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, 1998

[ ] 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 0-17872

                          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: (973) 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 $1,817,780.


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The aggregate  market value of the issuer's voting stock held as of December 31,
1998 by non-affiliates of the issuer,  based upon the average of the closing bid
and asked prices on that date was approximately $5,760,200.

As at December 31, 1998,  3,822,149 shares of the issuer's Common Stock,  $.0001
par value, were outstanding.

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




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                                                      PART I

           This Form  10-KSB  contains  forward-looking  statements.  Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by  forward-looking  statements,
including,  without limitation,  those relating to the Company's future business
prospects,  revenues, working capital,  liquidity,  capital needs and income are
subject to certain risks and  uncertainties  that could cause actual  results to
differ materially from those indicated in the forward-looking  statements due to
risks and factors  identified in this Form 10-KSB and as may be identified  from
time to time in the Company's future filings with the SEC.


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
referred to as the  "Company"),  is engaged in  bottling  and  distributing  its
non-sparkling  100%  natural  spring  water  through its  established  sales and
distribution  network to its  existing  base of  approximately  4,000  customers
located in the New York City  Metropolitan  area, New Jersey,  upstate New York,
eastern  Pennsylvania  (including  the Greater  Philadelphia  area) and northern
Delaware. The Company markets its 100% natural spring water under its brand name
"Echo Springs" for third party  distribution.  The Company  bottles its drinking
water  at its NSF  International  ("NSF")  "Certified  Bottling  Facility"  from
naturally  free-flowing  springs  at the  source on the  Company's  property  in
Burlington,  New York.  The Company also leases water coolers to its  commercial
and residential  customers and sells allied  products such as coffee,  tea and a
wide assortment of paper products, primarily to its commercial accounts.

           The  Company's  products  are  marketed  and  sold  primarily  by its
in-house  staff.  The Company  also  provides  installation  and service for its
leased coolers and other equipment, such as brewers and refrigerators.

           The  Company  is  highly  dependent  upon  the  Aramark   Corporation
("Aramark"),  one of the world's largest  privately-held food service companies,
for the Company's sales of five-gallon  bottled water. For the fiscal year ended
October  31,  1998,  approximately  $865,728 or 46.7% of gross sales was derived
from  Aramark.  Although  orders for sales have been  received,  there can be no
assurance that commitments for any additional years will be awarded. The Company
will continue to be dependent upon revenues from this source in the

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immediate future.  The loss of this revenue source would have a material adverse
impact upon the Company.


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., a distribution  company that leased water coolers and sold
water and other allied products to both commercial and residential  customers in
the State of New Jersey.


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 (ozonation,
                           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

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                           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 per-gallon price.

           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
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 three bottle  sizes:
16.9 ounce polyethylene  therephthalate and one-gallon high-density polyethylene
bottles and  five-gallon  polycarbonate  recyclable  containers  under the "Echo
Springs" brand.

           In  addition,  the  Company  leases  water  coolers  and sells a wide
variety of allied products,  including regular and decaffeinated  coffee, coffee
creamers,  sugar,  soups and a wide assortment of paper products such as hot and
cold 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,  including Elkay Manufacturing Company, Package
Material  Corp.  and  Portola  Packaging,  Inc.  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

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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  Company. 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,  the Company has focused its  marketing  and
sales  efforts  in the New  York  City  Metropolitan  area,  New  Jersey,eastern
Pennsylvania  (including the Greater  Philadelphia  area) and northern Delaware,
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. The Company sells its products to offices,  other commercial
establishments and residential  customers.  The Company  distributes its bottled
water and allied products from its Kearny,  New Jersey warehouse by means of its
fleet of ten leased trucks.  The Company  distributes its bottled water from its
Cherry Hill, New Jersey  warehouse by means of three leased trucks.  The Company
also leases a tractor and three  trailers  for delivery to its Kearny and Cherry
Hill warehouses.

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

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

Employees

           As of December 31, 1998, the Company  employed  twenty-eight  people,
four  in  production,  eighteen  in  distribution,  and  six 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 the 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

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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 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 cost to the Company to comply with government regulation consists
primarily of permits and water testing and amounted to approximately $21,000 for
the fiscal year ended October 31, 1998.

           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 owns its principal  facility  which consists of 150 acres
of land located in Burlington,  New York, 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 1,200,000 five-gallon bottles per year, which

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exceeds the Company's  projected  needs for the  foreseeable  future.  The plant
currently  operates  one  shift  per  day,  five  days  per  week,  representing
approximately 23% of capacity.

           The Company draws its water from three  developed  natural springs at
Burlington and from its two rented springs at 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.

           As the Company  controls its natural spring water sources,  it is not
vulnerable  to  unanticipated  factors  which might  otherwise  arise if its was
dependent upon outside-owned  sources.  However,  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.  These
two springs have a combined average capacity of approximately 57,000,000 gallons
of water per year.  The  Company  applied  for and  received  approval  from the
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  rent of $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 additional  $21,000  first-year rent, 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  $18,735  and  $19,661  for the  years  ended  October  31,  1998 and  1997,
respectively.

           The Company's  principal  offices are in Kearny,  New Jersey where it
leases 20,290 square feet of office and warehouse space

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pursuant to a lease expiring in March,  2003. The Company pays a monthly rent of
$6,256. The Company also rents the use of shared warehouse space in Cherry Hill,
New Jersey for a monthly rent of $1,200,  pursuant to a lease whose term expired
in March, 1997 and continues  thereafter on a month-to-month  basis. 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,  seeking a one-half  interest in the Company's
land and facility located in Burlington, New York and $17,000,000 in damages.

           All three suits have been dismissed in their entirety except a claim,
for an unspecified  amount,  that the Company and the other defendants have been
unjustly enriched at Mr. Williams' expense. The time in which Mr. Williams could
have pursued this claim has now expired.

           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 Company's consolidated financial statements.


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

           None.




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                                                      PART II

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


           The  following  table sets forth the high and low  closing bid 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.

                                                     Low                 High

Calendar Year 1996:

First Quarter*                                       $ .63                $1.25
Second Quarter*                                       1.00                 2.25
Third Quarter*                                        1.25                 3.00
Fourth Quarter                                        1.25                 2.75


Calendar Year 1997:

First Quarter                                         1.25                 2.63
Second Quarter                                         .75                 1.25
Third Quarter                                          .75                 1.50
Fourth Quarter                                         .81                 1.25


Calendar Year 1998:

First Quarter                                          .75                 1.19
Second Quarter                                         .91                 2.13
Third Quarter                                         1.13                 2.50
Fourth Quarter                                        1.25                 1.81


-----------
*recalculated after reverse split

           At December  31,  1998,  the Company had 276 holders of record of its
Common Stock.

           The Company has paid no cash  dividends  on its Common  Stock to date
and it does  not  anticipate  declaring  or  paying  any cash  dividends  in the
foreseeable future.




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


For the Fiscal Year Ended October 31, 1998 Compared with the Fiscal
Year Ended October 31, 1997

           Gross sales  decreased  $204,169  (9.9%) to $1,853,898 for the fiscal
year ended October 31, 1998 ("Fiscal  1998") from $2,058,067 for the fiscal year
ended  October  31,  1997  ("Fiscal  1997")  .  Five-gallon   sales  to  Aramark
Corporation  increased by  approximately  $152,000,  due to  increased  sales of
approximately  $66,000 to their  continuing  New York and New Jersey  operations
plus the Company's expansion into this customer's Pennsylvania locations,  which
accounted for the remaining  approximately  $86,000.  However,  five--gallon and
allied  product sales to and rental income from the Company's  regular  customer
base fell by approximately $101,000, $35,000 and $31,000, respectively,  largely
due to a deliberate  discontinuance of service to marginal  customers and only a
nominal  sales and  marketing  effort as the  Company  concentrated  its efforts
toward the Aramark  business  as this  business  requires no capital  investment
outlay for cooler  equipment  and  provides  its own sales and  marketing  at no
additional  cost to the  Company.  Further,  low--margin  five--gallon  sales to
distributors  fell by  approximately  $95,000,  due  largely to the loss of five
distributors  as a result of price  competition.  Sales of one  gallons  and one
quarts,   both  low--margin   products,   and  net  freight--out   decreased  by
approximately $86,000, $8,000 and $6,000, respectively,  largely due to the loss
of one of the Company's  distributors  which completed its own bottling facility
in July, 1997 and the five distributors  noted above as well as a discontinuance
of  service  to one  supermarket  customer.  Credits  and  allowances  decreased
approximately  $109,000 as the one--year Aramark Pennsylvania incentive discount
ended on  March 8,  1998.  The  remaining  decrease  in  other  income  resulted
primarily from a lower gain on unclaimed or lost customer deposits.

           Cost of sales for Fiscal 1998 was $616,184  (33.2% of gross sales) as
compared to $745,711 (36.2% of gross sales) for Fiscal 1997. This 3.0 percentage
point  improvement is comprised of a 3.6 percentage  point gain due primarily to
the above-noted reductions in the sales of low-margin product lines, offset by a
0.6  percentage  point  increase  caused  by the  above--noted  decrease  in the
equipment rental portion of gross sales.

           Selling,  general and  administrative  expenses  were  $1,685,765  in
Fiscal 1998 as compared to  $1,844,299  in Fiscal 1997.  Delivery and  warehouse
costs  increased  approximately  $15,000,  chiefly  due  to the  addition  of an
equipment  repair staff.  The addition of one outside  salesman  added a further
approximately  $25,000  while  third-party  commissions,   telephone  costs  and
advertising and promotion expense fell approximately  $4,000, $7,000 and $2,000,
respectively.

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Bad debt expense rose approximately  $12,000,  due principally to the write--off
of old  delinquent  accounts.  The  market  value of common  stock  issued to an
officer under agreement in 1997 was $166,250. A reduction in Kearny office staff
levels resulted in reduced labor costs of approximately $28,000.

           Interest expense  increased from $52,063 in Fiscal 1997 to $99,243 in
Fiscal  1998 as a result of  increased  debt.  Amortization  of other  assets of
$4,876 in Fiscal  1998 and  Fiscal  1997  related to the  amortization  of water
rights.  Other  income of  $344,255  in Fiscal  1998 and  $87,447 in Fiscal 1997
related to non--recurring operating items.

           The net loss for Fiscal 1998  decreased by $497,028  from $739,620 in
Fiscal 1997 to $242,592 in Fiscal 1998.


For the Fiscal Year Ended October 31, 1997 Compared with the Fiscal
Year Ended October 31, 1996

           Gross sales  decreased  $194,901  (8.7%) to $2,058,067 for the fiscal
year ended October 31, 1997 ("Fiscal  1997") from $2,252,968 for the fiscal year
ended October 31, 1996 ("Fiscal 1996"). Five-gallon sales to Aramark Corporation
increased by  approximately  $274,000,  due to increased sales of  approximately
$52,000  to  their  continuing  New  York  and New  Jersey  operations  plus the
Company's expansion into this customer's Pennsylvania locations, which accounted
for the  remaining  approximately  $222,000.  However,  five-gallon  and  allied
product sales to and rental income from the Company's regular customer base fell
by approximately $111,000, $63,000 and $62,000,  respectively,  largely due to a
deliberate  discontinuance of service to marginal  customers and a lack of sales
and marketing staff as the Company  concentrated  its efforts toward the Aramark
business  as this  business  requires  no capital  investment  outlay for cooler
equipment and provides its own sales and marketing at no additional  cost to the
Company. 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 and
one quarts, other low-margin products,  decreased by approximately  $207,000 and
$9,000,  respectively,  largely  due  to a  discontinuance  of  service  to  one
supermarket  customer and the loss of one of the  Company's  distributors  which
completed its own bottling  facility in July, 1997. A $7,000 decrease in regular
customer  credits  and  allowances  was  offset  by  approximately  $118,000  in
discounts  attributable  to a half-price  discount  offered to Aramark for three
months  (March 10 through June 8, 1997) and a $0.15  discount per bottle for the
nine months  thereafter as an incentive to obtain their  Pennsylvania  business.
Other income in Fiscal 1996 included  approximately  $32,000 of discounts earned
upon the  renegotiation  and settlement of five older payables,  which event did
not recur in Fiscal  1997.  The  remaining  decrease  in other  income  resulted
primarily from a lower

                                                         13

<PAGE>



gain on  unclaimed  or lost  customer  deposits  as a result of a more  accurate
method of estimation.

           Cost of sales for Fiscal 1997 was $745,711  (36.2% of gross sales) as
compared to $865,255 (38.4% of gross sales) for Fiscal 1996. This 2.2 percentage
point  improvement is comprised of a 3.4 percentage  point gain due primarily to
the above-noted reductions in the sales of low-margin product lines, offset by a
1.2  percentage  point  increase  caused  by  the  above-noted  decrease  in the
equipment rental portion of gross sales.

           Selling,  general and  administrative  expenses  were  $1,844,299  in
Fiscal 1997 as compared to  $1,483,147  in Fiscal 1996.  Delivery and  warehouse
costs increased  approximately $93,000. The Pennsylvania  operations amounted to
approximately  $120,000.  The disposal of the Company's remaining owned vehicles
resulted in an increase in truck rental costs of approximately $39,000 which was
offset by a similar reduction in maintenance and repairs and insurance expenses.
Also,  while  Kearny staff levels  remained  similar,  a change in the staff mix
resulted  in reduced  labor  costs of  approximately  $28,000.  Advertising  and
promotion costs  increased  approximately  $27,000 and related  primarily to the
Company's Aramark business. Further, general and administrative expenses rose by
approximately  $240,000.  Increased  clerical costs accounted for  approximately
$30,000.  The market value of common stock issued to an officer under  agreement
was $166,250.  Professional fees increased $60,000.  These increases were offset
by reduced travel and entertainment expenses of approximately $12,000.

           Interest expense decreased from $189,782 in Fiscal 1996 to $52,063 in
Fiscal  1997,  primarily  as  a  result  of  the  October,  1996  debt-to-equity
conversion.  Amortization  of other  assets of $4,876 in Fiscal  1997 and Fiscal
1996 related to the  amortization  of water  rights.  Other income of $87,447 in
Fiscal 1997 and $78,400 in Fiscal 1996 related to non-recurring operating items.

           The loss on disposal of assets in Fiscal 1997  related  primarily  to
the writing down of certain water coolers, bottles and brewers and furniture and
fixtures  to  realizable  value  based  upon a  detailed  review of these  asset
categories.

           The net loss before  extraordinary  gain for Fiscal 1997 increased by
$511,049 from $228,571 in Fiscal 1996 to $739,620 in Fiscal 1997.

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.


                                                         14

<PAGE>



           During the fiscal years ended October 31, 1998 and 1997,  the Company
had negative  cash flows from  operating  activities  of $472,441 and  $373,444,
respectively.  Investing  activities  used cash of  $104,999  in Fiscal 1998 and
$240,746  in  Fiscal  1997,  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, 1998, the Company had a working capital  deficiency of
$2,036,482.  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,
1998 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.  The  doubling  of its asset and equity  listing  requirements
during  1997  by  the  National  Association  of  Securities  Dealers  Automated
Quotation System ("NASDAQ") caused a delay in the Company's plans and, in Fiscal
1998, the proposed  offering costs that had been  capitalized  were written off.
The Company  intends to seek and  consummate  acquisitions  of  companies in the
bottled water and allied products  business.  No assurance can be given that the
Company will be successful in identifying  potential  acquisitions  or, if made,
that such acquisitions will have a beneficial effect on the Company. The Company
has no current  agreement  to acquire  any  business or  property,  or intent to
acquire any specific business or property.

           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.

           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 is close
to settling its prior

                                                        15

<PAGE>



years' unpaid  payroll taxes and,  upon  agreement,  intends to pay such amounts
from additional borrowings.

           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.

Year 2000

           Many  existing  computer  systems and software  applications  use two
digits,rather  than four, to record years (i.e."98"  instead of "1998").  Unless
modified,  such systems will not properly  record or interpret years after 1999,
which could lead to business disruptions. This is known as the Year 2000 issue.

           The  Company  relies  on  computer  hardware,  software  and  related
technology primarily in its internal operations, such as billing and accounting.
All such hardware and software has been evaluated for Year 2000  compliance.  In
order to ensure continued  operations of its business up to and beyond 2000, the
Company has installed new Year 2000 compliant  servers and network  software and
has obtained  written  assurances  from its sole  information  systems  software
supplier that the  programming  of such software to make it Year 2000  compliant
and  compatible  is  complete  and that  thorough  testing of such  programs  is
currently underway.  The Company is currently  investigating its backup software
and is obtaining competitive quotations on workstations with a view to replacing
same so as to be Year 2000 compliant.

           The Company does not rely solely on its information  systems in order
to produce the products it sells and it believes  that its  internal  operations
will not be affected by Year 2000 problems provided the project of becoming Year
2000 compliant continues on track.

           There can be no assurance  that  failure of systems of third  parties
upon which the Company's systems and operations depend to be Year 2000 compliant
will not have a material  adverse effect on the Company's  operating  results or
financial condition; however, short of any third-party disaster that the Company
is unable to control, such as utility  infrastructure  failure, the Company does
not believe its business will be  detrimentally  impacted by potential Year 2000
problems.


New Accounting Standards

           Financial  Accounting  Standards Board  Statements (SFAS No. 128, 130
and 131)  related to  Earnings  per Share,  Reporting  Comprehensive  Income and
Segment  Disclosures  were  adopted in fiscal 1998 and did not have an impact on
the Company.



                                                        16

<PAGE>
                                           ECHO SPRINGS WATER CO., INC.
                                         CONSOLIDATED FINANCIAL STATEMENTS
                                                FOR THE YEARS ENDED
                                             OCTOBER 31, 1998 AND 1997

Item 7.           Financial Statements


                                           INDEPENDENT AUDITORS' REPORT


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

         We have audited the  accompanying  consolidated  balance sheets of Echo
Springs Water Co., Inc. and subsidiaries as at October 31, 1998 and 1997 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,  1998 and 1997,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
12 to the consolidated 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  consolidated  financial  statements do not include any adjustments
that might result from the outcome of this uncertainty.




                                          CITRIN COOPERMAN & COMPANY, LLP


January 26, 1999
New York, New York

                                                        17


<PAGE>

                         ECHO SPRINGS WATER CO., INC.
                           CONSOLIDATED BALANCE SHEETS
                            OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                     1998              1997
                                                     ----              ----

                                     ASSETS
Current assets:
 Cash                                                $   18,848      $  170,288
 Accounts receivable - net of
  allowance for doubtful accounts
  of $29,000 in 1998 and $9,000 in 1997                313,713          255,675
 Notes receivable, current portion                      43,331           29,842
 Inventories                                            27,130           25,753
 Prepaid expenses                                       18,469           22,620
                                                       ---------      ---------
         Total current assets                          421,491          504,178

Notes receivable, net of current portion               102,936          132,254

Property, plant and equipment - net                  1,254,971        1,187,029

Other assets                                           225,577          353,970
                                                     ---------        ---------

         TOTAL ASSETS                               $2,004,975       $2,177,431
                                                    =========        =========

                LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
 Installment debt                                   $1,050,000       $  624,000
 Debentures                                             25,000           25,000
 Accounts payable and accrued expenses               1,053,182        1,419,074
 Customer deposits                                     317,200          304,800
 Unearned revenues                                      12,591           14,963
                                                     ---------       ---------
         Total current liabilities                   2,457,973        2,387,837
                                                       ---------      ---------

Shareholders' equity (deficiency):
 Common stock, $.0001 par value,
  75,000,000 shares authorized; issued
  and outstanding 3,822,149 shares in
  1998 and 1997                                           382          382

 Additional paid-in capital                         8,792,884     8,792,884
 Accumulated deficit                               (9,246,264)   (9,003,672)
     Total shareholders' equity
      (deficiency)                                   (452,998)     (210,406)
                                                   ---------        ---------

         TOTAL LIABILITIES AND SHARE-
          HOLDERS' EQUITY (DEFICIENCY)              $2,004,975      $2,177,431
                                                    =========       =========









      See   accompanying   notes   to   consolidated financial statements.

                                                               18


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997



                                                                                  1998                    1997
                                                                                  ----                     ----

Revenues:
 Gross sales                                                                 $1,853,898                 $2,058,067
 Credits and allowances                                                         (14,714)                  (123,979)
 Freight out                                                                    (32,686)                   (45,863)
 Other income                                                                    11,282                     29,219
                                                                              ---------                  ---------
                                                                              1,817,780                  1,917,444
                                                                              ---------                  ---------

Costs and expenses:
 Cost of sales                                                                  616,184                    745,711
 Selling, general and
  administrative                                                              1,685,765                  1,844,299
 Interest                                                                        99,243                     52,063
 Amortization of other
  assets                                                                          4,876                      4,876
 Other expenses (income) - net                                                 (344,255)                   (87,447)
 (Gain) loss on disposal of assets                                               (1,441)                    97,562
                                                                              ---------                  ---------
     Total costs and
      expenses                                                                2,060,372                  2,657,064
                                                                              ---------                  ---------

Net loss                                                                     $ (242,592)                $ (739,620)
                                                                              =========                  =========

Net loss per share                                                           $     (.06)                $     (.22)
                                                                              =========                  =========

Weighted average shares
 outstanding                                                                  3,822,149                  3,412,566
                                                                              =========                  =========






















                                  See   accompanying   notes   to   consolidated
financial statements.

                                                               19


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)

                                  FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997



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


Balance at
 October 31, 1996                                   2,907,149        $291         $7,967,725           $(8,264,052)       $(296,036)

Shares issued to
 officer under
 agreement                                            190,000          19            166,231                                166,250
Shares issued upon
 conversion of debt                                    75,000           7             74,993                                 75,000
Shares sold                                           650,000          65            583,935                                584,000
Net loss                                                                                                  (739,620)        (739,620)
                                                    ---------         ---          ---------            ----------          --------

Balance at
 October 31, 1997                                   3,822,149         382          8,792,884            (9,003,672)        (210,406)

Net loss                                                                                                  (242,592)        (242,592)
                                                    ---------         ---          ---------            ----------          --------

Balance at
 October 31, 1998                                   3,822,149        $382         $8,792,884           $(9,246,264)       $(452,998)
                                                    =========         ===          =========            ==========          ========




                                     See  accompanying   notes  to  consolidated
financial statements.

                                                                  20

<PAGE>



                          ECHO SPRINGS WATER CO., INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997

                                                                                          1998                     1997
                                                                                          ----                     ----


Operating activities:
 Net loss                                                                             $ (242,592)              $ (739,620)
 Adjustments to reconcile
  net loss to net cash used
  by operating activities -
  Depreciation and amortization                                                          152,443                  169,803
  (Gain) loss on disposal of assets                                                       (1,441)                  97,562
  Provision for doubtful accounts                                                         20,000                   (5,000)
  Stock issued for compensation                                                                                   166,250
  Debt reduction for expense recovery                                                                             (45,000)

  Changes in assets and liabilities -
   Accounts receivable                                                                   (78,038)                   6,537
   Inventories                                                                            (1,377)                   8,468
   Prepaid expenses                                                                        4,151                    7,558
   Other assets                                                                           30,277                  (45,580)
   Accounts payable and accrued expenses                                                (365,892)                 (83,508)
   Customer deposits                                                                      12,400                   91,800
   Unearned revenues                                                                      (2,372)                  (2,714)
                                                                                       ---------                ---------
         Net cash used by operating
          activities                                                                    (472,441)                (373,444)
                                                                                       ---------                ---------

Investing activities:
 Capital expenditures                                                                   (215,509)                (185,110)
 Deposits on equipment                                                                    93,240                  (93,240)

 Collections on notes receivable                                                          15,829                   23,782
 Proceeds from disposal of assets                                                          1,441                   13,822
                                                                                       ---------                ---------
         Net cash used by investing
          activities                                                                    (104,999)                (240,746)
                                                                                       ---------                ---------

Financing activities:
 Proceeds from issuance of common stock                                                                           584,000
 Increase in installment debt                                                            540,000                  732,000
 Repayment of installment debt                                                          (114,000)                (576,153)
                                                                                       ---------                ---------
     Net cash provided
          by financing activities                                                        426,000                  739,847
                                                                                       ---------                ---------

Net increase (decrease) in cash                                                         (151,440)                 125,657

Cash - beginning                                                                         170,288                   44,631
                                                                                       ---------                ---------

CASH - ENDING                                                                         $   18,848               $  170,288
                                                                                       =========                =========


Supplemental Cash Flow Information:
 Interest paid                                                                        $   41,644               $   41,714
 Conversion of debt and interest
  to common stock                                                                                                  75,000

     See   accompanying   notes  to  consolidated financial statements.


                                                                 21
<PAGE>


                          ECHO SPRINGS WATER CO., INC.
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 -        BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

                Business
                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 primarily  for
                direct   distribution  and  sale  to  business  and  residential
                customers.

                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 delivery to the customer.

                Inventories
                Inventories  consist  principally of items held for sale,  which
                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 $46,945 in 1998 and $42,245 in 1997.
                Depreciation   of  plant  and   equipment  is  provided  by  the
                straight-line method over the estimated economic useful lives of
                the various asset groups ranging from 5 to 40 years.

                Impairment of Long-Lived Assets
                The  Company  adopted   provisions  of  Statement  of  Financial
                Accounting  Standards No. 121  (Accounting for the Impairment of
                Long-Lived  Assets and for Long-Lived  Assets to Be Disposed Of)
                during  1997.  The  effect of  adopting  this  standard  was not
                material. The Company periodically reviews its long-lived assets
                to assess  recoverability and to ensure that the carrying values
                of such long-lived assets have not been impaired.


                                                            22


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                  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.

                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 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.  Loss per  share  represents  both the basic and
                diluted  amounts,  since all  conversion and exercise of options
                and warrants would be antidilutive  and therefore not taken into
                consideration.

                Statements of Cash Flows
                For  purposes  of the  statements  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, 1998 or 1997.

                Financial  Instruments and Credit Risks The carrying  amounts of
                cash,  accounts  receivable,  and  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,
                1998,  the Company  had  uncollateralized  receivables  with one
                distributor  approximating $111,000, which represents 43% of the
                Company's trade accounts balance. During the years ended October
                31,  1998  and  1997,   sales  to  this  customer   amounted  to
                approximately 47% and 35%, 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,  in January,  1994,  the
                Company sold its commercial and residential  water  distribution
                business  in Utica  and  related  assets,  with a book  value of
                $120,467, to an unrelated party for $225,000 and realized a gain
                on the sale of $104,533. As part of the sales agreement, the new
                operation will purchase bottled water from the Company for three
                years.  The purchase  price was  satisfied  with two notes.  The
                first  note  is for  $50,000  without  interest,  which  will be
                converted to a three-year, 6% term loan upon repayment




                                                            23


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 -        NOTES RECEIVABLE (CONTINUED)

                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
                1998 and 1997 amounted to $20,533 and $52,337, respectively.

NOTE 3 -        INVENTORIES

                Inventories consist of the following:
                                                                                                  October 31,   
                                                                                            1998              1997
                           Bottles                                                        $   833           $
                           Product held for sale                                           15,582            16,585
                           Supplies                                                        10,715             9,168
                                                                                           ------            ------
                                                                                          $27,130           $25,753
                                                                                           ======            ======


NOTE 4 -        PROPERTY, PLANT AND EQUIPMENT

                Property, plant and equipment are summarized as follows:

                                                                                                   October 31,    
                                                                                        1998                 1997
                           Land                                                     $  150,000           $  150,000
                           Buildings and improvements                                  364,541              362,298
                           Water coolers, bottles and
                            brewers                                                    842,289              754,084
                           Machinery and equipment                                     509,670              397,345
                           Vehicles                                                     10,500               10,500
                           Furniture and fixtures                                       90,610               77,874
                                                                                     ---------            ---------

                                                                                     1,967,610            1,752,101
                           Less: accumulated
                            depreciation and
                     amortization                                                      712,639              565,072
                                                                                     ---------            ---------
                                                                                    $1,254,971           $1,187,029
                                                                                     =========            =========

NOTE 5 -        OTHER ASSETS

                Other assets are comprised of the following:

                                                                                                     October 31,  
                                                                                         1998                 1997
                Water rights                                                          $205,000             $205,000
                Accumulated amortization                                                43,281               38,405
                                                                                       -------              -------
                     Net water rights                                                  161,719              166,595
                Deposits                                                                63,858              155,499
                Deferred public offering costs                                                               31,876
                                                                                       -------              -------
                                                                                      $225,577             $353,970
                                                                                       =======              =======



                                                            24


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 -        CAPITAL AND OPERATING LEASES

                Operating Leases
                The Company  leases  office and  warehouse  facilities  under an
                operating lease expiring March 31, 2003 and a second facility on
                a month-to-month  basis. Rental expense for office and warehouse
                facilities amounted to $85,668 in 1998 and $76,743 in 1997.

                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
                $285,712 in 1998 and $281,089 in 1997.

                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. These two springs have a combined average
                capacity of approximately  57,000,000 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  rent of
                $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 additional $21,000
                first-year  rent,  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 $18,735 and $19,661 for the years ended October 31, 1998 and
                1997, respectively.

                Minimum future lease payments are:
                                                                                                  Operating Leases     

                Fiscal year ending October 31,                                     Office        Equipment            Land

                1999                                                              $ 75,072        $ 78,918        $ 15,600
                2000                                                                75,072           6,180          19,500
                2001                                                                75,072                          31,200
                2002                                                                75,072                          31,200
                2003                                                                31,280                          31,200
                2004 and thereafter                                                                                366,600
                                                                                   -------         -------         -------
                Total minimum payments                                            $331,568        $ 85,098        $495,300
                                                                                   =======         =======         =======

                                                            25


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 -        INDEBTEDNESS
                                                                                                  1998               1997
                                                                                                  ----               ----
                Installment Debt

                Note payable due September, 1998 with
                 interest at prime plus 2%, secured
                 by all assets of the Company (*)                                            $  500,000           $500,000

                Note payable due February, 1999 with
                 interest at 8%, secured by all assets
                 of the Company                                                                 500,000

                Notes payable with interest at 18%
                 due December 31, 1995 (*)                                                       50,000            100,000

                Unsecured term loan due in monthly
                 installments of $3,000 including
                 interest through June, 1998                                                                        24,000
                                                                                              ---------            -------

                           TOTAL DEBT                                                         1,050,000            624,000

                           CURRENT PORTION                                                    1,050,000            624,000
                                                                                              ---------            -------

                           NET LONG-TERM PORTION                                             $   -0-              $  -0-  
                                                                                              =========            =======

                Debentures
                8%  Series  D  convertible   ($12.50  of  principal  per  share)
                 subordinated debentures maturing December 31,
                 1995 (*)                                                                   $25,000               $25,000
                                                                                             ======                ======

                *Obligations  in default as to principal and interest.  Portions
                 of the debt and interest  were  converted  into common stock of
                 the Company (Note 12).

NOTE 8 -        ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                Accounts payable and accrued expenses consist of the following:
                                                                                                   October 31,  
                                                                                       1998                 1997

                Accounts payable                                                  $  206,370           $  529,212
                Accrued expenses                                                     170,696              272,643
                Wages payable                                                         13,445               14,300
                Interest payable                                                      140,463               82,635
                Payroll taxes payable                                                438,261              450,526

                Sales taxes payable                                                   83,947               69,758
                                                                                   ---------            ---------


                                                                                  $1,053,182           $1,419,074
                                                                                   =========            =========
                                                            26


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 -        ACCOUNTS PAYABLE AND ACCRUED EXPENSES (CONTINUED)

                Michael S.  Rakusin,  the  President,  a Director and  principal
                shareholder  of the Company,  advances  funds to the Company for
                working capital purposes. Such advances increase and decrease as
                funds are needed and available. At October 31, 1998, the Company
                owed Mr. Rakusin $35,000 which is included in accounts  payable.
                Interest  expense  on such  loans  for the  fiscal  years  ended
                October  31,  1998  and  1997  amounted  to  $539  and  $16,847,
                respectively.

                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 shareholders 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.

                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.  These  warrants  expired in
                1998.

                On September 30, 1996,  the Company  issued 10,000 shares of its
                common stock at a value of $26,250  ($2.625 per share,  the then
                current market value) and on October 1, 1997, the Company issued
                190,000 shares of its common stock at a value of $166,250 ($.875
                per share,  the then  current  market  value) to Mr.  Rakusin in
                consideration  for prior services rendered by Mr. Rakusin to the
                Company.


NOTE 10-        INCOME TAXES

                At  October  31,  1998,  the  estimated  maximum  amount  of net
                operating loss  carryforward  available to reduce future taxable
                income is approximately  $9,152,000,  expiring from 2004 through
                2018.  Deferred tax benefits from the use of net operating  loss
                carryforwards  of  approximately  $3,112,000  are  offset  by  a
                corresponding  amount of  valuation  allowance  since it is more
                likely  than not that all or some  portion of the  deferred  tax
                asset will not be realized.


                                                            27


<PAGE>


                          ECHO SPRINGS WATER CO., INC.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10-        INCOME TAXES (CONTINUED)

                Tax benefits  that would have been  provided for the years ended
                October 31,  1998 and 1997 on the loss  before  taxes of $82,000
                and $250,000,  respectively,  have been offset by  corresponding
                changes in the valuation allowance.

                The approximate  amounts of net operating loss  carryforward and
                the year of expiration are as follows:

                                             Amount                            Year of Expiration

                                           $  460,000                                 2004
                                            1,160,000                                 2005
                                            1,600,000                                 2006
                                            2,000,000                                 2007
                                            1,050,000                                 2008
                                            1,730,000                                 2009
                                              200,000                                 2010
                                              725,000                                 2012
                                              227,000                                 2018


NOTE 11-        GOING CONCERN

                For the year ended  October 31,  1998,  the Company  sustained a
                loss of $242,592  and at October 31, 1998 had a working  capital
                deficiency of $2,036,482,  an accumulated  deficit of $9,246,264
                and deficit net worth of $452,998. In addition,  the Company was
                in default on principal  and  interest  payments on a portion of
                its debt (Note 7). 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  intends  to seek and  consummate  acquisitions  of
                companies in the bottled water and allied  products  business to
                increase  revenues.  No assurance  can be given that the Company
                will be successful in identifying potential  acquisitions or, if
                made, that such  acquisitions  will have a beneficial  effect on
                the Company. The Company has no current agreement to acquire any
                business or property, or intent to acquire any specific business
                or property.  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.





                                                            28


<PAGE>


                          ECHO SPRINGS WATER CO., INC.
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12-        PROPOSED PUBLIC OFFERING

                In  June,  1996,  the  Company  entered  into   negotiations  to
                consummate a public offering.  As part of the  negotiations,  on
                June 4,  1996,  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.  The  doubling  of its asset and equity
                listing  requirements during 1997 by the National Association of
                Securities Dealers Automated  Quotation System caused a delay in
                the Company's  plans and, in Fiscal 1998, the proposed  offering
                costs of $33,330 that had been capitalized were written off.





                                                            29


<PAGE>


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

           None.
                                                     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


Michael S. Rakusin...........      43     President, Treasurer,
                                           and Director

Edward J. Metzger............      41     Vice President-
                                             Operations, Secretary,
                                           and Director

Frank A. LaSala.............       75     Director


          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.  ("Berkshire")
(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

                                                        30

<PAGE>



manufacturing sophisticated machinery for the aerospace industry,
for the past 45 years.



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, 1998, 1997 and 1996.


Summary Compensation Table


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               1998         $94,350    -         -              -               -             -            $ -
  President                      1997          94,000    -         -              -               -             -         166,250(1)
                                 1996          80,200    -         -              -               -             -         26,250(2)

Edward J. Metzger                1998         $83,200    -         -              -               -             -             -
  Vice President                 1997          86,400    -         -              -               -             -             -
                                 1996          80,200    -         -              -               -             -             -




(1)       On October 1, 1997,  the Company  issued  190,000 shares of its Common
          Stock,  valued at  $166,250  ($0.875  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.

(2)       On September 30, 1996,  the Company issued 10,000 shares of its Common
          Stock, valued at $26,250 ($2.625 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,  1998 and 1997,  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, 1998,  there are no  outstanding  options or warrants held by any officer or
director of the Company.

                                                        31

<PAGE>



          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, 1998, 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, 1998 or within 60 days thereafter.

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

Michael S. Rakusin        400,000                               10.5%

Edward J. Metzger           6,800                                0.2%

Frank A. LaSala             1,920                                0.1%

ESWC, Inc.
149 Main Street
Cooperstown,
NY  11326                 210,243                               5.5%

H.T. Ardinger, Jr.
9040 Governors Row
Dallas, TX 75247         364,000                               9.5%

All Officers and
Directors as a
Group (three persons)    408,720                              10.7%


(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

                                                        32

<PAGE>



         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.



Item 12.        Certain Relationships and Related Transactions

           On September 30, 1996, the Company issued 10,000 shares of its Common
Stock,  valued at $26,250  ($2.625 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  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.  These  warrants
expired in 1998.

           At October 31, 1998,  Mr.  Rakusin had advanced a total of $35,000 to
the  Company,  which funds were used by the Company for working  capital.  These
funds were fully repaid by the Company to Mr. Rakusin during November, 1998.

           On October 1, 1997,  the Company  issued 190,000 shares of its Common
Stock,  valued at $166,250  ($0.875 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.


                                                      PART IV

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

Schedules and Reports on Form 8-K

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

Independent Auditors' Report

Consolidated Balance Sheets as at October 31, 1998 and 1997.

Consolidated Statements of Operations for the Years Ended October
   31, 1998 and 1997

Consolidated Statements of Shareholders' Equity (Deficiency) for
  the Years Ended October 31, 1998 and 1997

Consolidated Statements of Cash Flows for the Years Ended October
   31, 1998 and 1997

Notes to Consolidated Financial Statements

                                                        33

<PAGE>




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


[3](a)                     Certificate  of  Incorporation   and  all  amendments
                           thereto,   incorporated  by  reference  to  the  same
                           exhibit number to the  Registrant's  Annual Report on
                           Form 10-KSB for the year ended October 31,
                           1996

[3]                        (b)  By-Laws,  incorporated  by reference to the same
                           exhibit number to the  Registrant's  Annual Report on
                           Form 10- KSB for the year ended October 31, 1996

[4]                        Form of Common  Stock  Certificate,  incorporated  by
                           reference   to  the  same   exhibit   number  to  the
                           Registrant's  Annual  Report on Form  10-KSB  for the
                           year ended October 31, 1996


[27]           Financial Data Schedule



                                              34
</TABLE>

<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 9, 1999

                                       ECHO SPRINGS WATER CO., INC.


                                          By: /s/    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  Registrant  and in the
capacities and on the date indicated:


Name                            Titles                     Date



/s/ Michael S. Rakusin   President and Director           February 9, 1999
Michael S. Rakusin       Principal Executive,
                         Operating and Financial
                         Officer

/s/ Edward J. Metzger    Vice President, Secretary       February 9, 1999
Edward J. Metzger        and Director


/s/ Frank A. LaSala      Director                        February 9, 1999
Frank A. LaSala