REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS OF

              BERLINER KRAFT-UND LICHT(BEWAG) - AKTIENGESELLSCHAFT

                             BUSINESS YEAR 1997/1998

                     AS REQUIRED BY REGULATION S-X 210.3-09

<PAGE>


                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Berliner Kraft- und Licht (Bewag)-Aktiengesellschaft
Berlin, Germany

     We have audited the accompanying balance sheet of Berliner Kraft- und Licht
(Bewag)-Aktiengesellschaft  as of June 30, 1998,  and the related  statements of
profit and loss and cash flows for the year ended June 30, 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 audit.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the financial position of Bewag  Aktiengesellschaft as
of June 30, 1998,  and the results of its operations and cash flows for the year
ended June 30,1998, in conformity with accounting  principles generally accepted
in Germany.

     Generally  accepted  accounting  principles  in  Germany  vary  in  certain
significant respects from generally accepted accounting principles in the United
States of America.  Application of generally accepted  accounting  principles in
the United States of America  would have  affected the result of operations  for
the year ended June 30, 1998 and shareholders' equity as of June 30, 1998 to the
extent summarized in Appendix II to the financial statements.

KPMG Deutsche Treuhand-Gesellschaft AG (hand written)
Wirtschaftsprufungsgesellschaft

Berlin, Germany
September 8, 1998

<PAGE>

                                    BEWAG AG
                             BUSINESS YEAR 1997/1998
                                  BALANCE SHEET


<TABLE>
<CAPTION>

                                                              NOTES   30 JUNI 1998   30 JUNI 1997
                                                               NO.    DM THOUSAND    DM THOUSAND
                                                                                     (UNAUDITED)
<S>                                                            <C>         <C>            <C>

-------------------------------------------------------------------------------------------------
ASSETS
FIXED ASSETS:                                                   (1)
-------------------------------------------------------------------------------------------------
Intangible assets...........................................    (2)      330,978         330,410
Tangible assets.............................................    (3)    6,997,728       6,951,993(1)
Financial assets............................................    (4)      854,553         513,865
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                                                       8,183,259       7,796,268
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CURRENT ASSETS:
-------------------------------------------------------------------------------------------------
Inventories.................................................    (5)      168,851         190,040
Accounts receivable and other assets:
  Receivables for goods and services........................    (6)      546,744         480,187
  Receivables from affiliated companies.....................    (7)        3,265           1,047
  Receivables from companies in which participations are
    held....................................................    (8)        4,607          16,160
  Other assets..............................................    (9)      127,679         135,497
Securities..................................................   (10)      203,529         262,154
Checks, cash on hand, on deposit with Deutsche Bundesbank
  and Postbank, cash in other bank accounts.................   (11)      226,830         367,461
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                                                       1,281,505       1,452,546
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PREPAID EXPENSES............................................   (12)      134,192         146,439
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL LOSS ACCOUNT........................................   (13)      384,795         392,431(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                                                       9,983,751       9,787,684
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AND LIABILITIES
EQUITY:
-------------------------------------------------------------------------------------------------
Subscribed capital..........................................   (14)      560,000         560,000
Capital reserve.............................................   (15)       56,800          56,800
Revenue reserves............................................   (16)
  Statutory reserve.........................................             848,257         848,257(1)
  Special reserve according to Section 17 Sub-section 4
    DMBiLG..................................................             384,795         392,431(1)
  Other revenue reserves....................................           1,532,535       1,469,899
-------------------------------------------------------------------------------------------------
                                                                       2,765,587       2,710,587(1)
    Net profit for the year.................................   (17)      224,000         112,000
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                                                       3,606,387       3,439,387
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER................   (18)    1,844,528       1,780,264
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEM FOR INVESTMENT BONUSES.........................   (19)      410,711         451,354
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CONSTRUCTION COST SUBSIDIES.................................   (20)      683,564         645,126
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PROVISIONS
-------------------------------------------------------------------------------------------------
Provisions for pensions and similar obligations.............             407,804         391,415
Provisions for taxes........................................             103,452          49,766
Other provisions............................................   (21)    1,421,576       1,394,837(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                                                       1,932,832       1,836,018
-------------------------------------------------------------------------------------------------
LIABILITIES.................................................   (22)
-------------------------------------------------------------------------------------------------
Liabilities to banks........................................   (23)      858,713       1,047,640
Advance payments received...................................   (24)      127,816         108,827
Liabilities for goods and services..........................             305,481         269,097
Liabilities to affiliated companies.........................                 786             845
Liabilities to companies in which participations are held...   (25)       12,016          14,290
Other liabilities...........................................   (26)      200,673         194,797
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                                                       1,505,485       1,635,496
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
DEFERRED INCOME.............................................                 244              39
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                                                       9,983,751       9,787,684
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>



(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
    (DMBiLG)

The accompanying notes are an integral part of these statements.

<PAGE>


                                    BEWAG AG
                            BUSINESS YEAR 1997/1998
                             PROFIT AND LOSS ACCOUNT

<TABLE>
<CAPTION>


                                                                             1996/97
                                                   NOTES      1997/98      DM THOUSAND
                                                    NO.     DM THOUSAND    (UNAUDITED)
<S>                                                 <C>          <C>           <C>
--------------------------------------------------------------------------------------

SALES REVENUE....................................   (27)     3,959,727      4,092,864
--------------------------------------------------------------------------------------
Stock movements and other internally produced and
  capitalised assets.............................   (28)        49,477         65,548
Other operating income...........................   (29)       299,006        419,199
Cost of materials................................   (30)    -1,227,481     -1,427,178(1)
Personnel expenses...............................   (31)    -1,159,845     -1,142,730(2)
Depreciation.....................................   (32)      -617,995       -625,880
Other operating expenses.........................   (33)      -779,942     -1,016,906(1)(2)
Income from financial assets.....................   (34)       -16,181             31
Net interest income..............................   (35)       -51,557        -58,835
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
RESULT OF ORDINARY ACTIVITIES....................              455,209        306,113
--------------------------------------------------------------------------------------
Taxes............................................   (36)      -176,209       -121,613
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
  NET INCOME FOR THE YEAR........................              279,000        184,500
--------------------------------------------------------------------------------------
Allocations to other revenue reserves............              -55,000        -72,500
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
  NET PROFIT FOR THE YEAR........................              224,000        112,000
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------


</TABLE>

-------------------------

(1) After the reclassification of DM 104,592 thousand from other operating
    expenses to cost of materials

(2) After the reclassification of DM 2,500 thousand from other operating
    expenses to personnel expenses

The accompanying notes are an integral part of these statements.


<PAGE>



                                    BEWAG AG
                            BUSINESS YEAR 1997/1998
                               CASH-FLOW STATEMENT


<TABLE>
<CAPTION>

                                                                                1996/97
                                                                 1997/98      DM MILLION
                                                                DM MILLION    (UNAUDITED)
<S>                                                                <C>            <C>
-----------------------------------------------------------------------------------------

Net income for the year.....................................         279           185
Depreciation of fixed assets................................         634           619
Changes in long-term provisions.............................         -64           -45
Allocation to special item..................................         162           429
Release of special item.....................................        -136          -136
Other expenses and income without effect on payments........         -23           -55
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
DVFA/SG CASH-FLOW...........................................         852           997
Result from disposals of fixed assets.......................           3            -9
Increase/Decrease in inventories, receivables for goods and
  services and other assets.................................          -7           607
Increase/Decrease in liabilities for goods and services and
  other liabilities.........................................         262           105
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
INFLOW OF FUNDS FROM OPERATING ACTIVITIES...................       1,110         1,700
-----------------------------------------------------------------------------------------
Proceeds from disposals of fixed assets.....................          18            32
Disbursements for capital investments in fixed assets.......      -1,030          -921
  (including increase of participation in GASAG)............       (-354)          (--)
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR INVESTMENT ACTIVITIES..................      -1,012          -889
-----------------------------------------------------------------------------------------
Payments to shareholders (dividend).........................        -112           -90
Receipts from taking up loans...............................          --            54
Payments for redemption of loans............................        -185          -278
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR FINANCING ACTIVITIES...................        -297          -314
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
CHANGES IN FINANCING RESOURCES WITH EFFECT ON PAYMENT.......        -199           497
-----------------------------------------------------------------------------------------





---------------------------------------------------------------------------------------------
                                                                   30 JUNE 1997
                                                   30 JUNE 1998     DM MILLION       CHANGE
MOVEMENTS OF FINANCIAL FUNDS                        DM MILLION     (UNAUDITED)     DM MILLION
---------------------------------------------------------------------------------------------

Liquid funds.....................................      227             368            -141
Securities in current assets.....................      204             262             -58
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
FINANCIAL FUNDS..................................      431             630            -199
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------


The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>


                                    BEWAG AG
                            BUSINESS YEAR 1997/1998
                        NOTES TO THE FINANCIAL STATEMENTS

                               PRELIMINARY REMARKS

     On  1  July  1993,   Bewag  was  merged  with  the  energy  supply  company
Energieversorgung Berlin AG (EBAG), which was located in the former East Berlin.

     As a result of the merger under stock corporation law,  legislation  which,
according to the unification treaty applied only to companies in the former GDR,
now applies to Bewag as a whole.  This is  particularly  relevant with regard to
the  provisions of the DM-Balance  Sheet Act (DMBilG)  covering the special loss
account,  the special  reserves  under  Section 17  Sub-section 4 of the Act and
capital  reorganisation  under  Section 27 of the Act. In certain  circumstances
Section 36 DMBilG also  stipulates  changes in EBAG's DM opening  balance sheet,
which  then  retroactively  entail  corrections  in certain  balance  sheet item
valuations for each previous year.

     As of 30 June  1998  CHANGES  IN THE  OPENING  BALANCE  SHEET  were  either
necessary or possible for the following items:

     - Tangible  assets  increased  by DM 0.2  million,  because the total value
       shown for land had increased  pursuant to official  notices of allocation
       or adjustment.

     - Provisions for compensation obligations were reduced by DM 4.9 million as
       certain  restitution  claims  had  become  more  precise  or due to court
       decisions that had become legally effective.

     - As  a  consequence  of  new  investigations   regarding  the  expenditure
       necessary  to  rehabilitate   contaminated  properties,   provisions  for
       contamination  were reduced by DM 74.9 million.  The special loss account
       and the special reserve were also reduced by the same amount.

     As a result of these  changes,  the  statutory  reserve was increased by DM
80.0 million.

     Bewag must also take into  account the  stipulations  of the LAND  REGISTRY
ADJUSTMENT ACT (GBBerG). This act applies only to the territory which joined the
Federal Republic under the unification  treaty,  and especially covers easements
of utility supply companies in non-public land and compensation  payments due to
the owners of such  properties.  Provisions were established for this purpose as
of 30 June 1995,  the date of the initial  application  of the Act. At the time,
this provision did not affect operating  results in the profit and loss account;
it had  merely  served to record  such  liabilities  and  related  assets on the
balance sheet.

     Since the  obligations  will  become  due in two equal  installments,  on 1
January  2001 and 2011,  the  easements  were  assessed  at present  value.  The
difference between the value of the easements and the obligation was recorded as
prepaid expense.

     In the year under review,  detailed  studies of the location and quality of
the properties showed that the provision should be increased by DM 49.6 million.
Under the  accounting  methodology  used,  this  adjustment,  rather  than being
reported as an expense,  merely  increases the recorded assets and  liabilities.
The only consequence is a DM 3.8 million increase in depreciation expense and an
adjustment of prepaid expenses.

     Because  of the  insignificance  of  Bewag's  shareholdings  as a whole  in
relationship to its financial and income position, the company took advantage of
the option in Section 296  Sub-section 2 of the Commercial  Code (HGB) and chose
not to prepare a CONSOLIDATED ANNUAL STATEMENT.

ACCOUNTING AND VALUATION METHODS

     In the balance  sheet and the profit and loss  account,  certain items have
been  combined for the sake of greater  clarity;  they are then shown in greater
detail in the notes. Furthermore,  in an effort to provide more insight into the
company's financial position, a number of items have been added to the


<PAGE>

                                    BEWAG AG
                            BUSINESS YEAR 1997/1998
                        NOTES TO THE FINANCIAL STATEMENTS

                       PRELIMINARY REMARKS -- (CONTINUED)

balance  sheet.  The profit and loss  account has been drawn up according to the
cost-summary  method.  DM  figures  shown  in  the  annual  statement  represent
thousands.

     Specifically,   accounting   and  valuation  are  based  on  the  following
principles:

  ASSETS

     Purchased  INTANGIBLE  ASSETS  are valued at their  acquisition  costs less
regular straight-line depreciation.

     TANGIBLE  ASSETS are  assessed at  acquisition  or  production  costs.  The
following change was made in the year under review:  With regard to the costs of
self constructed assets, Bewag does not use a lump-sum overhead cost factor, but
rather  capitalizes  only  directly  allocable  costs.  Interest paid on outside
capital has been excluded from this item since 1 January 1991. When new tangible
assets  are  added,   investment  subsidies  are  deducted  from  the  costs  of
acquisition or production.  Regular  depreciation for tangible assets is carried
out on a straight-line basis for buildings,  and otherwise always at the highest
degression rate permissible  under taxation law;  straight-line  depreciation is
favoured as soon as this leads to higher annual amounts. Plant for which special
depreciation  can be claimed under Section 4 of the Development Area Act (FordG)
is  also  depreciated  by  the  straight-line  method,  as  stipulated  by  law.
Depreciation is based on the Federal  Minister of Finance's  depreciation  table
for the energy and water supply sector.

     In the in-service year of purchase or production,  new plant is depreciated
at 75.0 per cent of the normal annual rate.

     According  to one of the options of Section 6  Sub-section  2 of the Income
Tax Act (EStG),  minor assets are  depreciated  fully in the year of purchase or
production.

     FINANCIAL  ASSETS are valued at acquisition  cost.  Interest free loans are
discounted to their present value.

     If the book value of an asset calculated  according to the above principles
is greater than its quoted or market  value at  balance-sheet  date,  the excess
over the market value is written off.

     INVENTORIES are valued at average  acquisition  costs,  taking into account
the lower-of-cost-or-market rule. Deductions are made for inventories subject to
long storage and thus  potentially  less suitable for use. The amounts  deducted
depend on the rate of turnover for the goods concerned.

     With regard to  RECEIVABLES  AND OTHER  ASSETS,  an  appropriate  amount is
deducted for identifiable  single risks. Other risks are taken into account in a
general  allowance  for bad debts and  doubtful  accounts.  Advance  payments on
receivables for goods and services are offset against  electricity  supplied but
not yet invoiced.  Receivables for electricity supplied but not yet invoiced are
assessed on the basis of  electricity  consumption  and revenue  projections;  a
differentiated group assessment procedure is applied.  Interest-free receivables
are discounted according to their terms.

     SECURITIES are valued at acquisition cost or at their market price if it is
lower.

     No use is made of the option right to capitalize  debt  discount  expenses:
such expenses are immediately recorded in the profit and loss account.

     Provisions for which a SPECIAL LOSS ACCOUNT had been created in the opening
balance  sheet of EBAG as of 1 July  1990 and  which  have  been used up are not
reported as an expenditure in the


<PAGE>

                                    BEWAG AG
                            BUSINESS YEAR 1997/1998
                        NOTES TO THE FINANCIAL STATEMENTS

                       PRELIMINARY REMARKS -- (CONTINUED)

relevant items of the profit and loss account; instead, the special loss account
is depreciated by the amount of the used provisions.

  SHAREHOLDERS' EQUITY AND LIABILITIES

     As they  become  freely  disposable,  funds of the  SPECIAL  RESERVE  UNDER
SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET ACT (DMBilG) are transferred to
other revenue  reserves in accordance with the current version of the Act, which
has been in force since 25 July 1994.

     The amount by which the regular  depreciation  of tangible  assets  differs
from the  increased  deduction for  depreciation  under Section 14 of the Berlin
Promotion Act  (BerlinFG)  and the special  depreciation  under Section 4 of the
Development Area Act (FordG) are disclosed as SPECIAL ITEMS WITH PARTIAL RESERVE
CHARACTER,  together  with the  reserve  under  Section 6b of the Income Tax Act
(EStG). The difference between regular  depreciation and increased  deduction is
always released in accordance with established depreciation procedures,  but the
release  of the  special  depreciation  begins  at the  end of the  preferential
period.

     Tax-free investment bonuses are shown under liabilities as SPECIAL ITEM FOR
INVESTMENT  GRANTS.  The  release of this item into  income is carried  out on a
straight-line  basis in  accordance  with the  period  of use of the  subsidised
assets.

     CONSTRUCTION  COST  SUBSIDIES are released into income at an annual rate of
5.0 per cent unless a shorter term has been agreed upon.

     The PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS are formed according to
actuarial  principles.  Fractional  values  are  determined  on the  basis of an
interest rate of 6.0 per cent.

     OTHER  PROVISIONS  reflect all risks and  uncertain  obligations  which are
identifiable  according to the principles of the most probable estimate. For the
first time in the year under review,  no  discounting  was used to calculate the
provisions  for  early   retirement.   In  addition,   a  provision  for  future
expenditures  for repairs under Section 249 Sub-section 2 of the Commercial Code
(HGB) was created on 30 June 1995.

     LIABILITIES are reported at their repayment value.

  FOREIGN CURRENCY CONVERSION

     Receivables  and  liabilities  in foreign  currency  are  converted  at the
exchange rate applicable on the date of origin of the claim or liability, unless
a fall or rise in the  exchange  rate  makes a  devaluation  of the  claim or an
upvaluation of the liability necessary.

  CASH-FLOW STATEMENT

     In  accordance  with the bulletin of the main  specialist  committee of the
Institute of Auditors (IDW) and with international accounting standards (IAS 7),
the  cash-flow  statement  shows  payments  broken  down  into  cash  flow  from
operations,  from investment and from financing  activities.  Within the flow of
funds resulting from  operations,  cash flow is shown according to DVFA/SG.  The
balance  represents  the total change in resources in the course of the business
year.

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                           NOTES TO THE BALANCE SHEET

1. FIXED ASSETS

     Changes in individual  items of fixed assets in the 1997/98  business year,
including depreciation, are shown in the "Movements in fixed assets" section.

2. INTANGIBLE ASSETS

     The two main  intangible  assets are DM 159.8 million for  easements  under
Section 9 of the Land  Registry  Adjustment  Act (GBBerG) and the right of usage
for the  connection to the Western  European  grid  network,  valued at DM 145.8
million.

3. TANGIBLE ASSETS

     Additions and transfers to tangible  assets  involving  completed and fully
charged installations amount to DM 809.2 million. The most significant additions
were investments made for power transmission and distribution  equipment as well
as for district  heating  installations  -- including DM 326.8 million for cable
and  overhead  line  networks  and  DM  77.0  million  for  the   Friedrichshain
substation.

     The value of advance  payments made and  installations  under  construction
fell by DM 165.9  million to DM 709.0  million.  This  amount  covers the 380-kV
underground link between Mitte and Friedrichshain substations as well as various
electricity and heat distribution installations.

4. FINANCIAL ASSETS

     The  decrease in our shares in  affiliated  companies is largely due to the
write off of EAB  Fernwarme  GmbH,  Berlin to its  assessed  value.  Lendings to
affiliated  companies were exclusively to IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin.

     The  increase in our  participations  results  mainly from the fact that we
extended our 11.95 per cent participation in GASAG Berlin Gaswerke AG, Berlin by
a further  13.04 per cent to 24.99 per cent.  Lendings to  companies in which we
hold  participations   were  to  the  IT  company  BerlinDat   Gesellschaft  fur
Informationsverarbeitung  und  Systemtechnik  mbH,  Berlin,  as  well  as to EUS
Energie und Umwelt Service GmbH, Berlin.

5. INVENTORIES


<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
                                                                   30 JUNE 1997
                                                    30 JUNE 1998   DM THOUSAND      CHANGE
                                                    DM THOUSAND    (UNAUDITED)    DM THOUSAND
<S>                                                     <C>            <C>           <C>
                                                    ------------   ------------   -----------

Raw materials and supplies........................    155,681        172,111        -16,430
Work in progress for public lighting..............     13,170         17,929         -4,759
                                                      -------        -------        -------
  Total...........................................    168,851        190,040        -21,189
                                                      =======        =======        =======
---------------------------------------------------------------------------------------------

</TABLE>

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                   NOTES TO THE BALANCE SHEET -- (CONTINUED)

     The  reduction  in raw  materials  and  supplies  is mainly  due to reduced
amounts  of  fuel  oil  and  operating  materials.   Deductions  were  made  for
inventories  that have been in storage for a long time with  little  turnover as
the value of such material had decreased.

6. RECEIVABLES FOR GOODS AND SERVICES


<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
                                                                   30 JUNE 1997
                                                    30 JUNE 1998   DM THOUSAND      CHANGE
                                                    DM THOUSAND    (UNAUDITED)    DM THOUSAND
                                                    ------------   ------------   -----------
<S>                                                     <C>            <C>           <C>

Electricity supplied..............................    412,814        396,406        16,408
Heating supplied..................................    116,748         77,594        39,154
Other goods and services supplied.................     17,182          6,187        10,995
                                                      -------        -------        ------
  Total...........................................    546,744        480,187        66,557
                                                      =======        =======        ======
---------------------------------------------------------------------------------------------

</TABLE>


     The  increase  in  receivables  is due  largely to this  year's new billing
procedure  for heat  supplied and, in the  electricity  sector,  to the one-time
effects  of the  pricing  and  contract  reform for  special-contract  customers
introduced on 1 October 1997.

     Receivables for electricity and heating  supplied  include DM 769.0 million
in payments on account received for electricity and heating consumed but not yet
billed (previous year: DM 764.8 million).

     Of the receivables shown here, DM 16,198 thousand (previous year: DM 15,398
thousand) have terms of more than one year.

7. RECEIVABLES FROM AFFILIATED COMPANIES

     The receivables  shown are mainly due from the district heating company EAB
Fernwarme   GmbH   and   from   IPH   Institut    "Pruffeld   fur    elektrische
Hochleistungstechnik" GmbH, Berlin.

8. RECEIVABLES FROM COMPANIES IN WHICH PARTICIPATIONS ARE HELD

     The  receivables  shown are largely due from the gas supply  company  GASAG
Berliner  Gaswerke  AG,  Berlin,  as  well  as  from  the IT  company  BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin.

9. OTHER ASSETS

     The other assets shown mainly contain DM 50.0 million in  receivables  from
orders and services not yet invoiced,  DM 29.5 million in advance  payments made
and DM 26.4  million  in  receivables  from  ancillary  business  and  insurance
payments.

     Of the other assets,  DM 4,191 thousand  (previous year: DM 3,977 thousand)
have terms of more than one year.

<PAGE>


                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                   NOTES TO THE BALANCE SHEET -- (CONTINUED)

10. SECURITIES

     This item covers  mortgage bonds,  one federal  treasury note and one state
government treasury note.

11. CHEQUES, CASH ON HAND AND ON DEPOSIT WITH DEUTSCHE BUNDESBANK, POSTBANK,
    CASH IN OTHER BANK ACCOUNTS
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                                   30 JUNE 1997
                                                    30 JUNE 1998   DM THOUSAND      CHANGE
                                                    DM THOUSAND    (UNAUDITED)    DM THOUSAND
                                                    ------------   ------------   -----------
<S>                                                     <C>             <C>           <C>

Cheques and cash on hand..........................        528            524              4
Deposits with Deutsche Bundesbank and Postbank....     21,103         60,509        -39,406
Cash in other bank accounts.......................    205,199        306,428       -101,229
                                                      -------        -------       --------
  Total...........................................    226,830        367,461       -140,631
                                                      =======        =======       ========

--------------------------------------------------------------------------------
</TABLE>

12. PREPAID EXPENSES

     Prepaid expenses  contain the difference  between the nominal value and the
present value of the compensation  payments under Section 9 of the Land Registry
Adjustment  Act  (GBBerG)  -- DM 130,8  million  -- as well as  prepayments  for
pensions and other prepayments.

13. SPECIAL LOSS ACCOUNT UNDER SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET
    ACT (DMBILG)

     DM 7.6 million in provisions  related to the special loss account were used
during the course of the year under  review,  and the special  loss  account was
reduced by this amount to a value of DM 384.8 million.

14. SUBSCRIBED CAPITAL

     The  subscribed  capital  at the  balance-sheet  date  amounts  to DM 560.0
million.  Bayernwerk  Aktiengesellschaft,  Munich,  and Southern  Energy Holding
Beteiligungsgesellschaft mbH, Berlin, each hold 26.0 per cent. 23.0 per cent are
held by PreussenElektra  Aktiengesellschaft,  Hanover,  and 25.0 per cent are in
scattered ownership.

     The capital stock is distributed in:

          GROUP A SHARES (bearer shares with single voting right)

          75,333,400 shares with a face value of DM 5 each; 75,333,400 votes

          GROUP B SHARES (registered shares with double voting right)

          36,666,600 shares with a face value of DM 5 each; 73,333,200 votes


<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                   NOTES TO THE BALANCE SHEET -- (CONTINUED)

15. CAPITAL RESERVE

     The  capital  reserve  contains  allocations  from share  premiums  and the
reserves arising from the Bewag opening balance sheet of 1 April 1949.

16. REVENUE RESERVES
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------
                                                                 30 JUNE 1997
                                                  30 JUNE 1998   DM THOUSAND       CHANGE
                                                  DM THOUSAND    (UNAUDITED)     DM THOUSAND
<S>                                                   <C>             <C>           <C>
                                                  ------------   ------------    -----------

Statutory reserve...............................     848,257        848,257(1)          0
Special reserve under Section 17
  Sub-section 4 DMBilG..........................     384,795        392,431(1)     -7,636
Other revenue reserves..........................   1,532,535      1,469,899        62,636
                                                   ---------      ---------        ------
  Total.........................................   2,765,587      2,710,587(1)     55,000
                                                   =========      =========        ======



(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
    (DMBilG)
--------------------------------------------------------------------------------
</TABLE>

     The  statutory   reserve   contains  DM  824.1  million  from  the  earlier
realignment  of  the  capital   position  of  EBAG  effected  under  Section  27
Sub-section 2 of the DM-Balance Sheet Act (DMBilG).

     DM 55.0  million  of this  year's net income  were  allocated  to the other
revenue reserves.  In addition, a freely disposable amount of DM 7.6 million was
transferred  from the special  reserve  under  Section 17  Sub-section  4 of the
DM-Balance Sheet Act (DMBilG) to the other revenue reserves.

17. NET PROFIT FOR THE YEAR

     After the  allocation  of DM 55.0  million of this  year's net income of DM
279.0 million to the other revenue  reserves,  the net profit for the year is DM
224.0 million.

18. SPECIAL ITEM WITH PARTIAL RESERVE CHARACTER
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
                                                                   30 JUNE 1997
                                                    30 JUNE 1998   DM THOUSAND      CHANGE
                                                    DM THOUSAND    (UNAUDITED)    DM THOUSAND
<S>                                                     <C>             <C>          <C>
                                                    ------------   ------------   -----------

Increased deduction for depreciation under Section
  14 of the Berlin Promotion Act (BerlinFG).......     511,861        571,826       -59,965
Special depreciations under Section 4 of the
  Development Area Act (FordG)....................   1,324,150      1,191,768       132,382
Reserve under Section 6b of the Income Tax Act
  (EStG)..........................................       8,517         16,670        -8,153
                                                     ---------      ---------       -------
  Total...........................................   1,844,528      1,780,264        64,264
                                                     =========      =========       =======
---------------------------------------------------------------------------------------------

</TABLE>



<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                   NOTES TO THE BALANCE SHEET -- (CONTINUED)

     In the year under review,  the DM 16.7 million of last year's reserve under
Section 6b of the Income Tax Act was transferred to purchased land.

19. SPECIAL ITEM FOR INVESTMENT GRANTS

     While DM 14.4  million was  allocated  to the special  item for  investment
grants,  the overall reduction in this item results from the release into income
of an amount of DM 55.0 million.

20. CONSTRUCTION COST SUBSIDIES

     DM 62.5 million of  construction  cost subsidies  relate to construction in
progress.  Of the remainder,  DM 389.1 million apply to electricity  supply,  DM
231.3 million to heating supply and DM 0.7 million to public lighting.

21. OTHER PROVISIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                   30 JUNE 1998   30 JUNE 1997     CHANGE
                                                   DM THOUSAND    DM THOUSAND    DM THOUSAND
                                                   (UNAUDITED)    (UNAUDITED)    (UNAUDITED)
                                                   ------------   ------------   -----------
<S>                                                    <C>            <C>            <C>

Contamination removal............................     407,765        437,588(1)    -29,823
Personnel........................................     442,002        441,744           258
Easements under Section 9 of the Land Registry
  Adjustment Act (GBBerG)........................     384,575        334,996        49,579
Uncertain liabilities for supplies and
  services.......................................      59,254         57,046         2,208
Compensation obligations for property............      33,743         34,443(1)       -700
Demolition and dismantling.......................       7,999         13,033        -5,034
Interest on old loans of the former EBAG.........          --         16,284       -16,284
Sundry...........................................      86,238         59,703        26,535
                                                    ---------      ---------       -------
  Total..........................................   1,421,576      1,394,837(1)     26,739
                                                    =========      =========       =======

(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
    (DMBilG)
--------------------------------------------------------------------------------
</TABLE>

     The  provisions  for  contamination  removal  take into  account  the costs
anticipated  in the eastern  districts of Berlin for the  replacement of soil on
contaminated  properties,  the removal and disposal of oil-insulated cables, and
soil  rehabilitation  measures required as a result of leakages of oil-insulated
cables on  properties  owned by third  parties.  In addition,  a deduction of DM
110.3 million has been made with regard to the value of contaminated  properties
in the area formerly supplied by EBAG.

     The provisions for personnel  expenses mainly contain  provisions for early
retirement arrangements,  profit-sharing measures,  anniversary payments, annual
bonus payments,  residual holiday entitlement,  and for our new arrangements for
part-time work of older employees.

     The provisions for uncertain liabilities arising from supplies and services
also contain provisions for contingent losses for future expenditures.


<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                   NOTES TO THE BALANCE SHEET -- (CONTINUED)

     The  sundry   provisions  mainly  contain  DM  38.4  million  for  expected
expenditure  to repair the facade of the former  main  administration  building,
which is  classified  as a historical  monument,  as well as DM 23.7 million for
outside services which have not yet been invoiced.

22. LIABILITIES

     The  composition  and terms of our liabilities can be seen in the following
table:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                           TERMS
                                                -----------------------------------------------------
                                                  UP TO 1         1 - 5         OVER 5
                                                    YEAR          YEARS         YEARS         TOTAL
                                                     DM            DM             DM           DM
TYPE OF LIABILITY                                 THOUSAND      THOUSAND       THOUSAND     THOUSAND
-----------------                               ------------   -----------   ------------   ---------
<S>                                                  <C>            <C>          <C>           <C>

Liabilities to banks..........................    454,817        170,316       233,580        858,713
  previous year (unaudited)...................    197,929        350,165       499,546      1,047,640
Advanced payments received....................    127,816             --            --        127,816
  previous year (unaudited)...................    108,827             --            --        108,827
Liabilities for goods and services............    305,481             --            --        305,481
  previous year (unaudited)...................    269,097             --            --        269,097
Liabilities to affiliated companies...........        786             --            --            786
  previous year (unaudited)...................        845             --            --            845
Liabilities to companies in which
  participations are held.....................     12,016             --            --         12,016
  previous year (unaudited)...................     14,290             --            --         14,290
Other liabilities.............................     96,801         61,472        42,400        200,673
  previous year (unaudited)...................     91,230         46,767        56,800        194,797
  including -- tax liabilities................    (23,445)           (--)          (--)       (23,445)
  previous year (unaudited)...................    (34,041)           (--)          (--)       (34,041)
  social security.............................    (25,341)           (--)          (--)       (25,341)
  previous year (unaudited)...................    (24,393)           (--)          (--)       (24,393)
                                                  -------        -------       -------      ---------
     Total liabilities........................    997,717        231,788       275,980      1,505,485
                                                  -------        -------       -------      ---------
       previous year (unaudited)..............    682,218        396,932       556,346      1,635,496
                                                  =======        =======       =======      =========

--------------------------------------------------------------------------------
</TABLE>


<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                   NOTES TO THE BALANCE SHEET -- (CONTINUED)

23. LIABILITIES TO BANKS

     The reduction of DM 188.9 million largely represents repayments of DM 185.2
million, DM 13.2 million of which were made in advance of due date.  Liabilities
to banks also involve DM 126.7  million in loans under  Section 16 of the Berlin
Promotion Act  (BerlinFG)  and DM 454.6 million in loans under Section 17 of the
same Act.

24. ADVANCE PAYMENTS RECEIVED

     The increase in advance  payments is largely  attributable  to  electricity
operations.

25. LIABILITIES TO COMPANIES IN WHICH PARTICIPATIONS ARE HELD

     These  liabilities  are almost  entirely  to the  energy and  environmental
service  company EUS Energie und Umwelt  Service GmbH, to the gas supply company
GASAG  Gaswerke AG, Berlin,  and to the IT company  BerlinDat  Gesellschaft  fur
Informationsverarbeitung und Systemtechnik mbH, Berlin.

26. OTHER LIABILITIES

     Other  liabilities  of DM 200.7  million  include a loan from an  insurance
company of DM 100.0 million.

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                      NOTES TO THE PROFIT AND LOSS ACCOUNT

27. SALES REVENUES



<TABLE>
<CAPTION>
                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
BREAKDOWN BY AREA OF ACTIVITY                       DM THOUSAND   (UNAUDITED)   DM THOUSAND
<S>                                                     <C>           <C>          <C>
-----------------------------                       -----------   -----------   -----------

Electricity supplies..............................   3,081,755     3,167,907      -86,152
Heating supplies..................................     822,837       883,113      -60,276
Public lighting...................................      55,135        41,844       13,291
                                                     ---------     ---------     --------
  Total...........................................   3,959,727     4,092,864     -133,137
                                                     =========     =========     ========
</TABLE>

     There was a decrease of 2.7 per cent in sales revenues from the supplies of
electricity.  The discrepancy  between this figure and the 0.4 per cent decrease
in the quantity of  electricity  sold is mainly due to the price  reductions for
high and  medium-voltage  customers  which went into force on 1 January  1997 as
well as at the time of the pricing and contract reform of 1 October 1997.

     The reduction in sales revenues from heating  supplies is mainly due to the
strong  decrease  in the  amount of heat  supplied  as a result  of the  weather
conditions -- in spite of a slight increase in the thermal output capacity sold.

     The rise in  revenue  in the area of public  lighting  is the  result of an
increased  release  of  funds by the  state  of  Berlin  for the  operation  and
maintenance of street and traffic lighting.

28. CHANGES IN INVENTORIES AND OTHER INTERNALLY PRODUCED AND CAPITALIZED ASSETS

<TABLE>
<CAPTION>
                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
                                                    DM THOUSAND   (UNAUDITED)   DM THOUSAND
                                                    -----------   -----------   -----------
<S>                                                     <C>           <C>          <C>

Changes in amount of work in progress for public
  lighting........................................    (4,759)       (10,265)        5,506
Other internally produced and capitalized
  assets..........................................    54,236         75,813       -21,577
                                                      ------        -------       -------
  Total...........................................    49,477         65,548       -16,071
                                                      ======        =======       =======
</TABLE>

29. OTHER OPERATING INCOME

<TABLE>
<CAPTION>
                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
                                                    DM THOUSAND   (UNAUDITED)   DM THOUSAND
                                                    -----------   -----------   -----------
<S>                                                    <C>             <C>           <C>

Income from the release of special items:
  with partial reserve character..................     80,778        81,280          -502
  for investment bonuses..........................     55,032        54,588           444
Sundry operating income...........................    163,196       283,331      -120,135
                                                      -------       -------      --------
  Total...........................................    299,006       419,199      -120,193
                                                      =======       =======      ========

</TABLE>

     The income from the release of special items with partial reserve character
is  attributable  to the  release  of DM  60.0  million  due to  additional  tax
depreciations made in earlier years under Section 14


<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
              NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)

of the Berlin  Promotion  Act  (BerlinFG)  and of DM 20.8 million due to special
depreciations made in previous years under Section 4 of the Development Area Act
(FordG).

     The sundry operating income includes DM 33.1 million in refunds for changes
made to our distribution  installations at the request of third parties, DM 28.0
million  from  repairs and other  services,  DM 27.7  million in income from the
release of provisions,  DM 13.9 million from claim adjustments,  DM 10.4 million
from rentals and leases, DM 9.2 million in credit notes from fuel deliveries for
previous years as well as DM 8.5 million in revenue from the sale of properties.

30. COST OF MATERIALS
<TABLE>
<CAPTION>

                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
                                                    DM THOUSAND   (UNAUDITED)   DM THOUSAND
                                                    -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>

Expenditure for raw materials and supplies and for
  purchased goods.................................     949,864     1,031,977       -82,113
including -- fuel.................................    (524,184)     (560,431)     (-36,247)
          -- power................................    (315,443)     (358,419)     (-42,976)
Expenditure for purchased services................     277,617       395,201      -117,584
                                                     ---------     ---------     ---------
  Total...........................................   1,227,481     1,427,178      -199,697
                                                     =========     =========     =========
</TABLE>

     The  reduction  in  expenditure  for fuel is due  mainly to a  decrease  in
demand.  In  addition,  structural  shifts  in our use of fuel  from  relatively
expensive fuel oil to less costly lignite have contributed to lower  expenditure
levels.

     We achieved  considerable  savings in our  expenditure  for power by buying
more of our  purchased  electricity  in the spot  market,  where prices are more
favourable.

     The decrease in expenditure for purchased services is mainly due to savings
in maintenance.

     1996/97  expenditure  for  purchased  services is now  reported as being DM
104.6 million higher;  this is because all maintenance  expenditure is now shown
under  this  item,  and  no  longer  under  other  sundry  operating   expenses.
Correspondingly,  the latter  item has been  reduced by DM 104.6  million.  This
reclassification gives a better idea of the company's expenses.

31. PERSONNEL EXPENSES

<TABLE>
<CAPTION>

                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
                                                    DM THOUSAND   (UNAUDITED)   DM THOUSAND
                                                    -----------   -----------   -----------
<S>                                                      <C>          <C>          <C>

Wages and salaries................................     896,403       879,130       17,273
Social security contributions and expenditure for
  pensions and benefits...........................     263,442       263,600         -158
  including payments for pensions.................     (93,900)      (95,680)     (-1,780)
                                                     ---------     ---------      -------
     Total........................................   1,159,845     1,142,730       17,115
                                                     =========     =========      =======
</TABLE>


<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
              NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)

     The increase in personnel  expenditure -- in spite of lower average numbers
of staff -- is mainly the result of the new provisions to cover  arrangements on
part-time work for older  employees and of the increased need for provisions for
early retirement  arrangements.  In addition,  wage  adjustments  resulting from
collective  bargaining,  which were retroactive to the previous year,  increased
expenditure by DM 17.3 million.

     The 1996/97 figure is now reported as being DM 2.5 million higher,  because
expenditures resulting from provisioning for residual holiday is now shown under
wages  and   salaries   and  no  longer   under   sundry   operating   expenses.
Correspondingly, the previous year's figure for the latter item has been reduced
by DM 2.5  million.  There has also been an  increase  of DM 1.4  million in the
previous  year's payments for pensions,  because this item now includes  amounts
paid  to  the  Mutual   Benefit   Association   for  Pension   Security.   These
reclassifications also give a better idea of our expenses.

32. DEPRECIATION

     Depreciation  of  tangible  and  intangible  assets  can  be  seen  in  the
"Movements in fixed assets" overview. It includes extraordinary  depreciation of
DM 10.2  million on advance  payments for  intangible  assets as well as DM 12.6
million  for  tangible  assets.  In  addition,  the  special  loss  account  was
depreciated by DM 7.6 million.

33. OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
                                                                                  CHANGE
                                                      1997/98       1996/97     DM THOUSAND
                                                    DM THOUSAND   DM THOUSAND   (UNAUDITED)
<S>                                                    <C>            <C>           <C>
                                                    -----------   -----------   -----------

Allocation to special items with partial reserve
  character.......................................    161,711        428,723     -267,012
Franchise fee.....................................    204,366        193,710       10,656
Sundry operating expenses.........................    413,865        394,473       19,392
                                                      -------      ---------     --------
  Total...........................................    779,942      1,016,906     -236,964
                                                      =======      =========     ========

</TABLE>


     Allocations  to special  items with partial  reserve  character  consist of
special  depreciations  of DM 153.2 million  under Section 4 of the  Development
Area Act (FordG) and a reserve of DM 8.5 million  under Section 6b of the Income
Tax Act (EStG).

     The  higher  franchise  fee is  based  on the  increase  stipulated  in the
franchise contract with the state of Berlin, which came into effect on 1 January
1997 and now affected the entire business year.

     Sundry  operating  expenses  especially  include DM 77.1 million in outside
services for the administration and marketing  departments,  DM 43.7 million for
data    centre    services    rendered    by    BerlinDat    Gesellschaft    fur
Informationsverarbeitung  und Systemtechnik mbH, Berlin, DM 36.9 million in rent
and lease  payments,  DM 27.6 million in  allowances  on  receivables  and other
assets, DM 23.2 million for the purchase of materials for the administration and
marketing departments as well as DM 19.7 million in insurance premiums. The main
components of the item which are unrelated to this accounting period are DM 17.6
million on retroactive  rate  adjustments for heating,  DM 12.0 million in costs
for dismantling and losses of DM 11.7 million from the retirement of assets.

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
              NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)

34. INCOME FROM FINANCIAL ASSETS



<TABLE>
<CAPTION>
                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
                                                    DM THOUSAND   (UNAUDITED)   DM THOUSAND
                                                    -----------   -----------   -----------
<S>                                                     <C>            <C>          <C>

Income from companies in which participations are
  held............................................      5,720         3,014         2,706
  including from affiliated companies.............    (-2,993)      (-2,671)        (-322)
Income from other securities and from lending of
  financial assets................................      1,693           891           802
  including from affiliated companies.............       (716)         (141)        (-575)
Depreciation on financial assets and securities...    -23,541        -1,556       -21,985
Expenses for losses transferred...................        -53        -2,318         2,265
                                                      -------       -------       -------
Total.............................................    -16,181            31       -16,212
                                                      =======       =======       =======

</TABLE>

     Income from companies in which  participations are held consists largely of
the 1997 dividends and corporation tax credits received for the district heating
company  Fernheizwerk  Neukolln  AG,  Berlin,  and for the IT company  BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin.

     Depreciation on financial assets and securities  covers mainly write off to
their assessed  values of EAB Fernwarme  GmbH,  Berlin (DM 19.5  million),  ARGE
Modellprojekt Berliner  Energiesparpartnerschaft  Bewag/Landis & Gyr, Berlin (DM
1.7 million),  EAB  Energie-Anlagen  Berlin GmbH,  Berlin (DM 1.3 million),  EUS
Energie  und Umwelt  Service  GmbH,  Berlin (DM 0.6  million),  EFR  Europaische
Funk-Rundsteuerung  GmbH,  Berlin (DM 0.2 million)  and Berliner  Energieagentur
GmbH, Berlin (DM 0.2 million).

     The  expenses  for  losses  transferred  result  entirely  from the  losses
incurred in the 1997  business year by  "DEPOGAS-Gesellschaft  zur Gewinnung und
Verwertung von Deponiegasen  mbH" , a Berlin company for the exploitation of gas
from waste tips.

35. NET INTEREST INCOME
<TABLE>
<CAPTION>
                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
                                                    DM THOUSAND   (UNAUDITED)   DM THOUSAND
                                                    -----------   -----------   -----------
<S>                                                    <C>             <C>          <C>

Other interest and similar income.................     27,180        37,412       -10,232
Interest and similar expense......................    -78,737       -96,247        17,510
                                                      -------       -------       -------
  Total...........................................    -51,557       -58,835         7,278
                                                      =======       =======       =======
</TABLE>

     The  reduction in other  interest  and similar  income is mainly due to the
lower total average of financial investments.

     The  decline in  interest  and  similar  expense  is largely  the result of
reduced average holdings in long-term loans.


<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
              NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)

36. TAXES

<TABLE>
<CAPTION>

                                                                    1996/97
                                                      1997/98     DM THOUSAND     CHANGE
                                                    DM THOUSAND   (UNAUDITED)   DM THOUSAND
                                                    -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>

Taxes on revenue and income.......................    169,496        98,710        70,786
Other taxes.......................................      6,713        22,903       -16,190
                                                      -------       -------       -------
  Total...........................................    176,209       121,613        54,596
                                                      =======       =======       =======
</TABLE>

     The  increase in taxes on revenue and income is  attributable  to a rise in
taxable income.

     The reduction in other taxes is due almost  exclusively to the abolition of
the trading  capital tax as of 1 January 1998 and the abolition of the net worth
tax as of 1 January  1997.  This item now  includes  only real  property tax and
motor vehicles tax.

<PAGE>

                                    BEWAG AG
                            BUSINESS YEAR 1997/1998

                            SUPPLEMENTARY INFORMATION

EFFECTS OF VALUATION CHANGES AND TAX REGULATIONS ON THE REPORTED NET INCOME

     Accounting changes (Section 284 Sub-section 2 no. 3 of the Commercial Code)
with regard to provisions  for early  retirement  arrangements  have resulted in
approximately DM 20 million in increased  expenditure.  However,  because of the
reduction by the same amount in otherwise permissible special depreciation under
Section 4 of the Development Area Act (FordG), this measure has no effect on the
net income for the year.

     On the basis of the balance of  allocations  and releases of special  items
with partial reserve  character,  and the associated  effect this has on the tax
expenditure and on other expenditure dependent on profits and dividends, the net
income  declared  for the year is  approximately  DM 39  million  lower than the
amount which would otherwise have been declarable.

     The future  revenue tax burden  arising  from the release of special  items
with partial  reserve  character will depend on the tax rates  applicable at the
time.

OTHER FINANCIAL OBLIGATIONS

     Future capital  expenditure  already approved by the Supervisory  Board and
maintenance  work  needing to be done in the  coming  years  represent  purchase
commitments of  approximately  DM 650 million  (previous  year: DM 472 million).
This  amount  includes  mainly  capital  expenditure  for  repairs  and  for the
extension of our electricity and heat generating and distribution installations.

     The cash value of payment  obligations  arising from  long-term  rental and
leasing  agreements  is  approximately  DM 358 million  (previous  year:  DM 366
million).

     There are  approximately DM 149 million  (previous year: DM 209 million) in
other discounted purchase  commitments,  including  approximately DM 112 million
(previous year: DM 147 million) relating to affiliated companies.

     Fuel and power supplies are secured by long-term contracts in line with the
customs of the trade.


<PAGE>

                                    BEWAG AG
                            BUSINESS YEAR 1997/1998

SHARE OWNERSHIP UNDER SECTION 285 NO. 11 OF THE COMMERCIAL CODE (HGB)
<TABLE>
<CAPTION>



                                                     SHARE IN       EQUITY ON
                                                     CAPITAL    DECEMBER 31, 1997   1997 RESULT
NAME AND LOCATION OF THE COMPANY                        %          DM THOUSAND      DM THOUSAND
--------------------------------                     --------   -----------------   -----------
<S>                                                     <C>             <C>             <C>
                                                                         (DM THOUSAND)

DEPOGAS-Gesellschaft zur Gewinnung und Verwertung
  von Deponiegasen mbH, Berlin(1)..................   100.00               0                0
EAB Fernwarme GmbH, Berlin.........................   100.00          16,677           -6,307
Bewag Immobilienmanagement GmbH, Berlin............   100.00           1,203              177
IPH Institut "Pruffeld fur elektrische
  Hochleistungstechnik" GmbH, Berlin...............   100.00          16,759           -2,931
Bewag Energiemanagement GmbH, Berlin...............   100.00             493               -7
FHW Fernheizwerk Neukolln Aktiengesellschaft,
  Berlin...........................................    75.22          24,941            3,178
EAVV Energie Assekuranz Versicherungs Vermittlungs
  GmbH, Berlin.....................................    60.00             420              320
ARGE Energiesparpartnerschaft Bewag/Landis & Gyr
  GbR, Berlin......................................    50.00           1,859               -3
BerlinDat Gesellschaft fur Informationsverarbeitung
  und Systemtechnik mbH, Berlin(2).................    50.00           4,527            2,527
EAB Energie-Anlagen Berlin GmbH, Berlin(3).........    50.00               0           -3,234
Berliner Energieagentur GmbH, Berlin...............    33.33           3,372             -568
EFR Europaische Funk-Rundsteuerung GmbH, Berlin....    30.00               0           -1,104
EBH Energie-Beteiligungsholding GmbH, Dortmund.....    25.00         550,260            2,254
EUS Energie und Umwelt Service GmbH, Berlin........    25.00              68           -1,028
GASAG Berliner Gaswerke AG, Berlin.................    24.99         939,265          -98,161



-------------------------

(1) There is a profit and loss transfer contract with the company.

(2) The business year ended on 30 September 1997.

(3) The shares were sold on 28 July 1998.
</TABLE>

LIABILITY

     Of the  liabilities  for  sureties,  which total DM 22.1 million  (previous
year:  DM 22.8  million),  DM 19.6 million  represent  sureties for loans of the
district  heating  company EAB Fernwarme  GmbH,  Berlin,  and DM 2.5 million for
loans  of the  waste  tip  gas  exploitation  company  DEPOGAS-Gesellschaft  zur
Gewinnung und Verwertung von Deponiegasen mbH, Berlin.

     There  are also  guarantees  of DM 17.2  million  (previous  year:  DM 20.9
million).  DM 15.9 million of this amount  represent  guarantees  for affiliated
companies (previous year: also DM 15.9 million).

NOTIFICATIONS OF PARTICIPATION

     In  accordance  with  the  stipulations  of  Section  20  Sub-section  5 in
connection with  Sub-section 1 of the German Stock  Corporation Act (AktG),  the
state of Berlin notified Bewag in a letter dated

<PAGE>

                                    BEWAG AG
                            BUSINESS YEAR 1997/1998

29 September  1997 that it no longer holds a  participation  of more than 25 per
cent in Bewag's capital stock.

     In accordance with Section 20 Sub-section 1 of the German Stock Corporation
Act,  Bewag was also  notified by the Southern  Company,  Atlanta,  on behalf of
Southern Energy Holding  Beteiligungsgesellschaft  mbH, Berlin, in a letter of 6
October 1997, and by Bayernwerk AG, Munich, in a letter of 13 January 1998, that
they own more than 25 per cent of Bewag stock.

AVERAGE PERSONNEL LEVEL IN THE BUSINESS YEAR

     Employees (excluding apprentices)
<TABLE>
<CAPTION>

                                                              1997/98   1996/97   CHANGE
                                                              -------   -------   ------
<S>                                                             <C>       <C>      <C>
                                                                     (UNAUDITED)

Craftsmen...................................................   3,563     3,927     -364
Technical staff.............................................   3,224     3,312      -88
Commercial staff............................................   2,241     2,348     -107
                                                               -----     -----     ----
  Total.....................................................   9,028     9,587     -559
                                                               =====     =====     ====

</TABLE>

DETAILS OF THE COMPANY'S CORPORATE GOVERNANCE

     Members of Bewag's  Supervisory Board and Board of Management are listed in
Appendix I to these notes.

     For the  1997/98  business  year,  the total  remuneration  of the Board of
Management was DM 5,248,310  (previous year: DM 3,432,591) and the  remuneration
for the Supervisory Board was DM 957,250 (previous year: DM 473,000).

     A total of DM 2,519,819  (previous  year: DM 2,296,560)  was paid to former
members of the Board of Management  and their  surviving  family;  a total of DM
23,608 thousand  (previous  year: DM 20,297  thousand) is allocated as provision
for pension obligations to this group of persons.

DISTRIBUTION OF THE NET PROFIT FOR THE YEAR

     We propose  that the net profit for the year of DM  224,000,000  be used to
pay a dividend on the current  capital stock of DM 560 million as well as on the
coming capital increase of a further DM 560 million from corporate funds.

Berlin, 8 September 1998

BERLINER KRAFT- UND LICHT (BEWAG)-AKTIENGESELLSCHAFT
The Board of Management

<PAGE>

                                    BEWAG AG
                            BUSINESS YEAR 1997/1998

                            MOVEMENTS IN FIXED ASSETS


<TABLE>
<CAPTION>

                                                  ACQUISITION OR PRODUCTION COSTS
-------------------------------------------------------------------------------------------------
                                     STATUS                                             STATUS
                                   1 JULI 1997   ADDITIONS   TRANSFERS   DISPOSALS   30 JUNI 1998
                                       DM           DM          DM          DM            DM
                                    THOUSAND     THOUSAND    THOUSAND    THOUSAND      THOUSAND
<S>                                    <C>          <C>         <C>         <C>          <C>
-------------------------------------------------------------------------------------------------

INTANGIBLE ASSETS
-------------------------------------------------------------------------------------------------
Industrial property rights and
  similar rights and assets......     427,535       25,937      1,517       3,774        451,215
Advance payments.................      22,277        6,258     -1,481      10,059         16,995
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                      449,812       32,195         36      13,833        468,210
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
TANGIBLE ASSETS
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Real estate, rights equivalent to
  real estate and buildings,
  including buildings on third
  party land property............   2,987,334(5)    11,347     62,082      12,596      3,048,167
Power plant installations........   5,851,717       21,254     36,702      48,856      5,860,817
Electricity transmission and
  distribution installations.....   5,000,839      150,818(1)  372,194     23,904(1)   5,499,947
District heating distribution
  installations..................   2,159,598       31,227     94,061      15,161      2,269,725
Other installations, operating
  and business equipment.........     423,266       13,586(2)   15,903     25,215(2)     427,540
Advance payments and
  installations under
  construction...................     874,926      451,259   -580,978      36,234        708,973
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                   17,297,680      679,491        -36     161,966     17,815,169
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Shares in affiliated companies...      88,126          500         --          --         88,626
Loans to affiliated companies....       6,400        8,000         --          --         14,400
Participations...................     414,574      355,750         --       1,954        768,370
Loans to companies in which
  participations are held........      18,993          500         --          --         19,493
Other loans......................       2,950          717         --         596          3,071
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                      531,043      365,467         --       2,550        893,960
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
FIXED ASSETS.....................  18,278,535    1,077,153         --     178,349     19,177,339
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------



(1) Including minor assets: DM 10,682 thousands

(2) Including minor assets: DM 3,189 thousands

(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
    (DMBilG)

The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>


                                    BEWAG AG
                            BUSINESS YEAR 1997/1998

                            MOVEMENT IN FIXED ASSETS

<TABLE>
<CAPTION>
                                                                                                        NET BOOK VALUES
                                           ACCUMULATED DEPRECIATION IN DM THOUSAND                      IN DM THOUSAND
                              -----------------------------------------------------------------   ---------------------------
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                    STATUS
                                STATUS                                                STATUS         STATUS      30 JUNI 1997
                              1 JULI 1997   ADDITIONS      TRANSFERS   DISPOSALS   30 JUNI 1998   30 JUNI 1998   (UNAUDITED)
                              -----------   ---------      ---------   ---------   ------------   ------------   ------------
<S>                                <C>         <C>             <C>        <C>           <C>           <C>             <C>
-----------------------------------------------------------------------------------------------------------------------------

INTANGIBLE ASSETS
-----------------------------------------------------------------------------------------------------------------------------
Industrial property rights
  and similar rights and
  assets....................     119,402      21,120           --         3,290        137,232       313,983        308,133
Advance payments............          --      10,189           --        10,189             --        16,995         22,277
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
                                 119,402      31,309           --        13,479        137,232       330,978        330,410
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
TANGIBLE ASSETS
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Real estate, rights
  equivalent to real estate
  and buildings, including
  buildings on third party
  land property.............     903,848      87,664          355         5,181        986,686     2,061,481      2,083,486(5)
Power plant installations...   4,616,845     195,731          634        43,666      4,769,544     1,091,273      1,234,872
Electricity transmission and
  distribution
  installations.............   3,194,257     169,849(1)      -722        22,804(1)   3,340,580     2,159,367      1,806,582
District heating
  distribution
  installations.............   1,303,872      87,165           87        11,664      1,379,460       890,265        855,726
Other installations,
  operating and business
  equipment.................     326,865      38,641(2)      -354        23,981(2)     341,171        86,369         96,401
Advance payments and
  installations under
  construction..............          --          --           --            --             --       708,973        874,926
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
                              10,345,687     579,050           --       107,296     10,817,441     6,997,728      6,951,993
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Shares in affiliated
  companies.................      11,000      19,506           --            --         30,506        58,120         77,126
Loans to affiliated
  companies.................          --          --           --            --             --        14,400          6,400
Participations..............       6,082       4,019           --         1,278          8,823       759,547        408,492
Loans to companies in which
  participations are held...          --          --           --            --             --        19,493         18,993
Other loans.................          96(3)       --           --            18(4)          78         2,993          2,854
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
                                  17,178      23,525           --         1,296         39,407       854,553        513,865
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
FIXED ASSETS................  10,482,267     633,884           --       122,071     10,994,080     8,183,259      7,796,268
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------

(1) Including minor assets: DM 10,682 thousands

(2) Including minor assets: DM 3,189 thousands

(3) Discount of interest

(4) Accumulation of interest because of retirements disposal

(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
    (DMBilG)

The accompanying notes are an integral part of these statements.
</TABLE>



                                                                    APPENDIX I
                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

                                SUPERVISORY BOARD

BARNEY S. RUSH
(from 26 September 1997)
Chairman from 15 December 1997
President of Southern Energy Development
Europe Ltd., London

ERNST-OTTO KOCK
Deputy chairman from 15 December 1997
Deputy Chairman of the Public Services and
Transport Trade Union, Berlin regional
administration, Berlin

SVEN BERGELIN
(From 15 December 1997)
Department head for industry of the
DAG-Union, Berlin-Brandenburg Land
Administration, Berlin

HANS-JURGEN CRAMER
(from 15 December 1997)
Head of a main department of Bewag, Berlin

RAINER FRANK ELSASSER
(from 15 December 1997)
Member of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich

KLAUS FORSTER
Member of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich

DR. MANFRED GENTZ
(from 15 December 1997)
Member of the Board of Management of
Daimler Benz Aktiengesellschaft, Stuttgart

DR. HANS-DIETER HARIG
(Chairman until 15 December 1997)
Chairman of the Board of Management of
PreussenElektra Aktiengesellschaft, Hanover

BERND HELMS
(from 15 December 1997)
Head craftsmen of Bewag, Berlin

RITA KUHNER-PRZEWOSNIK
(from 15 December 1997)
Section head of Bewag, Berlin

CARL-FRIEDRICH MEISSNER
(from 15 December 1997)
Former Member of the Board of Management
of the Deutsche Telekom Aktiengesellschaft,
Calw

DR. GEORG OBERMEIER
(From 26 September 1997)
Member of the Board of Management of
VIAG Aktiengesellschaft, Munich

REINHOLD OFFERMANN
(from 15 December 1997)
Member of the Board of Management of
PreussenElektra Aktiengesellschaft, Springe

RICHARD J. PERSHING
(From 26 September 1997)
Senior Vice President of
Southern Energy Inc., Rosewell

KARL-HEINZ DIETER REGEL
(from 15 December 1997)
Project engineer of Bewag, Berlin

MARTIN SATTLER
(from 15 December 1997)
Meter fitter with special responsibilities of
Bewag, Berlin

UWE SCHARF
(from 15 December 1997)
Deputy Chairman of the Public Services
and Transport Trade Union, Berlin regional
administration, Berlin

MARIO SCHONIAN
(from 15 December 1997)
1st car mechanic of Bewag, Berlin

HERBERT STROBEL
1st senior clerk of Bewag, Berlin

DR. GIUSEPPE VITA
Chairman of the Board of Management
of Schering Aktiengesellschaft, Berlin

                       RESIGNED FROM THE SUPERVISORY BOARD

STEPHAN BOEHNKE
(until 15 December 1997)
Technician with special responsibilities of
Bewag, Berlin

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998

DR. ALFRED DWORAK
(until 15 December 1997)
Chief executive of VEBA Aktiengesellschaft,
Berlin

DR. ANNETTE FUGMANN-HEESING
(until 2 September 1997)
Senator for Finance, Berlin

REGINA GEISS
(until 15 December 1997)
Section head of Bewag, Berlin

JAMES R. HARRIS
(from 26 September 1997 until
15 December 1997)
Vice President of
Southern Energy Inc., Marietta

HARALD JOOS
(until 28 August 1997)
Chairman of the management of Schindler
Aufzugefabrik GmbH, Berlin

JORG KLOSE
(until 15 December 1997)
Contract clerk of Bewag, Berlin

DR. KURT LANGE
(until 15 December 1997)
Chairman of the Public Services and Transport
Trade Union, Berlin regional administration,
Berlin

DR. OTTO MAJEWSKI
(until 15 December 1997)
Chairman of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich

ELMAR PIEROTH
(until 2 September 1997)
Senator for Economic Affairs and Public Utility
Companies, Berlin

KLAUS POMMERANIG
(until 15 December 1997)
Former  departmental  head of the  energy  sector  in the  Public  Services  and
Transport Trade Union, Berlin regional administration, Berlin

OLAF ROCH
(until 15 December 1997)
Shop supervisor of Bewag, Berlin

DR. JOACHIM SCHMELZER
(until 15 December 1997)
Head of a main department/Staff member with
special responsibilities of Bewag, Berlin

DR. LORENZ SCHOMERUS
(until 1 September 1997)
State secretary in the Federal Ministry of
Economics, Bonn

MANFRED SCHWARZE
(until 15 December 1997)
Chairman of the Works Council of
Bewag, Berlin

WOLFGANG STEINRIEDE
(until 23 September 1997)
Former spokesman of the Board of
Management of Bankgesellschaft Berlin
Aktiengesellschaft, Berlin

JAMES A. WARD
(from 26 September 1997 until
15 December 1997)
Vice President of Southern Energy Inc.,
Fayetteville

                               BOARD OF MANAGEMENT

PROF. DR. DIETMAR WINJE
Chairman
Energy business and corporate development,
Berlin

DR. BERND BALZEREIT
Finance and legal affairs, Berlin

DR. KLAUS BECHTOLD
Generation and heating, Berlin

J. BRUCE JONES
(from 1 February 1998)
Electricity grid and sales, Berlin

DR. KURT LANGE
(from 1 February 1998)
Human resources and employee services, Berlin

                      RESIGNED FROM THE BOARD OF MANAGEMENT

MICHAEL PAGELS
(until 31 October 1997)
Personnel and organisation, Teltow

<PAGE>


                                                                 APPENDIX II

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                                      NOTES

SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

     The Bewag financial statements comply with accounting  principles generally
accepted  in Germany  ("German  GAAP"),  which  differs  in certain  significant
respects  from  accounting  principles  generally  accepted in the United States
("U.S.  GAAP").  The  significant  differences  that  affect  the net income and
shareholders'  equity of Bewag as of and for the year  ended  June 30,  1998 are
described below:

  (A) INVESTMENT IN SUBSIDIARIES

     In accordance with German GAAP, investments in controlled  subsidiaries are
not required to be consolidated if certain materiality tests are met, and can be
recorded under the cost method (and, if applicable,  the lower of cost or market
method). As Bewag meets these materiality tests for all controlled subsidiaries,
it accounts for these entities  under the cost method.  Under the cost method of
accounting,  dividends  declared are the basis for recognizing  earnings from an
investment.

     A  controlled  subsidiary  is  generally  defined  under  U.S.  GAAP as all
majority-owned  subsidiaries  unless  control is temporary or does not rest with
the majority owner. Under U.S. GAAP,  controlled  subsidiaries are consolidated,
with a minority  interest  shown as an adjustment to net income or loss and as a
separate item on the balance sheet.

     Certain of Bewag's  controlled  subsidiaries  were  acquired  in a purchase
requiring  purchase  accounting  treatment  under U.S. GAAP. The purchase method
requires that assets acquired and  liabilities  assumed be accounted for at fair
value.  The excess of purchase price over the fair value of net assets  acquired
is recorded as goodwill.  Under U.S.  GAAP,  goodwill  must be  capitalized  and
amortized through the income statement over its estimated useful life, which may
not exceed 40 years.

     In accordance  with German GAAP,  Bewag has written down its  investment in
EAB  Fernwarme to its estimated  value.  The  consolidation  of EAB Fernwarme as
required  under US GAAP  resulted  in the  reversal  of the  amounts  previously
written down, including the current year amount of DM 19.5 million. The attached
reconciliation   also  reflects  the  other  entries   necessary  to  completely
consolidate Bewag's controlled subsidiaries.

  (B) MINORITY INTEREST

     Under German GAAP, minority interest is included as a separate component of
shareholders' equity and included in net income. Bewag has not recorded minority
interest as  subsidiaries  have not been  consolidated  as allowed  under German
GAAP. Under U.S. GAAP,  minority interest is eliminated from income and is shown
as a liability to the minority owners on the balance sheet.

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                              NOTES -- (CONTINUED)

  (C) INVESTMENT IN AFFILIATED COMPANIES

     In  accordance  with  German  GAAP,  investments  in  affiliated  companies
(affiliated  companies  generally are entities  which are 20-50% owned by Bewag)
are not  required  to be  accounted  for under the  equity  method,  if  certain
materiality  tests are met, and can be recorded  under the cost method (and,  if
applicable,  the  lower  of  cost  or  market  method).  As  Bewag  meets  these
materiality tests for all affiliated  companies,  it accounts for these entities
under the cost method.  Under the cost method of accounting,  dividends declared
are the basis for recognizing earnings from an investment.

     Under U.S. GAAP, investments in affiliated companies are recorded using the
equity method of  accounting if an investment  enables the investor to influence
the operating or financial  decisions of the investee,  with the balance of each
investment  being  increased or decreased,  as  appropriate,  to account for the
investor's  proportionate  share of the investee  earnings.  Upon disposal,  the
above   differences   would  also  result  in  differing  gains  and  losses  on
disposition.

     Certain  of  Bewag's  affiliated  companies  were  acquired  in a  purchase
requiring  purchase  accounting  treatment  under U.S. GAAP. The purchase method
requires that assets acquired and  liabilities  assumed be accounted for at fair
value.  The excess of purchase price over the fair value of net assets  acquired
is recorded as goodwill.  Under U.S.  GAAP,  goodwill  must be  capitalized  and
amortized through the income statement over its estimated useful life, which may
not exceed 40 years.

     In accordance  with German GAAP,  Bewag has written down its  investment in
several affiliated  companies to the estimated value of these  investments.  The
application  of the equity  method of  accounting  as required  under U.S.  GAAP
resulted in the reversal of the amounts previously written off, prior to booking
the  appropriate  entries  to  record  Bewag's  equity  in the  earnings  of the
affiliated companies.

  (D) DEPRECIATION

     Under German GAAP,  certain  fixed and  intangible  assets are  depreciated
based on accelerated  depreciation  methods permitted by German law. German GAAP
allows disclosure of the effect of accelerated depreciation in a special balance
sheet position known as "Sonderposten",  or deduction from the cost basis of the
assets. The "Sonderposten"  recorded under German GAAP includes  depreciation in
accordance  with section 4 FordG and section 14 BerlinFG.  Further,  depreciable
lives  differ  from  those  allowed  under  U.S.  GAAP  and  75% of  the  annual
depreciation amount is allowed in the year an asset is placed in-service. German
GAAP  allows,  under  certain  circumstances  for the cost basis of assets to be
adjusted  (e.g.  assets sales gains being  transferred  to newly  acquired fixed
assets).  Such  adjustments  are not allowed under U.S.  GAAP.  Under U.S. GAAP,
fixed and  intangible  assets are  recorded at cost and  depreciated  over their
useful  life.  For  purposes  of the  reconciliation  to U.S.  GAAP,  fixed  and
intangible assets have been depreciated on a straight-line  basis.  Depreciation
in the in-service year is taken from the date the asset is placed in-service.

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                              NOTES -- (CONTINUED)

  (E) AMORTIZATION OF INVESTMENT GRANTS AND CONSTRUCTION COST SUBSIDIES

     The  amortization of certain  deferred  revenue,  comprised of customer and
government payments in support of investments, which is being amortized over the
depreciable  lives of the  related  assets for German  GAAP  purposes,  has been
adjusted to reflect the useful lives used for U.S. GAAP purposes.

  (F) INTEREST CAPITALIZATION

     German GAAP permits,  but does not require,  the capitalization of interest
as part of the historical cost of the acquisition of assets that are constructed
or otherwise  produced for an enterprise's own use. Bewag has elected to expense
these interest costs as incurred.  U.S. GAAP requires the capitalization of such
interest costs. The additional cost is depreciated over the expected useful life
of the related asset.

  (G) DEBT DISCOUNT

     German GAAP permits,  but does not require,  discount  associated  with the
issuance  of debt to be  expensed  as  incurred.  U.S.  GAAP  require  that such
discount be  capitalized  and  amortized  to income over the life of the related
debt.

  (H) PENSIONS AND OTHER EMPLOYEE BENEFITS

     Under German GAAP,  the Company  provided for pension  costs in  accordance
with article 6a of the German Income Tax Act. Pension accounting under U.S. GAAP
is prescribed by Financial Accounting  Standards No. 87, "Employers'  Accounting
for Pensions" ("SFAS 87"). SFAS 87 requires actuarial computation of the pension
costs for defined  benefit  plans  using the  Projected  Unit Credit  Method and
includes  current  service  cost,  interest  cost,  return  on plan  assets  and
amortization  of actuarial  gains/losses  and prior service cost.  Prior service
cost  is  amortized  over  the  future  service  period  of  active   employees.
Unrecognized  gains and losses  exceeding  10% of the  greater of the  projected
obligation or the market-related value of the plan assets are amortized over the
average service period of active  employees.  Differences  between U.S. GAAP and
German GAAP relate  primarily  to future  service  costs,  which are required to
measured under SFAS 87 and interest costs, which are fixed under German GAAP.

     SFAS 87 requires that companies located outside the United States adopt the
provisions of SFAS 87 for fiscal years beginning after December 15, 1988. Due to
the significant period of time which elapsed between the date when SFAS 87 would
have been  required to be adopted and the time when Bewag  first  determined  to
prepare U.S. GAAP financial  information,  adoption of the provisions of SFAS 87
as of July 1, 1989 was not feasible.  Accordingly, SFAS 87 has been adopted from
July 1, 1997. As of the date of adoption, a transition obligation was calculated
under  requirements  of SFAS 87 and is  being  amortized  over a 15 year  period
beginning on the assumed implementation date of July 1, 1989.

  (I) PROVISIONS AND ACCRUALS

     German  GAAP  permits  the  recognition  of  accruals  and  provisions  for
uncertain  liabilities  and loss  contingencies.  The amount of such accruals or
provision represents the anticipated expenses of

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                              NOTES -- (CONTINUED)

the company.  Specific  examples include the establishment of a provision in the
amount of DM 38.4 million to repair the facade of the old corporate headquarters
as well as a DM 34 million  provision for future lease  payments for the current
corporate  headquarters.  Under U.S. GAAP, an accrual for a loss  contingency is
recorded by a charge to income if it is probable that an asset has been impaired
or a liability has been incurred and at the same time the minimum  amount of the
loss can be  reasonably  estimated.  Less  precisely  determinable  reserves for
future losses,  costs, or risks do not meet the condition for accrual under U.S.
GAAP and have been eliminated.

  (J) SPECIAL ITEM "RESERVE UNDER SECTION 6B ESTG"

     Under  German  GAAP,  gains on disposal of land can be  transferred  to new
acquisition of land by offsetting  against  acquisition costs within a period of
four years after the disposal  became  effective.  Gains not yet transferred are
recorded as a special item (Reserve  under  section 6b EStG) in accordance  with
German GAAP.

     Under U.S. GAAP this treatment is not allowed. The special item for gains
on disposal of land therefore is eliminated. Gains of prior years increased
equity and the current gains added to the special item are taken to income under
U.S. GAAP.

  (K) SPECIAL PROVISION IN ACCORDANCE WITH D-MARKBILANZGESETZ ("SPECIAL LOSS
  ACCOUNT")

     As allowed  under  German GAAP,  Bewag has recorded a special  provision in
accordance with  D-Markbilanzgesetz  ("special loss account") as an asset on the
balance sheet and a corresponding  account shown as a component of equity.  This
special  provision  relates to the  opening  balance  sheet  prepared  under the
regulations  of the  D-Markbilanzgesetz  (DMBilG)  of  the  former  East  German
electric  utility  Energieversorgung  Berlin AG ("EBAG") as of July 1, 1990, the
date when all East German  companies  converted their  accounting  systems.  The
special  provision  relates  to  liabilities  (primarily  environmental  related
liabilities  and  restitution  claims) assumed by Bewag after merging with EBAG.
Adjustments  made to these  offsetting  accounts  do not impact  earnings  under
German GAAP. Under U.S. GAAP, the special  provisions have been eliminated.  The
associated liabilities are included on the balance sheet as appropriate for U.S.
GAAP with  adjustments to the liabilities  being treated as changes of estimates
and  included  in the U.S.  GAAP  operating  results in the period the change in
estimate occurs.

  (L) DEFERRED TAXES

     Under German GAAP,  deferred tax assets and  liabilities  are not generally
recognized  for all  differences  between the book  carrying  values and the tax
bases of assets and liabilities.

     Under  U.S.  GAAP,  deferred  tax  assets  and  liabilities  for  temporary
differences  using  enacted tax rates in effect at year-end  are  recognized  in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income  Taxes"  ("SFAS No.  109").  Under SFAS No. 109, net  operating  loss
carryforwards  that are  available  to reduce  future  taxes are  recognized  as
deferred tax assets.  Such  amounts are reduced by a valuation  allowance to the
extent that it is "more  likely than not" that the  deferred tax assets will not
be realized.

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                              NOTES -- (CONTINUED)

     The deferred tax liability on U.S. GAAP  adjustments  covers the future tax
burden related to the additional  depreciation  recorded for in the special item
with partial reserve character that is disclosed in the notes under German GAAP.

  (M) OTHER

     Several  other  differences  from German GAAP to U.S.  GAAP are  considered
insignificant  for the  reconciliation  of financial  statements  as of June 30,
1998.

     Under German GAAP, securities and other investments are valued at the lower
of acquisition  costs or market value at the balance sheet date.  Adjustments to
record  investments below cost are included in the income statement.  Under U.S.
GAAP marketable equity and debt securities are classified into three categories:
held-to-maturity   securities,    available-for-sale   securities   or   trading
securities. For U.S. GAAP purposes, Bewag's securities are considered to be held
to maturity  and  therefore  carried at the adjusted  cost at the balance  sheet
date.

     Other  but  insignificant  differences  in  accounting  principles  include
unrealized gains from foreign  currency  translations and other costs and income
amounts in the German financial  statements that are capitalized or deferred for
U.S. GAAP purposes, respectively.

  (N) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities",  (SFAS No. 133),  which is effective  for fiscal years
beginning  after  June 15,  2000  (July  1,  2000 in the  case of  Bewag).  This
statement requires that all derivative financial instruments be reflected on the
balance sheet at fair value, with changes in fair value recognized  periodically
in earnings or as a component of other  comprehensive  income,  depending on the
nature of the underlying item,  changes in the fair value of the derivative will
be recognized  currently in the statements of profit and loss. In June 1999, the
FASB issued SFAS No. 137,  "Accounting  for Derivative  Instruments  and Hedging
Activities -- Deferral of the Effective  Date of FASB  Statement No. 133",  that
amends SFAS No. 133 to be effective for all fiscal  quarters or all fiscal years
beginning after June 15, 2000.  Additionally,  on June 15, 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133",  that addresses a limited
number of  issues  causing  implementation  difficulties  for a large  number of
entities preparing to apply Statement 133.

     In December 1999, the  Securities  and Exchange  Commission  released Staff
Accounting Bulletin No. 101, Revenue Recognition In Financial  Statements.  This
bulletin  summarizes  the  views of the  staff on  applying  generally  accepted
accounting principles to revenue recognition in financial statements.  The staff
believes  that  revenue is  realized  or  realizable  and earned when all of the
following  criteria  are met:  persuasive  evidence  of an  arrangement  exists;
delivery has occurred or services have been rendered;  the seller's price to the
buyer is fixed or determinable;  and collectibility is reasonably  assured.  The
staff believes that the change must be reported,  by all  registrants,  no later
than the fourth fiscal quarter of the fiscal year  beginning  after December 15,
1999.

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                              NOTES -- (CONTINUED)

RECONCILIATION TO U.S. GAAP

     The following is a summary of the significant adjustments to net income for
the year ended June 30, 1998 and to shareholders'  equity at June 30, 1998 which
would be required if U.S. GAAP had been applied instead of German GAAP.

<TABLE>
<CAPTION>

                                                                      YEAR ENDED
                                                              NOTE   JUNE 30, 1998
                                                              ----   -------------
<S>                                                           <C>         <C>
                                                                             TDM

Net income as reported in the statement of operations under
  German GAAP...............................................            279,000
Adjustments required to conform to U.S. GAAP:
  Investment in subsidiaries................................  (a)       -17,117
  Minority interest.........................................  (b)          -895
  Investment in affiliated companies........................  (c)         1,283
  Depreciation..............................................  (d)        41,439
  Amortization of investment grants and construction cost
     subsidies..............................................  (e)       -22,472
  Interest capitalization...................................  (f)         2,918
  Debt discount.............................................  (g)        -2,034
  Pension and other employee benefits.......................  (h)       -45,896
  Provisions and accruals...................................  (i)         2,005
  Special item "Reserve under section 6b EStG"..............  (j)         8,517
  Special provision in accordance with DMBilG...............  (k)        87,703
  Deferred taxes............................................  (l)       -16,555
  Deferred tax effect of U.S. GAAP adjustments..............  (l)        23,957
                                                                       --------
     Net income in accordance with U.S. GAAP................            341,853
                                                                       ========
</TABLE>

<PAGE>

                                    BEWAG AG

                            BUSINESS YEAR 1997/1998
                              NOTES -- (CONTINUED)


<TABLE>
<CAPTION>

                                                                         AS OF
                                                              NOTE   JUNE 30, 1998
                                                              ----   -------------
<S>                                                           <C>         <C>
                                                                             TDM

Shareholders' equity as reported in the balance sheet under
  German GAAP...............................................            3,606,387
Adjustments required to conform to U.S. GAAP:
  Investment in subsidiaries................................  (a)         -42,067
  Minority interest.........................................  (b)         -12,022
  Investment in affiliated companies........................  (c)          80,977
  Depreciation..............................................  (d)       5,429,538
  Amortization of investment grants and construction cost
     subsidies..............................................  (e)        -291,520
  Interest capitalized......................................  (f)          28,560
  Debt discount.............................................  (g)           6,983
  Pension and other employee benefits.......................  (h)        -220,162
  Provisions and accruals...................................  (i)         103,440
  Special item "Reserve under section 6b EStG"..............  (j)          25,187
  Special provision in accordance with DMBilG...............  (k)        -384,564
  Deferred taxes............................................  (l)          90,410
  Deferred tax effect of U.S. GAAP adjustments..............  (l)      -2,646,565
                                                                      -----------
Shareholders' equity in accordance with U.S. GAAP...........            5,774,582
                                                                      ===========
</TABLE>