1. General

Danubius Hotel and Spa Rt. ("Danubius" or "the Company") is a company limited by shares incorporated under the laws of the Republic of Hungary. The Company and its subsidiaries (the "Group") provide hospitality services in Hungary, with an emphasis on 4- and 5-star spa and city hotels.

Danubius operated as a self-administered State enterprise (Danubius Hotel and Spa Company) controlled by an Enterprise Council until July 31, 1991. Effective July 31, 1991, Danubius was transformed into a company limited by shares and ownership was passed to the State Property Agency ("ÁPV Rt."). In November 1992, a portion of Danubius´ outstanding shares was publicly sold and such shares were listed for trading on the Budapest Stock Exchange.

Danubius acquired from ÁPV Rt. 85% of the shares of Hungária Szálloda Rt. ("Hungar Hotels"), a company incorporated under the laws of Hungary and operating in the hotel industry in January 1997. Danubius acquired further 14.78% of the shares from the employee consortium in September 1997 (see Note 26).

Danubius group was reorganized into a more efficient structure on 1 January, 1999 (see Note 27).

2. Significant Accounting Policies

Basis of preparation
Danubius Hotel and Spa Rt. and its subsidiaries maintain their official accounting records and prepare their financial statements for domestic purposes in accordance with the accounting regulations of Hungary.

The accompanying consolidated financial statements have been prepared in accordance with International Accounting Standards and, as a consequence, reflect adjustments not recorded in the Hungarian statutory records.

The consolidated financial statements are prepared in Hungarian Forint (HUF) and are presented in millions of forints.

The consolidated financial statements are prepared under the historical cost convention. In connection with the transformation of the state enterprise into a limited liability company at July 31, 1991 the Company valued certain non-current assets to their estimated market values based on independent valuations. These amounts became the accounting and tax bases.

The accounting policies have been consistently applied by the Group enterprises and, except for the changes in accounting policy disclosed on page 10, are consistent with those used in the previous year.

Basis of consolidation
Subsidiaries are those enterprises controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

The consolidated financial statements include the financial statements of Danubius Hotel and Spa Rt. and its significant subsidiaries after elimination of all material inter-company transactions and balances.

The Company´s principal subsidiary undertakings at 31 December, 1999 are as follows:

Cash and cash equivalents
Cash equivalents are liquid investments with original maturities of three months or less.