SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-KSB
                Annual Report Pursuant to Section 13 or 15(d) of
                       The Securities Exchange Act of 1934
               For the transitional year ended: December 31, 1998

Commission File number:  0-114244

                                 WATCHOUT! INC.
             (Exact name of registrant as specified in its charter)

                          WHITE CLOUD EXPLORATION, INC.
                                 (Former Name)


Utah                                               84-0959153
State or Other Jurisdiction                        (I.R.S. Employer
of incorporation or organization)                  Identification Number)

116 Stanyan, San Francisco, California    94118
(Address of principal Executive Offices   Zip Code)

Registrant's telephone number, including area code: 415-387-3135

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

             Common Stock, $.001 Par Value per Share
                        (Title of Class)

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                              Yes (X)   No ( )

     Check if disclosure of delinquent filers pursuant 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.

                              Yes ( )   No (X)


State issuer's revenues for its most recent fiscal year. $0


<PAGE>

Transitional Small Business Disclosure Format:

               ______ Yes     ___X___ No

As of December 31, 1998, 15,030,245 shares of common stock were outstanding. The
aggregate  market  value of the Stock  held by  nonaffiliates  was  $588,325  at
December 31, 1998 based on bid price of $.125 per share.

     Documents incorporated by reference:   None


<PAGE>

                                     Part I

Item 1. Business.

General - Organization and Reorganization

     Since its inception in July of 1983 as White Cloud Exploration,  Inc. ("the
Company"),  the  Company  has  been in the  developmental  stage,  while  it has
attempted to identify suitable mergers, asset or acquisitions of operations.

     The Company changed its name to WatchOut! Inc. in November, 1998.

     White  Cloud,  in March of 1991,  entered  into a Letter of Intent  whereby
White  Cloud was to  acquire  100% of the  Stock of  American  Technology,  Inc.
("ATI") in exchange for stock of White Cloud.  The merger was  cancelled  due to
accounting difficulties with American Technology, Inc.

     The Company had no further activities since 1991, and was inactive up until
1997.

     In April 1997,  William C. Meier  through his  beneficial  ownership of WCM
Investments, Inc., a Texas corporation ("WCM Investments"),  obtained control of
Registrant by purchasing on April 17, 1997, 5,010,750  (pre-reverse stock split)
shares of Registrant's Common Stock. On May 14, 1997, WCM Investments  purchased
from  Registrant  7,500,000  (pre-reverse  stock split)  newly-issued  shares of
Registrant's  Common  Stock  for  $7,500 in cash.  The  12,510,750  shares  were
automatically  converted  into 72,213  shares  pursuant to a 173.25 to 1 reverse
stock split of Registrant's Common Stock on June 29, 1997, and represented 72.2%
of the shares of Common Stock of Registrant outstanding at such time.

     The Watchout!  Agreement was entered into  effective May 30, 1997,  and the
Watchout!  Acquisition consummated pursuant thereto effective as of December 29,
1997.  Pursuant  to the  Watchout!  Agreement,  the  shareholders  of  Watchout!
contributed to Registrant  251,354 shares of Watchout's  common stock (100%) for
an aggregate  consideration of 11,296,300  shares of Registrant's  common stock.
The  number  of shares of  Registrant's  common  stock  issued  pursuant  to the
Watchout!   Agreement  was   determined   by  reference  to  the   proportionate
post-Acquisition    equity   ownership   of   Registrant   negotiated   by   the
pre-Acquisition  Watchout!   shareholders,   Goldpoint  members  and  Registrant
shareholders.  Prior to the closing of the Watchout! Acquisition,  Watchout! was
controlled by Robert Galoob and David Galoob.

     As a result of the  Watchout!  Acquisition,  Registrant  owned  100% of the
issued  and  outstanding  shares  of  Watchout!.  Watchout!  intended  to market
worldwide watches and other consumer goods utilizing  proprietary colored liquid
crystal display technology.

     Pursuant  to  an  LLC  Interest  and  Asset  Contribution   Agreement  (the
"Goldpoint   Agreement"   and  together  with  the  Watchout!   Agreement,   the
"Agreements"),  the members (i.e.,  equity holders) of Goldpoint  International,
LLC, a Delaware limited liability company ("Goldpoint"),

<PAGE>

effective  as of December 29,  1997,  contemporaneously  with the closing of the
Watchout! Acquisition, received from Registrant 2,140,000 newly-issued shares of
Registrant's  common stock in exchange for 100% of the  membership  interests in
Goldpoint  (the  "Goldpoint   Acquisition".)   The  2,140,000  shares  represent
approximately  14% of the outstanding  shares of common stock of Registrant on a
fully-diluted  basis.  Prior  to  the  closing  of  the  Goldpoint  Acquisition,
Goldpoint was controlled by Mr. Stephen J. Petre.

     Effective  as of  December  29,  1997,  pursuant  to  the  Agreements,  and
contemporaneously  with the consummation of the Acquisitions,  Robert Galoob and
David Galoob  accepted  appointments  as directors of Registrant  from the prior
directors of Registrant, each of whom resigned as directors.

     As a result  of the  Goldpoint  Acquisition,  Registrant  owns  100% of the
outstanding  membership interests in Goldpoint LLC. Goldpoint intended to market
fine writing instruments.

     Neither  WatchOut!  Inc. nor Goldpoint was successful in raising capital or
carrying out the business plan  adopted.  As a result all attempts at operations
were suspended in September 1998, and no further business was attempted in 1998.

     The Company,  subseqent to year end determined to seek  investment or other
business acquisition.



<PAGE>


Employees and Consultants

     The Company at fiscal year end had no paid  employees,  and its  President,
Robert Galoob,  Vice President Stephen Petre, and Secretary,  David Galoob serve
on an as  needed  basis.  These  officers  intend  to  devote  only such time as
necessary to the business affairs of the Company.

     Presently,  none  of the  officers  receive  salaries,  however,  they  are
reimbursed for their expenses  incurred in their services as officers.  There is
no provision for any  additional  bonuses or benefits.  The Company  anticipates
that in the  near  future  it may  enter  into  employment  agreements  with its
officers. Although Directors do not receive compensation for their services they
may be reimbursed for expenses incurred in attending Board meetings.

Item 2. Properties.

     The Company  maintains its corporate office at 116 Stanyan,  San Francisco,
California  94118 under an informal  arrangement  with the Company's  President.
This space is deemed adequate for the immediate future.

Item 3. Legal Proceedings.

     The Company was a party to pending legal  proceedings  with Boit, Inc., the
licensor of the watch technology as of year end. The suit seeks to terminate the
license due to certain defaults. The Company could lose the action, but it would
not have a material  effect since the Company has  abandoned  the business  plan
which would have used the watch technology.

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

     One matters was  submitted  to a vote of security  holders  within the year
covered by this  report by an  information  statement  solely for the purpose of
changing the name of the  corporation  to WatchOut!  Inc. The date of the action
was November 9, 1998.


                                     Part II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.


     The  outstanding  registered  securities  of the Company were quoted on the
OTCBB during the year.

               Common Stock   Common Stock
1998           Bid High       Bid Low
____________________________________________________
1st Quarter    no quote       no quote
2nd Quarter    no quote       no quote
3rd Quarter    no quote       no quote
4th Quarter    .125           .125

<PAGE>

               Common Stock   Common Stock
1997 and 1996  Bid High       Bid Low
____________________________________________________

1st Quarter    no quote       no quote
2nd Quarter    no quote       no quote
3rd Quarter    no quote       no quote
4th Quarter    no quote       no quote


     The  Company  anticipates  its shares will trade over the counter by market
makers who have not as yet quoted a specific  bid or ask price.  Quotations,  if
made,  represent only prices between  dealers and do not include retail markups,
markdowns or commissions and accordingly, may not represent actual transactions.
As of December 31, 1998, there are approximately 219 record  stockholders of the
Company's  shares,  not  including  shareholders  represented  by "street  name"
holders.

     No  dividends  have been  declared  or paid by the  Company  and  presently
intends to retain all future  earnings,  if any,  to finance the  expansion  and
development of its business.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

Financial Condition and Changes in Financial Condition

     No revenue producing  business  operations were conducted by the company in
1998. No revenues were generated in the fiscal year 1997 directly by White Cloud
Exploration,  Inc., however, with the acquisition of the assets of Watchout! and
Goldpoint  and the  operations  thereof,  the  recast of the  combined  business
entities reflected the combined financial  conditions of the acquired businesses
of Watchout!  and Goldpoint in 1997 which generated  $340,679 in gross profit on
total revenues of $826,446.  The Company at year end December 31, 1998, had $580
cash compared  with $59,147 in cash at December 31, 1997.  The Company at fiscal
year end needed cash infusions from  shareholders to provide  capital,  or loans
from any sources, for advancement of its business  ventures.  The Company had no
business at year end.

<PAGE>

Liquidity and Capital Assets.

     The Company's  primary  source of liquidity  since  inception has been from
funds raised during its initial capitalization and from shareholder advances and
loans. The company had $580 cash at 1998 year end, and $59,147 cash at 1997 year
end and current assets of $12,780 at December 31, 1998 and  $362,316 at December
31, 1997.

     Total  liabilities  for 1998  (which  were all due) were  $1,921,147  for a
deficit of ($1,908,367) in the ratio of liabilities to current assets.

     The  company was  critically  deficient  in capital and needs an  estimated
$1,000,000 to even commence  effective  operations.  No source of such funds had
been  identified  at year end, and it would have to occur  through debt or stock
sales.


Results of Operations for twelve month period ended December 31, 1998 Compared
to 1997

     In the year ended  December  31,  1998,  the Company  had no  revenues  and
incurred  operating  expenses  totaling  $602,833.  In  calendar  year  1997 the
combined  entities' net revenues  were  $340,679.  As of December 31, 1998,  the
Company had no material commitments for capital expenditures.

     In the year ended  December  31,  1998,  the  Company  incurred  $98,746 in
general and  administrative  expenses  compared  with  $201,328 in 1997.  In the
fiscal year ended December 31, 1998,  the Company  incurred an operating loss of
($602,833)  compared  to a loss of  ($731,582)  in  1997.  Net loss for 1998 was
($856,901) or ($.06) per share  compared to a net loss for 1997 of ($968,502) or
($.06) on a fully diluted basis.

     The Company had a loss on sale of inventory and  receivables  of ($162,000)
in 1998 and ($238,254) in 1997.  Interest expense  (accrued) was $92,063 in 1998
compared to $36,612 in 1997.

Item 7. Financial Statements and Supplemental Data.

     Attached  hereto and filed as part of this Form  10-KSB  are the  financial
statements required by Regulation SB. Please refer to pages F-1 through F-8.

Item 8. Changes in and Disagreements on Accounting and Financial Disclosure.

     In  connection  with audits of two most recent fiscal years and any interim
period preceding resignation,  no disagreements exist with any former accountant
on any matter of accounting principles or practices, financial

<PAGE>

statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the  satisfaction of the former  accountant would have caused him to
make  reference  in  connection  with his  report to the  subject  matter of the
disagreement(s).

     The principal  accountant's  report on the financial  statements for any of
the past two years  contained no adverse  opinion or a disclaimer of opinion nor
was qualified as to uncertainty,  audit scope, or accounting  principles  except
for the "going concern" qualification.

     For Fiscal  Year 1992 and  thereafter  the  Company  engaged as its Auditor
Michael  B.  Johnson  & Co.  There  were no  disagreements  as to any  matter of
accounting practice or principles,  financial  statement  disclosure or auditing
scope or procedure, with any prior accountant.

                                    Part III

Item 9. Directors and Executive  Officers of the Registrant and Compliance  with
Section 16(a).

Identification of Directors and Executive Officers of the Company

     The directors and executive  officers of the Company,  their age, positions
held in the  Company,  and  duration  as such,  were as follows as of end of the
fiscal year:

     Name           Age            Position                           Since
Robert Galoob       48             President/Director                 12/97
David Galoob        49             Secretary/Treasurer/Director       12/97
Stephen Petre       45             Vice President                     12/97

Business Experience

     The following is a brief account of the business experience during the past
five years of the former  officer/directors at the end of the period,  indicting
their principal  occupation and employment during that period,  and the name and
principal  business of the  organization in which such occupation and employment
were carried out.

     Robert Galoob obtained a B.S. from the University of California at Berkeley
in 1975. He was President and Director of Robert Galoob, Inc. from 1989 to 1995.
From 1995 to present he was President and a Director of Galoob Enterprises, Inc.
now known as Watchout! Inc.

     David Galoob, attended college at City College of San Francisco, University
of Oklahoma  and  University  of Southern  California.  From 1970 to 1991 he was
employed by Lewis  Galoob Toys, Inc. in various  management  positions including
President,  CEO,  and  Chairman of the Board.  He retired in 1991.  From 1991 to
1996,  we was  co-president  and  co-chairman  of the board of The  Original San
Francisco Toymakers.

<PAGE>

     Stephen J. Petre is Vice  President.  He was founder,  President and CEO of
Goldpoint,  LLC  since  1996.  Mr.  Petre  has 19 years of  business  experience
including extensive major account, international sales and marketing management,
in  addition  to  international  sourcing.  Mr.  Petre was the vice  presidentof
WATCHOUT!.  Mr. Petre  attended the  University of Denver and received a BSBA in
1978.

     Directors of the Company  hold office until the next annual  meeting of the
shareholders and until their successors have been elected and qualified.

     Officers of the Company are elected by the Board of  Directors at the first
meeting after each annual  meeting of the Company  shareholders  and hold office
until their death, or until they shall resign or have been removed from office.

Section 16(a) Reporting Delinquencies

     Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended  (the
"Exchange Act"), requires the Company's officers and directors,  and persons who
own more than 10% of a registered class of the Company's equity  securities,  to
file reports of ownership  and changes in ownership of equity  securities of the
Company with the Securities  and Exchange  Commission.  Officers,  directors and
greater-than  10%  shareholders  are  required by the  Securities  and  Exchange
Commission  regulation  to furnish the Company with copies of all Section  16(a)
filings.

Item 10. Executive Compensation.

     The Company accrued a total of no compensation to the executive officers as
a group for services  contributed  to the Company in all  capacities  during the
period ended  December 31,  1998.  No one  executive  officer  received,  or has
accrued for his benefit, in excess of $60,000 for the year. No cash bonuses were
or are to be paid to such persons.

<PAGE>

     The Company does not have any employee incentive stock option plans.

     There are no plans  pursuant  to which cash or non- cash  compensation  was
paid or  distributed  during the last fiscal year,  or is proposed to be paid or
distributed in the future,  to the executive  officers of the Company.  No other
compensation not described above was paid or distributed  during the last fiscal
year to the executive  officers of the Company.  There are no compensatory plans
or  arrangements,  with respect to any  executive  office of the Company,  which
result or will result from the resignation,  retirement or any other termination
of such individual's  employment with the Company or from a change in control of
the Company or a change in the individual's  responsibilities following a change
in control.

                    SUMMARY COMPENSATION TABLE OF EXECUTIVES


Name and       Fiscal   Salary  Bonus   Other Annual   Restriced    Securities
Principal      Year     ($)     ($)     Compensation   Stock        Underlying
Position                                ($)            Awards       Options/SARs
                                                       ($)          (#)
Robert Galoob  1995     0       0       0              0            0

President      1996     0       0       0              0            0

               1997     0*      0       0              0            0

               1998     0       0       0              0            0

David Galoob   1995     0       0       0              0            0

Secretary/     1996     0       0       0              0            0

Treasurer      1997     0*      0       0              0            0

               1998     0       0       0              0            0

Stephen Petre, 1998     0       0       0              0            0

Vice President 1996     0       0       0              0            0

               1997     0*      0       0              0            0

               1998     0       0       0              0            0

*accrued compensation of $39,250 total
Option/SAR Grants Table (None)
Aggregated  Option/SAR Exercises in Last Fiscal Year an  FY-End Option/SAR
value (None)
Long Term Incentive Plans - Awards in Last Fiscal Year (None)

<PAGE>

     DIRECTOR COMPENSATION FOR LAST FISCAL YEAR

(Except for  compensation of officers who are also Directors which  compensation
is listed in Summary Compensation Table of Executives)

<TABLE>
<CAPTION>

Name           Annual         Meeting        Consulting          Number of      Number of
               Retainer       Fees ($)       Fees/Other          Shares (#)     Securities
               Fees ($)                      Fees (R)                           Underlying
                                                                                Options/SAR
                                                                                (#)
<S>            <C>            <C>            <C>                 <C>            <C>

Robert Galoob, 0              0              0                   0              0
Director

David Galoob,  0              0              0                   0              0
Director

</TABLE>

Item 11. Security Ownership of Management and Beneficial Owners.

As of  December  31,  1998,  there  were  15,030,245  common  shares  issued and
outstanding.  The following table sets forth information, as of Fiscal year end,
with respect to the beneficial ownership of the Company's $.001 par value common
stock by each  person  known by the Company to be the  beneficial  owner of more
than five percent of the outstanding  common stock,  and by current officers and
directors of the Company.

Stock Title     Name and Address             Amount of Beneficial   Percentage
of Class        Of Beneficial Owner          Ownership              of Class

Common          WCM Investments, Inc.(1)     1,017,116              6.7%
                2350 Airport Freeway #660
                Bedford, TX 76022

Common          Robert Galoob,               3,141,823              20.9%
                President & Director
                116 Stanyan
                San Francisco, CA

Common          David Galoob                 3,781,823              25.2%
                Secretary and Director
                116 Stanyan
                San Francisco, CA

<PAGE>

Common          Mark Hollo                   1,820,000              12.1%
                c/o Sands Brothers
                90 Park Avenue
                New York, NY  10016

Common          Archangel(2)
                Holding Company, LLC         1,580,000              10.5%
                7 Park Avenue
                White Plains, NY  10603

Common          Martin Sands                 910,000                6%
                c/o Sands Brothers
                90 Park Avenue
                New York, NY  10016

Common          Steven Sands                 910,000                6%
                c/o Sands Brothers
                90 Park Avenue
                New York, NY  10016


                All Officers and             8,503,646             56.6%
                Directors as a Group
                (3 Persons)

(1)   WCM  Investments, Inc. is beneficially owned by William  C. Meier.

(2)  Archangel Holding Co, LLC is beneficially owned by Stephen Petre, Vice
President.

Item 12. Certain Relationships and Related Transactions.

     There were no transactions  or series of transactions  for the fiscal year,
to which the Company is a party,  in which the amount  exceeds  $60,000,  and in
which,  to the  knowledge  of the Company,  any  director,  executive  director,
nominee,  five percent  stockholder or any member of the immediate family of any
of the  foregoing  persons,  have or will  have a direct  or  indirect  material
interest, except as follows:

The  Watchout!  Agreement  was entered  into  effective  May 30,  1997,  and the
Watchout!  Acquisition consummated pursuant thereto effective as of December 29,
1997. Pursuant to the


<PAGE>

Watchout!  Agreement,  the  shareholders of Watchout!  contributed to Registrant
100% of  Watchout's  common stock for an aggregate  consideration  of 11,296,300
shares of  Registrant's  common  stock.  Prior to the  closing of the  Watchout!
Acquisition,  Watchout! was controlled by Robert Galoob and David Galoob. Robert
Galoob  received  3,141,823  shares of common stock of registrant.  David Galoob
received 3,781,823 shares of common stock of registrant.

Pursuant to a LLC  Interest and Asset  Contribution  Agreement  (the  "Goldpoint
Agreement" and together with the Watchout!  Agreement,  the  "Agreements"),  the
members  (i.e.,  equity  holders) of  Goldpoint  International,  LLC, a Delaware
limited  liability  company  ("Goldpoint"),  effective  as of December 29, 1997,
contemporaneously with the closing of the Watchout!  Acquisition,  received from
Registrant  2,140,000  newly-issued  shares  of  Registrant's  common  stock  in
exchange  for 100% of the  membership  interests in  Goldpoint  (the  "Goldpoint
Acquisition", and together with the Watchout!  Acquisition, the "Acquisitions").
The 2,140,000 shares represent  approximately  14% of the outstanding  shares of
common stock of Registrant on a fully-diluted basis. Prior to the closing of the
Goldpoint  Acquisition,  Goldpoint was  controlled by Stephen J. Petre.  Through
Arch Angel Holding  Company,  LLC, Mr. Petre  controls  1,580,000  shares of the
Registrant.

On September 3, 1997, the Company entered into a loan  arrangement  with certain
parties or loans  totaling  $450,000 to the Company.  The Company  advanced such
monies to Watchout!  in  furtherance of its Agreement of May 30, 1997. The loans
were funded by:

          (a)  An 18% Senior note issued by
               the Company to  Raymond  Larkin in the
               amount of  $50,000  due September 3,
               1998, in full with interest.

          (b)  An 18% Senior note issued by
               the Company to  Watchout!-Goldpoint
               Partners for $150,000  due September 3,
               1998, in full with interest.

          (c)  In  addition,  the Company  granted
               warrants  to purchase common shares at
               $.01/share as an inducement to the
               lenders to make the loans. The  options
               expire on September  3,  2002.  The
               warrants  are  to  Raymond J.  Larkin
               for  75,000 shares  and  to Watchout!
               Goldpoint  partners  for 225,000
               share

          (d)  Further, the Company granted
               warrants to purchase  25,000  shares
               each to  Mark  Hollo  and Sands
               Brothers & Co.  The warrants are
               exercisable at $.01 per share on or
               before September 3, 2002.

          (e) The Company, in a separate
              transaction related  to  the  Watchout!
              Agreement, borrowed $250,000 from Wayne
              Williams and John Bader at interest of
              18% per annum and agreed  to issue warrants
              to purchase a  total  of  250,000
              common  shares  of the Company @  $.10
              per  share exercisable  two  years from
              September  19,  1997. The  warrants are
              to be issued to John  Bader  and Wayne E.
              Williams  for  166,000  and   84,000,
              respectively.

<PAGE>

                                     Part IV

Item  13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)  The following exhibits and financial statement schedules are filed as
exhibits to this Report:

1. Financial Statements of the Registrant are included under Item 8 hereof.

2. Financial Statement Schedules - None

3. Exhibits:

Exhibit #        Description                   Location
3.1              Articles of Incorporation     Exhibit to Annual Report
                                               on Form 10K  for  Fiscal
                                               Year ended June  30, 1986

3.2              Bylaws of Registrant          Exhibit to Annual Report
                                               on Form 10K  for  Fiscal
                                               Year ended June  30, 1986

3.3              Amendment to Articles of      Exhibit to Form 8-K filed
                 Incorporation                 December 14, 1998

27.1             Financial Data Schedule       Attached

(b) Reports on Form 8-K.

     Incorporated by reference.


<PAGE>

                                   Signatures

Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities  and
Exchange Act of 1934, the Registrant had duly caused this Report to be signed on
its behalf by the  undersigned  thereunto  duly  authorized,  in the city of San
Francisco,  State of California on this 1st day of  November, 1999.

WatchOut! Inc.

     /s/ Kevin Waltzer
By:  ________________________________
     President

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been  signed by the  following  persons in the  capacities  and on the dates
indicated.

     Signature           Title                    Date

/s/ Robert Galoob                                 November 10, 1999
----------------------   Director                 --------------------
Robert Galoob


/s/ David Galoob         Secretary                November 10, 1999
----------------------   Director                 --------------------
David Galoob


/s/ John J. Russell                               November 1, 1999
----------------------   Director                 --------------------
John J. Russell



<PAGE>

                        Michael B. Johnson & Co., P.C. (A
                            Professional Corporation)

                          Certified Public Accountants
                         9175 East Kenyon Avenue, Suite
                           #100 Denver, Colorado 80237

Michael B. Johnson C.P.A.                                       (303)796-0099
Member: A.I.C.P.A.
Colorado Society of C.P.A.'s


                         REPORT OF INDEPENDENT AUDITORS


Board of Directors
White Cloud Exploration


We have audited the accompanying balance sheets of White Cloud Exploration, Inc.
as of December 31, 1998, and the related statements of operations and cash flows
for the years then ended. These financial statements are 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 statements presentation.
We believe that our audits provide a reasonable basis for our opinion.

As  shown in the  financial  statements,  the  Company  incurred  a  net loss of
$856,896 and had incurred substantial losses in the prior years. At December 31,
1998,  current  liabilities  exceed current assets by $1,920,567.  These factors
indicate that the Company has substantial doubt about its ability to continue as
a going  concern.  The  financial  statements  do not  include  any  adjustments
relating to the  recoverability  and  classification  of recorded assets, or the
amounts and  classification  of liabilities that might be necessary in the event
the Company cannot continue in existence.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial positions of White Cloud Exploration,  Inc.
as of December 31, 1998 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.


/s/ Michael Johnson & Co., LLC.

Denver, CO
October 20, 1999

                                       F1

<PAGE>

                                 WATCHOUT! INC.
                                  BALANCE SHEET
                           DECEMBER 31, 1998 AND 1997

                                                       1998            1997
ASSETS

Current Assets

Cash                                              $       580      $    59,147
Accounts Receivable                                         -          137,454
Less Allowance for doubtful accounts                        -          (53,325)
                                                  ------------   --------------
                                                          580          143,276
Inventory                                                   -          162,000

Total Current Assets                                      580          305,276

Property, plant and equipment                               -           17,905
Less accumulated depreciation                               -           (5,653)
                                                  ------------   --------------
Total property and equipment                                -           12,252

Other Assets

Due from Member                                             -           27,935
Organization Costs                                     15,250           16,853
Less Accumulated Amortization                          (3,050)               -
                                                  ------------   -------------
Total Other Assets                                     12,200           44,788
                                                  ------------   -------------
TOTAL ASSETS                                           12,780          362,316
                                                  ============   =============
LIABILITIES & STOCKHOLDERS' EQUITY

Current Liabilities

Accrued Expenses                                      537,213          200,157
Accounts Payable                                      475,989          319,983
Due to Stockholders                                   457,945          307,424
Due to Factor                                               -           55,537
Line of Credit                                              -           54,968
Notes Payable                                         450,000          450,000
                                                      -------         --------
Total Current Liabilities                           1,921,147        1,413,737

Stockholders' Equity (Deficit)

Preferred Stock, no par value 10,000,000 shares
 authorized, no shares issued or outstanding                -                -
Common Stock, $.001 par value, 50,000,000 shares
 authorized, 15,030,245 shares issued & outstanding    15,030           15,030
Additional paid in capital                            989,502          989,502
Accumulated Deficit                                (2,911,849)      (2,055,953)
                                                  ------------      -----------
Total Stockholders' Deficit                        (1,908,317)      (1,051,421)
                                                  ------------      -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY           $   12,780        $ 362,316
                                                  ============      ===========



    The accompanying notes are an integral part of this financial statement.

                                       F2


<PAGE>

                                 WATCHOUT! INC.
                            STATEMENT OF OPERATIONS
                      FOR THE YEARS ENDED DECEMBER 31, 1998

                                             1998           1997
                                             ----           ----

OPERATING REVENUES

Revenues                                  $         -       $    826,446
Cost of Goods Sold                                  -           (485,767)
                                        -------------       -------------
GROSS PROFIT                                        -            340,679

OPERATING EXPENSES

Royalties                                      56,250            225,000
Research Development                           48,048            260,359
Selling Expenses                                    -             23,117
Professional Fees                             122,051            112,851
Management Fees                                     -            115,321
Consluting Fees                                94,792             31,930
General & Administrative                       98,746            201,328
Marketing                                       1,251              7,855
Commitment/Loan Fees                          181,695             94,500
                                        -------------       ------------
TOTAL EXPENSES                                602,833          1,072,261
                                        --------------      -------------
OPERATING PROFIT (LOSS)                      (602,833)          (731,582)
                                        --------------      -------------
OTHER REVENUES & EXPENSES

Interest Expense                               92,063            (36,612)
Miscellaneous Income                                -             37,946
Loss on Sale of Receivables/Inventory        (162,000)          (238,254)
                                        --------------      -------------
TOTAL OTHER REVENUES & EXPENSES               254,063           (236,920)
                                        --------------      -------------
NET INCOME (LOSS)                            (856,896)          (968,502)
                                        ==============      =============
Weighted Average Common Shares             15,030,245         15,030,245
Loss Per Share                               $  (0.06)           $ (0.06)
                                        ==============      =============

    The accompanying notes are an integral part of this financial statement.

                                       F3

<PAGE>

<TABLE>
<CAPTION>

                                 WATCHOUT! INC.
                            STATEMENTS OF CASH FLOWS
                               DECEMBER 31, 1998

                                                                      1998             1997
                                                                 -------------     -----------
<S>                                                              <C>                 <C>

OPERATING ACTIVITIES
Net Loss                                                         $(856,896)          $(968,502)

Adjustment to Reconcile Net Loss to Net
 Cash Used in Operating Activities:
Depreciation & Amortization                                              -               7,607
Common Stock Issued in Exchange for Services                             -                  43
Expenses Paid by stockholder as Capital Contribution                     -              88,500
Changes in Operating Assets and Liabilities:
Inventory                                                          162,000                   -
Accounts Receivable                                                 84,129             (83,115)
Accounts Payable and Accrued Expenses                              457,216             266,808
Interest Payable                                                         -              25,668
                                                                 -------------       ----------
Net Cash Used in Operating Activities                             (153,551)           (662,991)

INVESTING ACTIVITIES
Purchase of Equipment                                                    -             (11,435)
(Advances) Payments to/from Member                                       -              73,080
                                                                 -------------       ----------
Net Cash Provided by Investing Activities                                -              61,645

FINANCING ACTIVITIES
Advances from Stockholders                                         150,521             185,016
Proceeds (Payments) from/to Factor                                 (55,537)            (16,902)
Proceeds from Line of Credit                                             -              20,961
Proceeds from Notes Payable                                              -             450,000
Proceeds from Issuance of Stock                                          -               7,457
                                                                 -------------       ----------
Net Cash Provided by Financing Activities                           94,984             646,532
                                                                 -------------       ----------
Net Increase (Decrease) in Cash and Cash Equivalents               (58,567)             45,186
Cash and Cash Equivalents at Beginning of Year                      59,147              13,961
                                                                 -------------       ----------
Cash and Cash Equivalents at End of Year                         $     580           $  59,147
                                                                 =============       ==========
SUPPLEMENTAL CASH FLOW
Interest Paid                                                    $  11,063           $  10,924
Taxes Paid                                                       $       -           $   1,050


</TABLE>

    The accompanying notes are an integral part of this financial statement.

                                       F4


<PAGE>

<TABLE>
<CAPTION>

                                 WATCHOUT! INC.
                       STATEMENTS OF STOCKHOLDER'S EQUITY
                      FOR THE YEARS ENDED DECEMBER 31, 1998


                                                                 Additional          Accum.         Total
                                          Common Stock           Paid-in             Excess/        Stockholders'
                                        Shares    Amount         Capital             (Deficit       Equity
                                        ----------------         ----------          --------       -------------
<S>                                 <C>               <C>        <C>               <C>              <C>

Balance 12/31/96                        22,072        227        746,755           (1,087,451)        (340,469)

Capital Contribution                         -          -        250,000                    -          250,000

Issue Stock for Services/Debt           43,290         43          7,457                    -            7,500

Issue of Stock for Merger           14,759,883     14,760        (14,760)                   -                -

Net Loss for 12/1/97                         -          -              -             (968,502)        (968,502)
                                   ------------    ------        -------             ---------      -----------
Balance 12/31/97                    15,030,245     15,030        989,452           (2,055,953)      (1,051,471)

Net Loss 12/31/98                            -          -              -             (856,896)        (856,896)
                                   ------------    ------        -------             ---------      -----------
Balance 12/31/98                    15,030,245     15,030        989,452           (2,912,849)      (1,908,367)
                                   ============   =======        =======            ==========      ===========

</TABLE>

    The accompanying notes are an integral part of this financial statement.

                                       F5



<PAGE>


                                 WATCHOUT! INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
---------------------------------------------------

The following is a summary of WatchOut!  Inc.'s (Company) significant accounting
policies:

Organization
------------

The  Company  was  incorporated  July 22,  1983  under  the laws of Utah for the
purpose  of  obtaining   capital  to  seek   potentially   profitable   business
opportunities.  Since inception,  the Company has been engaged in organizational
activities. In 1997, the Company acquired two entities:  WatchOut!, a California
Corporation  and  Goldpoint  International,  a  limited  liability  company.  In
November of 1998, the corporation changed it's name to WatchOut! Inc.

Cash and Cash Equivalents:
-------------------------

For purposes of the statement of cash flows,  cash and cash equivalents  include
cash in banks and money market accounts.

Research & Development
----------------------

Research and development costs are expense when incurred.

Use of Estimates in the preparation of Financial Statements:
-----------------------------------------------------------

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

Income Taxes
------------

No  provisions  have been made for income  taxes.  As of December 31, 1998,  the
Company  had net  operating  loss (NOL)  carryforwards  for  federal  income tax
purposes of approximately $2,912,849. These net operating laosses may be used to
offset future taxable income. Unusued carryforwards will expire in 2013.


                                       F6

<PAGE>


                                 WATCHOUT! INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CON'T:
----------------------------------------------------------

Income Taxes:
-------------

The  Financial  Accounting  Standards  Board  (FASB)  has  issued  Statement  of
Financial Accounting  Standards Number 109 ("SFAS 109"),  "Accounting for Income
Taxes,"  which  requires  a change  from the  deferred  method  to the asset and
liability  method of accounting for income taxes.  Under the asset and liability
method,  deferred  income  taxes  are  recognized  for the tax  consequences  of
"temporary  differences" by applying  enacted  stautory tax rates  applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities.

At December  31,  1998,  the Company had net  operating  loss  carryforwards  of
approximately  $2,912,849 for federal income tax purposes.  These carryforwards,
if not utilized to offset taxable income will expire at the end of the indicated
years:

               2009                $  102,487
               2010                    89,906
               2011                   895,058
               2012                   968,502
               2013                   856,896
                                   ----------
                                   $2,912,849
                                   ==========

There was no provision or benefit for income taxes in fiscal 1998.

NOTE 2 - NOTES PAYABLE
----------------------

Following is a summary of notes payable at December 31,

                                                  1998
                                                  ----

     8%   Unsecured notes payable to
          Shareholders, due on various dates      $457,945

          Unsecured notes payable, due in 1998
          at an interest rate of 12%               450,000
                                                  --------
                                                  $907,945
                                                  ========


                                       F7

<PAGE>


                                 WATCHOUT! INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 3 - GOING CONCERN:
----------------------

The Company  incurred a net loss of $856,896  for 1998 and $968,502 for 1997 and
has incurred  substantial  net losses in the prior years.  At December 31, 1998,
current  liabilities  exceeded  current assets by $1,920,567 and at December 31,
1997 by  $1,270,461.  These factors  indicate  that the Company has  substantial
doubt about its ability to continue in existence.  The  financial  statements do
not inclue any adjustments relating to the receoverability and classification of
recorded assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.

NOTE 4 - RELATED PARTY TRANSACTION:
----------------------------------

Watchout!  Inc.  has  recorded  unsecured,  non-interest-bearing  amounts due to
stockholders for the reimbursement of expenses.  There are no specific repayment
terms.  Officers,  directors and shareholders have loaned the Company large sums
of funds in order to keep the Company afloat.

NOTE 5 - SUBSEQUENT EVENTS:

a)       Gill & Associates,  a collection agency for Office Depot has threatened
         a collection suit for approximately $17,000.

b)       Boit,  Inc.  filed  suit to  resolve  the  technology  license  for the
         Company's watch products. The Company settled the suit and relinquished
         the license in the summer of 1999.

c)       Len Dorfman has filed suit for fees owed totaling $96,000.

d)       In October 1999, the major  shareholders  of the Company agreed to sell
         control  of the  Company by selling  over 8 million  shares,  including
         options, to Innovative  Cybersystems Corp. which intends to engage in a
         new business.  The Agreement  requires  settlement of certain debts and
         renegotiations of all other debt as a condition of the Agreement.

e)       The  Company  is  negotiating  to  cancel  the Sands  Brothers  selling
         Agreement to settle any claims by Sands Brothers for a Mutual Release.

f)       Bader-Williams  Loan: The Company is renegotiating the loan which is in
         default to provide a fixed amount and new payment terms.

g)       Watchout/Goldpoint Loan: The Company is renegotiating the loan which is
         in default, to provide a fixed amount and new payment terms.


                                       F8