on page 14.

General

     The following  discussion  should be read in conjunction with the Company's
financial statements appearing elsewhere herein.

     Prior to  December of 1996,  the Company was engaged in limited  operations
relating to the production and distribution of record albums, cassette tapes and
compact discs and videotape and television productions for domestic distribution
and foreign licensing; operation of a music publishing firm; and, generally, the
business of providing  personal  business  management  services for professional
entertainers.  On December 19, 1996,  the Company  acquired the Hang Fung Group,
and entered into the jewelry manufacturing and distribution business.

     The  acquisition  of the Hang Fung Group has been  accounted  for using the
purchase  method of accounting  with the  transaction  being  accounted for as a
"reverse acquisition." The Company does not consider the operations prior to the
acquisition  of the Hang Fung Group to be  material to an  understanding  of the
Company. Accordingly, this discussion relates to the operations of the Hang Fung
Group, for all periods  presented,  excluding the former operations of New Wine,
Inc.

     Hang  Fung   Group's   operations   consist   of   designing,   assembling,
merchandising  and  distributing a full line of gold and silver jewelry products
and other  ornamental  products on a wholesale  basis to customers in Hong Kong,
China, Europe, the Middle East, Southeast Asia, and the United States.  Revenues
from such operations are generated  through the manufacturing and wholesaling of
the Company's jewelry products,  subcontract jewelry  manufacturing for selected
customers  and through fees  payable to the Company by its business  partners in
the PRC ("Subcontracting fees").

     The primary cost of operating  the  Company's  jewelry  business is the raw
material  cost of jewelry.  The Company  assembles  or  manufactures  all of the
jewelry  which it sells,  other than sales  made as agent for  certain  business
partners.  The  Company  constantly  compares  costs and  quality of jewelry raw
materials to assure that it is  obtaining  the best  purchase  price and quality
available.  The cost of such raw  materials  and products  varies with  currency
fluctuations  and  other  factors  beyond  the  Company's  control.   While  any
fluctuations  in cost of  acquiring  raw  materials  may  adversely  affect  the
Company's profit margins,  the Company has  historically  been able to pass such
cost fluctuations on to its customers. See "Business - Purchasing."

     The Company's other  significant  operating  expenses are marketing  costs,
including participation in advertising programs, customer support, inventory and
quality control, jewelry design and general corporate overhead.


                                       11
<PAGE>


Results of Operations

     The following table sets forth,  for the periods  indicated,  certain items
from the  Consolidated  Statements  of  Operations  expressed as a percentage of
total revenues.

                                                 Year Ended March 31, 
                                            ------------------------------
                                            1996         1997         1998
                                            ----         ----         ----
Net sales..........................         85.2%        89.9%        93.1%
Subcontracting fees................         14.8         10.1          6.9
                                           ------       ------       ------
  Total revenues...................        100.0        100.0        100.0
Cost of sales......................         70.1         73.2         75.7
                                           ------       ------       ------
Gross profit.......................         29.9         26.8         24.3
Operating expenses.................         13.6         11.7         11.1
                                           ------       ------       ------
Income from operations.............         16.3         15.1         13.2
Other income (expense).............         (1.2)        (1.8)        (1.0)
                                           ------       ------       ------
Income before income taxes.........         15.1         13.3         12.2
Income taxes.......................         (2.5)        (2.4)        (2.1)
                                           ------       ------       ------
Net income.........................         12.6         10.9         10.1
                                           ======       ======       ======

Year Ended March 31, 1998 Compared to Year Ended March 31, 1997

     Revenues and Gross Profit.  Operating  revenues increased by 52.1% to $62.3
million for the year ended  March 31, 1998 as compared to the $40.9  million for
fiscal 1997.  Sales of Company  products were up 57.3% to $57.9  million  during
fiscal 1998 as compared to $36.8 million during fiscal 1997. Subcontracting fees
increased by 4.2% to $4.3 million  during  fiscal 1998 from $4.1 million  during
fiscal 1997.

     The  increase in sales  during  fiscal 1998 was  attributable  to increased
product  volumes   resulting  from  an  increase  in  production   capacity  and
investments in marketing efforts across  geographical  regions,  particularly in
the United States and the Middle East. The increase in  subcontracting  fees was
attributable  to  increased  marketing,  new  technology  and an increase in the
number of supply contracts.

     Geographically, sales in Hong Kong decreased and sales in the PRC increased
marginally  due to  increased  marketing  efforts  which were offset by economic
weakness. The Company experienced a shift in sales in Hong Kong and the PRC as a
result of the economic  turmoil  originating in the Asian region.  Sales in Hong
Kong  declined  approximately  33.7% to $10.3  million in fiscal 1998 from $15.6
million  in  fiscal  1997.  Sales in the PRC were up during  fiscal  1998 due to
stable  economic  conditions  relative to the region,  increasing  approximately
24.3% to $10 million in fiscal 1998 from $8.0 million in fiscal  1997.  Sales in
Southeast  Asia (not  including  Hong Kong and the PRC) during  fiscal 1998 were
also up due to increases in orders by existing  customers,  increasing 165.3% to
$12.2 million in fiscal 1998 from $4.6 million in fiscal 1997.

     Outside of Asia (in the United  States,  Europe and the Middle  East),  the
Company  experienced a 197.1% increase in sales with these sales  accounting for
43.8% of total  sales in  fiscal  1998 as  compared  to 23.2% of total  sales in
fiscal  1997.  The  increase  in sales  outside of Asia was driven by  increased
marketing  efforts and strong product demand which  accompanied  strong economic
conditions in those regions.  Sales in Europe increased  approximately 290.8% to
$5.9  million  in fiscal  1998 from $1.5  million in fiscal  1997.  Sales in the
Middle East were up during fiscal 1998,  increasing  approximately 62.2% to $9.3
million  from $5.7  million in fiscal 1997.  Sales in the United  States,  which
began in the fourth quarter of fiscal 1997,  increased  approximately  682.5% to
$10.2 million during fiscal 1998 from $1.3 million in fiscal 1997.

     Gross  profits  increased by 38% to $15.1 million in fiscal 1998 from $11.0
million   during  fiscal  1997.   The  increase  in  gross  profits  was  mainly
attributable  to increased  sales,  and expansion  into the United States market
which were  partially  offset by a reduction  in gross  margins.  Gross  margins
decreased  to 24.3% in  fiscal  1998 from  26.8% in  fiscal  1997 as a result of
implementation  of  a  marketing  strategy  offering  lower  prices  to  enhance
competitiveness and increase sales volume.


                                       12
<PAGE>

     Operating  Expenses.  Operating expenses totaled $6.9 million during fiscal
1998,  an increase of 45.1% from $4.8  million in fiscal  1997.  The increase in
operating  expenses  during the period was primarily  attributable  to increased
marketing  expenses  associated  with the expanded  selling  efforts,  increased
corporate  overhead and  depreciation  expense on  investment  in machinery  and
equipment to support the increase in sales volumes.

     Other Income(Expense),  Net. Other income(expense),  net during fiscal 1997
and 1998  consisted of  miscellaneous  income on disposal of  production  scrap,
recovery of expenses  paid on behalf of customers,  expenses on exchange  losses
and bank charges,  and interest income and interest expense.  A one time expense
attributable  to the reverse  acquisition  was also included in fiscal 1997. Net
other expenses decreased  approximately 14.2% to $0.6 million during fiscal 1998
from $0.7 million during fiscal 1997. The decrease was primarily attributable to
an increase in  interest  income of $0.1  million and the one time nature of the
$0.35 million  expenses  attributable to the reverse  acquisition  during fiscal
1997 which was partially offset by $0.32 million  increase in interest  expenses
due to increased borrowing levels.

     Income Taxes. Income taxes increased by 32% from approximately $1.0 million
in fiscal 1997 to $1.3  million in fiscal  1998.  The  increase in income  taxes
during the period was primarily attributable to the increase in taxable earnings
of the Company.

Year Ended March 31, 1997 Compared to Year Ended March 31, 1996

     Revenues and Gross Profit.  Operating  revenues increased by 52.4% to $40.9
million  for the year ended  March 31,  1997 as  compared  to $26.9  million for
fiscal 1996.  Sales of Company  products were up 60.8% to $36.8  million  during
fiscal  1997  as  compared  to  $22.9  million  in  sales  during  fiscal  1996.
Subcontracting  fees  increased by 4.2% to $4.1 million  during fiscal 1997 from
$3.9 million during fiscal 1996.

     The increase in sales was  attributable to growing demand for  electro-form
jewelry and gold card ornaments as well as increased demand in the PRC resulting
from a recovery in the PRC  economy.  The  increase in  subcontracting  fees was
attributable to an increase in orders by subcontract manufacturing customers.

     Geographically,  sales  in Hong  Kong  were up  during  fiscal  1997 due to
growing demand for gold jewelry and improving  economic  conditions,  increasing
approximately 55.3% to $15.6 million from $10.1 million in fiscal 1996, sales in
the PRC were up during  fiscal 1997 due to  improving  economic  conditions  and
higher income,  increasing approximately 31.2% to $8.0 million from $6.1 million
in fiscal  1996,  sales in Europe were down during  fiscal 1997 due to continued
weakness in European economies,  decreasing  approximately 29.9% to $1.5 million
from $2.1 million in fiscal 1996, sales in the Middle East were up during fiscal
1997 due to increased marketing efforts by the Company, increasing approximately
74.7% to $5.7 million from $3.3 million in fiscal 1996,  sales in Southeast Asia
during  fiscal 1997 were up due to  increases  in orders by existing  customers,
increasing 260.2% to $4.6 million from $1.3 million in fiscal 1996, and sales in
the United States totaled $1.3 million during fiscal 1997 with the  commencement
of  selling  efforts in the United  States  during the fourth  quarter of fiscal
1997.

     Gross profits  increased by 36.4% to $11.0 million in fiscal 1997 from $8.0
million  during fiscal 1996. The increase in gross profits was  attributable  to
increased sales and  subcontracting  fees during the period which were partially
offset by a  reduction  in gross  margins.  Gross  margins  were down during the
period to 26.8% from  29.9%.  However,  excluding  subcontracting  fees,  profit
margins  improved on sales of Company  products during the period as a result of
increased  demand  and  accompanying  higher  profit  margins  for  electro-form
jewelry.

     Operating  Expenses.  Operating expenses totaled $4.8 million during fiscal
1997,  an increase of 31.2% from  operating  expenses of $3.6  million in fiscal
1996.  The  increase  in  operating  expenses  during the  period was  primarily
attributable to increased marketing expenses associated with higher sales volume
and the impact of inflation on certain expenses in Hong Kong and China.

     Other Income(Expense),  Net. Other  income(expense),  net during the period
consisted of gains/losses  from  miscellaneous  income on disposal of production
scrap,  recovery of expenses paid on behalf of  customers,  expenses on exchange
losses and bank charges,  and interest income and interest  expense.  A one time
expense  of $0.35  million  attributable  to the  reverse  acquisition  was also
included in fiscal 1997 and primarily  caused the increase in net other expense.

                                       13
<PAGE>

     Income  Taxes.  Income taxes  increased by 43.2% from  approximately  $0.68
million in fiscal 1996 to $0.97  million in fiscal 1997.  The increase in income
taxes during the period was attributable to the increase in the taxable earnings
of the Company.

Factors that May Affect Future Results

     The Company's  quarterly and annual  operating  results have been, and will
continue to be, affected by a wide variety of factors that could have a material
adverse  effect on revenues  and  profitability  during any  particular  period,
including  the  level of orders  which  are  received  and can be  shipped  in a
quarter,   the   rescheduling  or  cancellation  of  orders  by  its  customers,
competitive  pressures on selling  prices,  changes in product or customer  mix,
availability and cost of raw materials, loss of any strategic relationships, the
Company's  ability to  introduce  new  products  and  implement  new or expanded
manufacturing  technologies on a timely basis, new product  introductions by the
Company's  competitors,  fluctuations  in  exchange  rates,  changes in consumer
tastes and spending patterns and general economic conditions, among others.

     The Company's  future  operating  results are  particularly  dependent upon
several  specific  factors,  in  addition to the general  factors  noted  above,
including  (1)  substantial  dependence  upon  manufacturing  and,  to a certain
extent,  marketing  arrangements  in the PRC,  (2)  ability  to secure  adequate
financing to support planned  increases in production and marketing of products,
and (3) the ongoing impact of the Asian financial crisis.

     Management  believes  that the  Company's  ability to sustain  its  current
margins and level of  profitability  is due,  to a  significant  degree,  to its
establishment of favorable contract  manufacturing and marketing arrangements in
the PRC with PRC government authorized entities. If, for any reason, the Company
were to be unable to continue its existing contractual relationships in the PRC,
or to replace those relationships with similar arrangements, it is possible that
the Company's operating costs could increase reducing both the Company's margins
and profitability.

     Management  believes  that the Company's  recent  growth,  and  anticipated
future growth, is a result of investments,  and planned investments,  in new and
expanded  production  capacity and expanded marketing  efforts.  The Company has
invested  substantial  amounts  in  new  machinery  and  the  modernization  and
expansion of the Beijing  Facility.  The Company has also  invested  substantial
amounts to expand  marketing  efforts in the United States,  the Middle East and
Europe.  In order to continue to grow  revenues and  profitability,  the Company
plans to  invest  substantial  additional  funds to expand  production  capacity
further and to support  further  increases  in marketing  efforts,  particularly
outside of Asia.  The Company has formed  Listco and plans to list Listco on The
Stock Exchange of Hong Kong to facilitate fund raising efforts to support future
investment.  Quality  Prince  previously  received a $10 million loan (which was
subsequently  converted to Preferred  Shares) from  Phenomenal to partially fund
the Company's  proposed  expansion of production and  marketing.  Phenomenal has
agreed to redeem the  Preferred  Shares  and apply a minimum  of $10  million to
subscribe  for equity of Listco  provided that the listing is completed by March
20,  1999.  If the  Company  is  unable  to list the  securities  of  Listco  as
anticipated  or is otherwise  unable to secure  additional  financing to support
increased production and marketing efforts, the Company may be unable to support
anticipated  future growth in revenues and profitability.  Further,  the Company
may be  required  to  redeem  the  $10  million  of  Preferred  Shares  held  by
Phenomenal. See "-- Liquidity and Capital Resources."

     Countries in the Asia Pacific region have recently  experienced  weaknesses
in their currency,  banking and equity markets. These weaknesses could adversely
affect,  among  other  things,  consumer  demand for luxury  goods in the region
(perhaps  including  the  Company's  products  which  may be  considered  luxury
consumer  goods),  and the U.S. dollar value of the Company's  foreign  currency
denominated  sales  (e.g.,  to the  extent  sales are  denominated  in Hong Kong
dollars). In addition, the Company's interest income and expense is sensitive to
fluctuations  in the general  level of Hong Kong  interest  rates.  However,  as
described  below,  the Company  believes that overall,  it is well positioned to
minimize such risks.

     The  Company  produces,  markets  and sells a broad  range of  jewelry  and
ornamental  products for different  market segments,  has already  increased its
marketing  efforts in North  America,  Europe and the Middle East, and has taken
steps to stabilize both demand for and supply of its products.  See "Business --
Sales and Marketing."


                                       14
<PAGE>

     In addition, the Company's policy is to denominate all its sales and assets
in U.S. dollars or Hong Kong dollars.  The Hong Kong Government has,  throughout
fiscal  1998 and since the  beginning  of fiscal  1999,  repeatedly  assured the
public that the "peg" of Hong Kong dollar to the U.S. dollar will not be changed
and the Hong Kong dollar will not be devalued.  Similarly, the governor of PRC's
central bank has  reassured  the public that the Renminbi  will not be devalued.
Therefore, based on information available to management at this time, management
does not anticipate  significant  fluctuations  in the exchange rate between the
U.S. dollar and the Hong Kong dollar in the foreseeable  future.  As the Company
makes its purchases of raw materials in local  currencies,  and those currencies
have  generally  exhibited  weakness  since  mid-1997  when compared to the U.S.
dollar,  management  does not believe the Company is exposed to undue  amount of
risk arising from  fluctuations  of the exchange rates between those  currencies
and the U.S. dollar.

     The Company  does not enter into  foreign  exchange  forward  contracts  or
currency options to hedge against foreign exchange fluctuations or interest rate
swaps,  interest rate forward  contracts and other  derivatives to hedge against
interest  rate  exposures.  The Company  monitors its exchange and interest rate
risks on a continuous basis, both on a stand-alone basis and in conjunction with
each  other,  from both an  accounting  and an economic  perspective.  Given the
horizons  of the  Company's  risk  management  activities,  there may be adverse
financial  impacts  resulting  from  unfavorable  movements  in  either  foreign
exchange or interest rates.

     Overall,  the Company  believes it is well positioned to minimize  material
adverse impact that the recent economic  developments in the Asia Pacific region
may have on the Company.

Year 2000 Issue

     The Year 2000  Issue is the  result of  potential  problems  with  computer
systems or any equipment  with computer  chips that use dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock
or date recording  mechanism  including date sensitive  software which uses only
two digits to represent the year, may recognize a date using 00 as the year 1900
rather  than  the  year  2000.   This  could  result  in  a  system  failure  or
miscalculations causing disruption of operations,  including among other things,
a temporary  inability  to process  transactions,  send  invoices,  or engage in
similar activities.

     The  Company is using both  internal  and  external  resources  to identify
significant  applications  that  will  require  modification,  and to make  such
modifications,  to ensure Year 2000 Compliance. The total cost to the Company of
these Year 2000 Compliance  activities has not been and is not anticipated to be
material to its  financial  position or results of operations in any given year.
The Company has completed the modifications of all significant  applications and
its systems are 2000 compliant.

     The  Company  has  planned to  communicate  with  others  with whom it does
significant  business to determine their Year 2000 Compliance  readiness and the
extent to which the Company is  vulnerable  to any third party Year 2000 issues.
However,  there can be no guarantee that the systems of other companies on which
the  Company's  systems  rely will be  timely  converted,  or that a failure  to
convert  by another  company,  or a  conversion  that is  incompatible  with the
Company's system, would not have a material adverse effect on the Company.

Liquidity and Capital Resources

     At March 31, 1998, the Company had cash balances  totaling $2.1 million and
a working  capital  deficit of $1.2 million.  This compares to a cash balance of
$0.1 million and working capital of $2.8 million at March 31, 1997.

     Cash  provided by operations  decreased to $1.9 million  during fiscal 1998
from  $2.8  million  during  fiscal  1997.  The  decrease  in cash  provided  by
operations was primarily due to increases in accounts receivable and inventories
which  accompanied  the increase in sales  during  fiscal  1998.  The  Company's
accounts receivable increased to $10.2 million, or approximately 16.4% of fiscal
1998 revenues,  as compared to $5.1 million,  or  approximately  12.5% of fiscal
1997  revenues.  The  increase in  accounts  receivable  during  fiscal 1998 was
attributable  to  increased  sales  levels,  particularly  in growing  non-Asian
markets and the granting of more favorable payment terms to selected  customers.
Days sales outstanding in receivables increased to 45 days for fiscal 1998, from
36 days for fiscal 1997.  Inventories  increased  to $13.1  million at March 31,
1998 from $8.5 million at March 31, 1997.  The increase in year end  inventories
was required to support  growing  sales.  The Company used $15.7  million,  $4.8
million and $2.2 million for investing activities in fiscal 1998, 1997 and 1996,
respectively.  The investment of cash in each of those periods related primarily
to acquisitions of machinery and equipment to increase the Company's  production
capacity in order to support growing sales.


                                       15
<PAGE>

     Financing  activities  provided $15.9 million in fiscal 1998 as compared to
$1.8 million in fiscal 1997. Cash generated from financing  activities in fiscal
1998 consisted  primarily of the proceeds of a $10 million loan from  Phenomenal
to the Company's wholly owned subsidiary Quality Prince. The Note evidencing the
loan accrued interest at three percent (3%) per month,  compounded monthly,  and
was  convertible  into  2914  shares,  or such  other  number  of shares as will
constitute not less than 29.14%, of Quality Prince. As additional  consideration
for the loan,  the Company  issued  Warrants to  Phenomenal  which  entitled the
holder to purchase  5,263,158 shares of the Company's common stock at a purchase
price of $2.19,  exercisable for a period  commencing upon the date of the grant
of the Warrants and ending on the earlier of (1) May 31, 1998 or (2) the closing
of a  consolidation  or merger of the Company (other than with its  wholly-owned
subsidiary), or the transfer of all or substantially all of the Company's assets
to, another  corporation (unless the owners of the capital stock of the Company,
prior to such  transaction,  continue to own a majority of the capital  stock of
the surviving corporation). The Warrants were only exercisable in the event that
the Note was not converted pursuant to its terms.

     On June 4, 1998, the Company (and its subsidiaries) and Phenomenal executed
a Deed  Amendment to modify the terms of the Note and the Warrants.  Pursuant to
the Deed Amendment,  Phenomenal agreed to waive all interest accrued on the Note
and to convert the Note into 5,263,788  Preferred Shares of the Company's wholly
owned  subsidiary,  Hang  Fung  Jewellery.  The  Deed  Amendment  evidences  the
Company's  intent to form a new holding company,  Listco,  for the shares of the
companies,  excluding  Quality  Prince,  comprising  the Hang  Fung  Group.  The
Preferred Shares must be redeemed and a minimum  $10,000,000 from redemption are
subject  to  mandatory  subscription  into  shares  of  common  equity of Listco
representing  29.14% of such  equity if, and only if, the Company has listed the
shares of Listco on The Stock Exchange of Hong Kong on or before March 20, 1999.
If the  Restructuring has been completed but such listing has not been completed
on or before March 20, 1999, Phenomenal shall have the right to either subscribe
for  shares of common  equity of Listco or to cause the  Preferred  Shares to be
redeemed for $10,000,000 plus a dividend accruing at 19.56% per annum.

     Pursuant to the Deed Amendment,  the Warrants were extended to May 31, 1999
or the date of the proposed  listing,  whichever  is earlier,  and the number of
warrant shares was modified to reflect the accrual of dividends on the Preferred
Shares until the Warrants are exercised.

     By the terms of the Deed  Amendment,  Phenomenal  may  either  convert  the
Preferred  Shares  into equity of Listco or exercise  the  Warrants  but may not
avail itself of both such rights.  The  conversion  of the  Preferred  Shares or
exercise of the Warrants shall cause  Phenomenal to forfeit its rights under the
other.

     The Company's primary  liquidity needs are to fund accounts  receivable and
inventories as well as to fund the purchase of new machinery in the total amount
of approximately  $25.5 million.  Prior to Phenomenal's  investment in Hang Fung
Group, the Company had historically  funded its operations through a combination
of internally generated cash,  short-term  borrowings under bank lines of credit
and hire purchase financing.

     At March  31,  1998,  the  Company  had no  material  capital  commitments.
However,  the  Company  intends to use  available  funds as needed to expand its
production  capacity and jewelry  distribution  operations in Europe, the Middle
East and the United States.

     At March 31, 1998,  the Company's  capital  resources  consisted of various
bank credit facilities and certain capital leases, in addition to funds on hand.
The Company's  bank credit  facilities  consist of a combination  of term loans,
lines of credit,  letters of credit, bank guarantees,  overdraft,  revolving and
similar  credit  facilities  generally  utilized  in the jewelry  industry.  The
Company's bank credit facilities are used to fund purchases of raw materials and
inventory and to finance accounts receivable and overdrafts. Such facilities are
consistent  with credit  facilities  generally  available  to  operators  in the
jewelry  industry in terms of  interest  rates and fees,  collateral,  repayment
terms,  and renewal.  The Company's  total  available bank credit  facilities at
March 31, 1998 were  approximately  $12.4  million of which  approximately  $9.9
million had been used at such date.


                                       16
<PAGE>

     At March 31,  1998,  the  Company  also had a number of capital  leases and
operating  leases  pursuant to which the Company  holds various  facilities  and
equipment. At March 31, 1998, the Company's capital lease obligations totaled $3
million of which $1.1 million was  attributable  to current  lease  obligations.
Obligations under operating leases require minimum annual rental payments by the
Company of approximately $0.35 million in fiscal 1999.

     The  Company  believes  that  the  available  trade  credit,   bank  credit
facilities,  funds  on  hand  and  funds  generated  from  operations,  will  be
sufficient to satisfy the Company's  bank credit needs and  anticipated  working
capital requirements for at least the next 12 months.

Seasonality

     The jewelry business is highly seasonal, with the third and fourth calendar
quarters  (second and third  fiscal  quarters),  which  includes  the  Christmas
shopping season, historically contributing the highest sales. Seasonality cannot
be  predicted  or counted  upon,  and the results of any interim  period are not
necessarily  indicative  of the  results  that might be  expected  during a full
fiscal year.

     The following  table sets forth the  Company's  unaudited net sales for the
periods indicated:

                                           Fiscal Year Ended March 31,
                              --------------------------------------------------
                                  1996             1997                 1998
                               (US$,000)        (US$,000)            (US$,000)
                             Amount     %      Amount      %      Amount       %
                             ------  ----      ------   ----      ------    ----
1st Quarter (4/1-6/30)      $5,961   22.3     $ 7,788   19.0      $13,926   22.4
2nd Quarter (7/1-9/30)       6,608   25.2       9,980   24.4       15,458   24.8
3rd Quarter (10/1-12/31)     7,684   28.6      12,639   30.8       17,706   28.4
4th Quarter (1/1-3/31)       6,615   23.9      10,551   25.8       15,212   24.4
                            ------  -----      ------  -----       ------  -----
    Total                  $26,868  100.0     $40,958  100.0      $62,302  100.0
                            ======  =====      ======  =====       ======  =====
Inflation

     Inflation  has  historically  not had a  material  effect on the  Company's
operations.  When the price of gold or other raw materials has increased,  these
costs  historically  have been passed on to the  customer.  Furthermore,  as the
Company does not have either long-term  supply contracts or long-term  contracts
with  customers,   prices  are  quoted  based  on  the  prevailing   prices  for
semi-precious gemstones or metals.  Accordingly,  the Company believes inflation
will not have a material effect on its future operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.

ITEM 8.  FINANCIAL STATEMENTS  AND SUPPLEMENTARY DATA

     The  consolidated  financial  statements of the Company,  together with the
independent   auditors'  report  thereon  of  Arthur  Andersen  &  Co.  ("Arthur
Andersen"),  Certified Public Accountants,  appears on pages F-1 through F-23 of
this report. See Index to Financial Statements on page 26 of this report.


                                       17
<PAGE>


ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

     Following  the  acquisition  of the  Hang  Fung  Group by the  Company,  in
December  1996, the Company's  Board of Directors  selected  Arthur  Andersen to
serve as its new  independent  accountants  and  dismissed  Albright,  Persing &
Associates, Ltd., Certified Public Accountants, of Reno, Nevada which previously
served as the independent accountants for the Company.

     Albright, Persing & Associates,  Ltd.'s reports on the financial statements
of the Company for the fiscal years ended  December 31, 1994 and 1995 contain no
adverse  opinion or  disclaimer of opinion and were not qualified or modified as
to uncertainty (other than uncertainty as to the company's continuing as a going
concern),  audit scope, or accounting principles.  In connection with its audits
for fiscal  years 1994 and 1995 and through  December  20,  1996,  there were no
disagreements  with  Albright,  Persing  &  Associates,  Ltd.  on any  matter of
accounting principles or practices,  financial statement disclosure, or auditing
scope or procedure,  which  disagreements if not resolved to the satisfaction of
Albright,  Persing & Associates,  Ltd.  would have caused them to make reference
thereto in its reports on the financial statements for such years.

     Arthur Andersen served as the principal accounting firm with respect to the
financial statements of for the Hang Fung Group for fiscal years ended March 31,
1994, 1995, 1996 and 1997.

                                       18
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Identification  of  Directors,   Executive  Officers  and  Certain   Significant
Employees

     The following table sets forth certain information  regarding the directors
and executive officers of the Company.

  Name                Age   Position
--------             -----  --------
Lam Sai Wing........   43   Chairman, Chief Executive Officer and President
Chan Yam Fai, Jane..   35   Vice President, Chief Financial Officer and Director
Ng Yee Mei..........   36   Vice President and Director
Cheng Wai On........   45   Director

Terms of Office

     The  directors of the Company hold office until the next annual  meeting of
stockholders of the Company or until their  successors in office are elected and
duly  qualified.  All officers serve at the discretion of the Board of Directors
except as set forth in employment agreements.

Family Relationships

     Lam Sai Wing and Chan Yam Fai, Jane are husband and wife.

Business Experience

     Lam Sai Wing has served as Chairman of the Board,  Chief Executive  Officer
and  President of the Company  since the Exchange in December of 1996 and of the
Company's  predecessor and operating  subsidiaries,  the Hang Fung Group,  since
founding the Hang Fung Group in 1986.

     Chan Yam Fai, Jane has served as Vice President,  Chief  Financial  Officer
and a Director of the Company  since the Exchange in December of 1996 and of the
Hang Fung Group since 1990.

     Ng Yee Mei has served as Vice President and a Director of the Company since
the Exchange in December of 1996 and of the Hang Fung Group since 1991.

     Cheng Wai On has served as a Director of the Company  since the Exchange in
December of 1996.  Mr. Cheng has been  employed by the Hang Fung Group as Export
Manager since 1986.

Compliance With Section 16(a) of the Exchange Act

     Under the securities  laws of the United States,  the Company's  directors,
its  executive  officers  and any persons  holding  more than ten percent of the
Company's  Common Stock are required to report  their  initial  ownership of the
Company's  Common  Stock and any  subsequent  changes in that  ownership  to the
Securities  and Exchange  Commission.  Specific due dates for these reports have
been  established and the Company is required to disclose any failure to file by
these dates during fiscal 1998.

     All of the filing  requirements  were satisfied on a timely basis in fiscal
1998.  In making  these  disclosures,  the Company has relied  solely on written
statements of its directors,  executive  officers and shareholders and copies of
the reports that they filed with the Commission.


                                       19
<PAGE>


ITEM 11.  EXECUTIVE COMPENSATION

Executive Compensation Table

     The following table sets forth  information as to the compensation  paid or
accrued to each officer and director receiving compensation of at least $100,000
per year and the Chief  Executive  Officer  for the three  years ended March 31,
1998:

<TABLE>

                                                          Annual Compensation   
                                           ------------------------------------------------                 
                                                                           Other Annual         All Other
         Name and Principal Position        Year       Salary      Bonus   Compensation (2)   Compensation
        -----------------------------      ------     --------    -------  ----------------   ------------
<S>                                       <C>          <C>        <C>       <C>                <C>
 
Lam Sai Wing............................     1998     $194,000    $  0        $     0           $   0
  Chief Executive Officer, Chairman of..     1997      145,000       0              0               0
  the Board and President (1)...........     1996       55,000       0         15,000               0
</TABLE>

------------------
                        
(1)  Mr. Lam assumed the  positions  indicated,  including the position of Chief
     Executive  Officer,  following  the  Exchange  in  December  of  1996.  The
     compensation  indicated  represents  amounts  paid by the Hang  Fung  Group
     during  each of the  years  indicated.  Mr.  Claude  Smith  served as Chief
     Executive  Officer of the Company during each of the years indicated and up
     until the  Exchange  in  December of 1996 at which time Mr. Lam assumed the
     position of Chief Executive Officer.

(2)  Mr.  Lam's other  annual  compensation  consists of a housing  allowance of
     $15,000.

Director's Compensation

     No compensation has been paid to any directors for service in such capacity
in the past and no such compensation is presently payable to directors.  At such
time as the Board of Directors deems  appropriate,  the Company intends to adopt
an appropriate policy to compensate  non-employee  directors in order to attract
and retain the services of qualified non-employee directors.

Employment Agreements

     The Company has employment  agreements  with Mr. Lam and Ms. Chan.  Each of
these  agreements  expires  December 31, 2003.  The  employment  agreements,  as
amended,  provide for a base salary and bonus of HK$1,499,000  (US$194,000)  for
Mr. Lam and HK$155,000  (US$20,000)  for Ms. Chan including a housing  allowance
and  participation  in all other benefit plans adopted by the Company for fiscal
1998.

Provident Plan

     The Company's  subsidiaries  in Hong Kong have adopted a voluntary  defined
contribution  provident  plan (the "Plan") for its  employees in Hong Kong.  The
Plan  generally  covers all  employees of the Company's  operating  subsidiaries
(excluding  contract  workers  in the PRC) who have  completed  three  months of
service with the Company.  Employees  electing to participate in the Plan defer,
in the form of a contribution  to the Plan, an amount equal to five percent (5%)
of their monthly salary and the Company makes a matching  contribution on behalf
of each participating employee.  Participating employees are always fully vested
with respect to contributions made by them to the Plan and earnings or increases
thereon.  Employees become vested in  contributions  made by the Company ratably
over ten years.

Compensation Report

     The Company does not  presently  maintain a  Compensation  Committee of its
Board of  Directors.  The Board of  Directors,  acting under the guidance of the
Company's Chairman and Chief Executive Officer,  Mr. Lam, has historically fixed
the compensation of executive officers. The salary of Mr. Lam was fixed pursuant
to the terms of an Employment Agreement entered in 1994 and amended in 1997.


                                       20
<PAGE>

     In fixing the  compensation  of Mr. Lam and other executive  officers,  the
Board of Directors  considered  the following  factors,  among others:  (1) from
fiscal 1995 through fiscal 1998, the Company and its predecessor,  the Hang Fung
Group,  was  consistently  profitable -- with revenues  increasing  166% and net
income  increasing  143%,  (2) the  importance of  attracting  and retaining the
highly  skilled  executive  officers  in  the  management  team  that  has  been
responsible  for  such  financial  performance,  (3)  the  efforts,  skills  and
responsibilities of, and contributions made by, each such executive officer, and
(4) the competitiveness of the Company's compensation packages.

     With respect to the Chairman and Chief  Executive  Officer,  the  Directors
acknowledged  that he has  brought to the  Company  not only his  expertise  and
personal relationships in the jewelry industry,  but also his vision,  foresight
and efforts to bring about the  Company's  financial  performance  over the past
several years,  and to steer the Company toward the more profitable  segments of
the  business.  The  Directors  also took into  account  the need to retain such
highly qualified officers by providing competitive compensation packages.

Performance Graph

     The  following  graph  summarizes   cumulative  total  shareholder   return
(assuming reinvestment of dividends) on the Common Stock of the Company compared
to the  returns  of the S&P  Smallcap  600 Index and of a peer  group (the "Peer
Group")  consisting  of DG Jewellry  CDA Ltd.  ("DGJ")  and IWI Holding  Limited
("IWI").  The Company's Common Stock was first registered under Section 12(g) of
the  Securities  Exchange  Act of 1934,  as  amended,  on March  24,  1997.  The
measurement  period  hereto  commenced  on March 24, 1997 and ended on March 31,
1998,  the Company's  1998 fiscal year end date. The graph assumes that $100 was
invested on March 24, 1997.

     As there is no broad equity  market index for the OTC Bulletin  Board where
the  Company's  Common  Stock is traded and there is no  published  industry  or
line-of-business index for the jewelry business in which the Company is engaged,
the Company has selected DGJ and IWI as peer issuers for comparison. DGJ and IWI
are engaged  primarily  in the design,  assembly,  merchandising  and  wholesale
distribution  of jewelry  and whose  shares  are traded in the  over-the-counter
market in the United States.

     The  comparisons  in this graph are required by the Securities and Exchange
Commission  and are not  intended to forecast or be  indicative  of future stock
price performance or the financial performance of the Company.  Shareholders are
encouraged to review the Financial Statements of the Company mentioned in Item 8
above.



                               [PERFORMANCE GRAPH]




                      March 24, 1997        March 31, 1997        March 31, 1998
                      --------------        --------------        --------------

S.W. Lam, Inc.             100                  100.00                16.67
S&P Smallcap 600 Index     100                   96.34               145.89
Peer Group                 100                  107.63                35.72


                                       21
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Common Stock

     The  following  table is  furnished  as of  December  28,  1998 to indicate
beneficial  ownership  of  shares  of the  Company's  Common  Stock  by (1) each
shareholder of the Company who is known by the Company to be a beneficial  owner
of more than 5% of the  Company's  Common  Stock,  (2) each  director  and named
officer of the Company,  individually, and (3) all officers and directors of the
Company as a group.  The information set out in the following table was supplied
by such persons.

<TABLE>

Name and Address of                                  Number of Shares
Beneficial Owner (1)                              Beneficially Owned (2)  Percent (2)
--------------------                              ----------------------  -----------     
<S>                                               <C>                     <C>    

Good Day Holdings, Ltd (3)(5).....................     6,600,000  (3)        51.6%
Phenomenal Limited (7)............................     5,263,158  (4)        29.1%
Lam Mo Wan (5)....................................     1,800,000             14.1%
Chan Wai Sum (5)..................................     1,800,000             14.1%
Lam Sai Wing (3)..................................     6,600,000  (3)        51.6%
Carhill Limited (6)...............................       800,000              6.3%
Chan Yam Fai, Jane................................       300,000              2.3%
Ng Yee Mei........................................           -0-                -
Cheng Wai On......................................           -0-                -
All officers and directors as a group (4 persons).     6,900,000  (3)        53.9%

</TABLE>

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

(2)  Includes shares of common stock not  outstanding,  but which are subject to
     options  and  warrants  exercisable  within  60  days  of the  date  of the
     information set forth in this table, which are deemed to be outstanding for
     the purpose of  computing  the shares held and  percentage  of  outstanding
     common stock with  respect to the holder of such options or warrants.  Such
     shares  are not,  however,  deemed to be  outstanding  for the  purpose  of
     computing the percentage of any other person.

(3)  Good Day Holdings Ltd. is  controlled  100% by Lam Sai Wing, an officer and
     director  of the  Company.  Accordingly,  Mr.  Lam may be  deemed to be the
     beneficial owner of the shares held by Good Day Holdings.

(4)  Includes  5,263,158  shares of  common  stock  issuable  upon  exercise  of
     Warrants  originally  issued by the  Company  and a  convertible  note (the
     "Note") issued by Quality Price in  consideration  of a loan, in the amount
     of $10,000,000,  from Phenomenal to Quality Prince. The Warrants originally
     entitled the holder to purchase  5,263,158  shares of the Company's  common
     stock at a purchase  price of $2.19,  exercisable  for a period  commencing
     upon the date of the grant of the Warrants and ending on the earlier of (1)
     May 31, 1998 or (2) the closing of a consolidation or merger of the Company
     (other than with its  wholly-owned  subsidiary),  or the transfer of all or
     substantially all of the Company's assets to, another  corporation  (unless
     the owners of the capital stock of the Company,  prior to such transaction,
     continue  to  own  a  majority  of  the  capital  stock  of  the  surviving
     corporation). The Warrants were only exercisable in the event that the Note
     was not converted  pursuant to its terms. On June 4, 1998, the Company (and
     its  subsidiaries)  and Phenomenal  executed a Deed Amendment to modify the
     terms of the Note and the  Warrants.  Pursuant to the Deed  Amendment,  the
     Warrants were extended to May 31, 1999 or the date of the proposed  listing
     of Listco,  whichever  is  earlier,  and the  number of warrant  shares was
     modified to reflect the accrual of dividends on the Preferred  Shares until
     the Warrants are exercised. By the terms of the Deed Amendment,  Phenomenal
     may either  convert the Preferred  Shares into equity of Listco or exercise
     the Warrants but may not avail itself of both such rights.  The  conversion
     of the Preferred  Shares or exercise of the Warrants shall cause Phenomenal
     to forfeit its rights under the other. See "Item 5. Market for Registrant's
     Common  Equity and  Related  Stockholder  Matters -- Sales of  Unregistered
     Securities."  

(5)  Address is Unit 302-303A,  3rd Floor,  Fu Hang  Industrial  Bldg. No. 1 Hok
     Yuen Street East, Kowloon, Hong Kong.

(6)  Address is c/o Suite 4703,  Central Plaza, 18 Harbour Road,  Wanchai,  Hong
     Kong.

(7)  Address  is P.O.  Box  957,  Offshore  Incorporations  Centre,  Road  Town,
     Tortola, British Virgin Islands.


                                       22
<PAGE>

Preferred Stock

     Series A Preferred  Stock.  The following table is furnished as of December
28, 1998 to indicate  beneficial  ownership of the Company's  Series A Preferred
Stock by each  shareholder  of the  Company  who is known by the Company to be a
beneficial owner of more than 5% of the Company's Series A Preferred Stock.

Name and Address of                        Number of Shares
Beneficial Owner (1)                      Beneficially Owned         Percent
--------------------                      ------------------         -------
Good Day Holdings Ltd. (3)............       100,000  (2)             100.0%
Lam Sai Wing..........................       100,000  (2)             100.0%
                                   
(1)  Unless  otherwise  noted,  each person or group  identified  possesses sole
     voting and  investment  power with respect to the shares shown opposite the
     name of such person or group.

(2)  Good Day Holdings Ltd. is  controlled  100% by Lam Sai Wing, an officer and
     director  of the  Company.  Accordingly,  Mr.  Lam may be  deemed to be the
     beneficial owner of the shares held by Good Day Holdings, Ltd.

(3)  Address is Unit 302-303A,  3rd Floor, Fu Hang Industrial  Bldg.,  No. 1 Hok
     Yuen Street East, Kowloon, Hong Kong

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company's  predecessor and subsidiary,  Hang Fung Group, has, from time
to time entered into transactions with officers and directors of the Company and
companies controlled by officers and directors of the Company.

     During the fiscal years ended March 31, 1997 and 1998,  the Hang Fung Group
paid rental  payments of $174,000 each year to Ms. Chan in  connection  with the
lease of the Company's principal executive offices in Hong Kong.

     The Company has from time to time both advanced to and borrowed  funds from
Mr. Lam. At March 31, 1997,  receivables from Mr. Lam totaled $475,000. At March
31, 1998,  the Company owed Mr. Lam $1.0 million.  All of such loans to and from
Mr. Lam are unsecured, non-interest bearing and without pre-determined repayment
terms.

     Mr.  Lam and Ms.  Chan have  personally  guaranteed  the  existing  banking
facilities  of the Hang  Fung  Group and have  pledged  certain  real  estate as
collateral to secure such banking facilities. Additionally, Mr. Lam and Ms. Chan
have  guaranteed the repayment of the $10 million of Preferred  Shares issued by
Hang  Fung  Jewellery  and held by  Phenomenal  pursuant  to the  terms of a Put
Option.  See  "Market For  Registrant's  Common  Equity and Related  Stockholder
Matters -- Sales of Unregistered Securities."

     With the exception of the non-interest bearing loans to Mr. Lam, all of the
above  transactions  are  believed  by  management  to be on  terms  at least as
favorable  to the  Company as may have been  obtained  from  unaffiliated  third
parties.  The Company has no present policy governing related party transactions
but intends to implement a policy such that all future and ongoing  transactions
between the Company  and its  directors,  officers,  principal  stockholders  or
affiliates  will be on  terms  no less  favorable  to the  Company  than  may be
obtained from  unaffiliated  third parties,  and any such  transactions  will be
approved by a majority of disinterested directors of the Company.


                                       23
<PAGE>
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are filed as a part of this Report:

     (1)  Consolidated  Financial Statements:  See Index to Financial Statements
          on page 26 of this report for financial  statements and  supplementary
          data filed as part of this report.

     (2)  Financial Statement Schedules

          None 

     (3)  Exhibits

   Exhibit
   Number                  Description of Exhibit
   -------                 ----------------------

   2.1    Acquisition Agreement between S.W. Lam, Inc. and the shareholders of
          Hang Fung Jewellery  Company  Limited and Kai Hang Jewellery Company
          Limited (1)
   3.1    Articles of Incorporation (1)
   3.2    Bylaws (1)
   4.1    Certificate of Designation for Series A Preferred Stock (1)
   10.1++ Employment Agreement with Lam Sai Wing dated January 1, 1994 (1)
   10.2++ Employment Agreement with Chan Yam Fai, Jane dated January 1, 1994 (1)
   10.3   Sales Agency Agreement between Hang Fung Jewellery Co., Ltd. and China
          Jewellery Import & Export Co. (1)
   10.4   Agreement for Jewellery Assembling  between Hang Fung  Jewellery Co.,
          Ltd. and China Jewellery Import & Export Co. (1)
   10.5   Sales Cooperation  Agreement between Hang Fung Jewellery Co., Ltd. and
          China Jewellery Import & Export Co. (1)
   10.6   Confirmation Agreement between Hang Fung Jewellery Co., Ltd. and China
          Jewellery Import & Export Co. (1)
   10.7   Lease  Agreement  between Chan Yam Fai,  Jane and Hang Fung  Jewellery
          Co., Ltd. re: executive offices (1)
   10.8++ Supplementary  Employment Contract with Lam Si Wing and Lam Chan Yam
          Fai (2)
   10.9   Warrant Agreement with Phenomenal Limited (3)
   10.10  Convertible Note with Phenomenal Limited (3)
   10.11  Deed Amendment (3)
   27.1*  Financial Data Schedule
           
-------------------                   
    ++    Compensatory plan or management agreement.

     *    Filed herewith

(1)  Incorporated   by  reference  to  the   respective   exhibits   filed  with
     Registrant's  Registration  Statement  on  Form  10  (Commission  File  No.
     0-22049)

(2)  Incorporated  by  reference  to the  respective  exhibits  filed  with  the
     Registrant's Annual Report on Form 10-K for the year ended March 31, 1997

(3)  Incorporated  by  reference  to the  respective  exhibits  filed  with  the
     Registrant's  Quarterly  Report on Form 10-Q for the period  ended June 30,
     1997

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended March 31, 1998.


                                       24
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         S.W. LAM, INC.



 
                                      By: /s/ Lam Sai Wing
                                         ------------------------------------
                                         Lam Sai Wing
                                         President and Chief Executive Officer
Dated:   January  13  , 1999
                 ----

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

    Signature                Title                                  Date
  -------------            ---------                              --------

/s/ Lam Sai Wing
--------------------   President, Chief Executive Officer       January 13, 1999
Lam Sai Wing          (Principal Executive Officer) and
                       Chairman of the Board
/s/ Chan Yam Fai, Jane
--------------------   Vice President, Chief Financial          January 13, 1999
Chan Yam Fai, Jane     Officer  (Principal Accounting
                       and Financial Officer) and Director
/s/ Ng Yee Mei
--------------------   Vice President and Director              January 13, 1999
Ng Yee Mei

/s/ Cheng Wai On
--------------------   Director                                 January 13, 1999
Cheng Wai On


                                       25
<PAGE>

                                 S.W. LAM, INC.

                   Index to Consolidated Financial Statements


                                                                           Page
                                                                          ------

Report of Independent Public Accountants..................................  F-1

Consolidated Balance Sheets as of March 31, 1997 and 1998.................  F-2

Consolidated Statements of Operations for the Years ended March 31, 1996,
   1997 and 1998..........................................................  F-3

Consolidated Statements of Cash Flows for the Years ended March 31, 1996,
   1997 and 1998..........................................................  F-4

Consolidated Statements of Changes in Shareholders' Equity for the Years 
   ended March 31, 1996, 1997 and 1998....................................  F-5

Notes to Consolidated Financial Statements................................  F-6



                                       26
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of S. W. Lam, Inc.:

We have audited the accompanying  consolidated balance sheets of S. W. Lam, Inc.
(incorporated in the State of Nevada,  United States of America;  "the Company")
and  Subsidiaries  ("the Group") as of March 31, 1997 and 1998,  and the related
consolidated  statements of operations,  cash flows and changes in shareholders'
equity  for the years  ended  March 31,  1996,  1997 and 1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of S. W. Lam, Inc. and
Subsidiaries as of March 31, 1997 and 1998, and the results of their  operations
and their cash  flows for the years  ended  March 31,  1996,  1997 and 1998,  in
conformity with generally accepted accounting principles in the United States of
America.





ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong



Hong Kong,
October 9, 1998.
S. W. LAM, INC.

                                      F-1

<PAGE>

                                 S.W. LAM, INC.

                          CONSOLIDATED BALANCE SHEETS
                         AS OF MARCH 31, 1997 AND 1998

                  (Amounts expressed in United States dollars)

                                                       Note      1997      1998
                                                      ------    ------    ------
                                                                $'000     $'000

ASSETS
------  

Current assets:    
   Cash and bank deposits                                          94      2,094
   Accounts receivable, net                             5       5,106     10,248
   Deposits and prepayments                             6         142        395
   Inventories                                          7       8,509     13,077
   Due from a director                                 18         475          -
                                                               ------     ------

      Total current assets                                     14,326     25,814

Property, machinery and equipment and capital 
leases, net                                             8       7,083     19,853

      Total assets                                             21,409     45,667
                                                               ======     ======

LIABILITIES AND SHAREHOLDERS'EQUITY
-----------------------------------

Current liabilities:   
   Short-term bank borrowings                           9       2,275      5,618
   Long-term bank loans, current portion               11         197        293
   Capital lease obligations, current portion          12         229      1,106
   Accounts payable                                             1,619      2,880
   Deposits from customers                                      1,125          -
   Accrued liabilities                                 10       4,754      4,880
   Convertible note                                    13           -     10,000
   Due to a director                                   18           -      1,034
   Taxation payable                                    14       1,359      1,173
                                                               ------     ------

      Total current liabilities                                11,558     26,984

Long-term bank loans, non-current portion              11       1,290      1,189
Capital lease obligations, non-current portion         12         260      1,933
Deferred taxation                                      14         284      1,283

Total liabilities                                              13,392     31,389

Shareholders' equity:        
   Common stock, par value $0.001 each: 
   - authorized - 25,000,000 shares;        
   - outstanding and fully paid - 12,800,000 shares                13         13
   Preferred stock, par value $0.001 each:     
   - authorized - 25,000,000 shares;         
   - outstanding and fully paid - Series A 
      preferred stock - 100,000 shares                              -          -
   Additional paid-in capital                                     511        511
   Retained earnings                                            7,343     13,628
   Cumulative translation adjustments                             150        126
                                                               ------     ------
      Total shareholders' equity                                8,017     14,278
                                                               ------     ------
      Total liabilities and shareholders' equity               21,409     45,667
                                                               ======     ======

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

                                      F-2

<PAGE>


                                S. W. LAM, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998

                  (Amounts expressed in United States dollars)


                                         Note      1996        1997       1998  
                                                  $'000       $'000      $'000

Revenues    
Net sales                                          22,903     36,825     57,994 
Contract processing fees                            3,965      4,133      4,308 
                                                   ------     ------    ------- 
Total revenues                                     26,868     40,958     62,302 
Cost of sales and services                        (18,822)   (29,987)   (47,159)
                                                   -------   -------    -------
Gross profit                                        8,046     10,971     15,143 
Selling, general and administrative expenses       (3,644)    (4,781)    (6,936)
Interest expenses                                    (403)      (389)      (711)
Interest income                                        11          -        137 
Other income (expenses), net                           63         (2)       (62)
Expenses related to reverse acquisition                 -       (350)         - 
                                                   ------     ------    -------
Income before income taxes                          4,073      5,449      7,571 
Provision for income taxes              14          (680)       (974)    (1,286)
                                                   ------     ------    -------
Net income                                         3,393       4,475      6,285
                                                   ======     ======    =======
Earnings per common share                         $ 0.32      $ 0.40     $ 0.49
                                                   ======     ======    =======
Weighted average number of
common shares                                 10,500,000  11,075,000 12,800,000
                                              ==========  ========== ==========






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

                                      F-3

<PAGE>

  
                                S. W. LAM, INC.


                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998

                  (Amounts expressed in United States dollars)


                                                     1996      1997       1998  
                                                    ------    ------     ------
                                                    $'000     $'000      $'000  

Cash flows from operating activities:
------------------------------------
Net income                                          3,393     4,475      6,285  
Adjustments to reconcile net income to net  
   cash provided by operating activities -
   Depreciation of property, machinery and equipment  678     1,031      2,988  
   Provision for bad and doubtful debts               114         -          -  
Decrease (Increase) in operating assets -   
   Accounts receivable, net                         2,455    (2,117)    (5,142) 
   Deposits and prepayments                             -      (128)      (253)
   Inventories                                        179      (440)    (4,568) 
   Due from a director                                431       581        475  
Increase (Decrease) in operating liabilities   -  
   Accounts payable                                 1,168       266      1,261  
   Deposits from customers                         (2,974)   (2,891)    (1,125)
   Accrued liabilities                              1,135     1,069        126  
   Due to a director                                    -         -      1,034  
   Taxation payable                                   693       701       (186) 
   Deferred taxation                                  (13)      284        999
                                                   -------   -------    -------
   Net cash provided by operating activities        7,259     2,831      1,894  
                                                   =======   =======    =======
Cash flows from investing activities:
------------------------------------
Additions to property, machinery and equipment     (2,173)   (4,809)   (15,756) 
                                                   =======   =======    =======
Cash Flows from financing activities:    
------------------------------------
Net proceeds from issuance of common stock              -       524          -  
Decrease in bank overdrafts                        (1,318)      (77)       (56) 
Increase in import trust receipts bank loans          909       736      3,399  
New long-term bank loans                            1,257       772        278  
Repayment of long-term bank loans                  (1,279)     (517)      (283) 
New capital lease obligations                         151       871      3,825  
Repayment of capital element of capital lease 
   obligations                                        (75)     (460)    (1,275) 
Net proceeds from issuance of convertible note          -         -     10,000  
Dividends paid                                     (5,000)        -          -
                                                   -------    ------    -------
Net cash (used in) provided by financing 
   activities                                      (5,355)    1,849     15,888
                                                   -------    ------    -------
Effect of cumulative translation adjustments          113       (21)       (26)
                                                   -------    ------    -------
Net (decrease) increase in cash and bank deposits    (156)     (150)     2,000
Cash and bank deposits, as of beginning of year       400       244         94
                                                   -------    ------    -------
Cash and bank deposits, as of end of year             244        94      2,094
                                                   =======    ======    =======

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

                                      F-4

<PAGE>


                                S. W. LAM, INC.


           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
               FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998

                  (Amounts expressed in United States dollars)


<TABLE>
                                                          Series A
                                     Common Stock       preferred stock                                           
                                ---------------------   ----------------------                                      Cumulative    
                                 Number of               Number of                 Additional         Retained     translation
                                 shares       Amount     Shares         Amount    paid-in capital     earnings     adjustments
                                ---------    --------   -----------    --------   ---------------     --------     -----------
                                  '000        $'000       '000          $'000         $'000            $'000         $'000 
<S>                               <C>          <C>        <C>           <C>           <C>              <C>           <C>

Balance as of March 31, 
   1995                          10,500          11        100             -              -             4,475           56          
Net income                            -           -          -             -              -             3,393            -
Dividends                             -           -          -             -              -            (5,000)           -         
Translation adjustments               -           -          -             -              -                 -          114       
Balance as of March 31,
   1996                          10,500          11        100             -              -             2,868          170
Effect of the exchange 
   reorganization                 1,500           1          -             -            (12)                -            -         
Issuance of common stock            800           1          -             -            999                 -            -          
Common stock issuance expenditure     -           -          -             -           (476)                -            -          
Net income                            -           -          -             -              -             4,475            -
Translation adjustments               -           -          -             -              -                 -          (20)
Balance as of March 31, 
   1997                          12,800          13        100             -            511             7,343          150         
Net income                            -           -          -             -              -             6,285            - 
Translation adjustments               -           -          -             -              -                 -          (24)        
Balance as of March 31, 
   1998                          12,800          13        100             -            511            13,628          126 

</TABLE>




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

                                      F-5

<PAGE>


                                S. W. LAM, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 -----------------------------------------------

      (Amounts expressed in United States dollars unless otherwise stated)




1.   ORGANIZATION AND OPERATIONS
     ---------------------------

S.  W.  Lam,  Inc.  ("the  Company"),  formerly  known  as New  Wine  Inc.,  was
incorporated  on April 12,  1994 in the  State of  Tennessee,  United  States of
America.  On November  15,  1996,  the Company  effected a change of domicile by
reincorporating  in the State of Nevada,  United States of America,  and changed
its name from New Wine,  Inc. to S. W. Lam, Inc. In addition,  on the same date,
the  Company  effected a change in par value of each  share of its common  stock
from $0.01 per share to $0.001 per share.

On December 31,  1996,  the Company  acquired  100%  interest in Quality  Prince
Limited ("QPL"; a company incorporated in the British Virgin Islands) by issuing
10,500,000  shares of its common  stock of par value  $0.001  each,  and 100,000
shares of its Series A preferred stock of par value $0.001 each, to the previous
shareholders of QPL. QPL is an investment  holding company which had acquired on
December 19, 1996, 100% interest in the following companies:

                                      Place of 
 Name of company                     incorporation     Principal activities
-----------------                   ---------------    --------------------

Hang Fung Jewellery Company Limited 
("HFJCL")(Note a)                   Hong Kong          Production and selling  
                                                       of jewellery products  

Kai Hang Jewellery Company Limited
("KHJCL")(Note a)                   Hong Kong          Property holding 

Macadam Profits Limited 
("MPL") (Note b)                    British Virgin 
                                    Islands            Inactive 

Priestgill Limited 
("PL")(Note b)                      British Virgin
                                    Islands            Inactive   

Soycue Limited 
("SL")(Note b)                      British Virgin
                                    Islands             Inactive
Notes -

a.   HFJCL took over the businesses previously undertaken by Hang Fung Jewellery
     Company  ("HFJC")  effective  September  1995.  Prior to December 19, 1996,
     HFJCL and KHJCL were  jointly  owned by Mr.  Lam Sai Wing and Ms.  Chan Yam
     Fai. HFJC was an unincorporated sole-proprietorship entity owned by Mr. Lam
     Sai Wing.

b.   HFJCL took over the business  previously  undertaken by SL effective  April
     1996.  Prior to December 19, 1996,  SL, MPL and PL were solely owned by Mr.
     Lam Sai Wing.

                                      F-6
<PAGE>

1.   ORGANIZATION AND OPERATIONS (Cont'd)
     ---------------------------

The Company and its  subsidiaries  ("the Group") are principally  engaged in the
production  and selling of jewellery  products to  customers  in Hong Kong,  the
People's  Republic of China ("the PRC") and other parts of the world.  The Group
maintains  its head  office  in Hong  Kong  where  it  coordinates  the  Group's
marketing and selling functions.  Its production  facilities are located in Hong
Kong and the PRC.

The  Group's  production  activities  in the PRC are mainly  operated  through a
series of contract processing agreements with China National Pearl, Diamond, Gem
and  Jewellery  Import and Export  Corporation  ("CNPIEC"),  Tai Yuen  Jewellery
Crafts Factory  ("TYJCF"),  Shenzhen Crafts Import and Export Company  ("SCIEC")
and Shenzhen Jia Yi Jewellery Co., Ltd. ("SJYJC"),  PRC state-owned enterprises,
which are among the few  entities  authorized  to engage in the  production  and
trading  of gold and  silver  products  in the PRC.  The key  transactions  with
CNPIEC, TYJCF and SCIEC were as follows:

a.   Under  a  contract  processing   agreement  dated  November  18,  1994  and
     subsequent  supplemental  agreement  entered into between HFJCL and CNPIEC,
     HFJCL has  operated a plant in Beijing,  the PRC ("the  Beijing  Plant") to
     produce  jewellery  products.  The  Beijing  Plant also  provides  contract
     processing  services to PRC customers at the  instruction  and on behalf of
     CNPIEC,  and shares a portion of the contract  processing  fees received by
     CNPIEC.  The  initial  term of the  agreements  is ten  years  expiring  on
     November 17, 2004, and is renewable upon expiration.

b.   On April 30, 1996, HFJCL entered into a contract processing  agreement with
     TYJCF,  pursuant to which a plant was  operated  by HFJCL in Tai Yuen,  the
     PRC,  ("the Tai Yuen Plant") to produce  jewellery  products.  The Tai Yuen
     Plant also provides  contract  processing  services to PRC customers at the
     instruction  and on behalf of TYJCF.  The  agreement  expires  on April 29,
     2006.

c.   Pursuant  to the  aforesaid  agreements,  CNPIEC and TYJCF  have  agreed to
     undertake  and pay  for  all of  HFJCL's  PRC  tax  liabilities,  including
     value-added  tax and other  related  charges,  if any,  relating to HFJCL's
     operations under the above-mentioned activities.

d.   On April 4, 1988, HFJCL entered into a contract  processing  agreement with
     SCIEC for the production of gold and silver products in Shenzhen,  the PRC.
     Pursuant to an agreement  dated January 2, 1997, the rights and obligations
     of SCIEC under the contract  processing  agreement was taken over by SJYJC.
     The agreement with SJYJC expires on December 31, 1999.

e.   Other transactions with the above-named parties include:

                                          1996      1997       1998 
                                         ------    ------     ------
                                         $'000     $'000      $'000          

Purchases of gold and silver from         
-   CNPIEC                                2,461        -          -    

Management fees paid to        
-   CNPIEC                                   84       54         28

                                      F-7
<PAGE>

2.   BASIS OF PRESENTATION
     ---------------------

The  acquisition  of QPL by the  Company on  December  31, 1996 was treated as a
reverse  acquisition  since  QPL is the  continuing  entity  as a result  of the
exchange  reorganisation.  On this basis,  the historical  financial  statements
prior to December 31, 1996 represent the  consolidated  financial  statements of
QPL and its subsidiaries.  The historical  shareholders'  equity accounts of the
Company  represented  10,500,000  shares of common  stock of par value of $0.001
each and  100,000  shares of Series A preferred  stock of par value  $0.001 each
which were issued in connection  with the  acquisition.  The original  1,500,000
shares  of  common  stock of par  value  $0.001  each  outstanding  prior to the
exchange  reorganisation  have been  reflected as an addition in the  historical
shareholders' equity accounts of the Company on December 31, 1996.

The  acquisitions  of HFJCL,  KHJCL,  MPL, PL and SL by QPL on December 19, 1996
have been accounted for as a  reorganization  of entities under common  control,
similar to a pooling of interests as the shareholders and management  control of
HFJCL, KHJCL, SL, MPL, PL and QPL are the same before and after the acquisition.


3.   SUBSIDIARIES
     ------------

Details of the  Company's  subsidiaries  (which  together  with the  Company are
collectively referred to as "the Group") as of March 31, 1998 were as follows:

                            Place of         Percentage of  
                            incorporation    equity interest     Principal 
     Name                   operations       held                activities
----------------           ---------------  -----------------    -----------

Quality Prince Limited     British Virgin 
                              Islands             100%        Investment holding

Hang Fung Jewellery 
Company Limited            Hong Kong              100%        Production and    
                                                              selling of 
                                                              jewellery products
Kai Hang Jewellery 
Company Limited            Hong Kong              100%        Property holding  

Macadam Profits Limited    British Virgin
                           Islands                100%        Inactive    

Priestgill Limited         British Virgin
                           Islands                100%        Inactive    

Soycue Limited             British Virgin 
                           Islands                100%        Inactive          

Hang Fung Gold 
Technology Limited         Bermuda                100%        Inactive


There  is no  restriction  on the  distribution  of the  subsidiaries'  retained
earnings.

                                      F-8
<PAGE>


4.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------

a.   Basis of consolidation
     ----------------------

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

Inventories

Inventories are stated at the lower of cost, on a first-in, first-out basis, and
market  value.  Costs of  work-in-progress  and finished  goods  include  direct
materials, direct labour and an attributable portion of production overheads.

Property, machinery and equipment and capital leases

Property, machinery and equipment and capital leases are recorded at cost. Gains
or losses on disposals are  reflected in current  operations.  Depreciation  for
financial reporting purposes is provided using the straight-line method over the
estimated  useful  lives of the assets as  follows:  leasehold  land - 50 years,
building - 20 years, machinery and equipment - 5 to 10 years, motor vehicles - 5
years,  and  furniture,   fixtures  and  office  equipment  -  5  years.   Major
expenditures for betterments and renewals are  capitalized.  All ordinary repair
and maintenance costs are expensed as incurred.

Impairment  loss  on  property,  machinery  and  equipment  is  recognized  when
evidence,  such as the sum of  expected  future  cash  flows  (undiscounted  and
without  interest  charges)  indicates that future  operations  will not produce
sufficient  revenue to cover the related future costs,  including  depreciation,
and when the  carrying  amount of the asset  cannot be  realized  through  sale.
Measurement of the impairment loss is based on fair value of the assets.

d.   Sales
     -----

Sales comprise (i) the invoiced value of merchandise supplied to customers,  net
of sales  returns and  allowances,  which are  recognized  when  merchandise  is
shipped and title is passed to  customers,  and (ii) contract  processing  fees,
which are recognized when the contract processing service is rendered.

Deposits or advanced  payments from customers prior to passage of title of goods
and the expiration of right of return are recorded as deposits from customers.

e.   Income taxes
     ------------

The Group accounts for income tax under the provisions of Statement of Financial
Accounting  Standards No. 109, which requires recognition of deferred tax assets
and  liabilities  for the expected  future tax  consequences of events that have
been included in the financial statements or tax returns.  Deferred income taxes
are provided using the liability method.  Under the liability  method,  deferred
income taxes are recognized for all significant  temporary  differences  between
the tax and financial statement bases of assets and liabilities.

                                       F-9
<PAGE>

4.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
     ------------------------------------------

f.   Leases
     ------

Finance leases  represent those leases under which  substantially  all the risks
and rewards of  ownership  of the leased  assets are  transferred  to the Group.
Fixed assets held under  finance  leases are  initially  recorded at the present
value of the minimum  payments at the inception of the leases,  with  equivalent
liabilities categorized as appropriate under current or non-current liabilities.
Interest  expenses,  which represent the difference between the minimum payments
at the inception of the finance leases and the  corresponding  fair value of the
assets  acquired,  are  allocated to  accounting  periods over the period of the
leases to produce a constant rate of charge on the outstanding balances.

Operating leases represent those leases under which  substantially all the risks
and rewards of ownership of the leased  assets  remain with the lessors.  Rental
payments  under  operating  leases are  charged to expense on the  straight-line
basis over the period of the relevant leases.

g.   Foreign currency translation
     ----------------------------

The  Company  considers  Hong  Kong  dollars  as its  functional  currency  as a
substantial  portion of the Group's  business  activities  is based in Hong Kong
dollars.

The  translation  of the  financial  statements  into United  States  dollars is
performed for balance sheet accounts  using the closing  exchange rate in effect
at the balance sheet date and for revenue and expense  accounts using an average
exchange rate during each reporting  period.  The gains or losses resulting from
translation  are  included in  shareholders'  equity  separately  as  cumulative
translation   adjustments.   Aggregate  gains  (losses)  from  foreign  currency
transactions included in the results of operations for the years ended March 31,
1996,  1997  and  1998  were  approximately   $1,000,   $(2,000)  and  $(2,000),
respectively.

h.   Earnings per common share
     -------------------------

Basic  earnings per common  share is computed in  accordance  with  Statement of
Financial  Accounting  Standards No. 128 by dividing net income for each year by
the weighted  average  number of shares of common stock  outstanding  during the
years,  as if the  Company  had  acquired  the  100%  interest  in QPL as of the
beginning of years as a  recapitalization  of QPL with QPL as the acquirer  (see
Note 2). The weighted  average  number of shares used to compute basic  earnings
per common share was  10,500,000,  11,075,000 and 12,800,000 for the years ended
March 31, 1996, 1997 and 1998, respectively.

No diluted  earnings per common  share is computed as the exercise  price of the
warrant was higher  than the average  market  price of common  stock  during the
year.

i.   Use of estimates
     ----------------

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  in the United States of America  requires  management to
make  estimates  and  assumptions  that  affect  certain  reported  amounts  and
disclosures. Accordingly, actual results could differ from those estimates.

                                      F-10
<PAGE>

4.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
     ------------------------------------------

j.   Fair value of financial instruments
     -----------------------------------

     All  financial  instruments  of  the  Group  are  carried  at  cost,  which
     approximate their fair values.



5.   ACCOUNTS RECEIVABLE
     -------------------

Accounts receivable comprised:

                                                1997         1998  
                                               ------       ------
                                               $'000        $'000  

Trade  receivables                             5,558       10,700  
Less:  Provision  for  bad  and  doubtful
receivables                                     (452)        (452)        
                                              -------      -------
Accounts receivable, net                       5,106       10,248
                                              =======      =======

6.   DEPOSITS AND PREPAYMENTS
     ------------------------

Deposits and prepayments comprised:

                                                1997        1998
                                               ------      ------
                                               $'000       $'000   

Rental and utility deposits                      123         80   
Prepayments                                       19        139  
Others                                             -        176
                                               ------     ------
                                                 142        395
                                               ======     ======

7.   INVENTORIES
     -----------

Inventories comprised:

                                                1997       1998
                                               ------     ------
                                               $'000      $'000  

Raw materials                                  3,907      4,371   
Finished goods                                 4,107      8,706   
Consigned finished goods                         495          -
                                               ------     ------
                                               8,509     13,077

As of March 31,  1997 and 1998,  inventories  of  approximately  $1,834,000  and
$5,233,000,  respectively,  were released under import trust receipts bank loans
arrangements.

                                      F-11
<PAGE>

8.   PROPERTY, MACHINERY AND EQUIPMENT AND CAPITAL LEASES
     ----------------------------------------------------

Property, machinery and equipment and capital leases comprised:

                                                1997      1998  
                                               ------    ------
                                               $'000     $'000  

Property, machinery and equipment:   
   Leasehold land and building                   255       255  
   Machinery and equipment                     7,239    17,238  
   Motor vehicles                                 89       119  
   Furniture, fixtures and office equipment    1,087     2,989    

Capital leases:     
   Machinery and equipment                     1,022     4,847    
                                              ------    ------
Cost                                           9,692    25,448

Less:  Accumulated depreciation   
   Property, machinery and equipment          (2,374)   (4,391)  
   Capital leases                               (235)   (1,204)        
                                              ------    ------
Property, machinery and equipment and capital 
leases,  net                                   7,083    19,853
                                              ======    ======

As of March 31, 1997 and 1998,  all of the Group's  leasehold  land and building
were situated in Hong Kong and were held under a long-term lease.

As of March 31, 1997 and 1998, leasehold land and building with a net book value
of  approximately  $221,000  and  $216,000,  respectively,  were  mortgaged  and
machinery  and  equipment  with a net book value of  approximately  $328,000 and
$248,000,  respectively,  were pledged as  collateral  of certain of the Group's
banking facilities.


9.   SHORT-TERM bank BORROWINGS
     --------------------------

Short-term bank borrowings comprised :

                                               1997       1998  
                                              ------     ------
                                              $'000      $'000  

Bank overdraft                                  441        385  
Import trust receipts bank loans              1,834      5,233          
                                             ------     ------
                                              2,275      5,618
                                             ======     ======

                                      F-12
<PAGE>


9.   SHORT-TERM BANK BORROWINGS (Cont'd)
     --------------------------

Short-term  bank  borrowings  were  denominated  in Hong Kong dollars,  and bore
interest at the Hong Kong prime  lending rate plus 0.75% to 3.75%,  which ranged
from 9.5% to 12.5% per annum as of March 31,  1997 and 9.25% to 12.25% per annum
as of March 31, 1998.  Short-term bank borrowings are  collaterized by mortgages
over the  Group's  leasehold  land and  building  and  pledges of certain of the
Group's  machinery and equipment (see Note 8), mortgages over leasehold land and
buildings  owned  by Mr.  Lam Sai Wing and Ms.  Chan Yam Fai,  directors  of the
Company,  and personal  guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam
Fai.

Supplemental  information  with respect to short-term  bank  borrowings  for the
years ended March 31, 1997 and 1998 is as follows:

<TABLE>

                             Maximum         Average           Weighted          Weighted  
                             amount          amount        average interest  average interest
                           outstanding      outstanding         rate at           rate at        
                         during the year  during the year   the end of year    the end of year
                         ---------------  ---------------  ----------------  -----------------
                             $'000            $'000              
<S>                      <C>               <C>              <C>                <C>    

Year ended March 31,
     1997                         
--------------------
Bank overdrafts              1,389              306             10.22%             11.36%     

Import trust receipts bank 
   loans                     1,937            1,433             10.94%             10.49%            

Year ended March 31,
     1998                         
--------------------
Bank overdrafts                517              415              9.73%             11.87%   

Import trust receipts bank 
   loans                     5,414            4,194             10.87%             10.08%   
accrued liabilities

</TABLE>

10.  ACCRUED LIABILITIES
     -------------------

Accrued liabilities comprised:

                                                1997          1998
                                               ------        ------
                                               $'000         $'000        

Accruals for operating expenses      
-   Audit fee                                    103            86  
-   Workers' wages and bonus                     154           270  
-   Rental expenses                                1            21  
-   Others                                     4,496         4,503       
                                              ------        ------
                                               4,754         4,880
                                              ======        ======
                                      F-13
<PAGE>


11.  LONG-TERM BANK LOANS
     --------------------

Long-term bank loans were denominated in Hong Kong dollars, and bore interest at
the Hong Kong prime  lending rate plus 2% to 3.25%,  which ranged from 10.75% to
12% per annum as of March 31, 1997 and 10.5% to 11.75% per annum as of March 31,
1998.  Long-term  bank loans are  collaterized  by  mortgages  over the  Group's
leasehold land and building and pledges of certain of the Group's  machinery and
equipment  (see Note 8),  mortgages  over certain  leasehold  land and buildings
owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, and personal guarantees provided
by Mr. Lam Sai Wing and Ms. Chan Yam Fai.

Aggregate maturities of long-term bank loans are as follows:

                                                             1997          1998
                                                            ------        ------
                                                            $'000         $'000 

Payable during the following periods:      
   -  Within one year                                        197           293  
   -  Over one year but not exceeding two years              195           251  
   -  Over two years but not exceeding three years           137           116  
   -  Over three years but not exceeding four years          155           132  
   -  Over four years but not exceeding five years           133           148  
   -  Over five years                                        670           542
                                                           ------        ------
Total bank loans                                           1,487         1,482  

Less: Current portion                                       (197)         (293)
                                                           ------        ------
Non-current portion                                        1,290         1,189
                                                           ======        ======

12.  CAPITAL LEASE OBLIGATIONS
     -------------------------

Future  minimum  lease  payments  under the capital  leases,  together  with the
present value of the minimum lease payments, were:

                                                            1997           1998
                                                           ------         ------
                                                           $'000          $'000

Payable during the following periods:      
   - Within one year                                         281          1,384 
   - Over one year but not exceeding two years               193          1,283 
   - Over two years but not exceeding three years             95            830 

Total minimum lease payments                                 569          3,497 
Less:  Amount representing future interest                   (80)          (458)

Present value of minimum lease payments                      489          3,039 
Less: Current portion                                       (229)        (1,106)

Non-current portion                                          260          1,933

                                      F-14
<PAGE>

13.  CONVERTIBLE NOTE
     ----------------

On May 20, 1997, the Company and its wholly owned subsidiary,  QPL, entered into
an agreement with Phenomenal  Limited,  an independent third party,  under which
QPL issued a convertible note ("the Note") of $10,000,000 to Phenomenal  Limited
at face value.  The Note bore  interest at 3% per month,  and was repayable in a
lump sum payment on March 20, 1998.  As one of the  conditions  for the lending,
the Company  issued a  non-detachable  warrant  ("the  Warrant")  to  Phenomenal
Limited to subscribe for  5,263,158  shares of common stock of the Company at an
exercise price of $2.19 per share.  The Note was secured by personal  guarantees
provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai and the 53.9% equity  interest
in the Company  owned by Mr. Lam Sai Wing and Ms.  Chan Yam Fai.  In  accordance
with the term of the agreement, the Warrant expired on May 31, 1998.

On June 4, 1998,  Phenomenal  Limited  agreed to extend the maturity date of the
Note from March 20, 1998 to June 4, 1998, and waive its  entitlement to interest
accrued under the Note during the period from May 20, 1997 (date of issue of the
Note) to June 4,  1998.  Also,  the  Group  and  Phenomenal  Limited  agreed  to
restructure and capitalize the Note into redeemable  preference shares of HFJCL,
another wholly owned subsidiary of the Company.  As a result,  on June 30, 1998,
HFJCL issued 5,263,788 shares of redeemable preference stock of $0.01 each ("the
Preference  Shares") at approximately  $1.90 per share to Phenomenal  Limited in
replacement  of the Note.  Under the revised  agreement,  Phenomenal  Limited is
required to convert its interest in the Preference  Shares to ordinary shares of
Hang Fung Gold  Technology  Limited,  a related  company,  upon  satisfaction of
certain conditions.  Alternatively,  Phenomenal Limited has an option to require
HFJCL to redeem the  Preference  Shares at a redemption  amount as determined in
accordance with a pre-determined  formula,  or requires Mr. Lam Sai Wing and Ms.
Chan Yam Fai to purchase the Preference  Shares held by Phenomenal in case HFJCL
defaults in redeeming the Preference Shares.


14.  PROVISION FOR INCOME TAXES
     --------------------------

The provision for income taxes consisted of the following:

                                             1996        1997          1998
                                            ------      ------        ------
                                            $'000       $'000         $'000  

Current tax        
   -  Hong Kong profits tax                  693         690           287      

Deferred tax                                 (13)        284           999  
                                            -----       -----        ------
                                             680         974         1,286
                                            =====       =====        ======

The Company and its  subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
Subsidiaries  with  business  operations  in Hong Kong are  subject to Hong Kong
profits tax at a rate of 16.5%.  The British  Virgin  Islands  subsidiaries  are
incorporated  under the  International  Business  Companies  Act of the  British
Virgin Islands and, accordingly, are exempted from payment of the British Virgin
Island income taxes. The Bermuda  subsidiary is incorporated under the Companies
Act 1981 of Bermuda (as  amended) as an exempted  company and,  accordingly,  is
exempted from payment of Bermuda income taxes until 2016.

                                      F-15
<PAGE>


14.  PROVISION FOR INCOME TAXES (Cont'd)
     --------------------------

The reconciliation of the United States federal income tax rate to the effective
income  tax rate  based on the  income  before  income  taxes as  stated  in the
consolidated statements of operations is as follows:

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

U.S. federal income tax rate                     35.0%      35.0%       35.0%   

Weighted average effect of 
   different tax rates in the foreign 
   jurisdictions                                (18.3%)    (17.1%)     (18.0%)
                                                ------     ------       ------
Effective income tax rate                        16.7%      17.9%       17.0%
                                                ======     ======       ======

Components  of  deferred  tax  balances  as of  March  31,  1997 and 1998 are as
follows:

                                                    1997         1998  
                                                   ------       ------
                                                   $'000        $'000

Tax effect of accumulated difference between 
   taxation allowance and depreciation expenses     284         1,283
                                                   ======       ======

15.  COMMITMENTS
     -----------

a.   Capital commitments
     -------------------

As of March 31, 1997 and 1998, the Group had capital commitments for acquisition
of  machinery  and  equipment  amounting  to  approximately  $42,000 and $78,000
respectively.

b.   Operating lease commitments
     ---------------------------

The Group has various  operating lease  agreements for staff  quarters,  factory
premises,  warehouses and motor vehicles under non-cancellable  operating leases
which extend through March 1999.  Rental  expenses for the years ended March 31,
1996,  1997  and  1998  were  approximately  $257,000,  $285,000  and  $612,000,
respectively.  As of March  31,  1997 and 1998,  future  rental  payments  under
agreements  classified  as operating  leases with  non-cancellable  terms are as
follows:

                                                          1997        1998
                                                         ------      ------
                                                         $'000       $'000  

Payable during the following periods:      
   -  Within one year                                     556         351  
   -  Over one year but not exceeding two years           347           7  
   -  Over two years but not exceeding three years          -           7  
   -  Over three years but not exceeding four years         -           7  
   -  Over four  years but not  exceeding five years        -           4 
                                                         ------      ------
                                                          903         376
                                                         ======      ======
                                      F-16
<PAGE>

16.  RETIREMENT PLAN
     ---------------

The Group's  employees  in the PRC are all employed on a  contractual  basis and
consequently  the Group  has no  obligation  for  pension  liabilities  of these
employees.

The employees of the Group's operation in Hong Kong after completing a probation
period may join the Group's  defined  contribution  provident fund managed by an
independent trustee. Both the Group and the employees make monthly contributions
to the scheme of 5% of the employees' basic salaries. The employees are entitled
to receive their entire  contribution  together with accrued interest thereon at
any time upon leaving the Group, and 100% of the Group's  employer  contribution
and the accrued  interest  thereon  upon  retirement  or leaving the Group after
completing  ten years of  service or at a reduced  scale of  between  30% to 90%
after  completing  three to nine years of service.  Any forfeited  contributions
made by the Group and the accrued  interest  thereon  are used to reduce  future
employer's   contributions.   The  aggregate  amount  of  the  Group's  employer
contributions  (net of  forfeited  contributions)  for the years ended March 31,
1996, 1997 and 1998 was approximately $2,000, $10,000 and $12,000, respectively.


17.  BANKING FACILITIES
     ------------------

As of March 31, 1997 and 1998,  the Group had  aggregate  banking  facilities of
approximately  $5,550,000 and $12,448,000,  respectively  from several banks for
bank  overdrafts,  loans and trade financing.  Unused  facilities as of the same
date amounted to approximately  $1,309,000 and $2,576,000,  respectively.  These
facilities were secured by:

i.   pledge of machinery  and equipment  with a net book value of  approximately
     $328,000 and $248,000 as of March 31, 1997 and 1998, respectively;

ii.  mortgage over the Group's leasehold land and building with a net book value
     of  approximately  $221,000  and  $216,000  as of March 31,  1997 and 1998,
     respectively;

iii. the Group's stocks held under import trust receipts bank loans arrangement;

iv.  pledges of the Group's bank deposits of nil and approximately $1,290,000 as
     of March 31, 1997 and 1998, respectively;

v.   mortgages over certain  leasehold  land and buildings  owned by Mr. Lam Sai
     Wing and Ms. Chan Yam Fai, directors of the Company;

vi.  personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai; and

vii. corporate guarantee provided by the Company.

                                      F-17
<PAGE>


18.  RELATED PARTY TRANSACTIONS
     --------------------------

a.   The Group entered into the following transactions with related parties:

                                          1996         1997           1998
                                         ------       ------         ------
                                         $'000        $'000          $'000  

Sales to a related company        
  - Hang Fung Jewellery Co., Inc. 
    ("HFJCI")                              83            -              -       

Rental paid to Ms. Chan Yam Fai           199          174            174
                                         =====        =====          =====

Prior to October 1, 1996, HFJCI was  beneficially  owned by Mr. Lam Sai Wing and
was principally  engaged in the provision of marketing  service for HFJCL in the
United  States of  America.  Effective  from  October 1, 1996,  Mr. Lam Sai Wing
disposed all of his shareholdings in HFJCI.

b.   The Group had the following outstanding balances with related companies:

                                                    1997         1998
                                                   ------       ------
                                                   $'000         $'000        

Due from (to) a director      
   -  Mr. Lam Sai Wing                               475        (1,034)
                                                   ======       ======

The balances due from (to) a director were unsecured,  non-interest  bearing and
without pre-determined repayment terms.

c.   The Group's  banking  facilities  were secured by, among others,  mortgages
     over  leasehold  land and buildings  owned by Mr. Lam Sai Wing and Ms. Chan
     Yam Fai and personal  guarantees  provided by Mr. Lam Sai Wing and Ms. Chan
     Yam Fai.



19.  SEGMENT INFORMATION
     -------------------

a.   Revenue
     -------

                                                  1996        1997         1998
                                                 ------      ------       ------
                                                 $'000       $'000        $'000 

Sales of jewellery products to customers in        
   -  Hong Kong                                 10,057      15,617       10,348 
   -  PRC                                        6,129       8,043       10,000 
   -  Middle East (export sales)                 3,288       5,744        9,317 
   -  South East Asia (export sales)             1,280       4,610       12,232 
   -  Europe (export sales)                      2,149       1,506        5,886 
   -  United States of America (export sales)        -       1,305       10,211
                                                ------      ------       ------
                                                22,903      36,825       57,994
                                                ------      ------       ------ 
Contract processing fees        
   -  PRC                                        3,965       4,133        4,308
                                                ======      ======       ======

                                      F-18
<PAGE>

19.  SEGMENT INFORMATION (Cont'd)
     -------------------

b.   Operating profit *
     ----------------

                                               1996        1997         1998
                                              ------      ------       ------
                                              $'000       $'000        $'000   

Hong Kong operation                            445        2,004        3,486
The PRC operation                            3,957        4,292        4,898  
Others                                           -         (106)        (177)  
                                             -----       ------        ------
Total                                        4,402        6,190        8,207
                                             =====       ======        ======

*    Operating  profit  represents  gross  profit  less  selling,   general  and
     administrative expenses.

c.   Identifiable assets **
     -------------------

                                                         1997         1998
                                                        ------       ------
                                                        $'000        $'000  

Hong Kong operation                                    12,661       35,198  
The PRC operation                                       8,677       10,469
Others                                                     71            - 
                                                       ------       ------
Total                                                  21,409       45,667
                                                       ======       ======

**   Identifiable assets represent total assets of the respective operations.

d.   Major customers
     ---------------

Details of individual customers accounting for more than 5% of the Group's sales
are as follows:

                                                1996        1997        1998 
                                               ------      ------      ------ 
                                               $'000       $'000       $'000

CNPIEC                                          14.5%       0.9%          -  
Chow Tai Fook Jewellery Co., Ltd.                6.0%      12.3%        5.9% 
World Commercial Sales Co. Ltd.                  0.2%       6.4%       2.28%
Sam Ming Tong Jewellery Co., Ltd.                0.1%       3.0%        5.5%
                                               ------     ------      ------

                                      F-19
<PAGE>

20.  OPERATING RISKS
     ---------------

a.   Country risk
     ------------

The Group's operations are conducted in Hong Kong and the PRC. Accordingly,  the
Group's business, financial position and results of operations may be influenced
by the political,  economic and legal environments in Hong Kong and the PRC, and
by the general state of the Hong Kong and the PRC economies.

Effective from July 1, 1997, sovereignty over Hong Kong was transferred from the
United Kingdom to the PRC, and Hong Kong became a Special  Administrative Region
of the PRC  ("SAR").  As  provided  in the Basic Law of the Hong Kong SAR of the
PRC, the Hong Kong SAR will have full economic autonomy and its own legislative,
legal and judicial  systems for fifty  years.  The Group's  management  does not
believe that the transfer of sovereignty over Hong Kong had an adverse impact on
the Group's  financial  and  operating  environment.  There can be no assurance,
however,  that changes in political or other  conditions will not result in such
an adverse impact.

The  Group's  operations  in the PRC are subject to special  considerations  and
significant  risks not typically  associated with companies in North America and
Western  Europe.   These  include  risks  associated  with,  among  others,  the
political,  economic and legal environments and foreign currency  exchange.  The
Group's results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in  governmental  policies with respect to
laws  and  regulations,  anti-inflationary  measures,  currency  conversion  and
remittance abroad, and rates and methods of taxation, among other things.

b.   Dependence on strategic relationship
     ------------------------------------

Gold and silver  products  are  restricted  commodities  in the PRC and  special
authorization is required for production and trading of gold and silver products
in  the  PRC.  The  PRC  government  has  only  granted  a few  licences  to PRC
state-owned  enterprises  to produce  and trade gold and silver  products in the
PRC. The Group's  present  operations in the PRC are conducted  through  various
contract processing agreements with PRC state-owned  enterprises as described in
Note 1.  Any  changes  in any of  these  strategic  relationships  could  have a
material adverse effect on the revenue and  profitability of the Group and could
potentially  limit the Group's  ability to  continue to conduct  business in the
PRC.

c.   Concentration of credit risk
     ----------------------------

Concentration  of  accounts  receivable  as of  March  31,  1997  and 1998 is as
follows:

                                                         1997             1998
                                                        ------           ------

Five largest accounts receivable                        36.5%             30.1%
                                                        =====             =====

The Group  performs  ongoing  credit  evaluation  of each  customer's  financial
condition.  It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections.

                                     F-20
<PAGE>


20.  OPERATING RISKS (Cont'd)
     ---------------

Dependence on a limited number of suppliers

The  Group   purchases  raw  materials  from  a  limited  number  of  suppliers.
Concentration on the Group's  suppliers for the years ended March 31, 1996, 1997
and 1998 is as follows:

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

Purchases from five largest suppliers        50.8%         81.7%        66.2%
                                             =====         =====        =====

21.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     ------------------------------------------------

a.   Cash paid for interest and income taxes are as follows:

                                          1996           1997          1998
                                         ------         ------        ------
                                         $'000          $'000         $'000   

Interest paid                              392            389           711
                                          =====          =====         =====
Income taxes                                 -              -           473
                                          =====          =====         =====

b.   Cash received for interest income are as follows:

                                          1996           1997           1998
                                         ------         ------         ------
                                         $'000          $'000          $'000   

Interest received                          11              -            137
                                         ======         ======         ======

c.   During  the years  ended  March 31,  1996,  1997 and  1998,  capital  lease
     obligations   of   approximately   $151,000,   $871,000   and   $3,825,000,
     respectively,  were  incurred  to  finance  the  Group's  additions  of new
     machinery and equipment.

                                      F-21
<PAGE>


22.  OTHER SUPPLEMENTAL INFORMATION
     ------------------------------

                                               1996        1997        1998
                                              ------      ------      ------
                                              $'000       $'000       $'000  

Depreciation of property, machinery and 
   equipment        
   - owned assets                               663        826        2,018  
   - assets held under capital leases            15        205          970   

Provision for bad and doubtful debts            114          -            -

Interest expenses for        
   - bank overdrafts and loans                  397        352          577  
   - capital lease obligations                    6         37          134 

Operating lease rentals for        
   - premises                                   257        285          612 

Repairs and maintenance expenses                 45         46           86 

Net foreign exchange gain (loss)                  1         (2)          (2)

Interest income from bank deposits               11          -          137
                                               =====       =====       =====