Dear Shareholders,

In this annual report, you will receive full details of our performance and our continued strong financial position. Our profit was only a little ahead of 1998, but I believe this is a creditable performance given the Kosovo problem which affected not only our Group during the spring and summer season of last year, but all other hoteliers in Central and Eastern Europe. Thankfully, this problem is, we hope, now behind us as it is never pleasant to be affected by something over which we had no control.

We are, of course, encouraged that it seems the Hungarian economy is steadily improving and foreign investors have shown renewed confidence in the future as Hungary continues its preparations for EU membership. The positive economic trends have also been reflected in a strong property market which has reinforced our decision, just over a year ago, to separate the management of our hotel properties from the management of our hotel operations. I am pleased to report that this new organization is setting down well. The property company´s activities will continue to develop independently in the future, and our hotel management company is already benefiting from many new initiatives, such as the centralization of our purchasing. There is already evidence of cost saving and we hope to improve this throughout the current year, not least through standardization wherever possible.

Our major programme of hotel refurbishment has continued during 1999, and the next two years will see an acceleration of such investment. This will be essential, given the strong competition we anticipate in 2000 and beyond, particularly in Budapest where several new hotels are under construction. I would like to emphasise that we are not at all frightened by this competition, and indeed we are fortunate in having several unique properties which should give us strength in a highly competitive market. We are also developing new "Danubius Premier" health and fitness clubs which will be the market leader in this field. The first club opened recently at the Helia Hotel and others will.

One issue which I see most important for the future is to continue to adapt ourselves to technical developments and to the increasing of our customers in this area. This applies particularly to the Internet and also to other advanced information and communication systems. In 1999, we can say, we have already done a lot to improve the technical level of our hotels and head office but this vital process will be ongoing.

Within our own organization I am delighted to say that our new and integrated management information system has been implemented. This will both make us more efficient in every aspect of our business, and also give management better and more direct control.

We are continuing our efforts to expand our spa and city centre business in other countries outside of Hungary. In 1999 we made our first foreign acquisition of the spa Hotel Villa Butterfly, in Mariánské Lázne in the Czech Republic. In Hungary we were successful on the privatization tender for Hotel Nádor in Pécs and increased our share in Hotel Hullám to 100%.

Imake no apology for repeating once again that my main objective is to ensure a sound base for the long-term development of the Group and, through this, improved returns to all shareholders. I know a number of shareholders have been disappointed that we have not paid dividends in the past. This year we are proposing a dividend which some of you might say rather small. I can only answer this by saying that if a company wants to expand, it has to have the capital to do so, and it seems to me that the majority of our shareholders accept this approach. Since the problems caused to the stock market as a whole trough the Russian crisis in 1998, our share price has increased from just over 2000 to over 6000 today, which is not at all a bad record. Let me therefore thank you, our shareholders, for your ongoing support. I am also grateful for the hard work of our management and employees, many of whom, I am pleased to say, will benefit from the employee share proposals.

Ican assure you, it is our intention to grow our business and to make Danubius one of the most successful companies in Hungary - in the eyes of our guests, employees and all of our investors and even our competitors.