UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


[x] Annual report pursuant to section 13 or 15(d) of The Securities Exchange Act
of 1934 ("Exchange Act") [Fee Required]

For the fiscal year ended October 31, 1996

[ ] Transition report pursuant to section 13 or 15(d) of The Securities
Exchange Act of 1934

For the transition period from _________ to __________

Commission file number 33-30980

                          ECHO SPRINGS WATER CO., INC.
                  (formerly known as Grudge Music Group, Inc.)
                 (Name of small business issuer in its charter)

     New York                                16-1433379
(State or other jurisdiction        (I.R.S. Employer Identification No.)
of incorporation or organization)

Building 100A, Hackensack Avenue, Kearny, NJ  07032
(Address of principal executive offices)        (Zip Code)

Issuer's telephone number: (201) 465-5151

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

Securities Registered under Section 12(g) of the Exchange Act:
     Title of Each Class:  Common Stock, Par Value $.0001

Check  whether  the issuer  (1) has 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 issuer 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 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  issuer'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. [ ]

The issuer's net revenues for its most recent fiscal were $2,264,702.


                                                                 1

<PAGE>



The aggregate  market value of the issuer's voting stock held as of December 31,
1996 by non-affiliates of the issuer,  based upon the average of the closing bid
and asked prices on that date, was approximately $5,376,900.

As at December 31, 1996,  3,097,149 shares of the issuer's Common Stock,  $.0001
par value, were outstanding.

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




                                                                 2

<PAGE>



                                                      PART I

Item 1. Description of Business

Introduction

           Echo Springs Water Co., Inc., and its wholly-owned  subsidiaries,  RG
Water Company, Inc., and Berkshire Acquisition Company, Inc., (collectively, the
"Company") is engaged in bottling and  distributing  its  non-sparkling  natural
spring  water from  naturally  free-flowing  springs  located  on the  Company's
property in  Burlington,  New York.  The Company's  natural spring water is sold
both under the label "Echo  Springs" and under  private  label  distributor  and
supermarket  brands.  The Company also leases water coolers to  residential  and
commercial  customers and sells allied  products such as coffee,  tea and a wide
assortment of paper products to its commercial accounts.

           The  Company's  products  are  primarily  marketed  and  sold  by its
in-house  staff.  To  a  lesser  extent,   sales  to  certain  distributors  and
supermarkets are made through  independent  commissioned sales  representatives.
The Company also provides installation and service for its leased coolers.

           At present,  the Company has an  established  sales and  distribution
network and an  existing  base of over 4,000  customers  located in the New York
City Metropolitan area, New Jersey and upstate New York

History of the Company

           The Company,  formerly Grudge Music Group,  Inc., was incorporated in
New York in 1985 for the purpose of engaging  in the music  recording  business.
Due to continuing  losses from  operations,  the Company  discontinued its music
business in 1990.

           In 1991 and 1992,  the Company  commenced its bottled water  business
through  the  acquisition  of two  companies.  In  December  1991,  the  Company
completed  the  acquisition  of the assets of Echo Springs  Water Co., Inc. (now
known as ESWC,  Inc.)  consisting  of its  present  spring  water  source  and a
fully-automated  natural spring water bottling  facility  located in Burlington,
New York.

           In July 1992, the Company acquired the assets of Berkshire Springs of
New Jersey, Inc.  (Berkshire),  a distribution company that leases water coolers
and sells water and other allied  products to both  commercial  and  residential
customers in the State of New Jersey.





                                                         3

<PAGE>



The Bottled Water Market

           The bottled water market comprises three major segments: non-
sparkling, sparkling and imported water.

           *               Non-sparkling, or still water contains no
                           carbonation and is consumed as an
                           "alternative to tap water."  Non-sparkling
                           water is generally distributed directly to
                           homes and offices, through retail outlets
                           and through vending machines.
                           Distinctions are often made among brands
                           of non-sparkling water based on their
                           source, level of mineral content and the
                           method of purification (distillation,
                           deionization or reverse osmosis).

           *               Sparkling water contains either natural or
                           artificial carbonation and is positioned
                           to compete in the broad "refreshment
                           beverage" field.  Sparkling water includes
                           domestic sparkling water, club soda and
                           seltzer, and is typically sold through
                           normal food and beverage retail channels.

           *               Imported water, which includes both
                           sparkling and non-sparkling water produced
                           and bottled outside the U.S., is targeted
                           to "image-conscious consumers." Imported
                           water is sold through normal food and
                           beverage retail channels, typically at
                           significantly higher prices than other
                           bottled water alternatives.

           The Company  participates only in the  non-sparkling,  or still water
market.  Non-sparkling bottled water is currently distributed through office and
home  delivery,  retail stores and vending  machines.  Within the  non-sparkling
segment,  retail  pricing  generally  reflects  the  costs  associated  with the
maintenance of each distribution  channel. As a result,  bottled water delivered
to the home or office has the  highest  per  gallon  price,  with  off-the-shelf
bottled water sold through  retail  channels  having the next highest per gallon
price and, finally, vended water, which has the lowest price per gallon.

           Natural spring waters are not always free from contamination
problems.  Springs can be contaminated with coliform (bacteria in
the water). Natural springs need to be monitored and tested on a
regular basis to make sure they are without contamination.  To
date, the Company has had no contamination problems with its three
active springs.  The Company's water has not been determined to be
better or less contaminated than municipal water.  The Company

                                                         4

<PAGE>



believes, however, that natural spring water has advantages over municipal water
because,  unlike  municipal  water,  natural  spring  water is not treated  with
chlorine and other chemicals.

Products

           The  Company's  natural  spring  water is sold in two  bottle  sizes:
one-gallon plastic bottles and five-gallon high density polyethylene  recyclable
containers.  The Company  previously sold its natural spring water in 2.5 gallon
bottles, but has discontinued its sales in that size. Water sold under the "Echo
Springs" brand is packaged in both one-gallon and five-gallon  bottles.  Private
label water is sold only in one-gallon  size  bottles.  Private label sales have
not been significant to date.

           In  addition,  the  Company  leases  water  coolers  and sells a wide
variety of allied products,  including regular and decaffeinated  coffee, coffee
creamers and milk,  sugar,  soups and paper  products such as hot and cold paper
cups and plastic utensils.  To date, revenues from such allied products have not
been significant.

Suppliers

           The Company  purchases  all of its coolers and bottle and plastic cap
requirements from major vendors. In the past, the Company has experienced delays
from time to time in obtaining an adequate  supply of these materials due to its
vendors' inability to meet demand.  While such delays have become less frequent,
there can be no assurance that the Company will not experience similar delays in
the  future.  To date,  such delays  have not had a material  adverse  effect on
operations.

           Substantially  all of the Company's  water coolers are purchased from
the Cordley Temprite Division of Elkay Manufacturing. This supplier was selected
based on its reputation in the cooler  industry and its ability to meet delivery
deadlines  on a cost  efficient  basis.  Since there are only a few large cooler
manufacturers  in the United  States,  the  inability to obtain water coolers on
satisfactory  terms  could  have a  material  adverse  effect  on the  Company's
business.  The Company has not experienced  any such problems.  The Company also
purchases  certain allied  products,  such as coffee,  tea and a wide variety of
paper products from numerous vendors.  The Company believes there are sufficient
vendors from which to obtain these products on competitive terms.

Marketing and Distribution

           The Company  markets its "Echo  Springs" brand as a 100% pure natural
spring water. The Company believes that this  distinguishes  its water from many
of its  competitors'  water,  many of which sell either  filtered  municipal tap
water or purified water. To date,

                                                         5

<PAGE>



the Company has focused its marketing  and sales  efforts in the New  Jersey/New
York City Metropolitan  area, which it believes offers a substantial  market for
growth.  If the Company is successful  in further  penetrating  this market,  of
which there can be no  assurance,  it intends to expand its  marketing and sales
focus to the northeastern  United States.  The Company sells all of its products
through its own in-house staff except for certain  distributor  and  supermarket
sales which are made through independent commissioned sales representatives. The
Company  sells  its  products  to  offices,  other  commercial   establishments,
residential  customers and  supermarkets.  The Company  distributes  its bottled
water and allied products from its Kearny,  New Jersey warehouse by means of its
fleet of eleven  trucks,  four of which are owned,  five of which are rented and
two of which are leased.  The Company  also leases a tractor and three  trailers
for  delivery  to  its  Kearny   warehouse  and  to  certain   distributors  and
supermarkets.

Seasonality

           In the beverage industry,  sales typically increase in the second and
third calendar quarters.  In order to help minimize the impact of seasonality on
sales in the future,  the Company will seek to expand its distribution of allied
products by  increasing  its  marketing  of such  products to its bottled  water
customers.

Competition

           The bottled water market is highly competitive.  The Company competes
in the  non-sparkling  segment of the bottled  water market  directly with other
office delivery water companies and indirectly with companies that provide water
vending machines and with off-the-shelf  marketers. The Company's water products
compete not only with other bottled water  products but also with other types of
beverages,  including  soft drinks,  coffee,  beer,  wine and fruit juices.  The
Company competes with vended water and  off-the-shelf  marketers on the basis of
(1) quality,  (2) taste,  (3) the  convenience of on site delivery,  and (4) the
features  offered by the water  dispenser  (i.e.  the  ability  to have  heated,
chilled or room temperature  water,  depending on the type of dispenser rented).
Such competition  includes bottlers and distributors of water products,  several
of which  are  more  experienced  and  have  greater  financial  and  management
resources  than  the  Company  and  have  established   proprietary  trademarks,
distribution facilities and bottling facilities.

           Many bottled water companies in the United States are owned
by European or Japanese companies.  Nestle (Swiss) owns the
Perrier, Great Bear, Poland Springs, Ozarka, Oasis, Zephyrhills,
Arrowhead, Calistoga, Ice Mountain and Volvic brands.  BSN Group
(French) owns the Evian Brand.  Anjou (French) owns the Sierra
Springs and Hinckley & Schmitt brands.  Suntory (Japanese) owns the

                                                         6

<PAGE>



Belmont Springs, Crystal, Kentwood, Polar, Willow and Talwonda
Springs brands.

Employees

           As of December 31, 1996, the Company  employed  twenty-eight  people,
six in  production,  fifteen  in  distribution,  and  seven  in  management  and
administration.  None of the  Company's  employees  is subject  to a  collective
bargaining  agreement  and the  Company  believes  that its  relations  with its
employees are satisfactory.

Government Regulation

           The United  States  Food and Drug  Administration  ("FDA")  regulates
bottled water as a food. Accordingly,  the Company's bottled water must meet FDA
standards  for  manufacturing  practices  and  chemical and  biological  purity.
Furthermore,  these  standards  undergo a continuous  process of  revision.  The
labels  affixed to bottles and other  packaging  of the water are subject to FDA
restrictions on health and nutritional claims for foods.

           In addition, all drinking water must meet United States Environmental
Protection  Agency  standards  established  under  the Safe  Drinking  Water Act
("SDWA") for mineral and chemical concentration. The 1986 amendments to the SDWA
mandated  the   establishment  of  new  drinking  water  quality  and  treatment
regulations.

           Bottled water must originate from an "approved  source" in accordance
with standards  prescribed by the state health  department in each of the states
in which the Company's  products are sold.  The source must be inspected and the
water sampled, analyzed and found to be of safe and wholesome quality. There are
annual  "compliance  monitoring tests" of both the source and the bottled water.
The health  departments  of the  individual  states also govern water purity and
safety,  labeling of bottled  water  products  and  manufacturing  practices  of
producers.

           The Company's water supply is located in the State of New York, which
requires a bottled  water  manufacturer  to be  certified  by the New York State
Department   of  Health   ("Department   of   Health").   In  order  to  receive
certification,  a prospective manufacturer must submit an application,  together
with a  detailed  report  prepared  by a  licensed  professional  engineer.  The
application  includes the manner of  development  of the source,  the sanitation
methods to be used in the bottling operation,  the water treatment proposed, the
laboratory control of water quality which will be provided, detailed engineering
plans of the bottling facility and water source,  and a flow diagram from source
through bottling operation.

           The application, report and proposed labels and caps are
reviewed by the Department of Health. In addition, samples of the

                                                         7

<PAGE>



water are tested.  After this review and testing,  arrangements are made for the
local county public health unit to inspect the water bottling facilities.

           The Company  currently  has all required  approvals and believes that
its  bottling  facilities  are in  substantial  compliance  with all  applicable
government regulations.

Item 2. Description of Properties

           The  Company's  principal  facility  consists  of 150  acres  of land
located in  Burlington,  New York,  and owned by the Company,  on which there is
located a processing facility consisting of 7,200 square feet and seven springs,
of which three are  completed  and in  operation.  The  Burlington  facility was
built,  and  bottling  equipment  installed,  in 1990.  The Company  also leases
property in Edmeston,  New York.  Although  the Company has no present  plans to
develop the four uncompleted springs, in order to do so it would be necessary to
landscape the area, cap the springs, run an underground pipe from the springs to
the bottling  facility and obtain approval from the New York State Department of
Health.  The Company estimates that this process would take three to four months
to complete. Until developed,  management is not able to estimate the additional
capacity that these springs would provide.

           The  current  production   capacity  of  the  bottling  facility  per
eight-hour shift is 1,400,000 four-pack crates per year of one-gallon bottles or
1,100,000  five-gallon  bottles per year, which exceeds the Company's  projected
needs for the foreseeable  future.  The plant  currently  operates one shift per
day, five days per week, representing approximately 25% of capacity.

           The Company draws its water from three  developed  natural springs at
Burlington  and  Edmeston.  The  Company's  Burlington  water sources flow at an
average rate of 26 gallons per minute.  The Edmeston springs  (described  below)
have  average flow rates of 50 and 60 gallons per minute.  The Company  believes
that its water is clean, refreshing and lightly mineralized.

           The Company is dependent upon the natural springs for the water which
it bottles  and sells.  Natural  occurrences  beyond the  control of the Company
including,  but not limited to, drought, which prevents the natural springs from
recharging  themselves,  and other  occurrences,  such as  contamination  of the
springs  or  failure  of  the  water  supply  to  comply  with  all   applicable
governmental  requirements for mineral and chemical concentration,  could have a
material adverse effect on the business of the Company.

           The  Company  entered  into a  20-year  lease  with  an  unaffiliated
landlord on  September  14, 1994 for 41.686 acres of land located in the town of
Edmeston,  State of New York,  on which are located two developed  springs.  The
springs have a combined average capacity of

                                                         8

<PAGE>



approximately  58,000,000 gallons of water per year. The Company applied for and
received  approval  from the New York State  Department of Health to operate the
springs on August 10,  1995.  Based on the amended  agreement  of July 19, 1995,
rent for the property is $.005 per gallon of water  extracted for the first five
years (with minimum rent of $300 per week) and $.01 per gallon for the following
fifteen  years with  minimum  rent of $600 per week).  The  Company  has paid an
additional $21,000 during the first year. The Company has the right to build and
operate a processing  plant (which will become the property of the  landlord) on
the property in which case the rent will increase to $.015 per gallon extracted.
The Company  also has the right to terminate  the lease  without  penalty  after
payment of rent  aggregating  $100,000  plus the $21,000 first year fee, and, in
the event it has  constructed a processing  plant,  the right to renew the lease
for an  additional  20-year term on terms to be agreed upon by the parties.  The
Company intends,  as its needs require,  to utilize the water from these springs
in its business.  The water can be utilized without  construction of a plant and
the  Company  has no  immediate  plans to build a plant on this  property.  Rent
expense  under this lease was $33,426 and $9,330 for the years ended October 31,
1996 and 1995, respectively.

           The Company's  principal  offices are in Kearny,  New Jersey where it
leases  23,000  square feet of office and  warehouse  space  pursuant to a lease
expiring in March,  1998. The Company pays a monthly rent of $5,495. The Company
believes that its current facilities are adequate for its foreseeable needs.

Item 3. Legal Proceedings

           Kenneth T. Williams  commenced two actions in March and April,  1994,
and a third action in June,  1996 in the Supreme Court of the State of New York,
County of Otsego, against certain parties,  including the Company and certain of
its subsidiaries and affiliates.

           The first two  actions  involved  a dispute  concerning  title to the
Company's land and facility located in Burlington,  New York  ("Property").  The
plaintiff sought a one-half interest in the Property and $17,000,000 in damages.
The  plaintiff  caused a lis pendens to be placed on the Property in  connection
with such prior action.

           In October,  1994, all of the plaintiff's  claims against the Company
were dismissed except for claims of breach of contract and unjust enrichment. In
June, 1995 the Appellate  Division,  Third  Department,  dismissed the breach of
contract claim against the Company in the second  action.  It also dismissed all
of plaintiff's  claims,  and cancelled the lis pendens,  in the first action. In
July and November of 1995, the Company moved to cancel the lis pendens and grant
judgment  by  default in the second  action  which was denied by the Court,  but
granted in appeal by the Appellate

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<PAGE>



Division  on  November  25,  1996,  pursuant  to which all  claims  against  all
defendants were dismissed.

           In June, 1996,  plaintiff  commenced a third action against Grey, the
former  owners of the  Property  and the Company  (essentially  re-alleging  the
claims asserted against them in the first and second  actions).  On November 25,
1996, the Court  dismissed all claims against all defendants on the grounds that
they were the subject of the two earlier  actions and that plaintiff is bound by
the dispositions of those actions.  On January 16, 1997, the Appellate  Division
affirmed the Company's motion for default judgment or cancellation of the notice
of pendency,  leaving only the unjust  enrichment cause of action pending in the
second lawsuit.

           In August,  1996,  an action was  commenced  against  the Company and
Messrs.  Rakusin and Grey in the Supreme Court of the State of New York,  Broome
County,  demanding a judgment on a promissory  note in the  principal  amount of
$50,000  issued by the Company and  allegedly  personally  guaranteed by Messrs.
Rakusin and Grey. In December,  1996, the plaintiff was granted summary judgment
in this matter.  The Company intends to pay all principal and interest due under
such note.

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

           On  October  1,  1996  the  Company   held  its  annual   meeting  of
shareholders,  at which  meeting,  the  shareholders  were asked to elect  three
directors and to approve a proposal to effect a 1-for- 25 reverse stock split of
the outstanding shares of common stock of the Company. The directors elected and
the votes cast were as follows:

           Name               Votes in Favor        Votes Withheld
Michael S. Rakusin        42,101,212             50,800
Edward J. Metzger         42,102,712             49,300
Frank A. LaSala           41,996,712            115,300

           The  proposal to approve the reverse  stock split was approved by the
shareholder vote as follows:

            Votes in Favor      Votes Against        Abstained
             41,215,676          870,900              24,260


                                                        10

<PAGE>




                                                      PART II

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


           The  following  table  sets  forth  the high and low  prices  for the
periods indicated as reported by the National  Association of Securities Dealers
Automated  Quotation  System (Nasdaq)  between dealers and do not include retail
mark-ups,  mark-downs,  or commissions and do not necessarily  represent  actual
transactions.
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                     Low                        High


Calendar Year 1994*:

First Quarter                                        7/64                       3/16
Second Quarter                                       7/64                       3/16
Third Quarter                                        5/32                       1/4
Fourth Quarter                                       9/64                       19/64

Calendar Year 1995*:

First Quarter                                        1/16                       3/32
Second Quarter                                       1/16                       3/32
Third Quarter                                        1/16                       3/32
Fourth Quarter                                       1/16                       3/32

Calendar Year 1996:

First Quarter*                                       1/16                       3/32
Second Quarter*                                      1/32                       3/32
Third Quarter*                                       1/32                       3/32
Fourth Quarter                                       1 1/2                     2 1/2
</TABLE>

-----------
*pre-reverse split


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

Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended October
31, 1995.

       Net revenues decreased $302,507 (11.8%) to $2,264,702 for the fiscal year
ended October 31, 1996 ("Fiscal 1996")from  $2,567,209 for the fiscal year ended
October 31, 1995 ("Fiscal 1995").  The $353,520  decrease in gross sales was due
primarily to four factors. The 2.5-gallon sales fell by approximately $17,000 as
this low-margin,  low-volume  product line was discontinued in July, 1996. Sales
of one gallons, another low-margin product, decreased by approximately $139,000,
largely due to a  discontinuance  of service to three  customers,  including one
bankruptcy.  The third  contributing  factor was a deliberate  discontinuance of
service to marginal customers as determined from a customer-by-customer review

                                                            11

<PAGE>



in setting up the new corporate  computer  system.  The fourth factor was a much
cooler summer in 1996 compared to 1995.  The remaining  increase in net revenues
was  accounted  for  primarily  by  three  items.   Discounts  earned  upon  the
renegotiation and settlement of a few older payables  increased by approximately
$24,000 and credits and allowances were reduced by approximately  $55,000. These
gains were  offset by a lower gain on  unclaimed  or lost  customer  deposits of
approximately $30,000.

       Cost of sales for  Fiscal  1996 was  $865,255  (38.4% of gross  sales) as
compared  to  $978,901  (37.6% of gross  sales)  for  Fiscal  1995.  This  small
percentage increase was caused primarily by an approximately $24,000 increase in
rental expense relating to the Wheeler springs resulting from twelve months rent
in Fiscal 1996 versus three months in Fiscal 1995.

       Selling,  general and  administrative  expenses were $1,481,897 (60.6% of
net revenues) in Fiscal 1996 as compared to  $1,542,160  (60.1% of net revenues)
in Fiscal 1995. A significant  reduction in the sales and marketing  staff in an
effort to better concentrate on the current customer base resulted in an overall
savings  of   approximately   $158,000.   However,   delivery  costs   increased
approximately  $49,000 primarily as a result of increased truck rental costs due
to a larger  number of  rental  vehicles  in the  corporate  fleet,  in order to
improve the timeliness of product  deliveries,  combined with a 50% truck rental
price increase in May, 1996.  Further,  warehouse costs increased  approximately
$21,000 due largely to increased  cooler repair costs resulting from contracting
such repairs to a third party professional.  Lastly,  general and administrative
expenses rose by  approximately  $28,000.  A small  reduction in  administrative
staff and  expenses of  approximately  $7,000 was offset by the  start-up  costs
related  to the new  corporate  computer  system of  approximately  $18,000  and
increased business development costs of approximately $16,000 to investigate new
potential business investments.

       Interest  expense  decreased  from $247,694 in Fiscal 1995 to $189,782 in
Fiscal 1996 primarily as a result of the $200,000 8% mortgage note payable under
litigation  being  eliminated  at  October  31,  1995 and the effect of the debt
conversion  described  in  Note  14 to the  consolidated  financial  statements.
Amortization of other assets of $4,876 in Fiscal 1996 and Fiscal 1995 related to
the  amortization  of water  rights.  Other income of $78,400 in Fiscal 1996 and
$3,705 in Fiscal 1995 related to non-recurring operating items.

       The net loss for Fiscal 1996 increased by $13,053 from $214,268 in Fiscal
1995 to $227,321 in Fiscal 1996.




                                                            12

<PAGE>




Fiscal Year Ended October 31, 1995 Compared to Fiscal Year Ended October
31, 1994

      Net revenues decreased $115,158 (4.3%) from $2,682,367 for the fiscal year
ended October 31, 1995 ("Fiscal  1995") to $2,567,209  for the fiscal year ended
October 31, 1994 ("Fiscal  1994").  The $85,053  decrease in gross sales was due
primarily to two factors.  First, the sales mix in Fiscal 1995 showed increases,
totaling $74,296, in more profitable five gallon and coffee service sales offset
by decreases,  totaling  $133,537,  in less profitable 2.5 gallon and one gallon
sales.  The  second  contributing  factor  was a  discontinuance  of  service to
marginal  customers in the New York City suburbs.  The remaining decrease in net
revenues  related  primarily to a reduced  gain on  unclaimed  or lost  customer
deposits in Fiscal 1995 to $46,257 from $78,971 in Fiscal 1994.

      Cost of sales for  Fiscal  1995 was  $978,901  (37.6%  of gross  sales) as
compared to  $1,090,011  (40.5% of gross sales) for Fiscal 1994.  This  decrease
resulted  largely from two factors.  The first factor was the shift in sales mix
noted  above  which was  further  enhanced  by  shifting  the  packaging  of the
remaining  2.5 gallon and one gallon sales from  disposable  cardboard  boxes to
reusable plastic crates.

      Selling, general and administrative expenses were $1,542,160 (60.1% of net
revenues) in Fiscal 1995 as compared to  $1,872,906  (69.8% of net  revenues) in
Fiscal 1994. $192,903 of this $330,746 total decrease  represented a significant
reduction in the sales and marketing staff in an effort to better concentrate on
the current customer base while a further $135,884  resulted from a streamlining
of the  administrative  staff and  expenses.  The  remaining  $1,959  saving was
achieved in the delivery and warehouse operations.

      Interest  expense  increased  from  $220,223 in Fiscal 1994 to $247,694 in
Fiscal 1995  primarily as a result of the full-year  effect on 1994  borrowings.
The $200,000  mortgage note payable under  litigation was not  eliminated  until
year end in Fiscal 1995.  Amortization  of other assets of $4,876 in Fiscal 1995
and Fiscal 1994  related to the  amortization  of water  rights.  The  remaining
Fiscal 1994  amortization  costs  related to deferred  charges  which were fully
amortized as at October 31, 1994.

      In Fiscal 1994, the Company  wrote-off  $739,707 of costs incurred for the
proposed merger and public  offering which were  subsequently  withdrawn.  Other
income of $3,705 in Fiscal  1995 and other  expenses  of $318,895 in Fiscal 1994
related primarily to non-recurring operating items.

      The loss on sale of assets of $11,551 in Fiscal  1995  resulted  primarily
from the disposition of the property under  litigation while the gain on sale of
assets of $99,794 in Fiscal 1994 resulted  primarily  from the sale of the Utica
operation.

      The net loss for Fiscal 1995  decreased by $1,526,407  from  $1,740,675 in
Fiscal 1994 to $214,268 in Fiscal 1995.


                                                            13

<PAGE>




      Liquidity and Capital Resources

      The Company's  primary  sources of liquidity have been cash generated from
sales, issuance of common stock, debentures and installment debt, and borrowings
from its officers.

      During the fiscal years ended  October 31, 1996 and 1995,  the Company had
negative  cash  flows  from  operating  activities  of  $270,514  and  $139,699,
respectively.  Investing  activities  used cash of  $44,695  in Fiscal  1996 and
$48,181 in Fiscal 1995 primarily for the  acquisition of property and equipment.
The Company has financed its  operating and  investing  activities  during these
periods primarily through the issuance of common stock and installment debt.

      At October  31,  1996,  the Company had a working  capital  deficiency  of
$1,954,160.  Short-term  credit sources are limited to trade credit on purchases
and services.  The report issued by the Company's  accountants  that accompanies
the Company's  consolidated  financial statements for the year ended October 31,
1996 states that there is a  substantial  doubt about the  Company's  ability to
continue as a going concern.

      Considerations  which  tend to  mitigate  the  question  of going  concern
include  management's  successful  efforts  in  raising  funds  through  private
placements,  the ability to renegotiate and restructure long-term financing with
major  creditors,  past and  present  efforts to convert  debt to equity and the
ability to acquire,  restructure and develop the bottled water business which it
believes  will be able to achieve  profitable  operations.  In June,  1996,  the
Company  entered into  negotiations to consummate a public offering with minimum
gross proceeds of  approximately  $4,000,000.  Such offering is expected to take
place during  Fiscal  1997.  The Company  believes  that these  factors  provide
meaningful evidence as to the Company's ability to continue in operation for the
next fiscal year and support the going concern  presentation in the accompanying
consolidated  financial  statements in favor of the liquidation basis. There can
be no  assurance,  however,  that  management  will continue to be able to raise
sufficient  capital or  convert  existing  debt to equity or achieve  profitable
operations going forward.

      The Company has no plans or commitments  for capital  expenditures  during
the next twelve  months other than the ordinary  equipment  purchases  which are
expected to be funded with additional installment debt.

      The  Company's  business is subject to seasonal  fluctuation,  with summer
being the busiest season and winter the slowest.  To date,  seasonality  has not
had any  material  effect on the  Company's  financial  condition  or results of
operations.


      Item 7.              Financial Statements.


                                                            14

<PAGE>












      Board of Directors and Shareholders
      Echo Springs Water Co., Inc.


                                               Independent Auditors' Report

         We have audited the  accompanying  consolidated  balance  sheet of Echo
Springs Water Co., Inc. and subsidiaries as at October 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity (deficiency)
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 audits.

         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 aforementioned  consolidated  financial statements
present fairly, in all material respects, the financial position of Echo Springs
Water Co.,  Inc.  and  subsidiaries  as at October  31,  1996 and 1995,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.

         The accompanying  financial statements have been prepared assuming that
the Company  will  continue as a going  concern.  As discussed in Note 12 to the
financial statements,  the Company has suffered recurring losses from operations
and has a working  capital  deficiency and a net capital  deficiency  that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described in Note 12. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



                                      CITRIN COOPERMAN & COMPANY, LLP

      January 22, 1997
      New York, New York

                                                            15

<PAGE>



                                                CONSOLIDATED BALANCE SHEET

    <TABLE>
<CAPTION>
<S>                                      <C>
                           AS AT OCTOBER 31,

                                                                                        1996                       1995
                                                                                        ----              -------------

                                     ASSETS
      Current Assets:
       Cash                                                                     $   44,631                $   57,224
       Accounts receivable - net of
        allowance for doubtful accounts
        of $14,000 in 1996 and $35,000 in 1995                                     257,212                   279,128
       Notes receivable, current portion                                            26,010                    22,380
       Inventories                                                                  34,221                    39,909
       Prepaid expenses                                                             30,178                    27,406
                                                                                 ---------                  ---------
         Total Current Assets                                                      392,252                   426,047

      Notes receivable, net of current portion                                     159,868                   157,857

      Property, plant and equipment - net                                        1,278,230                 1,395,090

      Other assets                                                                 220,026                   219,704
                                                                                 ---------                 ---------

         TOTAL ASSETS                                                           $2,050,376                $2,198,698
                                                                                 =========                 =========

                LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

      Current Liabilities:
       Current portion of debt                                                          $  552,153                 $  830,544
       Debentures                                                                           50,000                  1,325,000
       Accounts payable and accrued expenses                                             1,513,582                  2,242,578
       Customer deposits                                                                   213,000                    211,900
       Unearned revenues                                                                    17,677                     49,400
                                                                                       ---------                  ---------
   Total Current Liabilities                                                             2,346,412                  4,659,422

      Installment debt                                                                                                  5,577

         Total Liabilities                                                               2,346,412                  4,664,999
                                                                                         ---------                  ---------

      Shareholders' Equity (Deficiency):
       Common stock, $.0001 par,
        75,000,000 shares authorized; issued
        and outstanding 3,097,149 shares in
        1996 and 1,659,996 shares in 1995                                                      310                        166
       Additional paid-in capital                                                        8,295,406                  5,897,964
       Accumulated deficit                                                              (8,591,752)                (8,364,431)
                                                                                       ---------                     ---------
           Total Shareholders' Equity
            (Deficiency)                                                                 (296,036)                 (2,466,301)
                                                                                         --------                     ---------
         TOTAL LIABILITIES AND SHARE-
          HOLDERS' EQUITY (DEFICIENCY)                                                 $2,050,376                   $2,198,698
                                                                                         =========                   =========




      See accompanying notes to consolidated financial statements.


                                                               16

<PAGE>



                      CONSOLIDATED STATEMENT OF OPERATIONS

                        FOR THE YEARS ENDED OCTOBER 31,

                                                                    1996                                       1995
                                                                    ----                                       ----



      Revenues:
       Gross sales                                                   $2,252,968                         $2,606,488
       Credits and allowances                                           (12,734)                           (67,241)
       Freight out                                                      (43,154)                           (50,745)
       Other income                                                      67,622                             78,707
                                                                      ---------                          ---------

                                                                      2,264,702                          2,567,209
                                                                      ---------                          ---------

      Costs and Expenses:
       Cost of sales                                                    865,255                            978,901
       Selling, general and
        administrative                                                1,481,897                          1,542,160
       Interest                                                         189,782                            247,694
       Amortization of other
        assets                                                            4,876                              4,876

       Other expenses (income) - net                                    (78,400)                            (3,705)
       Loss (gain) on sale
        of assets                                                        28,613                             11,551
                                                                      ---------                          ---------
         Total Costs and
          Expenses                                                    2,492,023                          2,781,477
                                                                      ---------                          ---------

      Net loss                                                       $ (227,321)                        $ (214,268)
                                                                      =========                          =========

      Net loss per share                                             $     (.12)                        $     (.13)
                                                                      =========                          =========

      Weighted average shares
       outstanding                                                    1,929,759                          1,659,996
                                                                      =========                          =========


</TABLE>


      See accompanying notes to consolidated financial statements.





                                                               17

<PAGE>



                      CONSOLIDATED STATEMENT OF CASH FLOWS

                         FOR THE YEARS ENDED OCTOBER 31,

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                          1996                     1995
                                                                                          ----                     ----


      Operating Activities:
       Net loss                                                                       $ (227,321)               $(214,268)
       Adjustments to reconcile
        net loss to net cash used
        by operating activities -
        Depreciation and amortization                                                    156,096                  139,245
           Loss on sale of assets                                                         28,814                   11,551
        Provision for doubtful accounts                                                  (21,000)                   8,000
         Changes in assets and liabilities -
         Accounts receivable                                                              20,166                  (11,832)
          Inventories                                                                      5,688                    7,376
          Prepaid expenses                                                                (2,772)                 (11,643)
          Other assets                                                                    11,450                      512
          Accounts payable and accrued expenses                                         (211,012)                 (75,640)
          Customer deposits                                                                1,100                   18,900
          Unearned revenues                                                              (31,723)                 (11,900)
                                                                                       ---------                 --------

            Net Cash Used By Operating
             Activities                                                                 (270,514)                (139,699)
                                                                                       ---------                 --------

      Investing Activities:
       Capital expenditures                                                              (68,409)                 (85,210)
       Collections on notes receivable                                                    18,479                   23,342
       Proceeds from sale of assets                                                        5,235                   13,687
                                                                                       ---------                 --------
         Net Cash Used By Investing
          Activities                                                                     (44,695)                 (48,181)
                                                                                       ---------                 --------

      Financing Activities:
       Proceeds from issuance of common stock                                            180,000
       Purchase of common stock                                                             (420)
       Increase in installment debt                                                      312,153                  124,336
       Repayment of installment debt                                                    (171,099)                (127,056)
       Deferred public offering costs                                                    (18,018)
                                                                                       ---------
        Net Cash Provided
          (Used) By Financing Activities                                                 302,616                   (2,720)
                                                                                       ---------                 --------

      Net decrease in cash                                                               (12,593)                (190,600)

      Cash - beginning                                                                    57,224                  247,824
                                                                                       ---------                 --------

      CASH - ENDING                                                                   $   44,631                $  57,224
                                                                                       =========                 ========

      Supplemental Cash Flow Information:
       Interest paid                                                                  $   45,292                $  20,071
       Conversion of accounts
        receivable to notes receivable                                                    22,750
       Conversion of other assets to
        notes receivable                                                                   1,370
       Conversion of debt and interest
        to common stock                                                                2,193,006
       Issuance of common stock to
        officer under agreement                                                           25,000

      See accompanying notes to consolidated financial statements.

                                                                 18
</TABLE>

<PAGE>



      CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)

                                  FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                                                      Total
                                                         Common Stock                                              Shareholders'
                                                                           Paid-in             Accumulated           Equity
                                                 Shares       Amount       Capital               Deficit           (Deficiency)


      Balance at October 31,
       1994                                        1,659,996        $166        $5,897,964           $(8,150,163)      $(2,252,033)

      Net loss                                                                                          (214,268)         (214,268)
                                                    ---------         --- ------------------            ----------         ---------

      Balance at October 31,
       1995                                         1,659,996         166          5,897,964            (8,364,431)     (2,466,301)

      Shares issued upon
       conversion of debt
       and interest                                   877,201          88          2,192,918                              2,193,006
      Shares purchased                                    (48)                          (420)                                  (420)
      Shares issued to
       officer under
       agreement                                      200,000          20             24,980                                 25,000
      Shares sold                                     360,000          36            179,964                                180,000
      Net loss                                                                                            (227,321)       (227,321)
                                                    ---------         ---          ---------            ----------         ---------

      Balance at
       October 31, 1996                             3,097,149        $310         $8,295,406           $(8,591,752)     $ (296,036)
                                                    =========         ===          =========            ==========         =========




</TABLE>


      See accompanying notes to consolidated financial statements.

                                                                  19

<PAGE>




                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      NOTE 1 -
         BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

                Echo  Springs  Water Co.,  Inc.  ("the  Company"),  through  its
                subsidiaries,  is engaged  principally  in the  distribution  of
                bottled  water and allied  products.  The Company  bottles water
                from  its own  natural  springs  in  Burlington,  NY for  direct
                distribution  and sale to business and residential  customers as
                well as for  wholesale to  supermarkets  and other bottled water
                distributors.

                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

                Principles of Consolidation
                The consolidated  financial  statements  include the accounts of
                the Company and its wholly-owned  subsidiaries.  All significant
                intercompany accounts and transactions have been eliminated.

                Use of Estimates
                The  preparation  of financial  statements  in  conformity  with
                generally accepted accounting  principles requires management to
                make estimates and assumptions  that affect the amounts reported
                in the  financial  statements  and  accompanying  notes.  Actual
                results could differ from those estimates.

                Revenue Recognition
                Revenue from equipment  rental is recognized based on the period
                in which it is earned and  unearned  revenue is recorded for the
                portion  billed in  advance.  Revenues  from  product  sales are
                recognized  upon  shipment to the  wholesaler or delivery to the
                customer, as applicable.

                Inventories
                Inventories consist of items held for sale or rental,  including
                water  coolers  and  bottles  which  have  not yet been put into
                service, and are valued at the lower of cost or market with cost
                being determined on the basis of the first-in, first-out method.

                Property, Plant and Equipment
                Property,  plant and equipment are recorded at cost.  Additions,
                renewals and improvements are capitalized. Asset and accumulated
                depreciation  accounts are relieved  for  dispositions  with any
                resulting  gain or loss reflected in earnings.  Maintenance  and
                repairs  are  charged to expense as  incurred.  Maintenance  and
                repairs expense amounted to $61,730 in 1996 and $39,716 in 1995.
                Depreciation   of  plant  and   equipment  is  provided  by  the
                straight-line method over the estimated economic useful lives of
                the various asset groups as follows:

                           Buildings and improvements        5-40 years
                           Machinery and equipment          10-20 years
                           Furniture and fixtures               7 years
                           Vehicles                             5 years
                           Water coolers, bottles
                            and brewers                       6-10 years

                                                        20

<PAGE>



                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      NOTE 1 -      BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
                  


                Other Assets
                The allocated  cost of the  acquisition  of water rights in 1991
                was  capitalized  and is being  amortized  by the  straight-line
                method over 40 years.  Costs associated with the proposed public
                offering  (Note  14)are  being  deferred at October 31, 1996 and
                will be  offset  against  the  proceeds  of such  offering  upon
                completion  or charged to expense  should such  offering  not be
                completed.


                Income Taxes
                All  deferred tax benefits  from the use of net  operating  loss
                carryforwards   are  offset  by  valuation   allowances  in  the
                accompanying consolidated financial statements.


                Loss Per Common and Equivalent Share
                Loss per  share is based  upon the  weighted  average  number of
                shares  outstanding  during each period. All share and per share
                amounts  give  effect  to a  1-for-25  reverse  stock  split  in
                October, 1996.


                Statement of Cash Flows
                For  purposes  of the  statement  of  cash  flows,  the  Company
                considers all highly liquid debt  instruments  purchased  with a
                maturity of three months or less to be cash  equivalents.  There
                were no cash equivalents at October 31, 1996 or 1995.


                Financial Instruments and Credit Risks
                The  carrying  amounts of cash,  accounts  receivable,  accounts
                payable, and accrued expenses  approximate fair value.  However,
                it was not  practicable  to  estimate  the  fair  value of other
                financial  instruments  -  principally,   installment  debt  and
                debentures - because  quoted  market  prices do not exist and an
                estimate could not be made through other means without incurring
                excessive costs.

                Concentrations  of credit risk with respect to  receivables  are
                limited due to the large number of customers.  As of October 31,
                1996,  the Company  had  uncollateralized  receivables  with one
                distributor  approximating  $65,000, which represents 24% of the
                Company's trade accounts balance. During the years ended October
                31,  1996  and  1995,   sales  to  this  customer   amounted  to
                approximately 20% and 12%, respectively,  of the Company's gross
                sales.  No other  customer  accounted for more than 10% of gross
                sales.

      NOTE 2 -             NOTES RECEIVABLE
                           ----------------

                In efforts to consolidate operations, the Company sold its Utica
                operation in January, 1994. As part of the sales agreement,  the
                new operation  will purchase  bottled water from the Company for
                three  years.  The  Company  realized  a gain on the sale of the
                operation  of  $104,533  and,  as  part  of the  selling  price,
                received  notes  of  $225,000.  The  first  note is for  $50,000
                without interest, which will be converted to an interest-bearing
                term  loan upon  repayment  of the  second  note  unless  repaid
                sooner.  The  second  note  was  renegotiated  in 1996  with the
                inclusion of  approximately  $24,000 of accounts  receivable and
                other  assets  owed to the  Company and is now payable at $2,788
                per month,  including  interest at 6%, through June, 2001. Sales
                of bottled water to the new company in 1996 and 1995 amounted to
                $49,233 and $39,924, respectively.


                                                            21

<PAGE>




                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      NOTE 3 -             INVENTORIES
                           -----------

                Inventories consist of the following:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                                     October 31,
                                                                                             1996              1995

                           Bottles                                                        $ 1,722           $ 2,094
                           Product held
                            for sale                                                       16,415            18,298
                           Supplies                                                        16,084            19,517
                                                                                           ------            ------
                                                                                          $34,221           $39,909

                                                                                           ======            ======

</TABLE>

      NOTE 4 -             PROPERTY, PLANT AND EQUIPMENT
                           -----------------------------

                Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                                   October 31,
                                                                                        1996                 1995

                           Land                                                     $  150,000           $  150,000
                           Buildings and improvements                                  362,298              362,298
                           Water coolers, bottles and
                            brewers                                                    918,730              864,068
                           Machinery and equipment                                     335,069              373,588
                           Vehicles                                                     60,850               60,850
                           Furniture and fixtures                                      127,128              124,862
                                                                                     ---------            ---------
                                                                                     1,954,075            1,935,666

                           Less: accumulated
                            depreciation and
                     amortization                                                      675,845              540,576
                                                                                     ---------            ---------
                                                                                    $1,278,230           $1,395,090
                                                                                     =========            =========

      NOTE 5 -             OTHER ASSETS
                           ------------

                Other assets are comprised of the following:

                                                                                                     October 31,
                                                                                         1996                 1995

                Water rights                                                          $205,000             $205,000
                Accumulated amortization                                                33,529               28,653
                                                                                       -------              -------
                     Net deferred charges                                              171,471              176,347
                Security deposits                                                       30,537               43,357
                Deferred public offering costs                                          18,018
                                                                                       -------
                                                                                      $220,026             $219,704
                                                                                       =======              =======


                Deferred  charges of $576,521 for financing  costs,  non-compete
                agreement and consulting  costs were fully  amortized at October
                31, 1994 and written off in 1995.



                                                        22
</TABLE>

<PAGE>




                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



      NOTE 6 -             CAPITAL AND OPERATING LEASES
                           ----------------------------

                Capital Leases
                The Company leased  machinery and equipment under capital leases
                that  were  included  under  the  caption  "Property,  Plant and
                Equipment" in the accompanying balance sheet at October 31, 1995
                with a book value of $36,293.  The  equipment was disposed of in
                1996.

                Operating Leases
                The Company  leases  office and  warehouse  facilities  under an
                operating  lease  expiring  March 31, 1998.  Rental  expense for
                office and warehouse  facilities amounted to $65,943 in 1996 and
                $65,943 in 1995.

                In  addition  the Company  leases  vehicles  and various  office
                equipment  under  operating  leases that extend until  February,
                2000.   Rental  expenses  under  equipment  leases  amounted  to
                $214,265 in 1996 and $150,575 in 1995.

                The Company  entered into a 20-year  lease with an  unaffiliated
                landlord on September  14, 1994 for 41.686 acres of land located
                in the town of Edmeston, State of New York, on which are located
                two  developed  springs.  The  springs  have a combined  average
                capacity of approximately  58,000,000 gallons of water per year.
                The Company applied for and received  approval from the New York
                State  Department of Health to operate the springs on August 10,
                1995. Based on the amended  agreement of July 19, 1995, rent for
                the  property  is $.005 per  gallon of water  extracted  for the
                first five years (with  minimum  rent of $300 per week) and $.01
                per gallon for the following fifteen years (with minimum rent of
                $600 per  week).  The  Company  has paid an  additional  $21,000
                during the first  year.  The  Company has the right to build and
                operate a  processing  plant  (which will become the property of
                the  landlord)  on the  property  in which  case  the rent  will
                increase to $.015 per gallon extracted. The Company also has the
                right to terminate  the lease  without  penalty after payment of
                rent aggregating  $100,000 plus the $21,000 first year fee, and,
                in the event it has constructed a processing plant, the right to
                renew the lease for an  additional  20-year  term on terms to be
                agreed upon by the parties.  The Company  intends,  as its needs
                require,  to  utilize  the  water  from  these  springs  in  its
                business.  The water can be utilized  without  construction of a
                plant and the Company has no immediate plans to build a plant on
                this  property.  Rent  expense  under this lease was $33,426 and
                $9,330  for  the  years   ended   October  31,  1996  and  1995,
                respectively.







                                                            23

<PAGE>





                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      NOTE 6 -             CAPITAL AND OPERATING LEASES (CONTINUED)
                           ----------------------------------------
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                Minimum future lease payments are:

                                                                                                              Operating Leases
                Fiscal year ending                                                 Office        Equipment            Land
                ------------------                                                 ------        ---------            ----
                1997                                                              $65,943          $34,020        $ 15,600
                1998                                                               27,476           24,720          15,600
                1999                                                                                24,720          15,600
                2000                                                                                 6,180          19,500
                2001                                                                                                31,200
                2002 and thereafter                                                                                429,000
                                                                                   ------           ------         -------
                Total minimum payments                                            $93,419          $89,640        $526,500
                                                                                   ======           ======         =======
</TABLE>

      NOTE 7 -             INDEBTEDNESS
                           ------------
<TABLE>
<CAPTION>
<S>                                                                                                <C>               <C> 
                                                                                                   1996              1995
                                                                                                   ----              ----
                Installment Debt

                Secured time note, with interest at 9.0%,  payable in 36 monthly
                 installments  of $954  including  interest.  Final  installment
                 originally due April 1997, repaid
                 in 1996.                                                                      $                 $ 15,119

                Secured time notes, at 12.0%,
                 payable in 36 monthly installments
                 of $6,072 including interest                                                                      57,509

                Advance payable to stockholder
                 with interest at 12%                                                           282,153            60,000

                Capitalized lease obligations                                                                       8,471

                Notes payable with interest at 18%
                 due December 31, 1995 (c) (*)                                                  150,000           300,022

                Notes payable with interest at 7%
                 due December 31, 1995 (b) (*)                                                                    275,000

                Mortgage note payable, with 8.0%
                 interest payable quarterly,
                 principal due December 1993 (a) (*)                                            120,000           120,000
                                                                                                -------           -------

                           TOTAL DEBT                                                           552,153           836,121


                           CURRENT PORTION                                                      552,153           830,544
                                                                                                -------           -------

                           NET LONG-TERM PORTION                                               $                 $  5,577
                                                                                                =======           =======






                *Obligations in default as to principal and interest. Portions
                 of the debt and interest were converted into common stock of
                 the Company.  (Note 14).




                                                            24
</TABLE>

<PAGE>





                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



      NOTE 7 -             INDEBTEDNESS (CONTINUED)
                           ------------------------

                (a) During 1993,  $1,300,000  of the  mortgage was  converted to
                5,200,000 shares of common stock on the basis of four shares for
                each dollar of debt and $80,000 was repaid. In addition, 500,000
                shares of common stock were issued in  settlement  of $71,143 of
                accrued  interest  and  any  additional  unpaid  interest.   The
                mortgagor has agreed to extend the maturity  until  December 31,
                1995.

                (b)  Echo  Springs  Water  Company,  Inc.,  a  related  company,
                borrowed $300,000 under a promissory note dated August 24, 1994.
                The loan bears  interest at 7% and  principal  and  interest are
                payable December 31, 1995. As additional  consideration  for the
                loan,  Echo  Springs  Water  Company,  Inc.  was to issue 25,000
                shares of its common stock to the note holder.  In October 1994,
                $25,000  of  the  borrowing  was  repaid.  The  proceeds  of the
                borrowings were lent to the Company under the same terms as with
                the note holder.

                (c)  Holders of notes  totalling  $200,000  agreed to extend the
                maturity  date in  exchange  for shares of common  stock of Echo
                Springs Water Company, Inc. Shares which were to be issued equal
                20% of the  amount  of the note  extended  divided  by $3.00 per
                share for an aggregate 13,333 shares. Holders of notes totalling
                $50,000  have sued the company  for  payment  and have  received
                judgment which they are currently trying to enforce.

                Shares of Echo Springs Water Company, Inc. to be issued under
                (b) and (c) above were not issued and there was an offer made
                to rescind the transaction since the contemplated offering was
                not consummated.

<TABLE>
<CAPTION>
<S>                                                                                            <C>                   <C> 
                                                                                               1996                  1995
                                                                                               ----                  ----
                Debentures

                8% Series D convertible
                 subordinated debentures
                 maturing December 31, 1995 (*)                                             $50,000            $   85,000


                10% Series E debentures
                 maturing December 31, 1995 (*)                                                                 1,240,000
                                                                                             ------             ---------

                           TOTAL                                                            $50,000            $1,325,000
                                                                                             ======             =========


                *          Obligations in default as to principal and interest.
                           Portions of the debt and interest were converted into
                           common stock of the Company.  (Note 14).

                The convertible  subordinated  debentures are  convertible  into
                common stock at $12.50 per share.





</TABLE>
                                                            25

<PAGE>




                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      NOTE 8 -             ACCOUNTS PAYABLE AND ACCRUED EXPENSES
                           -------------------------------------

                Accounts payable and accrued expenses consist of the following:
    <TABLE>
<CAPTION>
<S>                                                                                                   <C>
                                                                                              October 31,
                                                                                       1996                 1995
                Trade payables                                                    $  564,385           $  649,983
                Accrued expenses                                                     294,947              573,507
                Wages payable                                                         40,527               41,263
                Interest payable                                                     100,130              451,373
                Payroll taxes payable                                                461,751              494,670
                Sales taxes payable                                                   51,842               31,782
                                                                                   ---------            ---------

                                                                                  $1,513,582           $2,242,578
                                                                                   =========            =========

</TABLE>
                The Company is presently  negotiating  for  settlement  of prior
                years' unpaid payroll taxes.  No provision has been made for any
                possible interest and penalties thereon, as management is of the
                opinion that such amounts, if any, will not be material.

      NOTE 9 -                                             COMMON STOCK
                                                           ------------

                On October 1, 1996 the stockholders  approved a 1-for-25 reverse
                stock  split of the  outstanding  shares of common  stock of the
                Company.   The  par  value,   $.0001,   and  authorized  shares,
                75,000,000,  were not changed. The then outstanding common stock
                of  50,499,910  shares were  converted  to  2,019,996  shares of
                common  stock.  All  references  in the  accompanying  financial
                statements  to the number of common shares and per share amounts
                give effect to the reverse stock split.

                At October 31, 1996, the Company has warrants  outstanding  that
                allow the holders to purchase shares of common stock as follows:

                Group              Shares           Price       Expiration Date
                Investment banker  4,000          $20.25          March, 1997
                Officer           27,759            4.20        October, 1998

                In partial  settlement  of prior debts,  the Company  granted an
                officer  warrants to purchase 27,759 shares of common stock at a
                price of $12.50 per share, which warrants were to expire October
                31, 1993 and were extended an additional  year in 1993. In 1994,
                the  warrants  were  extended  an  additional  two years and the
                exercise  price  reduced  to $6.25 per share and,  in 1996,  the
                warrants  were  again  extended  for two years and the  exercise
                price reduced to $4.20 per share.

                Other warrants for 20,120 shares at an excise price of $6.25 per
                share expired as at October 31, 1996.

      NOTE 10-                                         INCOME TAXES

                The Company files a consolidated  federal income tax return with
                its  subsidiaries.  As of October 31, 1996,  the Company had net
                operating  loss   carryforwards  in  excess  of  $8,000,000  for
                financial as well as State and Federal tax purposes which expire
                in varying amounts beginning in 2004.


                                                            26

<PAGE>



                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      NOTE 11-                                                     LITIGATION

                The  Company  and  its  affiliates  are  defendants  in  actions
                involving a dispute  concerning  title to the Company's land and
                facility located in Burlington,  New York  ("Property") in which
                the  plaintiff  seeks a one-half  interest in the  Property  and
                $17,000,000  in damages.  Most of the claims in this  litigation
                have been dismissed by the courts.  Management is of the opinion
                that  there  is  no  material  exposure  to  the  Company,  and,
                therefore,  no provision  has been made for any possible loss in
                the accompanying consolidated financial statements.

      NOTE 12-  GOING CONCERN

                For the year ended  October 31,  1996,  the Company  sustained a
                loss of $227,321  and at October 31, 1996 had a working  capital
                deficiency of $1,954,160,  an accumulated  deficit of $8,591,752
                and deficit net worth of $296,036. In addition,  the Company was
                in default on principal  and interest  payments on a substantial
                portion of its debt. These facts raise  substantial  doubt about
                the   Company's   ability  to  continue  as  a  going   concern.
                Considerations  which tend to  mitigate  the  question  of going
                concern include management's successful efforts in raising funds
                through  private  placements,  the  ability to  renegotiate  and
                restructure  long-term financing with major creditors,  past and
                present  efforts  to convert  debt to equity and the  ability to
                acquire,  restructure  and develop the  bottled  water  business
                which it believes will be able to achieve profitable operations.
                The  Company  believes  that these  factors  provide  meaningful
                evidence as to the  Company's  ability to continue in  operation
                for  the  next  fiscal  year  and  support  the  going   concern
                presentation   in  the   accompanying   consolidated   financial
                statements in favor of the  liquidation  basis.  There can be no
                assurance,  however, that management will continue to be able to
                raise  sufficient  capital or convert existing debt to equity or
                to achieve profitable operations going forward.

      NOTE 13-                                 EMPLOYMENT AGREEMENT

                In October 1996, Michael S. Rakusin,  the President,  a Director
                and  principal  shareholder  of  the  Company,  entered  into  a
                three-year employment agreement with the Company, effective upon
                completion of the proposed public offering,  which provides for,
                among  other  things,   an  annual  salary  of  $120,000  and  a
                non-competition  clause during the term of his employment by the
                Company  and for one  year  following  the  termination  of such
                employment.

                On September 30, 1996,  the Company issued 200,000 shares of its
                common stock valued at $25,000  ($.125 per share) to Mr. Rakusin
                in consideration for prior services rendered by Mr.
                Rakusin to the Company.



                                                            27

<PAGE>



                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




      NOTE 14-                             PROPOSED PUBLIC OFFERING

                In  June,  1996,  the  Company  entered  into   negotiations  to
                consummate  a public  offering  with minimum  gross  proceeds of
                approximately  $4,000,000.  As  part  of the  negotiations,  the
                Company  asked  their  lenders to convert  outstanding  debt and
                unpaid  interest  thereon  into  shares of  common  stock of the
                Company at a  conversion  ratio of $2.50 per share.  The lenders
                converted   $1,700,022  of  outstanding   principal  and  unpaid
                interest of $492,984,  which was converted to 877,201  shares of
                common  stock.  This  transaction  will reduce  future  interest
                expense by approximately $173,000 per year.











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

         None



                                                            28

<PAGE>




                                                         PART III

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

      Directors and Executive Officers

         The  following  individuals  are the present  directors  and  executive
officers of the Company.  Each  director  will hold office until the next annual
meeting of the  shareholders  and until his successor is elected and  qualified.
Officers are elected by, and serve at the pleasure of the Board of Directors.

Name
         Age             Position
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Michael S. Rakusin...........                                    40                          President,
                                                                                             Treasurer, and
                                                                                             Director

Edward J. Metzger............                                    39                          Vice President -
                                                                                             Operations,
                                                                                             Secretary, and
                                                                                             Director

Frank A. LaSala.............                                     73                          Director

</TABLE>

         Michael S. Rakusin is a founder of the Company and has been
President and a Director since inception, and Treasurer since 1987. He
was appointed Secretary in June, 1987; Executive Vice President in
November, 1988; and President in April, 1991.  From 1984 to March,
1987, Mr. Rakusin was self-employed, rendering financial and accounting
services.  From 1976 to 1984, he was employed as an accountant by J.M.
Stern & Co., Certified Public Accountants.  Mr. Rakusin is a Certified
Public Accountant in the State of New York.  He earned a Bachelor of
Business Administration Degree from the City University of New York in
1976.

         Edward J. Metzger joined the Company in July,  1992 as Vice President -
Operations. He was elected a Director in October, 1996. From 1988 to July, 1992,
he was Senior Vice President of Berkshire  Springs of N.J., Inc. (doing business
as Stony Brook  Spring  Water) in charge of all  operations,  including  routes,
customer  service,  cooler  repair  and  warehouse  activities.  The  assets  of
Berkshire were acquired by the Company in July, 1992.

         Frank A. LaSala has been a Director of the Company since October, 1996.
Mr.  LaSala  has  been a  principal  of his  own  business,  Sal-Ma  Instruments
Corporation, a company engaged in manufacturing  sophisticated machinery for the
aerospace industry, for the past 45 years.







                                                            29

<PAGE>



      Item 10.                                    Executive Compensation

         The following table provides certain summary information concerning the
compensation  paid or  accrued  by the  Company  to or on  behalf  of its  Chief
Executive  Officer  and the other  named  executive  officer of the  Company for
services  rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended October 31, 1996, 1995 and 1994.


      Summary Compensation Table


<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Name and Principal                                                             Long-Term Compensation
Position                                       Annual Compensation                 Awards Payouts
                                      Other
                                                                 Annual      Restricted                                   All Other
                                                                Compen-         Stock          Options/        LTIP        Compen-
                                 Year      Salary      Bonus     sation       Award(s)           SARs        Payouts        sation
                                 ----      ------      -----     ------       --------           ----        -------        ------
Michael S. Rakusin               1996         $80,200    -         -              -               -             -        $25,000 (1)
  President
                                 1995         $81,288    -         -              -               -             -             -

                                 1994         $87,006    -         -              -               -             -             -


Edward J. Metzger                1996         $80,200    -         -              -               -             -             -
  Vice President
                                 1995         $83,000    -         -              -               -             -             -

                                 1994        $104,200    -         -              -               -             -             -



</TABLE>

      (1)         On September 30, 1996,  the Company  issued  200,000 shares of
                  its Common Stock  valued at $25,000  ($0.125 per share) to Mr.
                  Michael S. Rakusin,  the  President,  a Director and principal
                  shareholder of the Company in consideration for prior services
                  rendered by Mr. Rakusin to the Company.


         For the fiscal  years  ended  October  31,  1996 and 1995,  none of the
directors of the Company have received or were accrued  compensation of any kind
for their services  rendered in such  capacities to the Company.  As of December
31, 1996, there are no


                                                        30

<PAGE>



outstanding  options or warrants  held by any officer or director of the Company
except for warrants held by Michael S. Rakusin,  the  President,  a Director and
principal  shareholder of the Company, to purchase 27,759 shares of Common Stock
at $4.20 per share.  These  warrants were issued in October,  1990 and expire on
October 31, 1998.

         Michael S. Rakusin, the President, a Director and principal shareholder
of the  Company,  has entered into a three-year  employment  agreement  with the
Company in October,  1996 which will  commence  on the  closing of the  proposed
public  offering.  The  agreement  provides for,  among other things,  an annual
salary  of  $120,000  and a  non-competition  clause  during  the  term  of  his
employment by the Company and for one (1) year following the termination of such
employment.

         The Company has no standard arrangement pursuant to which its directors
are  compensated  in their  capacity as  directors.  The Company does not have a
compensation or audit committee of the Board.

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

         The following  table sets forth as of December 31, 1996,  the number of
shares of Common  Stock of the  Company and the  percentage  of that class owned
beneficially,  within the meaning of Rule 13d-3  promulgated  under the Exchange
Act,  and  the  percentage  of the  Company's  voting  power  owned  by (i)  all
shareholders  known by the Company to beneficially own more than five percent of
the  Company's  Common Stock;  (ii) each director of the Company;  and (iii) all
directors and officers as a group.  All shares set forth in the following  table
are  entitled  to one vote per share and the named  beneficial  owners have sole
voting and investment  power.  Each  percentage set forth in the following table
assumes the exercise of all stock options exercisable by the named individual or
group as of December 31, 1996 or within 60 days thereafter.

      Name and Address            Number of Shares
      of Beneficial Owner(1)   Owned Beneficially(2)        Percentage

      Michael S. Rakusin       427,759(3)                           13.7%

      Edward J. Metzger         6,800                               0.2%

      Frank A. LaSala           1,920                               0.1%

      ESWC, Inc.
      149 Main Street
      Cooperstown,
      NY  11326               210,243                               6.8%


                                                        31

<PAGE>




<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
      H.T. Ardinger, Jr.
      9040 Governors Row
      Dallas, TX 75247                                        398,127                              12.9%

      William Heim
      8845 South Pleasant
      Chicago, IL 60620                                       273,133                               8.8%

      Robert Moody, Jr.
      601 Moody National
         Bank Tower
      Galveston, TX 77550                                     205,323                               6.6%

      Robert P. Gillings
      7423 Ridge Boulevard
      Brooklyn, NY 11209                                      290,000                               9.4%

      All Officers and
      Directors as a
      Group (three persons)                                   436,479(3)                           14.0%

    </TABLE>

      (1)         Unless  otherwise  indicated,  the address of each shareholder
                  listed is c/o Echo Springs  Water Co.,  Inc.,  Building  100A,
                  Hackensack Avenue, Kearny, NJ 07032.

      (2)         Pursuant to the rules and regulations of the Securities
                  and Exchange Commission, shares of Common Stock that an
                  individual or group has a right to acquire within 60 days
                  pursuant to the exercise of warrants are deemed to be
                  outstanding for the purposes of computing the percentage
                  ownership of such individual or group, but are not deemed
                  to be outstanding for the purposes of computing the
                  percentage ownership of any other person shown in the
                  table.

      (3)         Includes  27,759 shares of common stock  issuable  pursuant to
                  warrants  exercisable  at $4.20  per  share  and  expiring  on
                  October 31, 1998.


      Item 12.             Certain Relationships and Related Transactions

      On September 30, 1996,  the Company  issued  200,000  shares of its Common
Stock  valued at $25,000  ($0.125  per share) to Mr.  Michael  S.  Rakusin,  the
President,  a Director and principal shareholder of the Company in consideration
for prior services rendered by Mr. Rakusin to the Company.

      On October 1, 1996, the Company entered into a three-year
employment agreement with Mr. Rakusin.  See "Executive
Compensation."

      On October  1, 1996,  the  Company  extended  Mr.  Rakusin's  warrants  to
purchase 27,759 shares of the Company's  Common Stock,  from October 31, 1996 to
October 31, 1998 and established an exercise price of $4.20.


                                                        32

<PAGE>



      At October 31, 1996, Mr. Rakusin,  had advanced a total of $282,153 to the
Company, evidenced by the Company's 12% note payable to Mr. Rakusin, which funds
were used by the Company for working capital.


                                                        33

<PAGE>







                                                      PART IV

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

      Schedules and Reports of Form 8-K


      (A)(1)      The following  financial  statements  are included in Part II,
                  Item 7:

      Independent Auditors' Report

      Consolidated Balance Sheet as at October 31, 1996 and 1995.

      Consolidated Statement of Operations for the Years Ended October
   31, 1996 and 1995

      Consolidated Statement of Shareholders' Equity (Deficiency) for
   the Years Ended October 31, 1996 and 1995

      Consolidated Statement of Cash Flows for the Years Ended October
   31, 1996 and 1995

      Notes to Consolidated Financial Statements

      Schedules are omitted for the reason that they are not  required,  are not
   applicable,  or the required information is shown on the financial statements
   or notes thereto.

      (B)         Reports on Form 8-K - Not applicable.
      (C)         Exhibits.  The following exhibits are filed as part of
                  the   Company's   report.   Where  such   filing  is  made  by
                  incorporation  by  reference  (I/B/R)  to a  previously  filed
                  statement or report, such statement or report is identified in
                  parenthesis.

      Official Exhibit

      Number                         Description                  Page Number

      [3] (a)          Certificate of Incorporation
                       and all amendments thereto

      [3] (b)           By-Laws

      [4]               Form of Common Stock Certificate

      [27]              Financial Data Schedule



                                                        34

<PAGE>




                                                    SIGNATURES

         Pursuant  to the  requirements  of Section 13 or 15(d) of the  Exchange
Act,  Echo  Springs  Water Co.,  Inc. has caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.

      Dated: February 12, 1997

                                  ECHO SPRINGS WATER CO., INC.


                                  By: /s/ Michael S. Rakusin
                                      Michael S. Rakusin
                                    President

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

     Name                                  Titles                  Date




      /s/ Michael S. Rakusin   President and Director        February 12, 1997
      Michael S. Rakusin       Principal Executive,
                               Operating and Financial
                               Officer



      /s/ Edward J. Metzger    Vice President, Secretary    February 12, 1997
      Edward J. Metzger        and Director



      /s/ Frank A. LaSala      Director                     February 12, 1997
      Frank A. LaSala


<PAGE>