Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)

                        CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1999 and 1998




<PAGE>







                                 C O N T E N T S

Independent Auditors' Report................................................. 3

Consolidated Balance Sheet................................................... 4

Consolidated Statements of Operations........................................ 5

Consolidated Statements of Stockholders' Equity.............................. 6

Consolidated Statements of Cash Flows........................................ 7

Notes to the Consolidated Financial Statements............................... 8





<PAGE>


                            HJ & ASSOCIATES, L.L.C.
                  CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
               American Institute of Certified Public Accountants
                Utah Association of Certified Public Accountants



                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Q-Seven Systems, Inc. and Subsidiary
(Formerly Downstream Incorporated - DSI)
Monheim, Germany

We have audited the accompanying  consolidated balance sheet of Q-Seven Systems,
Inc. and  Subsidiary  (formerly  Downstream  Incorporated - DSI) at December 31,
1999 and the related consolidated statements of operations, stockholders' equity
and  cash  flows  for  the  years  ended  December  31,  1999  and  1998.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
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  consolidated  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 consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Q-Seven
Systems,  Inc. and  Subsidiary  (formerly  Downstream  Incorporated - DSI) as of
December 31, 1999 and the  consolidated  results of their  operations  and their
cash flows for the years ended  December  31, 1999 and 1998 in  conformity  with
generally accepted accounting principles.



/S/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
May 10, 2000





<PAGE>



                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                           Consolidated Balance Sheet

                                     ASSETS

                                                                 December 31,
                                                                     1999
                                                              -----------------
CURRENT ASSETS

   Cash                                                       $          57,534
   Accounts receivable (Notes 1 and 3)                                  388,112
                                                              -----------------
     Total Current Assets                                               445,646
                                                              -----------------
PROPERTY AND EQUIPMENT - NET (Notes 1 and 2)                                622
                                                              -----------------
     TOTAL ASSETS                                             $         446,268
                                                              =================


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

   Accounts payable                                           $         200,571
   Accrued expenses (Note 5)                                            167,073
   Income taxes payable (Note 1)                                         35,674
                                                              -----------------
     Total Current Liabilities                                          403,318
                                                              -----------------

COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS' EQUITY

   Preferred stock: 50,000,000 shares authorized of
    $0.001 par value, -0- shares issued and outstanding                    -
   Common stock: 100,000,000 shares authorized of $0.001
    par value, 12,500,000 shares issued and outstanding                  12,500
   Additional paid-in capital (deficit)                                  (8,343)
   Retained earnings                                                     38,793
                                                              -----------------
     Total Stockholders' Equity                                          42,950
                                                              -----------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $         446,268
                                                              =================



     The accompanying notes are an integral part of these consolidated financial
statements.


                                        4


<PAGE>



                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                        For the Years Ended
                                                            December 31,
                                                -------------------------------------
                                                       1999                1998
                                                ------------------  -----------------
<S>                                            <C>                <C>

SALES                                           $        1,296,154  $         340,293

COST OF SALES                                              554,249             77,008
                                                ------------------  -----------------
GROSS MARGIN                                               741,905            263,285
                                                ------------------  -----------------
OPERATING EXPENSES

   Depreciation                                                 90             -
   Selling, general and administrative                     743,533            192,633
                                                ------------------  -----------------
     Total Operating Expenses                              743,623            192,633
                                                ------------------  -----------------
OPERATING INCOME (LOSS)                                     (1,718)            70,652
                                                ------------------  -----------------
OTHER INCOME (EXPENSES)
   Interest income                                           4,175              1,358
                                                ------------------  -----------------
     Total Other Income                                      4,175              1,358
                                                ------------------  -----------------
NET INCOME BEFORE INCOME TAXES                               2,457             72,010

INCOME TAXES (Note 1)                                       35,674             -
                                                ------------------  -----------------
NET INCOME (LOSS)                               $          (33,217) $          72,010
                                                ==================  =================
BASIC INCOME (LOSS) PER SHARE (Note 1)          $            (0.00) $            0.01
                                                ==================  =================
</TABLE>



     The accompanying notes are an integral part of these consolidated financial
statements.


                                        5


<PAGE>



                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                 Consolidated Statements of Stockholders' Equity


<TABLE>
<CAPTION>
                                                                                Additional
                                                  Common Stock                   Paid-In
                                    -------------------------------------------- Capital            Retained
                                          Shares               Amount           (Deficit)           Earnings
                                    -----------------  ------------------  ------------------  -----------------
<S>                                <C>                <C>                 <C>                 <C>
Balance,
 December 31, 1997                          7,900,000  $            7,900  $           (2,900) $          -

Capital contributions, 1998                    -                   -                   56,425             -

Net income for the year ended
 December 31, 1998                             -                   -                   -                  72,010
                                    -----------------  ------------------  ------------------  -----------------
Balance,
 December 31, 1998                          7,900,000               7,900              53,525             72,010

Recapitalization                            4,600,000               4,600             (75,265)            -

Capital contributions, 1999                    -                   -                   13,397             -

Net loss for the year ended
 December 31, 1999                             -                   -                   -                 (33,217)
                                    -----------------  ------------------  ------------------  -----------------
Balance,
 December 31, 1999                         12,500,000  $           12,500  $           (8,343) $          38,793
                                    =================  ==================  ==================  =================
</TABLE>



     The accompanying notes are an integral part of these consolidated financial
statements.


                                        6


<PAGE>



                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                    For the Years Ended
                                                                                        December 31,
                                                                           -------------------------------------
                                                                                  1999                1998
                                                                           ------------------  -----------------
<S>                                                                      <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES

   Net income (loss)                                                       $          (33,217) $          72,010
   Adjustments to reconcile net loss to net cash
    used in operating activities:
     Depreciation                                                                          90             -
   Changes in operating assets and liabilities:
     (Increase) in accounts receivable                                               (285,826)          (102,286)
     Increase in accounts payable                                                     200,571             -
     Increase in accrued expenses                                                     126,841             24,522
     Increase in income taxes payable                                                  35,674             -
                                                                           ------------------  -----------------
       Net Cash (Used) Provided in Operating Activities                                44,133             (5,754)
                                                                           ------------------  -----------------
CASH FLOWS FROM INVESTING ACTIVITIES                                                   -                  -
                                                                           ------------------  -----------------
CASH FLOWS FROM FINANCING ACTIVITIES

   Related party loans made                                                            -                 (55,667)
   Proceeds from additional capital contribution                                       13,397             56,425
                                                                           ------------------  -----------------
       Net Cash Provided by Financing Activities                                       13,397                758
                                                                           ------------------  -----------------
NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                                                                      57,530             (4,996)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                4              5,000
                                                                           ------------------  -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                     $           57,534  $               4
                                                                           ==================  =================
SUPPLEMENTAL CASH FLOW INFORMATION

Cash Payments For:

   Income taxes                                                            $           -       $          -
   Interest                                                                $           -       $          -

Non-Cash Financing Activities

   Stock issued for fixed assets                                           $              712  $          -
</TABLE>



     The accompanying notes are an integral part of these consolidated financial
statements.


                                        7


<PAGE>



                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                 Notes to the Consolidated Financial Statements
                           December 31, 1999 and 1998


NOTE 1 -  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          a. Organization

          Q-Seven Systems, Inc., formerly known as Downstream Incorporated - DSI
          ("the Company"),  was incorporated under the laws of the State of Utah
          on  November   26,  1996  to  engage  in  the  business  of  financial
          consulting.

          Q-Seven Systems,  Inc.  ("Q-Seven  Nevada") was incorporated under the
          laws of the  State  of  Nevada  on May 18,  1999  for the  purpose  of
          acquiring  marketing  rights to a  certain  Internet  user  management
          software program,  and to acquire X-Real  Intertainment,  Inc. Ltd., a
          corporation  organized under the laws of the Bahamas on April 23, 1999
          ("X-Real").

          X-Real   acquired  on  May  18,  1999,   from  X-Real  GbR,  a  German
          partnership, all of X-Real GbR's assets, which consist of six Internet
          pay sites.

          On May 24, 1999, the Company,  Q-Seven Nevada and the  shareholders of
          Q-Seven  Nevada  entered into an Agreement and Plan of Share  Exchange
          whereby the Company acquired 100% of the issued and outstanding shares
          of  Q-Seven  Nevada  for  7,900,000  shares of its  common  stock (the
          "Q-Seven Nevada Acquisition"). The Q-Seven Nevada Acquisition has been
          accounted for as a reverse merger.

          On May 26, 1999,  Q-Seven Nevada  acquired all issued and  outstanding
          shares  of common  stock of X-Real  (the  "X-Real  Acquisition").  The
          X-Real Acquisition was accounted for as a recapitalization because the
          partners  of X-Real  GbR became the  shareholders  of Q-Seven  Nevada.
          Prior to the X-Real  Acquisition,  Q-Seven  Nevada had no  operations,
          assets or liabilities.

          b. Principles of Consolidation

          The  accompanying   consolidated   financial  statements  include  the
          accounts  of  Q-Seven   Nevada,   the  acquiring   company,   and  its
          wholly-owned   subsidiary,    X-Real.    Intercompany   accounts   and
          transactions have been eliminated in consolidation.

          c. Accounting Method

          The  Company's  financial  statements  are prepared  using the accrual
          method of accounting. The Company has elected a December 31, year end.

          d. Cash and Cash Equivalents

          The Company considers all highly liquid investments with a maturity of
          three months or less when purchased to be cash equivalents.



     The accompanying notes are an integral part of these consolidated financial
statements.


                                        8


<PAGE>




                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                 Notes to the Consolidated Financial Statements
                           December 31, 1999 and 1998


NOTE 1 -  ORGANIZATION   AND   SUMMARY  OF   SIGNIFICANT   ACCOUNTING   POLICIES
          (Continued)

          e. Accounts Receivable

          Accounts  receivable  are  shown  net of the  allowance  for  doubtful
          accounts of $-0- at December 31, 1999.

          f. Basic Income (Loss) Per Share

          The  computations of basic loss per share of common stock are based on
          the weighted  average number of common shares  outstanding  during the
          period of the consolidated financial statements as follows:

                                                   For the Years Ended
                                                       December 31,
                                                ---------------------------
                                                     1999          1998
                                                -------------  ------------

          Basic income (loss) per share:

            Income (loss) (numerator)           $     (33,217) $     72,010
            Shares (denominator)                   10,685,206     7,900,000
            Per share amount                    $       (0.00) $       0.01

          There were no common stock equivalents outstanding for the years ended
          December 31, 1999 and 1998. Accordingly,  only the basic income (loss)
          per share has been calculated.

          g. Change in Accounting Principle

          In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
          Instruments and Hedging Activities" which requires companies to record
          derivatives as assets or  liabilities,  measured at fair market value.
          Gains  or  losses  resulting  from  changes  in the  values  of  those
          derivatives  would  be  accounted  for  depending  on  the  use of the
          derivative  and whether it  qualifies  for hedge  accounting.  The key
          criterion for hedge accounting is that the hedging  relationship  must
          be highly effective in achieving  offsetting  changes in fair value or
          cash  flows.  SFAS No. 133 is  effective  for all fiscal  quarters  of
          fiscal  years  beginning  after June 15,  1999.  The  adoption of this
          statement  had  no  material   impact  on  the   Company's   financial
          statements.



                                        9


<PAGE>



                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                 Notes to the Consolidated Financial Statements

NOTE 1 -  ORGANIZATION   AND   SUMMARY  OF   SIGNIFICANT   ACCOUNTING   POLICIES
          (Continued)

          h. Property and Equipment

          Property  and  equipment  is recorded  at cost.  Major  additions  and
          improvements  are  capitalized.   The  cost  and  related  accumulated
          depreciation  of  equipment  retired  or sold  are  removed  form  the
          accounts and any differences between the undepreciated  amount and the
          proceeds  from  the  sale  are  recorded  as  gain  or loss on sale of
          equipment.  Depreciation  is computed using the  straight-line  method
          over a period of five years.

          i. Provision for Taxes

          A provision for income taxes charged to operations  from  inception on
          November 4, 1997 through  December 31, 1999 has been  established  for
          the  amount of  $35,674.  This  amount is based on income tax rates in
          Germany and has been converted to U.S.  dollars.  X-Real was organized
          under  the  laws of  Bahamas,  however,  even  though  X-Real  has its
          statutory seat outside  Germany,  it is still subject to unlimited tax
          liability  in Germany  since the  Company had its  effective  place of
          management in Germany.

          j. Estimates

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

          k. Advertising

          The Company follows the policy of charging the costs of advertising to
          expense as incurred.

          l. Revenue Recognition Policy

          Revenue is  recognized  as the service is provided to and  accepted by
          the customer.

          m. Concentrations of Risk

          Since the  financial  statements  of X-Real must be translated in U.S.
          dollars,  major  changes in the  currency  exchange  rate  between the
          foreign  denominations and U.S. dollars may have a significant  impact
          on operations of the Company. Although the Company does not anticipate
          the currency exchange rate to be significantly different over the next
          12 months, no such assurances can be given.



                                       10


<PAGE>




                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                 Notes to the Consolidated Financial Statements
                           December 31, 1999 and 1998


NOTE 2 -  PROPERTY AND EQUIPMENT

          Property and equipment consists of the following at December 31, 1999:

          Office equipment                               $           1,359
          Accumulated depreciation                                    (737)
                                                         -----------------
          Net property and equipment                     $             622
                                                         =================

          Depreciation  expense for the years ended  December  31, 1999 and 1998
          was $90 and $-0-, respectively.

NOTE 3 -  ACCOUNTS RECEIVABLE

          X-Real conducts all of its business on the Internet,  and all revenues
          are collected electronically.  All revenue collections and refunds are
          managed by a  corporation  with which  X-Real has a service  agreement
          (Note  4).  Collected  funds  are  held  by the  service  company  for
          approximately 60 days before they are released to X-Real.  The cost of
          sales  under the  service  agreement  related to the  receivables  are
          deducted  from the amount  released.  These  costs are  classified  as
          accounts payable and accrued expenses as of the balance sheet date.

NOTE 4 -  COMMITMENTS AND CONTINGENCIES

          Service Agreement

          X-Real  owns  several  Internet  pay  sites,  which are  managed  by a
          corporation (the "Provider").  The Provider assumes responsibility for
          the costs of operating the sites. In exchange, the Provider receives a
          percentage  of the gross  revenues of the sites as a service  fee. The
          agreement can be terminated any time with a notice of 180 days.

          Licensing Agreement

          Q-Seven  Nevada has an  exclusive  licensing  agreement  with  Q-Seven
          Systems GmbH, a German corporation that develops  software.  Under the
          agreement, the Company has the unlimited right to sell licenses of the
          software worldwide for perpetuity. The Company incurs a royalty fee of
          90% of the licensing income.

          Royalty expense was $180,995 and $-0- for the years ended December 31,
          1999 and 1998, respectively.



                                       11


<PAGE>


                      Q-SEVEN SYSTEMS, INC. AND SUBSIDIARY
                    (Formerly Downstream Incorporated - DSI)
                 Notes to the Consolidated Financial Statements
                           December 31, 1999 and 1998


NOTE 5 -  ACCRUED EXPENSES

          At December 31, 1999, accrued expenses consisted of the following:

                                                                   December 31,
                                                                       1999
                                                                 --------------
          Cost of sales associated with receivables (Note 3)     $       99,546
          Advertising                                                    67,527
                                                                 --------------
                   Total Accrued Expenses                        $      167,073
                                                                 ==============

NOTE 6 -  SUBSEQUENT EVENTS

          Subsequent to December 31, 1999, the Company  verbally  agreed to sell
          50% of the  shares of X-Real  Intertainment  Inc.  Ltd.  to a Bahamian
          investment  company for cash  consideration  of 1 million German marks
          (approximately $500,000 U.S. dollars based on the exchange rate at the
          end  of  March).   The  shares  are  to  be  issued  when  the  entire
          consideration  is received.  As of April 28, 2000, only 500,000 German
          marks had been received by X-Real.



                                       12