BALTIC INTERNATIONAL USA INC, 10KSB, 1999-09-01

BALTIC INTERNATIONAL USA INC
10KSB, 1999-09-01
ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO

Previous: BALTIC INTERNATIONAL USA INC, 10QSB, 1999-09-01

Next: SOUTH ASIA PORTFOLIO, N-30D, 1999-09-01

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-KSB

(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended: December 31, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________.

Commission File Number: 0-26588

BALTIC INTERNATIONAL USA, INC.
(Name of small business issuer in its charter)

Texas 76-0336843
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

5151 San Felipe, Suite 1661
Houston, Texas 77056
(Address of principal executive offices, including zip code)

(713) 961-9299
(Issuer's telephone number, including area code)

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

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.01 par value
Warrants
(Title of Class)

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

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]

Issuer's revenues for the year ended December 31, 1998 were $658,585.

The aggregate market value of Common Stock held by non-affiliates of the
registrant at August 25, 1999, based upon the last sales price as reported by
the OTC Bulletin Board, was $509,458.

As of August 25, 1999, there were 9,445,960 shares of Common Stock
outstanding.

Transitional Small Business Disclosure Format (Check one): Yes ; No X .

TABLE OF CONTENTS
Page

PART I
Item 1. Description of Business 3

Item 2. Description of Property 5

Item 3. Legal Proceedings 5

Item 4. Submission of Matters to a Vote of Security Holders 5

PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6

Item 6. Management's Discussion and Analysis or Plan of Operation 6

Item 7. Financial Statements 10

Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 11

PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 11

Item 10. Executive Compensation 13

Item 11. Security Ownership of Certain Beneficial Owners and
Management 14

Item 12. Certain Relationships and Related Transactions 15

Item 13. Exhibits and Reports on Form 8-K 16

SIGNATURES

PART I

Item 1. DESCRIPTION OF BUSINESS

Baltic International USA, Inc. (the "Company" or "BIUSA") is a Texas
corporation which provides and has provided capital, management, and technical
services to start-up and established private companies located primarily in
Eastern Europe. In most instances, the Company is directly involved in
management, and in all instances assists in allocation of capital either
directly from the Company or through the investment of third parties. BIUSA has
not taken significant profits or management fees from these investments.

The Company's current operations are in-flight catering through the
Company's 23% interest in AIRO Catering Services and distribution of beer
products through the Company's wholly owned subsidiary American Distributing
Company. During 1999, the Company decided to focus on utilizing its assets to
achieve profitability by acquiring business operations based in the United
States. The Company is currently doing due diligence on several potential
acquisitions. However, based on the Company's current financial condition,
there are no assurances that the Company can complete any acquisitions.

AIRO Catering Services

Management has identified a number of business opportunities presented by
in-flight catering due to the lack of international standard kitchens in
airports in Eastern Europe and the Newly Independent States. Currently, many
Western airlines flying into airports in Eastern Europe and the former Soviet
Union back-cater their food -that is, food for both legs of the trip is carried
on board from the originating point - increasing food costs and reducing
revenue-producing cargo space.

In February 1996, the Company formed AIRO Catering Services ("AIRO") with
TOPflight Catering AB ("TOPflight"). TOPflight operates kitchens in Malmo,
Gothenburg and Stockholm, Sweden. In this joint operation, the Company
contributed its management and operational expertise, part of its interest in
Riga Catering Services ("RCS"), market knowledge, knowledge of the regional
customer base and labor force for a 51% interest. TOPflight contributed its
technical experience in building in-flight kitchens and its interest in RCS for
a 49% interest. During 1997, LSG Lufthansa Services/Sky Chefs ("LSG")
purchased 51% of TOPflight.

In December 1997, the Company entered into a share purchase and
shareholder agreement with LSG. The primary purpose of the agreement is to
identify AIRO as the vehicle for the development of new LSG in-flight kitchens
in Eastern Europe and the Republics of the former Soviet Union. Under the
agreement, the Company sold 5% of the stock of AIRO to LSG in return for the
LSG commitments and $600,000 in cash. Following the share purchase, the
Company controlled 46% of AIRO and LSG controls 54%.

In July 1999, the Company sold a 23% interest in AIRO to ORESA Ventures
N.V. and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the
Company's common stock, warrants to purchase 6,250,000 shares of the Company's
common stock and $250,000 in cash. As part of this transaction, the Company
also entered into an option agreement giving ORESA Ventures N.V. and Celox S.A.
the right to purchase the remaining 23% of AIRO held by the Company for
$1,145,000 in cash and forgiveness of about $190,000 in debt. The option
agreement expires on September 30, 1999.

In January 1998, the Company transferred its remaining direct interest in
RCS of 20.68% to AIRO as part of a capital contribution made by the partners of
AIRO. As part of this capital contribution, TOPflight and LSG made their pro
rata share contributions consisting of cash of $1,100,000 and services with a
value of $197,990. RCS is currently owned 58.5% by AIRO and 41.5% by the
principals of the Company's partner in Baltic Catering Services ("BCS").

AIRO operates in Riga, Latvia through RCS which was started by the
Company, and which caters all carriers serving Riga International Airport
including Scandinavian Airlines System Denmark-Norway-Sweden ("SAS"), Lufthansa
and Air Baltic. AIRO opened a new kitchen in Tallinn, Estonia in January 1998
and a new kitchen in Kiev, Ukraine in May 1998. The contract in Kiev provides
for a 20-year building lease to AIRO with at least five years exclusivity.

Baltic Catering Services

The business of BCS after the transfer of the catering business to RCS was
primarily the operation of a restaurant in the Riga Airport. BCS ceased
operations in 1998 and is being liquidated.

Air Baltic Corporation

In 1992, the Company developed Baltic International Airlines ("BIA") - the
first independent airline in the former Soviet Union. In October 1995, the
Company sold the scheduled passenger service operations of its 49% interest in
BIA, to the newly created national airline of Latvia, Air Baltic. The Company
sold its 8.02% interest in Air Baltic to SAS in January 1999 for $2,144,333
cash under the terms of an option agreement between the Company and SAS. The
Company used the proceeds from the sale to repay the $2 million loan from a
shareholder.

Baltic International Airlines

The Company currently owns an 89% interest in BIA. BIA currently has no
substantive operations. The Company believes that maintaining BIA's airline
certification and the availability of BIA's tax holiday in Latvia are
beneficial to the Company.

American Distributing Company

American Distributing Company ("ADC") is a wholly-owned subsidiary of the
Company. It distributes Miller, Topvar and Kalnapilis beers in the Baltic
States. This business commenced in December 1995 as a successor to the
Company's distribution activities which began in 1993. The Company has a
distribution system, offices and a 12 person staff in Riga, Latvia and Vilnius,
Lithuania.

Baltic World Air Freight

Through its wholly-owned subsidiary Baltic World Air Freight ("BWAF"), the
Company served as a cargo marketer to Air Baltic and other airlines. In August
1998, the Company ceased the operations of BWAF.

Government Regulation

Republic of Latvia Law on Foreign Investment

In November 1991, the Republic of Latvia adopted the Law on Foreign
Investment ("Foreign Investment Law"), which was designed to encourage the
participation by foreigners in the establishment of Latvian joint operations.
The Foreign Investment Law generally provides certain preferential tax
advantages to ventures formed under the Foreign Investment Law beginning in the
year in which profits are first generated from the operations of such ventures.
In addition, the Foreign Investment Law permits non-Latvian entities to own up
to a 100% interest in most Latvian business entities, including airlines.

Pursuant to the Foreign Investment Law, ventures having foreign
participation of at least 30% (with a minimum investment of at least $50,000)
are exempt from profit taxes for a period of two years, and thereafter for the
following two years, profit taxes for such ventures are reduced by 50%.
Ventures having foreign participation in excess of 50% (equal to at least
$1,000,000) are exempt from profit taxes for a period of three years, and
thereafter for the following five years, profit taxes for such ventures are
reduced by 50%. In addition, ventures which are active in certain industries
deemed to be "preferential" by the government of the Republic of Latvia and
having foreign participation of at least 30% (with a minimum investment of at
least $50,000) are entitled to a three-year tax holiday from the payment of
profit taxes, and thereafter for the following two years, profit taxes for
these "preferential" ventures are reduced by 50%.

The business of BIA is deemed to be a preferential industry, entitling it
to a three-year profit tax holiday beginning the first year in which it
generates profits and a 50% reduction in profit taxes for the following two
years. To date, BIA has not generated any profits in any year and currently
has no operations.

Republic of Latvia Law on Limited Liability Companies

The formation and operation of joint venture-limited liability companies
within the Republic of Latvia is regulated and governed by the Republic of
Latvia Law on Limited Liability Companies ("Company Law"). A joint
venture-limited liability company is recognized as a separate legal entity
under the Company Law for purposes of transacting business in the Republic of
Latvia, and accordingly, a joint venture-limited liability company can incur
its own obligations and liabilities with respect to its business operations.
Furthermore, the capital shareholders of a joint venture-limited liability
company are afforded limited liability with respect to any acts or obligations
of the joint venture-limited liability company. Accordingly, the Company will
not be liable, because of its status as owner of a joint venture-limited
liability company interest or as owner of any subsidiary registered as a
Latvian limited liability company, for any obligations incurred by its
subsidiaries and joint operations resulting from their respective business
operations.

Political, Economic and Social Climate of Destination Countries

The Company's subsidiaries and joint operations operate in geographic
areas which are subject to evolving political, economic and social climates,
including other Baltic States and other republics of the former Soviet Union.
Failure to improve political, economic or social stability in these regions
could have an adverse effect on future operations and expansion efforts.

Competition

The Company's business ventures face competition from other companies and
individuals that have also recognized the Baltic States and Newly Independent
States as a developing market. Air Baltic, as a passenger service carrier,
faces competition from other airlines, many of which have longer operating
histories, greater name recognition, greater financial resources, more
extensive facilities and equipment and better marketing resources. Other
businesses that the Company currently operates, or may operate in the future,
presently compete and will compete with other entities, many of which may have
greater financial, marketing and technical resources.

Employees

The Company currently employs 3 persons on a full-time basis in the
Houston office. AIRO employs 139 persons and ADC employs 12 persons. The
Company has in the past, and will continue in the future, to employ independent
contractors and to make extensive use of its outside directors and others as
consultants. None of the employees of the Company and its subsidiaries and
joint operations are represented by a labor organization. The Company believes
its relationships with all of these employees are satisfactory.

Item 2. DESCRIPTION OF PROPERTY

The Company leases approximately 800 square feet of office space in
Houston, Texas for a monthly rental of approximately $1,200. ADC leases office
space in Riga, Latvia and Vilnius, Lithuania. AIRO leases space in Stockholm,
Sweden; Riga, Latvia; Tallinn, Estonia and Kiev, Ukraine. The Company believes
that its facilities are adequate for its current operations. The facilities of
the Company's other business ventures are satisfactory for current purposes.

Item 3. LEGAL PROCEEDINGS

None.

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

Not applicable.

PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is listed on the OTC Bulletin Board under the
symbol "BISA." On September 8, 1998, Nasdaq informed the Company that due to
the bid price of the Company's Common Stock not meeting Nasdaq's minimum bid
price requirement, the Company's securities were no longer to be listed on the
Nasdaq Stock Market. The Company's Common Stock was immediately traded on the
OTC Bulletin Board. The following table sets forth the high and low sales
prices of the Common Stock for the periods indicated:

1998 1997
High Low High Low

First Quarter $0.594 $0.219 $0.750 $0.375
Second Quarter 0.594 0.344 0.500 0.375
Third Quarter 0.406 0.125 1.031 0.375
Fourth Quarter 0.188 0.094 0.656 0.344

On August 25, 1999, the last sales price for the Common Stock was $0.08,
and the Company believes there were approximately 1,000 beneficial holders of
its Common Stock.

The Company has not paid, and does not currently intend to pay, cash
dividends on its Common Stock. The current policy of the Company's Board of
Directors is to retain earnings, if any, to provide funds for operation and
expansion of the Company's business. Such policy will be reviewed by the Board
of Directors of the Company from time to time in light of, among other things,
the Company's earnings and financial position.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussions contain forward-looking information. Readers
are cautioned that such information involves risks and uncertainties,
including those created by general market conditions, competition and the
possibility of events may occur which limit the ability of the Company to
maintain or improve its operating results or execute its primary growth
strategy. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and there can therefore be no assurance that the forward-looking
statements included herein will prove to be accurate. The inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.

The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.

General

In 1997 and 1998, the Company continued its strategy of making investments
in businesses in Eastern Europe and further developing its existing activities
in such region. In September 1997, the Company shifted its focus to
concentrate on its in-flight catering operations.

In January 1999, the Company sold its 8.02% of Air Baltic stock to SAS for
$2,144,333 under the terms of the option agreement between the Company and SAS.
The Company used the proceeds from the sale to repay the $2 million loan from a
shareholder.

The Company's revenues have historically been derived from its equity in
the net income of its joint operations, beer and food distribution and
commissions due from sales of airline tickets under the agreement between Air
Baltic and the Company. Significant portions of the operational activities of
the Company are reflected in the net equity in earnings and losses of joint
operation investments. The Company uses the equity method to record its
interest in its joint operations owned 20% to 50% or companies owned greater
than 50% in which the Company does not have control. The Company's interests
relating to joint operation activities resulted in income of $85,579 for 1998
and $361,688 for 1997.

Results of Operations

Years Ended December 31, 1998 and 1997. Revenues for 1998 decreased by
$252,027, or 28%, to $658,535 compared to $910,562 for 1997. This decrease is
due to a decrease in the net equity in earnings of catering operations
resulting from the additional general and administrative costs in AIRO in 1998
for the infrastructure of AIRO which did not exist in 1997 and the reversal in
1997 of a reserve recorded on the final determination of RCS' income tax
status for 1996. The tax determination was received in 1997 in favor of RCS.
The decrease was partially offset by the increase in food distribution revenue
resulting from the Company focusing the operations of ADC on beer distribution
and adding additional beers to its products for distribution.

The number of meals sold by AIRO's in-flight kitchens increased by 91% to
694,438 meals sold in 1998 from 364,111 meals sold in 1997. This increase is
due to the openings of the Tallinn kitchen in January 1998 and the Kiev
kitchen in May 1998 and an 11% increase in meals sold in Riga.

Operating expenses increased 59% to $2,544,198 for 1998 compared to
$1,604,385 for 1997. This increase was due to an increase in a reserve on the
Company's investment in BIA and increased food distribution costs, partially
offset by a decrease in personnel and consulting and other general and
administrative expenses. The Company recorded the reserve in 1998 of
$1,143,115 as a result of the uncertainty of the characteristics of the
contribution from the Latvian partner and the length of time that has
transpired since the Latvian partner committed to make the contribution. The
decrease in personnel and consulting and other general and administrative
expenses results from the Company's continued efforts to reduce its overhead
expenses.

As a result of the changes in revenues and expenses discussed above, the
operating loss for the Company increased 172% to $1,885,663 for 1998 from
$693,823 for 1997. The Company had a net loss (including interest expense,
non-recurring gains and discontinued operations discussed below) of $2,375,781
for 1998 compared to $798,458 for 1997.

Interest expense decreased by $242,184 or 48% to $265,563 for 1998 from
$507,747 in 1997, reflecting the decreased amortization of debt costs for
borrowings incurred during 1996 and repaid in 1997.

Interest income decreased to $15,536 for 1998 from $32,450 for 1997. This
decrease is due primarily to interest earned on temporary investments of money
from financings in 1997 prior to advances made to AIRO at the end of 1997.

In December 1997, the Company sold 5% of the stock of AIRO to LSG for
certain LSG commitments and $600,000 in cash. A gain of $569,926 was
recognized on this sale.

In August 1998, the Company discontinued the operations of BWAF. The
unamortized goodwill of $176,766 resulting from the acquisition of the
remaining 50% interest in BWAF was written off in 1998 and included in the loss
on disposal of discontinued operations.

The Company's consolidated financial statements included elsewhere herein
present the Company's share of the joint operations other than Air Baltic and
BIA using the equity method of accounting in accordance with generally
accepted accounting principles. The Company's interests in Air Baltic and BIA
are accounted for using the cost method. The following table presents a pro
forma condensed combined statement of operations of the Company assuming its
proportionate share of the joint operations accounted for using the equity
method is combined with the Company. Management believes this presentation is
informative of the Company's results of operations given that a significant
portion of the Company's business is conducted through the joint operations.

<TABLE>
<CAPTION>
Pro forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1998

Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
<S> <C> <C> <C> <C>
Operating revenues $ 658,535 $2,362,064 $ (85,579) $ 2,935,020
Operating expenses 2,544,198 1,946,761 - 4,490,959
---------- ---------- --------- ----------
Income (loss) from operations (1,885,663) 415,303 (85,579) (1,555,939)
Other income (expense) (251,962) (34,666) - (286,628)
---------- ---------- --------- ----------
Income (loss) before minority
interest, income taxes and
discontinued operations (2,137,625) 380,637 (85,579) (1,842,567)
Minority interest - (255,421) - (255,421)
Provision for income taxes - (39,637) - (39,637)
---------- ---------- --------- ----------
Income (loss) from continuing
operations (2,137,625) 85,579 (85,579) (2,137,625)
Discontinued operations (238,156) - - (238,156)
---------- ---------- --------- ----------
Net income (loss) $(2,375,781) $ 85,579 $ (85,579) $(2,375,781)
========== ========== ========= ==========
</TABLE>

Liquidity and Capital Resources

At December 31, 1998 the Company had a working capital deficit of
$2,635,670 compared to working capital of $693,699 at December 31, 1997. The
decrease in working capital is due primarily to the reclassification of
$2,000,000 of debt to current liabilities, which was repaid in January 1999.
The Company had stockholders' equity of $709,534 at December 31, 1998.

Net cash used by operating activities was $605,192 for 1998, compared to
$1,136,596 for 1997. The decrease in cash used by operating activities in 1998
was primarily due to the Company's continued efforts to reduce its overhead
expenses. Net cash used by investing activities was $54,459 for 1998, compared
to $93,014 for 1997. The decrease in cash used by investing activities was
attributable to the decrease in advances made to BIA partially offset by the
decrease in the proceeds from the sale of assets. Net cash used by financing
activities was $195,961 for the 1998, compared to cash provided of $1,811,357
for 1997 due to a decrease in financing requirements.

The Company's consolidated balance sheet included elsewhere herein
presents the Company's share of the joint operations using the equity method
of accounting in accordance with generally accepted accounting principles.
The Company's interests in Air Baltic and BIA are accounted for using the cost
method. The following table presents a pro forma condensed combined balance
sheet of the Company assuming its proportionate share of the joint operations
accounted for using the equity method is combined with the Company.
Management believes this presentation is informative of the Company's
financial condition since the majority of the Company's underlying investment
in its joint operations consists of net current assets.

Pro forma Condensed Combined Balance Sheet
As of December 31, 1998

Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company

Current assets $ 348,993 $ 499,608 $ (61,083) $ 787,518
Investments in and
advances to joint
operations 3,276,094 - (1,131,882) 2,144,212
Property and other
assets, net 69,110 2,967,172 (1,618,442) 1,417,840
---------- ---------- ---------- ----------
Total assets $3,694,197 $3,466,780 $(2,811,407) $4,349,570
========== ========== ========== ==========

Current liabilities $2,984,663 $ 989,680 $ (610,965) $3,363,378
Minority interest - 276,658 - 276,658
Shareholders' and
partners' equity 709,534 2,200,442 (2,200,442) 709,534
---------- ---------- ---------- ----------
Total liabilities and
equity $3,694,197 $3,466,780 $(2,811,407) $4,349,570
========== ========== ========== ==========

During 1997, the Company borrowed an aggregate principal amount of
$2,540,000, including bridge financing and bank debt. The majority of the
borrowings for 1997 consisted of a loan from a shareholder in the amount of
$2,000,000 that the Company entered into in October 1997. This loan was repaid
in January 1999 after the Company exercised its right to put the shares that it
owned of Air Baltic to SAS for $2,144,333. During 1997, the Company issued
7,000,000 shares of Common Stock for net proceeds of an aggregate of $2,510,501
pursuant to private sales and the exercise of stock options. Additionally in
1998 and 1997, the Company issued 126,437 and 623,128 shares of Common Stock,
respectively, for payment of accounts payable and services rendered of $40,992
and $317,763 respectively.

In connection with the private placements in 1997, the Company issued
warrants to purchase 6,800,000 shares at an exercise price of $0.65 per share
of Common Stock, which warrants were immediately exercisable and expire in
August 2002. The Company reacquired an aggregate of 6,250,000 shares of the
Company's common stock and 6,250,000 of these warrants in July 1999 as part of
the consideration received from the sale of a 23% interest in AIRO.

The Company has incurred losses since inception through December 31, 1998
and thereafter. The Company incurred losses of $2,375,781 in 1998 and $798,458
in 1997. At December 31, 1998, the Company had an accumulated deficit of
$14,030,604 and current assets and current liabilities of $348,993 and
$2,984,663, respectively, resulting in a working capital deficit of $2,635,670.
(The current liabilities were reduced in January 1999 as the result of the
repayment by the Company of a $2,000,000 shareholder loan using the proceeds
from the sale of the interest in Air Baltic.) Net cash used in operating
activities was $605,192 in 1998 and $1,136,596 in 1997. The Company currently
has limited cash resources available and has loans due or becoming due in the
near future including two notes payable of $25,000 each which matured prior to
December 31, 1998 and have not yet been paid.

Management believes that the Company will be able to achieve a
satisfactory level of liquidity to meets its business plan and capital needs
through December 31, 1999. During March 1999 through July 1999, the Company
borrowed an aggregate principal amount of $108,000 as bridge financing from
officers and directors of the Company. In connection with these borrowings,
the Company issued warrants to purchase 10,800 shares of common stock at an
exercise price of $0.15 per share. In July 1999, the Company sold a 23%
interest in AIRO to ORESA Ventures N.V. and Celox S.A. in exchange for an
aggregate of 6,250,000 shares of the Company's common stock, warrants to
purchase 6,250,000 shares of the Company's common stock and $250,000 in cash.
As part of this transaction, the Company also entered into an option agreement
giving ORESA Ventures N.V. and Celox S.A. the right to purchase the remaining
23% of AIRO held by the Company for $1,145,000 in cash and forgiveness of
approximately $190,000 in debt. The option agreement expires on September 30,
1999. If this option is not exercised by the other parties, management
believes that the Company has the ability to sell the remaining interest in
AIRO to another third party or use the shares as collateral for a debt
financing. The Company also has loans receivable from AIRO of $577,000 that
management believes could be sold to a third party at a discount or used as
collateral for a loan. Additionally, management believes the Company has
the ability to obtain additional financing from key officers, directors
and certain investors. However, there can be no assurance that the Company
will be able to generate sufficient liquidity to maintain its operations.

The above factors raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments related to the recoverability and
classification of recorded assets or other adjustments should the Company be
unable to continue as a going concern.

Inflation

Inflation has not had a significant impact on the Company during the last
two years. However, an extended period of inflation could be expected to have
an impact on the Company's earnings by causing operating expenses to increase.
It is likely that the Company's subsidiaries and joint operations would attempt
to pass increased expenses to customers. If the Company's subsidiaries and
joint operations are unable to pass through increased costs, their operating
results could be adversely affected which would adversely affect the Company's
operating results.

Year 2000 System Requirements

Company's State of Readiness. The Company is performing an analysis of
its systems in order to determine the impact of Year 2000 issues. Management
is unable to predict at this time the full impact that Year 2000 issues will
have on the Company's operations or future financial condition. The Company
does not currently have information concerning the Year 2000 compliance of all
of its suppliers and customers.

Costs to Address the Company's Year 2000 Issues. The Company expects that
such costs to modify its programs and systems will be less than $10,000.

Risks of the Company's Year 2000 Issues. Although the Company believes it
is unlikely, it is possible the Company could experience an adverse impact that
could be material to the results of operations or the financial position of the
Company as a result of potential failure by major customers or suppliers, or a
delay or oversight in the Company's effort, to address Year 2000 issues. In
addition, if the suppliers fail to provide their services, such failure could
also have an adverse impact on the results of operations or financial position
of the Company. However, management believes that if the Company's current
suppliers fail to provide their services, the Company will be able to find
replacement suppliers to meet its needs.

Company's Contingency Plans. The Company expects to establish contingency
plans, in the event all systems and critical suppliers have not been made Year
2000 compliant, during 1999. If the computer systems fail, management believes
that the Company can maintain its systems using manual methods until the proper
systems are in place.

Item 7. FINANCIAL STATEMENTS

The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.

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

There have been no changes in accountants during the Registrant's two most
recent fiscal years, nor have there been any disagreements with accountants on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.

PART III

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

Executive Officers and Directors

The following table gives certain information with respect to the
executive officers and directors of the Company:

Name Age Position

Robert L. Knauss (3) 68 Chairman of the Board and Chief Executive
Officer, Director - Class III
David A. Grossman 36 President, Chief Financial Officer,
Corporate Secretary and Director - Class I
Homi M. Davier (1) 51 Director - Class I
James W. Goodchild (4) 44 Director - Class II
Paul R. Gregory (2) 58 Director - Class I
Juris Padegs (1)(2)(3) 67 Director - Class III
Ted Reynolds (1)(2) 68 Director - Class II
___________________________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
(4) Mr. Goodchild resigned as President and Chief Operating Officer in
March 1998. He remains as a director of the Company.

Mr. Knauss has served as chief executive officer since January 1994. Mr.
Knauss served as Dean of the University of Houston Law Center from 1981
through December 1993. Mr. Knauss was involved in establishing the
relationship between the University of Houston Law Foundation and the former
Soviet Union in 1991 whereby the University of Houston Law Foundation assisted
the former Soviet Union in creating the Petroleum Legislation Project, and was
involved with the government of Russia in the development of privatization
legislation. Mr. Knauss has served as a director of Equus Investments, Inc.
since 1984 and as one of the two United States directors for the Mexico Fund
since 1985. He was elected as a director of Philip Services Corp. in 1997
following the merger of Allwaste, Inc. and Philip Services Corp. and was
elected chairman of the board of Philip Services Corp. in May 1998.
Securities of the Mexico Fund, Philip Services Corp. and Equus Investments,
Inc. are registered under the Securities Exchange Act of 1934 (the "Exchange
Act"). Mr. Knauss is a graduate of Harvard University and the University of
Michigan Law School. Mr. Knauss has traveled extensively to the former Soviet
Union. Mr. Knauss has served as chairman of the board of the Company since
its inception in March 1991.

Mr. Grossman has served as president since November 1998, chief financial
officer since September 1997 and as corporate secretary since December 1996.
He served as comptroller from November 1995 until September 1997. Prior to
joining the Company, he was an audit senior manager for Deloitte & Touche LLP.
Mr. Grossman is a certified public accountant and graduated from Indiana
University in 1985 with a BS degree in accounting.

Mr. Davier served as president of the Company from March 1991 until
August 1995. Mr. Davier has served as a director and as the Company's
managing director to BIA from June 1991 to August 1995. He served as senior
traffic assistant of Air India from 1971 to 1975, and assisted in the start-up
of Gulf Air in Oman from 1975 to 1978 and in the start-up of the Middle
Eastern operations of Air Bangladesh and Sabena Belgian Airlines from 1978 to
1980. Mr. Davier has served as chairman of the board and president of
Capricorn Travel and Tours, Inc. since April 1983. He is the founder and
president of Capricorn Computers, established in 1985, which developed and
markets the Capri 2020, a revenue accounting and management report system for
travel agencies. He has been chief executive officer of Travel Stop, a
Houston-based retail travel outlet, since 1990. Mr. Davier graduated from
Hislop College in Nagpur, India.

Mr. Goodchild has been senior credit officer of AMRESCO Builders Group,
Inc. since March 1998. He served as president of the Company from September
1997 and as chief operating officer of the Company from October 1994 until
March 1998. He served as chief financial officer of the Company from
September 1993 until September 1997. Mr. Goodchild served as the Company's
vice president of finance and development from July 1992 to August 1993. From
August 1989 through June 1992, Mr. Goodchild attended the University of
Houston where he acquired a BA degree in Russian and Soviet Studies, and a BA
degree in International Relations. Mr. Goodchild was project administrator of
the Russian Petroleum Legislation Project from July 1992 to December 1992.
From 1984 to March 1989, he was employed with MCorp, formerly a Dallas-based
bank holding company, where he served as senior vice president and manager of
credit administration of MCorp's Collection Bank. Additionally, Mr. Goodchild
acquired a BS degree in finance from the University of Houston in 1978.

Dr. Gregory served as treasurer, on a part-time basis, of the Company
since its inception in March 1991 until August 1995. Dr. Gregory is the
Cullen Professor of Economics and Finance at the University of Houston where
he has been a faculty member since 1972. He was involved in creating the
Petroleum Legislation Project with Russia and he served as project coordinator
of the Russian Securities Project in conjunction with the Russian State
Committee for Property Management and the various Russian stock exchanges. He
serves as advisor to a number of major United States corporations on their
Russian business activities, and has been active in the former Soviet Union
for 25 years. He has served as chairman of the board of Amsovco International
Consultants, Inc. since 1988. He has also served as a consultant to the World
Bank. Dr. Gregory graduated from Harvard University with a Ph.D. in economics
and is fluent in Russian and German. Dr. Gregory is the author of a text on
the Soviet and Russian economies.

Mr. Padegs served as a managing director of Scudder, Stevens & Clark, an
international investment and management firm from 1985 to 1996, has been
employed with Scudder, Stevens & Clark since 1964 and is now Advisory Managing
Director at that firm. Mr. Padegs is the chairman and director of the Korea
Fund and the Brazil Fund. Mr. Padegs is the director of several other
international companies. Mr. Padegs was born in Latvia and holds a Bachelor
of Arts and a law degree from Yale University. Mr. Padegs is fluent in
Latvian and German. In July 1994, he was appointed by President Clinton to
the board of the Baltic American Enterprise Fund, a $50 million fund to
promote private enterprise in the Baltic States. Mr. Padegs is a graduate of
Yale University and Yale Law School.

Mr. Reynolds has been president of Houston Grain Company since 1983 and
vice president of Mid-America Grain Commodities since 1976. He also formed
and is owner of Red River Grain Company. He is actively involved in various
international business transactions. Mr. Reynolds is a graduate of Texas
Christian University.

Directors are divided into three classes with three directors in each
class. The Class I directors hold office until the 2001 Annual Meeting of
Shareholders, the Class II directors hold office until the 1999 Annual Meeting
of Shareholders, and the Class III directors hold office until the 2000 Annual
Meeting of Shareholders and until their successors are elected and qualified.
The Audit Committee reviews and reports to the Board on the financial results
of the Company's operations and the results of the audit services provided by
the Company's independent accountants, including the fees and costs for such
services. The Compensation Committee reviews compensation paid to management
and recommends to the Board of Directors appropriate executive compensation.
The Nominating Committee selects director nominees for election to the Board
of Directors. Officers are elected annually and serve at the discretion of
the Board of Directors. There is no family relationship between or among any
of the directors and executive officers of the Company.

Director Compensation

Outside directors are entitled to receive options to purchase 10,000
shares of Common Stock in their first year of service and options to purchase
5,000 shares of Common Stock per year thereafter as compensation in addition to
reimbursement of out-of-pocket expenses to attend board meetings. In December
1997, Messrs. Davier, Gregory, Padegs and Reynolds each received options to
purchase 5,000 shares of common stock at a price of $0.40625 per share. Such
options expire in December 2002. In December 1998, Messrs. Davier, Gregory,
Padegs and Reynolds each received options to purchase 5,000 shares of common
stock at a price of $0.125 per share. Such options expire in December 2003.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file
reports with the Securities and Exchange Commission relating to transactions
and holdings in the Company's common stock. The Company believes that during
the fiscal year ended December 31, 1998 all such filing requirements were
satisfied.

Item 10. EXECUTIVE COMPENSATION

The following table sets forth information with respect to the chief
executive officer and the only other executive officer of the Company who
received total annual salary and bonus for the fiscal year ended December 31,
1998 in excess of $100,000:

<TABLE>
<CAPTION>
Summary Compensation Table

Long-Term Compensation

Annual Compensation (1) Securities
Underlying
Name and Principal Fiscal All Other Restricted Options
Position Year Salary Bonus Compensation Stock Awards and Warrants
<S> <C> <C> <C> <C> <C> <C>
Robert Knauss, 1998 $100,000 $ 0 $0 $ 0 0
Chief Executive 1997 120,000 0 0 51,616 (2) 244,700 (2)
Officer 1996 120,000 0 0 0 0

David Grossman, 1998 $ 82,500 $25,000 (3) $ 0 $ 0 0
President and Chief 1997 70,000 0 0 18,562 (2) 88,000 (2)
Financial Officer 1996 70,000 0 0 10,052 (4) 0
</TABLE>

(1) None of the named executive officers received perquisites or other
benefits valued in excess of 10% of the total of reported annual salary
and bonus.
(2) In August 1997, the Company granted 122,350 and 44,000 shares of the
Company's common stock and 244,700 and 88,000 options to Messrs. Knauss
and Grossman, respectively, for services to be rendered. Half of the
shares and options were vested in February 1998 and the remaining half
vests in August 1999.
(3) The Company expects to pay the 1998 bonus to Mr. Grossman in 1999.
(4) The other compensation paid to Mr. Grossman in 1996 consists of 16,667
shares of the Company's common stock for services rendered.

Stock Options

In September 1992, the Company adopted its 1992 Equity Incentive Plan
("Plan"), which was amended effective March 1995, December 1995 and September
1997. The Plan provides for the issuance of incentive stock options and non-
qualified options. An aggregate of 1,500,000 shares of the Company's Common
Stock may be issued pursuant to options granted under the Plan to employees,
non-employee directors and consultants, subject to evergreen provisions
included in the Plan. The compensation committee of the Company's Board of
Directors administers the Plan. The compensation committee has the authority to
determine, among other things, the size, exercise price and other terms and
conditions of awards made under the Plan. Subject to certain restrictions, the
exercise price of incentive stock options may be no less than 100% of fair
market value of a share of Common Stock on the date of grant. As of July 30,
1999, options to purchase an aggregate of 1,498,366 shares were outstanding
under the Plan.

The following table shows, as to the named executive officers, information
concerning individual grants of stock options and warrants during 1998.

<TABLE>
<CAPTION>
Option/Warrant Grants in Last Fiscal Year

Number of Percentage of Total
Securities Options/Warrants
Underlying Granted to
Options/Warrants Employees in Exercise Price Expiration
Name Granted 1996 Per Share Date
<S> <C> <C> <C> <C>
Robert L. Knauss 0 0.00% $ - -
David A. Grossman 0 0.00% $ - -
</TABLE>

The following table shows, as to the named executive officers,
information concerning aggregate stock option and warrant exercises during
1998 and the stock option and warrant values as of December 31, 1998.

<TABLE>
<CAPTION>
Aggregated Option and Warrant Exercises in Last Fiscal Year
and Year End Option and Warrant Values

Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/Warrants at Options/Warrants at
Shares December 31, 1998 December 31, 1998
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert L. Knauss 0 $0 287,850/122,350 $0/$0
David A. Grossman 0 0 69,000/44,000 $0/$0
</TABLE>

The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit or actuarial plans.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of August 25, 1999, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known to the Company who beneficially owns more than 5% of the
Company's outstanding Common Stock; (ii) each director; (iii) each named
executive officer; and (iv) all directors and officers as a group:

Shares Beneficially Owned
Name of Beneficial Owner (1) Number Percent

Robert L. Knauss 1,333,174 (2) 13.26%
Citibank (Switzerland) 1,000,000 10.58%
Paul R. Gregory 894,152 (3) 9.09%
James W. Goodchild 590,976 (4) 6.03%
Homi M. Davier 403,027 (5) 4.18%
Juris Padegs 338,129 (6) 3.52%
David A. Grossman 246,567 (7) 2.56%
Ted Reynolds 119,000 (8) 1.25%
All directors and executive officers
as a group (7 persons) 3,925,025 (9) 34.76%

(1) The business address of each individual is the same as the address of
the Company's principal executive offices except for Citibank
(Switzerland) whose business address is P. O. Box 244, Zurich,
Switzerland CH-8021; Mr. Goodchild whose business address is 11011
Richmond Avenue, Houston, Texas 77042; Mr. Padegs whose business address
is 345 Park Avenue, New York, New York 10154; and Mr. Reynolds whose
business address is 1300 Post Oak Boulevard, Suite 770, Houston, Texas
77056.
(2) Includes an aggregate of 594,970 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable. Excludes an
aggregate of 130,500 shares subject to options which are not currently
exercisable.
(3) Includes an aggregate of 378,783 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable.
(4) Includes an aggregate of 345,348 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable.
(5) Includes an aggregate of 179,598 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable.
(6) Includes 140,688 shares subject to options, warrants and Series A
Preferred Stock which are currently exercisable.
(7) Includes 161,900 shares subject to options which are currently
exercisable. Excludes an aggregate of 130,500 shares subject to options
which are not currently exercisable.
(8) Includes 36,000 shares subject to options and warrants which are
currently exercisable.
(9) Includes an aggregate of 1,837,287 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable. Excludes
an aggregate of 261,000 shares subject to options which are not currently
exercisable.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In July 1997, ORESA Ventures N.V., an affiliate of Jonas af Jochnick
(a former director), advanced $500,000 to the Company, bearing interest at a
rate of 13% per annum. This loan was repaid in September 1997.

In August and September 1997, Celox S.A., an affiliate of Jonas af
Jochnick, purchased an aggregate of 2,500,000 shares of Common Stock for
$1,000,000. In connection with this private placement, the Company issued
warrants to purchase 2,500,000 shares of Common Stock at an exercise price of
$0.65 per share, which warrants are currently exercisable and expire in August
2002. Additionally in August and September 1997, ORESA Ventures N.V.
purchased an aggregate of 3,750,000 shares of Common Stock for $1,500,000. In
connection with this private placement, the Company issued warrants to
purchase 3,750,000 shares of Common Stock at an exercise price of $0.65 per
share, which warrants will be currently exercisable and expire in August 2002.

In October 1997, ORESA Ventures N.V. advanced $2,000,000 to the Company,
bearing interest at a rate of 13% per annum. This loan was repaid in January
1999.

Management believes that all prior related party transactions are on
terms no less favorable to the Company as could be obtained from unaffiliated
third parties. All ongoing and future transactions with such persons,
including any loans to such persons, will be approved by a majority of
disinterested, independent outside members of the Company's Board of
Directors.

Item 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission, are incorporated herein by reference as exhibits
hereto.

Exhibit No. Identification of Exhibit

2.1 Plan and Agreement of Recapitalization (Exhibit 2.1 to
Form SB-2, No. 33-74654-D)

3.1(a) Restated Articles of Incorporation (Exhibit 3.1(a) to
Form SB-2, No. 33-74654-D)

3.1(b) Amended Articles of Incorporation (Exhibit 3.1(b) to
Form SB-2, No. 33-74654-D)

3.1(c) Articles of Correction (Exhibit 3.1(c) to Form SB-2,
No. 33-74654-D)

3.2 Bylaws (Exhibit 3.2 to Form SB-2, No. 33-74654-D)

3.3 Statement of Resolution Establishing and Designating a
Series of Shares of the Company, Series A Cumulative
Preferred Stock, $10.00 par value (Exhibit 3.3 to Form
SB-2, No. 33-74654-D)

3.4 Certificate of Elimination of Shares Designated as Series
A Cumulative Preferred Stock (Exhibit 3.4 to Form 10-QSB
for the quarter ended June 30, 1995, File No. 0-26588)

3.5 Certificate of the Designation, Preference, Rights and
Limitations of Convertible Redeemable Series A Preferred
Stock (Exhibit 3.5 to Form 10-QSB for the quarter ended
June 30, 1995, File No. 0-26588)

4.1 Common Stock Specimen (Exhibit 4.1 to Form SB-2,
No. 33-74654-D)

10.1 1992 Equity Incentive Plan, as amended (Exhibit 10.3 to
Form S-8, No. 33-90030)

10.2 Employment Agreement between the Company and Robert L.
Knauss (Exhibit 10.4 to Form SB-2, No. 33-74654-D)

10.3 Baltic International Airlines Joint Venture Limited
Liability Company Agreement between the Latvian Civil
Aviation Board and the Company (Exhibit 10.7 to
Form SB-2, No. 33-74654-D)

10.4 Settlement Agreement between the Company and Latvian
Airlines and Ministry of Transportation of the Republic of
Latvia (Exhibit 10.12 to Form SB-2, No. 33-74654-D)

10.5 Air Baltic Joint Venture Agreement (Exhibit 10.36 to
Form 8-K dated August 29, 1995, File No. 0-26588)

10.6 Amendment to Air Baltic Joint Venture Agreement (Exhibit
10.40 to Form SB-2, File No. 333-860)

10.7 Share Purchase Agreement with SAS (Exhibit 10.41 to Form
8-K dated January 10, 1996, File No. 0-26588)

10.8 AIRO Catering Services Joint Venture Agreement (Exhibit
10.42 to Form 10-KSB for the year ended December 31, 1997,
File No. 0-26588)

Exhibit No. Identification of Exhibit

10.9 Riga Catering Services Shareholders' Agreement (Exhibit
10.43 to Form 10-KSB for the year ended December 31, 1995,
File No. 0-26588)

10.10 Statement of the Designation, Preferences, Rights and
Limitations of Series B Convertible Redeemable Preferred
Stock, as amended (Exhibit 10.45 to Form SB-2, File No.
333-860)

10.11 Compensatory Plan for Robert Knauss, James Goodchild and
David Grossman (Exhibit 10.46 to Form 10-QSB for the
quarter ended September 30, 1997, File No. 0-26588)

10.12 Promissory Note Agreement with ORESA Ventures N.V.
(Exhibit 10.47 to Form 10-QSB for the quarter ended
September 30, 1997, File No. 0-26588)

10.13 Share Purchase Agreement with SAS (Exhibit 10.48 to Form
8-K dated January 4, 1999, File No. 0-26588)

10.14 Share Purchase Agreement with ORESA Ventures and Celox
(Exhibit 10.1 to Form 8-K dated July 12, 1999, File No. 0-
26588)

23.1 Consent of Arthur Andersen LLP

27 Financial Data Schedule

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter of 1998.

BALTIC INTERNATIONAL USA, INC.

INDEX TO FINANCIAL STATEMENTS
Page

Report of independent public accountants F-2

Consolidated balance sheets at December 31, 1998 and 1997 F-3

Consolidated statements of operations for the years ended
December 31, 1998 and 1997 F-4

Consolidated statements of shareholders' equity for the years
ended December 31, 1998 and 1997 F-5

Consolidated statements of cash flows for the years ended
December 31, 1998 and 1997 F-7

Notes to consolidated financial statements F-8

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Baltic International USA, Inc.

We have audited the accompanying consolidated balance sheets of Baltic
International USA, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Baltic
International USA, Inc. as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

As discussed in Note 1 to the accompanying consolidated financial statements,
the Company has incurred significant losses through December 31, 1998 and
thereafter. At December 31, 1998 the Company had an accumulated deficit of
$14,030,604, a working capital deficit, the Company has limited cash resources
available and has obligations due or becoming due in the near future. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

ARTHUR ANDERSEN LLP

Houston, Texas
August 26, 1999

BALTIC INTERNATIONAL USA, INC.
Consolidated Balance Sheets

December 31, December 31,
1998 1997
ASSETS

CURRENT ASSETS
Cash and cash equivalents $ 110,380 $ 965,992
Accounts receivable:
Trade 89,247 135,109
Affiliates 74,633 138,125
Inventory 66,589 195,971
Prepaids and deposits 8,144 11,446
---------- ----------
Total current assets 348,993 1,446,643
PROPERTY AND EQUIPMENT, net 35,211 12,836
INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 3,276,094 4,316,168
OTHER ASSETS 33,899 31,649
GOODWILL, net - 208,848
---------- ----------
Total assets $ 3,694,197 $ 6,016,144
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 934,663 $ 669,233
Short-term debt, net 50,000 83,711
Short-term debt to a shareholder 2,000,000 -
---------- ----------
Total current liabilities 2,984,663 752,944
LONG-TERM DEBT TO A SHAREHOLDER - 2,000,000
---------- ----------
Total liabilities 2,984,663 2,752,944
---------- ----------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Warrants 1,306,610 1,306,610
Preferred stock:
Series A, convertible, $10 par value,
499,930 shares authorized,
123,000 shares issued and outstanding 1,230,000 1,230,000
Series B, convertible, $10 par value,
$25,000 stated value, 70 shares authorized,
14 and 16 shares issued and outstanding 350,000 400,000
Common stock, $.01 par value, 40,000,000
shares authorized, 15,629,229 and 15,502,792
shares issued and 15,586,785 and 15,460,348
shares outstanding 156,292 155,028
Additional paid-in capital 11,717,776 11,687,809
Accumulated deficit (14,030,604) (11,495,707)
Treasury stock, at cost (20,540) (20,540)
---------- ----------
Total shareholders' equity 709,534 3,263,200
---------- ----------
Total liabilities and shareholders'
equity $ 3,694,197 $ 6,016,144
========== ==========

See accompanying notes to consolidated financial statements.

BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Operations

Year Ended December 31,

1998 1997
REVENUES:
Food distribution $ 494,956 $ 470,874
General sales agency revenue 78,000 78,000
Net equity in earnings of joint operations 85,579 361,688
---------- ----------
Total operating revenues 658,535 910,562
---------- ----------

OPERATING EXPENSES:
Cost of revenue-food distribution 490,126 452,379
Personnel and consulting 478,621 671,515
Legal and professional 129,191 109,729
Other general and administrative 303,145 370,792
Reserve of investment in BIA 1,143,115 -
---------- ----------
Total operating expenses 2,544,198 1,604,385
---------- ----------

LOSS FROM OPERATIONS (1,885,663) (693,823)
---------- ----------

OTHER INCOME (EXPENSE):
Interest expense (265,563) (507,747)
Interest income 15,536 32,450
Gain on sale of assets - 569,926
Other income (expense) (1,935) (112,465)
---------- ----------
Total other income (expense) (251,962) (17,836)
---------- ----------

LOSS BEFORE INCOME TAXES AND DISCONTINUED
OPERATIONS (2,137,625) (711,659)

INCOME TAX EXPENSE - -
---------- ----------
LOSS FROM CONTINUING OPERATIONS (2,137,625) (711,659)

DISCONTINUED OPERATIONS:
Loss from operations of freight operations (47,675) (86,799)
Loss on disposal of freight operations (190,481) -
---------- ----------
NET LOSS $(2,375,781) $ (798,458)
---------- ----------

LESS PREFERRED DIVIDENDS (159,116) (275,724)
---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(2,534,897) $(1,074,182)
========== ==========

LOSS PER SHARE AMOUNTS (BASIC AND DILUTED):
Continuing operations $ (0.15) $ (0.10)
Discontinued operations $ (0.01) $ (0.01)
Total $ (0.16) $ (0.11)

See accompanying notes to consolidated financial statements.

<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Shareholders' Equity

Preferred Stock
Series A Series B
Warrants Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ - 123,000 $1,230,000 34 $ 850,000
Common shares and warrants
issued 1,306,610
Preferred stock and accrued
dividends converted to
common stock (18) (450,000)
Purchase of treasury shares
Reissuance of treasury shares
Net loss
Dividends on preferred stock:
Series A, $1.00 per share
Series B, $6221 per share
---------- -------- ---------- --- ----------
Balance, December 31, 1997 $1,306,610 123,000 $1,230,000 16 $ 400,000
Common shares issued
Purchase of preferred stock (2) (50,000)
Net loss
Dividends on preferred stock:
Series A, $1.00 per share
Series B, $2500 per share
---------- -------- ---------- --- ----------
Balance, December 31, 1998 $1,306,610 123,000 $1,230,000 14 $ 350,000
========== ======== ========== === ==========
</TABLE>

See accompanying notes to consolidated financial statements.

<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Shareholders' Equity
(Continued)

Additional
Common stock paid-in Accumulated Treasury
Shares Amount capital deficit stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 7,302,108 $ 73,021 $ 9,905,403 $(10,421,525) $ - $ 1,636,899
Common shares and
warrants issued 7,052,913 70,529 1,256,514 2,633,653
Preferred stock and
accrued dividends
converted to common stock 1,147,771 11,478 497,597 59,075
Purchase of treasury shares (292,300) (292,300)
Reissuance of treasury shares 28,295 271,760 300,055
Net loss (798,458) (798,458)
Dividends on preferred stock:
Series A, $1.00 per share (123,000) (123,000)
Series B, $6221 per share (152,724) (152,724)
---------- -------- ----------- ------------ --------- -----------
Balance, December 31, 1997 15,502,792 $155,028 $11,687,809 $(11,495,707) $ (20,540) $ 3,263,200
Common shares issued 126,437 1,264 39,728 40,992
Purchase of preferred stock (9,761) (59,761)
Net loss (2,375,781) (2,375,781)
Dividends on preferred stock:
Series A, $1.00 per share (123,000) (123,000)
Series B, $2500 per share (36,116) (36,116)
---------- -------- ----------- ------------ --------- -----------
Balance, December 31, 1998 15,629,229 $156,292 $11,717,776 $(14,030,604) $ (20,540) $ 709,534
========== ======== =========== ============ ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Cash Flows

Year Ended December 31,

1998 1997
Cash flows from operating activities:
Net loss $(2,375,781) $ (798,458)
Noncash adjustments:
Net equity in earnings of joint operations (85,579) (361,688)
Reserve of investment in BIA 1,143,115 -
Loss on disposal of discontinued operations 190,481 -
Depreciation and amortization 35,720 37,018
Amortization of debt costs and discount - 188,174
Gain on sale of assets - (569,926)
Increase/decrease in current assets and
current liabilities:
Accounts receivable 89,011 (124,522)
Prepaid and other 32,379 333,553
Inventory 129,382 (148,230)
Accounts payable and accrued liabilities 236,080 382,483
Commitments for guarantees - (75,000)
----------- -------------
Net cash used by operating activities (605,192) (1,136,596)
----------- -------------

Cash flows from investing activities:
Investment in and advances to joint operations (37,119) (814,078)
Distributions and repayments from joint
operations 8,673 123,276
Proceeds from sale of assets - 600,000
Acquisition of property and equipment (26,013) (2,212)
----------- -------------
Net cash used by investing activities (54,459) (93,014)
----------- -------------

Cash flows from financing activities:
Borrowings of debt - 2,540,000
Repayment of debt and long-term obligations (33,711) (2,930,060)
Issuance of stock, net of related costs - 2,524,467
Purchase of preferred stock (59,761) -
Purchase of treasury stock - (292,300)
Preferred dividends paid (102,489) (30,750)
----------- -------------
Net cash provided (used) by financing
activities (195,961) 1,811,357
----------- -------------

Net increase (decrease) in cash and cash
equivalents (855,612) 581,747
Cash and cash equivalents, beginning of period 965,992 384,245
----------- -------------
Cash and cash equivalents, end of period $ 110,380 $ 965,992
=========== =============

See accompanying notes to consolidated financial statements.

BALTIC INTERNATIONAL USA, INC.
Notes to Consolidated Financial Statements

NOTE 1 - BUSINESS OPERATIONS AND FINANCIAL CONDITION

Business operations

Baltic International USA, Inc. (the "Company" or "BIUSA"), a Texas corporation,
was organized on March 1, 1991 to identify, form and participate in aviation-
related and other business ventures in the former Soviet Union.

The Company initially pursued its plans to participate in airline service in
Latvia through a 49% interest in a newly formed start-up airline - Baltic
International Airlines ("BIA"), a limited liability company registered in the
Republic of Latvia. The Company made significant investments in and advances
to BIA which has incurred losses since inception. On October 1, 1995, the
routes and passenger service operations of BIA were transferred as part of its
capital contribution to a new Latvian carrier, Air Baltic Corporation SIA ("Air
Baltic"). The Company owned a 8.02% interest in Air Baltic. As discussed in
Note 4, the Company sold its interest in Air Baltic in January 1999. BIA has
no current operations and has not conducted any substantive business operations
since October 1995.

The Company is also engaged in providing aviation catering services to Air
Baltic and other airlines through its interest in AIRO Catering Services
("AIRO"). As discussed in Note 4, the Company sold a 23% interest in AIRO to
ORESA Ventures N.V. and Celox S.A. in July 1999. As part of this transaction,
the Company also entered into an option agreement giving ORESA Ventures N.V.
and Celox S.A. the right to purchase the remaining 23% of AIRO held by the
Company for $1,145,000 in cash and forgiveness of approximately $190,000 in
debt. The option agreement expires on September 30, 1999. American
Distributing Company ("ADC"), a wholly owned subsidiary, began operations on
December 1, 1995 as a food and beverage distribution company. In August 1998,
the Company ceased operations as a cargo marketer to Air Baltic and other
airlines through its wholly owned subsidiary, Baltic World Air Freight ("BWAF").

Financial condition

The Company has incurred losses since inception through December 31, 1998 and
thereafter. The Company incurred losses of $2,375,781 in 1998 and $798,458 in
1997. At December 31, 1998, the Company had an accumulated deficit of
$14,030,604 and current assets and current liabilities of $348,993 and
$2,984,663, respectively, resulting in a working capital deficit of $2,635,670.
(The current liabilities were reduced in January 1999 as the result of the
repayment by the Company of a $2,000,000 shareholder loan using the proceeds
from the sale of the interest in Air Baltic.) Net cash used in operating
activities was $605,192 in 1998 and $1,136,596 in 1997. The Company currently
has limited cash resources available and has obligations due or becoming due in
the near future.

Management believes that the Company will be able to achieve a satisfactory
level of liquidity to meets its business plan and capital needs through
December 31, 1999. During March 1999 through July 1999, the Company borrowed
an aggregate principal amount of $108,000 as bridge financing from officers
and directors of the Company. In connection with these borrowings, the
Company issued warrants to purchase 10,800 shares of common stock at an
exercise price of $0.15 per share. In July 1999, the Company sold a 23%
interest in AIRO for consideration that included $250,000 cash and entered
into an option giving the buyers the right to purchase the remaining 23% of
AIRO held by the Company for $1,145,000 in cash and forgiveness of
approximately $190,000 in debt. If the option is not exercised by the buyers
to purchase the remaining interest in AIRO by September 30, 1999, management
believes that the Company has the ability to sell the remaining interest in
AIRO to another third party or use the shares as collateral for a debt
financing. The Company also has loans receivable from AIRO of $577,000 that
management believes could be sold to a third party at a discount or used as
collateral for a loan. Additionally, management believes the Company has the
ability to obtain additional financing from key officers, directors and certain
investors. Management also believes that the Company can continue to defer
certain notes and amounts payable by the Company which are either currently due
or due in the near future. However, there can be no assurance the Company will
generate sufficient liquidity to maintain its operations.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries (BWAF and ADC). All significant intercompany
accounts and transactions have been eliminated. The Company accounts for its
investment in the joint operations other than Air Baltic, BIA and Lithuanian
Aircraft Maintenance Corporation ("LAMCO") using the equity method. The
Company's interest in Air Baltic is accounted for using the cost method because
the Company owned only 8.02% of Air Baltic and had no control, voting or
otherwise, over Air Baltic. The Company's interest in BIA is accounted for
using the cost method because BIA has no current operations and the Company is
currently in the process of restructuring its investment in BIA. LAMCO was
accounted for using the cost method because the Company owned only 2.6% of
LAMCO and it had no operations since its inception.

Revenue recognition

Revenues are recognized when earned and expenses are recognized when the goods
and services are acquired or provided.

Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market (net
realizable value). Inventory consists of ADC's food and beverage products.

Property, equipment and depreciation

Property and equipment are recorded at cost. Depreciation is computed over the
estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations as incurred.

Debt issuance costs

Debt issuance costs are amortized using the interest method until the maturity
date of the related note payable.

Goodwill

Goodwill results from the acquisition of the remaining 50% interest in BWAF.
Goodwill is amortized over ten years. As a result of the discontinued
operations of BWAF, all unamortized goodwill was written off in 1998.

Long-lived assets

The Company periodically evaluates the carrying value of long-lived assets for
potential impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.

Income taxes

Deferred income taxes result from temporary differences between the financial
statements and tax basis of assets and liabilities (see Note 6).

Loss per common share

The Company adopted SFAS No. 128, "Earnings Per Share," as of December 31,
1997. SFAS No. 128 establishes the disclosure requirements of basic and
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings.
Stock warrants and options are considered to be dilutive for earnings per share
purposes if the average market price during the period ending on the balance
sheet date exceeds the exercise price and the Company had earnings for the
period.

Cash and cash equivalents

For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less
to be cash equivalents.

Use of estimates

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

Concentration of credit risk

Substantially all of the Company's assets and revenue sources are heavily
concentrated in Latvia and Lithuania. Failure of the Company's subsidiaries
and joint operations to perform up to the terms of its obligations due to
economic or political circumstances would result in a material credit risk to
the Company.

At December 31, 1998 and 1997, the Company's cash in financial institutions
exceeded the federally insured deposits limit by $0 and $786,367, respectively.
An investment of $870,000 in a reverse repurchase agreement is included in cash
and cash equivalents at December 31, 1997. The collateral for this investment
consisted of a collateralized mortgage obligation with a market value of
$870,000 at December 31, 1997.

Foreign currency translation

Portions of the Company's operations are conducted in convertible foreign
currencies and are translated into U.S. dollars at average current rates during
each period reported. Foreign currency transaction gains and losses are
included in net income. Net exchange gains or losses resulting from the
translation of assets and liabilities are accumulated as a separate component
of joint venture partners' equity. Any translation gains or losses are not
significant and therefore have not been recorded on the Company's consolidated
balance sheets as of December 31, 1998 and 1997.

New accounting pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting the components of comprehensive income. The Company adopted SFAS
No. 130 as of January 1, 1998. However, the Company has no items of other
comprehensive income in any period presented in the accompanying consolidated
financial statements. Therefore, a separate statement of comprehensive income
has not been presented.

The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" as of December 31, 1998. SFAS No. 131 requires that
segment reporting for public reporting purposes be conformed to the segment
reporting used by management for internal purposes. This standard also
requires disclosures about products and services, geographic areas and major
customers.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which requires at adoption the Company to write-off any unamortized
start-up costs as a cumulative change in accounting principle and, going
forward, expense all start-up activity costs as they are incurred. The Company
is required to and will adopt SOP 98-5 in the first quarter of 1999 and
believes that adoption will have a negative effect on its net equity in
earnings of joint operations of approximately $300,000 as a result of the
write-off of AIRO's unamortized start-up costs.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. Changes in
the derivative's fair value will be accounted for based upon their intended use
and designation. Since the Company's holdings in such instruments are minimal,
adoption of this standard is not expected to have a material effect on the
consolidated financial statements. The Company is required to adopt SFAS
No. 133 not later than the first quarter of fiscal 2001.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current
presentation.

NOTE 3 - CONSOLIDATED SUBSIDIARIES

American Distributing Company

ADC, a wholly owned subsidiary of BIUSA, distributes Miller, Topvar and
Kalnapilis beer products in the Baltic States. This business commenced in
December 1995, as a successor to the Company's distribution activities which
began in 1993. The Company has a distribution system and offices in Riga,
Latvia and Vilnius, Lithuania.

Baltic World Air Freight

The Company operated BWAF to serve as the cargo sales agent for Air Baltic and
other airlines in Riga, Latvia. In August 1998, the Company ceased the
operations of BWAF.

The consolidated statements reflect the operating results of the discontinued
operations separately from continuing operations. The unamortized goodwill of
$176,766 resulting from the acquisition of the remaining 50% interest in BWAF
was written off in 1998. Amounts for prior periods have been restated to
reflect the discontinued operations. Operating results for the discontinued
operations were:

December 31,
1998 1997

Operating revenues $ 101,461 $ 225,680
Loss from operations $ (128,236) $ (74,624)
Net loss $ (47,675) $ (86,799)

At December 31, 1998, BWAF had current assets aggregating $11,688, noncurrent
assets of $5,625 and current liabilities of $146,833 which are included in the
Company's consolidated financial statements. The Company recorded a loss from
the disposal of the operation for the write-off of the goodwill and the
estimated costs to liquidate BWAF.

NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT OPERATIONS

The investment in and advances to joint operations are as follows:

December 31,
1998 1997
Joint operations accounted for using
cost method:
Air Baltic $2,144,212 $2,144,212
BIA - 1,131,315
LAMCO - 40,000
--------- ---------
Subtotal 2,144,212 3,315,527
--------- ---------
Joint operations accounted for using
equity method:
BCS 5,000 44,298
AIRO 1,126,882 784,991
RCS - 171,352
--------- ---------
Subtotal 1,131,882 1,000,641
--------- ---------
Total $3,276,094 $4,316,168
========= =========

Joint operations at cost -

Air Baltic Corporation

On August 29, 1995, a Joint Venture Agreement was signed between the Company,
the Republic of Latvia ("Latvia"), SAS, Investeringsfonden for Ostlandene (the
Investment Fund for Central and Eastern Europe - "IO") and Swedfund
International AB ("Swedfund") (collectively, the "Parties"), for the
establishment of a Latvian national airline, Air Baltic Corporation.

Upon completion of the Joint Venture Agreement, as amended on November 27,
1995, Air Baltic had a share capital of $11.7 million consisting of $3.4
million cash and $8.3 million other assets including real estate, with the
following ownership percentages: Latvia - 51.07%, the Company - 20.02%, SAS -
16.51%, IO - 6.2% and Swedfund - 6.2%. The Company obtained its 20.02%
interest based on its cumulative-to-date investments in and advances to BIA.
The Joint Venture Agreement provides that supplemental funding in the amount of
$4.0 million for working capital as necessary, will be provided by the Nordic
Investment Bank, or a similar financial institution.

On January 10, 1996, the Company sold 12% of Air Baltic stock to SAS for $1.7
million in cash and the assumption by SAS of the Company's future debt funding
obligation to Air Baltic of $2,175,000.

In October 1997, the Company contributed an additional $226,212 of capital to
Air Baltic.

On January 4, 1999, the Company sold its remaining 8.02% interest in Air Baltic
to SAS for $2,144,333 in cash under the terms of the option agreement between
the Company and SAS. The Company used the proceeds from the sale to repay the
$2 million loan from ORESA Ventures N.V. See unaudited pro forma information
as of December 31, 1998 in Note 16.

Summarized financial information for Air Baltic is as follows (100%):

December 31,
1998 1997

Current assets $10,931,000 $ 7,109,000
Noncurrent assets 23,675,000 21,576,000
---------- ----------
Total assets $34,606,000 $28,685,000
========== ==========

Current liabilities $22,062,000 $11,295,000
Noncurrent liabilities 12,126,000 13,776,000
Equity 418,000 3,614,000
---------- ----------
Total liabilities and equity $34,606,000 $28,685,000
========== ==========

Year Ended December 31,
1998 1997

Revenues $39,757,000 $36,141,000
Loss from operations $(5,487,000) $(3,981,000)
Net loss $(7,325,000) $(5,651,000)

Baltic International Airlines

The Company entered into a joint venture agreement with the Latvian Civil
Aviation Department, an agency of the Government of Latvia, on June 6, 1991 to
create BIA as a limited liability company in the Republic of Latvia. The
Company currently owns a 89% interest in BIA.

As discussed in Note 1, BIA experienced significant losses which have been
recognized in the Company's financial statements through a reserve of its
investment in BIA. In conjunction with the transfer of BIA's passenger service
operations to Air Baltic, the Company entered into negotiations with its
partner to restructure BIA and obtain full ownership. The Company also made
advances on behalf of BIA in 1996 to facilitate the termination of operations
of BIA. In March 1997, the Company's Latvian partner in BIA agreed to
contribute real estate and a promissory note with a combined value of at least
$1,000,000 to BIA. In May 1997, the Company capitalized $6.3 million of BIA's
debt to the Company which was previously reserved by the Company. BIA will
assign the promissory note from the Latvian partner to the Company. Management
believes that the Latvian partner's contribution will be made during 1999 or
2000. The Company has agreed with the Latvian partner that it will forgive
the promissory note of the Latvian partner in exchange for the transfer of the
Latvian partner's ownership in BIA. BIA will then become a wholly owned
subsidiary of the Company.

The Company recorded a reserve against the investment in BIA of $1,143,115 in
1998 as a result of the uncertainty of the characteristics of the contribution
from the Latvian partner and the length of time that has transpired since the
Latvian partner committed to make the contribution.

Lithuanian Aircraft Maintenance Corporation

On September 28, 1995, the Company entered into a joint operation with a joint
stock company, Siauliai Aviacija, presently 100% owned by the Ministry of
Transportation of the Republic of Lithuania and the Municipality of Siauliai
City for the establishment of an aircraft maintenance facility, LAMCO. The
Company's initial investment totaled $40,000 for 2.6% of LAMCO. LAMCO was
liquidated in 1998. The Company received cash of $8,673, equipment with an
estimated value of $3,700 and Lithuanian government securities with a face
value of approximately $28,000 from the liquidation in 1998. These government
securities bear no interest, mature beginning in April 2002 and have been
included in other assets on the consolidated balance sheet.

Joint operations using equity method -

A condensed summary of the financial position (100% basis) of the combined
joint operations accounted for using the equity method of accounting is as
follows:

December 31,
1998 1997

Current assets $ 1,089,182 $ 920,152
Noncurrent assets 6,468,654 3,385,511
---------- ----------
Total assets $ 7,557,836 $ 4,305,663
========== ==========

Current liabilities $ 2,157,576 $ 3,461,788
Minority interest 603,134 -
Equity 4,797,126 843,875
---------- ----------
Total liabilities and equity $ 7,557,836 $ 4,305,663
========== ==========

A summary of the results of operations of the combined joint operations
accounted for using the equity method of accounting is as follows:

Year Ended December 31,
1998 1997
Combined 100% Basis:
Operating revenues $ 5,149,474 $ 3,063,014
Income from operations $ 637,956 $ 863,358
Net income (loss) $ (80,867) $ 985,624

Company Percentage Interest:
Operating revenues $ 2,362,064 $ 1,251,768
Income from operations $ 415,303 $ 323,037
Net income $ 85,579 $ 361,688

AIRO Catering Services and Riga Catering Services

In February 1996, the Company formed AIRO with TOPflight AB ("TOPflight").
TOPflight operates kitchens in Malmo, Gothenburg and Stockholm, Sweden. In
this joint operation, the Company contributed its management and operational
expertise, its partial interest in Riga Catering Services ("RCS"), market
knowledge, knowledge of the regional customer base and labor force for a 51%
interest, while TOPflight contributed its technical experience in building
in-flight kitchens for a 49% interest. AIRO is targeting various airports for
in-flight catering development. During 1997, LSG purchased 51% of TOPflight.
AIRO is accounted for using the equity method as certain provisions of the
partnership agreement result in the Company not having control of AIRO.

In December 1997, the Company entered into a share purchase and shareholder
agreement with LSG. The primary purpose of the agreement is to identify AIRO
as the vehicle for the development of new LSG in-flight kitchens in Eastern
Europe and the Republics of the former Soviet Union. Under the agreement, the
Company sold 5% of the stock of AIRO in return for the LSG commitments and
$600,000 in cash. Following this share purchase, the Company controlled 46% of
AIRO and LSG controls 54%.

In July 1999, the Company sold a 23% interest in AIRO to ORESA Ventures N.V.
and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the
Company's common stock, warrants to purchase 6,250,000 shares of the Company's
common stock and $250,000 in cash. As part of this transaction, the Company
also entered into an option agreement giving ORESA Ventures N.V. and Celox S.A.
the right to purchase the remaining 23% of AIRO held by the Company for
$1,145,000 in cash and forgiveness of approximately $190,000 in debt. The
option agreement expires on September 30, 1999. See unaudited pro forma
information as of December 31, 1998 in Note 16.

At December 31, 1998 and 1997, the Company had advances aggregating $577,000 to
AIRO which is included in investments in and advances to joint operations in
the accompanying consolidated balance sheet. These loans mature on
December 31, 2000 and bear interest at rates of 8% to 10% per year.

Summarized financial information for AIRO is as follows (100%):

December 31,
1998 1997

Current assets $ 1,089,182 $ 106,615
Noncurrent assets 6,468,654 5,787,149
---------- ----------
Total assets $ 7,557,836 $ 5,893,764
========== ==========

Current liabilities $ 2,157,576 $ 2,144,172
Noncurrent liabilities - 723,046
Minority interest 603,134 -
Equity 4,797,126 3,026,546
---------- ----------
Total liabilities and equity $ 7,557,836 $ 5,893,764
========== ==========

Year Ended December 31,
1998 1997

Revenues $ 5,149,474 $ 416,066
Income from operations $ 637,956 $ 78,379
Net income (loss) $ (80,867) $ 3,379

On April 2, 1996, the catering operations of BCS were acquired by RCS,
previously owned by TOPflight, in exchange for shares in RCS. In April 1997,
the Company transferred 2.82% of its interest in RCS to AIRO as part of a
capital contribution. In January 1998, the Company transferred its remaining
direct interest in RCS to AIRO as part of a capital contribution. At December
31, 1998, RCS was owned 58.5% by AIRO and 41.5% by the principals of the
Company's partner in BCS.

In 1997, RCS declared dividends payable to its shareholders aggregating
$508,475 that were unpaid as of December 31, 1997. The Company's share of
these dividends was $105,153 and is included in accounts receivable from
affiliates on the consolidated balance sheet as of December 31, 1997. The
Company received $88,810 in 1998 prior to the transfer of the interest in RCS
to AIRO. The remaining amount was transferred to the investment in AIRO.

Summarized 1997 financial information for RCS is as follows (100%):

December 31, 1997

Current assets $ 770,181
Noncurrent assets 404,279
----------
Total assets $ 1,174,460
==========

Current liabilities $ 572,982
Equity 601,478
----------
Total liabilities and equity $ 1,174,460
==========

Year Ended
December 31, 1997

Revenues $ 2,835,465
Income from operations $ 1,092,314
Net income $ 1,108,769

In accordance with Latvian Law on Foreign Investments, RCS is exempt from
corporate income tax for its first three years of profitable operations and
will receive a 50 percent tax reduction for the following three years. The
first year of the tax holiday for RCS was 1996.

Baltic Catering Services

BCS was formed on March 26, 1993 as a joint operation between ARVO, Ltd., a
Latvian limited liability company, and the Company. On April 2, 1996, the
catering operations of BCS were acquired by RCS in exchange for shares in RCS.
The business of BCS after the transfer of the catering business to RCS is
primarily the operation of a restaurant in the Riga Airport. BCS ceased its
operations in 1998 and is currently being liquidated by the Company.

NOTE 5 - DEBT

Debt consists of the following:

December 31,
1998 1997

Note payable to a shareholder, secured
by put agreement with SAS on Air Baltic
shares and security interest in all
shares of stock owned in AIRO, interest
rate of 13%, repaid in January 1999 $ 2,000,000 $ 2,000,000

Note payable to bank, unsecured, interest
rate of 10.5%, due upon maturity,
principal payable July 1996, guaranteed
by an officer of the Company, repaid in
January 1998 - 8,711

Subordinated bridge loan financing,
interest payable quarterly at 10% per
annum, secured by warrants to purchase
175,000 common shares of the Company,
originally due March 31, 1996 and
currently due on demand 50,000 75,000
---------- ----------
Total debt 2,050,000 2,083,711
Less short-term debt, net (2,050,000) (83,711)
---------- ----------
Long-term debt, net $ - $ 2,000,000
========== ==========

In May 1997, the Company entered into promissory notes in connection with
loans to the Company aggregating $40,000 from directors of the Company. The
lenders received warrants to purchase an aggregate of 4,000 shares of common
stock at $0.50 per share. These loans were repaid in August 1997.

In July 1997, the Company entered into a promissory note with ORESA Ventures
N.V. in connection with a $500,000 loan to the Company. Principal and
interest at an annual rate of 13% was due the earlier of November 11, 1997 or
the date in which the funding of an equity placement in the aggregate amount
of $2,500,000 was received by the Company. This loan was repaid in September
1997.

In October 1997, the Company entered into a promissory note with ORESA
Ventures N.V., a shareholder of the Company, in connection with a $2,000,000
loan to the Company. Principal and interest at an annual rate of 13% will be
due on January 29, 1999. The proceeds from this loan were used to repay the
principal of another loan to the Company which was to mature in November 1997.
The Company reissued 469,442 shares of its treasury shares to pay the accrued
interest on the previous loan. This loan was repaid in January 1999 from the
proceeds of the sale of the Company's interest in Air Baltic.

The Company is in the process of renegotiating the maturity of the
subordinated bridge loans of $50,000 that matured prior to December 31, 1998.
Management believes that it will be able to extend the maturity of these loans
on terms similar to the previous loans. However, there can be no assurance
the Company will be successful in such efforts.

NOTE 6 - INCOME TAXES

The components of net deferred tax assets consisted of the following:

December 31,
1998 1997

Deferred tax assets:
Net operating loss carryforward $ 3,020,442 $ 2,646,739
Reserve on investment - 159,443
Deferred compensation 89,222 89,222
Amortization and depreciation 54,854 -
Other 30,720 -
---------- ----------
Total deferred tax assets 3,195,238 2,895,404
---------- ----------

Deferred tax liabilities:
Unremitted earnings of joint operations 129,709 259,021
Other 1,977 26,708
---------- ----------
Total deferred tax liabilities 131,686 285,729
---------- ----------
Net deferred tax assets before valuation
allowance 3,063,552 2,612,675
Valuation allowance (3,063,552) (2,612,675)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========

Provisions for income taxes in the statements of operations were as follows:

Year ended December 31,
1998 1997

Current expense:
U.S. $ - $ -
Foreign - -
Deferred expense - -
---------- ----------
Total expense $ - $ -
========== ==========

Differences between the effective income tax rate and the statutory federal
income tax rate were primarily the result of net operating losses for which
valuation reserves have been fully provided.

As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $8,900,000 available to offset future taxable income. These
carryforwards will expire at various dates beginning in 2009.

NOTE 7 - COMMON STOCK

In August and September 1997, the Company sold an aggregate of 6,250,000 shares
of common stock to Celox S.A. and ORESA Ventures N.V. for $2,500,000. In
connection with these private placements, the Company issued warrants to
purchase 6,250,000 shares at an exercise price of $0.65 per share, which
warrants are currently exercisable and expire in August 2002. As discussed in
Note 4, the Company reacquired all of these shares and warrants in July 1999 as
part of the consideration received from the sale of a 23% interest in AIRO.

During 1997, the Company acquired an aggregate of 625,993 shares of its common
stock at a total cost of $292,300 through private transactions. The Company
reissued 583,549 of these shares to satisfy $300,055 of accounts payable. At
December 31, 1998 and 1997, the Company has 42,444 treasury shares.

NOTE 8 - OPTIONS

In 1992, the Company adopted an Equity Incentive Plan (the "Plan") under which
an aggregate of 800,000 shares of common stock may be issued. In December
1995, the board of directors adopted a resolution subject to shareholder
approval to increase the number of shares that may be issued under the Plan to
1,500,000 shares. The Plan provides for the grant of options or rights,
including incentive stock options and nonqualified stock options to officers,
directors, employees and consultants to the Company for the purpose of
providing incentive to those persons to work for or provide services to the
Company.

The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" which allow the Company to continue to apply the provisions of
APB No. 25 to determine compensation expense. Had compensation expense for the
Plan been determined using a stock-based, fair value method as allowed by SFAS
No. 123, the Company's net loss and loss per common share would have been
increased to the following pro forma amounts:

Year ended December 31,
1998 1997

Net loss As Reported $(2,375,781) $ (798,458)
Pro Forma (2,452,849) (892,969)
Loss per common share As Reported (0.16) (0.11)
Pro forma (0.17) (0.11)

The resulting pro forma compensation cost may not be representative of that to
be expected in future years because the method of accounting under SFAS No. 123
has not been applied to options granted prior to January 1, 1995.

At December 31, 1998, the Company had 1,102,366 shares of common stock reserved
for issuance upon exercise of outstanding options, and 397,634 options were
available for future grant under the Plan. A summary of changes in outstanding
options is as follows:
<TABLE>
<CAPTION>

Year Ended December 31,
1998 1997
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Shares under option, beginning
of period 1,072,366 $ 0.78 589,000 $ 1.12
Changes during the period:
Granted 30,000 0.13 521,700 0.42
Canceled - - (25,000) 1.53
Exercised - - (13,334) 0.50
--------- ---------
Shares under option, end of
period 1,102,366 $ 0.76 1,072,366 $ 0.78
========= =========
Options exercisable, end of
period 864,016 $ 0.85 595,666 $ 1.06
========= =========
</TABLE>

The exercise prices of the options outstanding at December 31, 1998 range from
$0.13 to $1.38. The weighted average contractual life of the options
outstanding at December 31, 1998 was 3.1 years. The weighted-average grant-
date fair value of options granted during 1998 was $0.11 and during 1997 was
$0.37. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998 and 1997: risk-free interest rate
of 6.0% and, 6.5%, respectively; expected dividend yield of 0% and 0%,
respectively; expected lives of 5 years and 6 years, respectively; and expected
volatility of 122% and 128%, respectively.

NOTE 9 - WARRANTS

During 1997, the Company issued 7,705,000 warrants in connection with the
issuance of 7,000,000 shares of common stock pursuant to private sales. The
Company allocated a portion of the net proceeds received from the issuances to
the warrants of $1,306,610. This allocation was calculated using fair values
of the warrants granted using the Black-Scholes option pricing model. As
discussed in Note 7, the Company reacquired 6,250,000 of these warrants in July
1999.

At December 31, 1998, the Company had 9,901,849 shares of common stock reserved
for issuance upon exercise of outstanding warrants. A summary of changes in
outstanding warrants is as follows:
<TABLE>
<CAPTION>

Year Ended December 31,
1998 1997
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Shares under warrant,
beginning of period 10,035,845 $ 1.01 1,891,595 $ 2.58
Changes during the period:
Granted - - 8,144,250 0.64
Canceled (133,996) 0.84 - -
Exercised - - - -
---------- ----------
Shares under warrant, end of
period 9,901,849 $ 1.00 10,035,845 $ 1.01
========== ==========
Warrants exercisable, end of
period 9,901,849 $ 1.00 10,035,845 $ 1.01
========== ==========
</TABLE>

The exercise prices of the warrants outstanding at December 31, 1998 range from
$0.44 to $9.80. The weighted average contractual life of the warrants
outstanding at December 31, 1998 was 3.2 years. The weighted-average grant-
date fair value of warrants granted during 1997 was $0.40. During March 1999
through July 1999, the Company issued warrants to purchase 10,800 shares of
common stock at an exercise price of $0.15 per share in connection with bridge
financing from officers and directors of the Company.

NOTE 10 - PREFERRED STOCK

Effective June 30, 1995, the Company created its Convertible Redeemable Series
A Preferred Stock ("Series A Preferred Stock"), 500,000 shares authorized $10
par value, and issued 123,000 shares thereof upon conversion of $1,230,000 in
aggregate principal amount of long-term indebtedness. The Series A Preferred
Stock: (i) is redeemable only at the option of the Company and only during the
thirty day period beginning on December 31 and June 30 of each year that the
Series A Preferred Stock is outstanding; (ii) is convertible at any time by the
holders thereof at the initial conversion price of $2 per share; (iii) carries
a liquidation preference of $10 per share; (iv) is non-voting; and (v) accrues
cumulative cash dividends per share at an annual rate equal to 10% of the
stated value per share, payable in equal quarterly installments. The voting
rights of the holders of the Company's common stock will be diluted upon
conversion to the Series A Preferred Stock and the holders of the Series A
Preferred Stock will have preferential dividend and liquidation rights over the
holders of common stock. Furthermore, when and if the Company becomes
profitable, the issuance of the shares of Series A Preferred Stock will have a
dilutive effect on the per share value of the common stock. The conversion
price of the Series A Preferred Stock is adjustable for certain issuances of
securities at less than 90% of the conversion price. At December 31, 1998, the
conversion price was $0.92 per share.

Effective February 22, 1996, the Company created its Series B Convertible
Redeemable Preferred Stock ("Series B Preferred Stock"), 70 shares authorized
$25,000 stated value per share and $10 par value, and issued 50 shares thereof
for net proceeds of $1,090,200 in February and March 1996. The Series B
Preferred Stock: (i) is not entitled to receive dividends; (ii) is convertible
at any time by the holders thereof on or after the 55th day after the date that
the shares were issued at the conversion price of the lesser of $2 per share or
82% of the 5-day average closing bid price of the Company's common stock; (iii)
is non-voting; (iv) carried a liquidation preference of $25,000 per share and
an amount equal to 10% per annum since the issuance date after payment in full
of the Series A Preferred Stock; and (v) is redeemable only at the option of
the Company if the conversion price is $0.75 or less per share. In October
1996, the Company amended the conversion price to the lesser of $0.55 per share
or 82% of the 5-day average closing bid price of the Company's Common Stock.

During 1997, shareholders converted an aggregate of 18 shares of Series B
Preferred Stock into 1,147,771 shares of the Company's common stock. During
1998, there were no such conversions. During 1998, the Company purchased two
shares of Series B Preferred Stock from a shareholder for an aggregate $70,000
including accrued dividends.

NOTE 11 - LOSS PER SHARE

Supplemental disclosures for loss per share are as follows:

Year ended December 31,
1998 1997

Basic and diluted
Net loss to be used to compute basic and
diluted loss per share:
Net loss $(2,375,781) $ (798,458)
Less preferred dividends (159,116) (275,724)
---------- ----------
Net loss attributable to common shareholders $(2,534,897) $(1,074,182)
========== ==========

Weighted average number of shares:
Average common shares outstanding 15,568,063 10,189,215
========== ==========

Basic and diluted loss per common share $ (0.16 $ (0.11)
========== ==========

NOTE 12 - RELATED PARTY TRANSACTIONS

The following is a summary of material related party transactions which have
occurred during 1998 and 1997, other than those disclosed elsewhere in the
notes to the accompanying consolidated financial statements.

The Company earns general sales agency revenue by operating the North American
sales and marketing office of Air Baltic. The Company earned $78,000 of such
revenue for each of the years ended December 31, 1998 and 1997. The general
sales agency revenue from Air Baltic comprised 12% of the Company's revenue in
1998.

Air Baltic purchases goods and services from RCS and AIRO. BWAF was dependent
upon Air Baltic for cargo transportation.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

The Company leases certain equipment and office space under operating leases
that expire over the next five years. Rental expense under operating leases
was $37,595 and $41,238 for 1998 and 1997, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:

1999 $ 15,027
2000 3,027
2001 1,513
----------
Total $ 19,567
==========

The Company is self-insured for some of its insurance coverage, such as
workers' compensation. Based on historical experience, management does not
anticipate that potential future claims would have a material impact on the
Company's consolidated financial position.

The Company is from time to time party to litigation in the ordinary course of
business. There are currently no pending legal proceedings that, in
management's opinion, would have a material adverse effect on the Company's
operating results or financial condition.

NOTE 14 - SUPPLEMENTAL CASH FLOW DISCLOSURES

Supplemental disclosure of noncash transactions is as follows:

Year ended December 31,
1998 1997

Conversion of accounts payable and
accrued dividends to equity $ 3,750 $ 376,838
Conversion of preferred stock to common stock - 450,000
Common stock issued for services 37,242 -
Dividends declared and unpaid 97,616 244,974
Transfer of RCS shares to AIRO 191,695 28,434

Supplemental disclosures:
Interest paid $ 8,153 $ 62,650
Income taxes paid $ - $ -

NOTE 15 - SEGMENT INFORMATION

As discussed in Note 2, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" as of December 31, 1998.
Reportable segments are based on internal organizational structure and are
comprised of Catering, Airlines, Distribution and Cargo. The Company's
catering products are primarily sold to airlines. Airline services are
promoted to the general public. Distribution products are sold principally to
wholesalers, food stores and food and drink establishments. Cargo services
were sold to freight forwarders.

Segment financial information is summarized as follows:

<TABLE>
<CAPTION>
Corporate
Catering Airlines Distribution Cargo and Other Total
<S> <C> <C> <C> <C> <C> <C>
1998
Revenue:
Net sales $ - $ 78,000 $ 494,956 $ - $ - $ 572,956
Equity in earning of joint operations 85,579 - - - - 85,579
---------- ---------- -------- -------- ---------- ----------
Total revenue 85,579 78,000 494,956 - - 658,535
---------- ---------- -------- -------- ---------- ----------

Income (loss) before income taxes
and discontinued operations 85,579 (1,065,115) (117,120) - (1,040,969) (2,137,625)
Discontinued operations - - - (238,156) - (238,156)
Net income (loss) 85,579 (1,065,115) (117,120) (238,156) (1,040,969) (2,375,781)

Other disclosures:
Depreciation and amortization $ - $ - $ 3,657 $ - $ 32,063 $ 35,720
Capital expenditures - - 25,813 - 200 26,013
Investment in and advances to joint
operations at end of year 1,131,882 2,144,212 - - - 3,276,094
Total assets at end of year 1,131,882 2,144,212 203,221 17,313 197,569 3,694,197

1997
Revenue:
Net sales $ - $ 78,000 $ 470,874 $ - $ - $ 548,874
Equity in earning of joint operations 361,688 - - - - 361,688
---------- ---------- -------- -------- ---------- ----------
Total revenue 361,688 78,000 470,874 - - 910,562
---------- ---------- -------- -------- ---------- ----------

Income (loss) before income taxes
and discontinued operations 361,688 78,000 (102,522) - (1,048,825) (711,659)
Discontinued operations - - - (86,799) - (86,799)
Net income (loss) 361,688 78,000 (102,522) (86,799) (1,048,825) (798,458)

Other disclosures:
Depreciation and amortization $ - $ - $ 3,007 $ - $ 34,011 $ 37,018
Capital expenditures - - 1,088 - 1,124 2,212
Investment in and advances to joint
operations at end of year 1,000,641 3,275,527 - - 40,000 4,316,168
Total assets at end of year 1,000,641 3,275,527 319,630 80,673 1,339,673 6,016,144
</TABLE>

Information concerning principal geographic areas was as follows:

North America Eastern Europe Total
1998
Revenues $ 78,000 $ 580,535 $ 658,535
Investment in and advances to joint
operations at end of year - 3,276,094 3,276,094
Other long-term assets at end of year 32,694 36,416 69,110

1997
Revenues $ 78,000 $ 832,562 $ 910,562
Investment in and advances to joint
operations at end of year - 4,316,168 4,316,168
Other long-term assets at end of year 235,315 18,018 253,333

NOTE 16 - UNAUDITED PRO FORMA INFORMATION

As discussed in Note 4, in January 1999, the Company sold its remaining 8.02%
interest in Air Baltic to SAS for $2,144,333 in cash under the terms of the
option agreement between the Company and SAS. The Company used the proceeds
from the sale to repay the $2 million loan from ORESA Ventures N.V. In July
1999, the Company sold a 23% interest in AIRO to ORESA Ventures N.V. and Celox
S.A. in exchange for an aggregate of 6,250,000 shares of the Company's common
stock, warrants to purchase 6,250,000 shares of the Company's common stock and
$250,000 in cash.

Summarized financial information for the unaudited pro forma consolidated
balance sheet as of December 31, 1998 assuming these transactions occurred on
December 31, 1998 is as follows:

Actual Pro Forma
December 31, Pro Forma December 31,
1998 Adjustments 1998
(Unaudited) (Unaudited)

Current assets $ 348,993 $ 250,000 $ 598,993
Noncurrent assets 3,345,204 (2,719,752) 625,452
---------- ---------- ----------
Total assets $ 3,694,197 $(2,469,752) $ 1,224,445
========== ========== ==========

Current liabilities $ 2,984,663 $(2,144,333) $ 840,330
Shareholders' equity 709,534 (325,419) 384,115
---------- ---------- ----------
Total liabilities and
shareholders' equity $ 3,694,197 $(2,469,752) $ 1,224,445
========== ========== ==========

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 27th day of August, 1999.

BALTIC INTERNATIONAL USA, INC.

/s/ Robert L. Knauss
-------------------------------------------------
ROBERT L. KNAUSS
Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:

Signature Title Date

/s/ Robert L. Knauss Chairman of the Board and Chief August 27, 1999
- ----------------------- Executive Officer (Principal
ROBERT L. KNAUSS Executive Officer)

/s/ David A. Grossman President, Chief Financial Officer, August 27, 1999
- ----------------------- Corporate Secretary and Director
DAVID A. GROSSMAN (Principal Financial and
Accounting Officer)

/s/ Homi M. Davier Director August 27, 1999
- -----------------------
HOMI M. DAVIER

/s/ James W. Goodchild Director August 27, 1999
- -----------------------
JAMES W. GOODCHILD

/s/ Paul R. Gregory Director August 27, 1999
- -----------------------
PAUL R. GREGORY

/s/ Juris Padegs Director August 27, 1999
- -----------------------
JURIS PADEGS

/s/ Ted Reynolds Director August 27, 1999
- -----------------------
TED REYNOLDS

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
registration statement on Form S-8 (33-90030).

ARTHUR ANDERSEN LLP

Houston, Texas
August 26, 1999

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 110,380 965,992
<SECURITIES> 0 0
<RECEIVABLES> 163,880 273,234
<ALLOWANCES> 0 0
<INVENTORY> 66,589 195,971
<CURRENT-ASSETS> 348,993 1,446,643
<PP&E> 35,211 12,836
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 3,694,197 6,016,144
<CURRENT-LIABILITIES> 2,984,663 752,944
<BONDS> 0 0
0 0
1,580,000 1,630,000
<COMMON> 156,292 155,028
<OTHER-SE> (1,026,758) 1,478,172
<TOTAL-LIABILITY-AND-EQUITY> 3,694,197 6,016,144
<SALES> 572,956 548,874
<TOTAL-REVENUES> 658,535 910,562
<CGS> 490,126 452,379
<TOTAL-COSTS> 2,544,198 1,604,385
<OTHER-EXPENSES> 1,935 112,465
<LOSS-PROVISION> 1,143,115 0
<INTEREST-EXPENSE> 265,563 507,747
<INCOME-PRETAX> (2,137,625) (711,659)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,137,625) (711,659)
<DISCONTINUED> (238,156) (86,799)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,375,781) (798,458)
<EPS-BASIC> (0.16) (0.11)
<EPS-DILUTED> (0.16) (0.11)

</TABLE>