--------------------------------------------------------------------------------

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

                           ---------------------------


                                   FORM 10-KSB

(Mark One)

|X|  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

                   For the fiscal year ended December 31, 2000

                                       OR

|_|  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

                        For the transition period from to

                        Commission file number: 333-6440

                              Q-SEVEN SYSTEMS, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)

                  Utah                                  87-0567618
     (State or Other Jurisdiction of                 (I.R.S. Employer
     Incorporation or Organization)                 Identification No.)

 Boettgerstr. 25, 40789 Monheim, Germany            011-49-2173-683350
(Address of Principal Executive Offices)        (Issuer's Telephone Number)

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

         Securities registered under Section 12(g) of the Exchange Act:

                    Common Stock, $0.001 Par Value Per Share
                                (Title of Class)

     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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES |_| NO
|X|

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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. [X]

     The issuer's revenues for the fiscal year ended December 31, 2000 were
$1,766,395.

     As of December 8, 2000, the aggregate market value of voting stock held by
non-affiliates of the issuer based upon the closing price for the issuer's
common stock of $0.875 on such date, as quoted on the OTC Bulletin Board
service, was approximately $4,025,000 (calculated by excluding shares owned
beneficially by directors and officers of the issuer).

     The number of shares outstanding of the issuer's common stock, $0.001 par
value, as of September 4, 2001 was 12,500,000.

     Transitional Small Business Disclosure Format: YES |_| NO |X|

--------------------------------------------------------------------------------



<PAGE>



                                     PART I

Item 1. Description of Business.

                              Business Development

          Q-Seven Systems, Inc., formerly known as Downstream Incorporated - DSI
(collectively with the subsidiaries specified in Exhibit 21.1, unless otherwise
noted or required by the context, "our company," "we" or "us"), was incorporated
in November 1996 under the laws of the State of Utah. In July 1997, we completed
a public offering of our common stock, in which we issued to the public
1,034,000 shares of our common stock, par value $.001 per share. On May 24,
1999, our company and the shareholders of Q-Seven Systems, Inc., a Nevada
corporation ("Q-Seven Nevada"), entered into an Agreement and Plan of Share
Exchange pursuant to which our company acquired from Messrs. Kriependorf, Kamp
and Cordt 100% of the issued and outstanding shares of Q-Seven Nevada in
exchange for 7,900,000 newly issued shares of our common stock. Messrs.
Kriependorf, Kamp and Cordt are now the principal shareholders and officers of
our company. Messrs. Kriependorf and Kamp are also directors of our company. Mr.
Cordt was a director of our company until March 26, 2001. See also Item 12,
"Certain Relationships and Related Transactions." On June 10, 1999, we changed
our name from Downstream Incorporated - DSI to Q-Seven Systems, Inc. On October
29, 1999, we filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form 8-A to register our common stock
under Section 12(g) of the Securities Exchange Act of 1934. As described in our
Current Report on Form 8-K filed on April 11, 2001, which is incorporated herein
by reference, we have recently offered to acquire shares of Partner Air Plc. See
also Item 11, "Security Ownership of Certain Beneficial Owners and
Management--Change in Control Arrangements."

                               Business of Issuer

          PRODUCTS AND SERVICES

          Our company currently engages directly and through our subsidiaries,
Q-Seven Nevada and X-Real Intertainment Inc. Ltd., a company organized under the
laws of the Bahamas ("X-Real"), in two lines of Internet related businesses:

          o    the sale of licenses to the Q-Seven User Management Software; and

          o    the operation of Internet adult entertainment websites.

Q-Seven User Management Software

          We sell licenses relating to a modulized software suite, the Q-Seven
User Management Software (the "User Management Software" or "our software"),
that allows Internet content providers to build, operate and manage Internet
environments, especially entertainment environments. Our software consists of
different modules which can be combined and customized to provide Internet
solutions for our customers' specific needs. The User Management Software has
been developed and is owned by Q-Seven Systems GmbH which has granted us the
exclusive right to license the User Management Software. Q-Seven Systems GmbH is
not a subsidiary of our company but is owned by Messrs. Kriependorf, Kamp and
Cordt. See Item 12, "Certain Relationships and Related Transactions." Customers
to whom we license our software pay us a fee for the grant of such licenses and
the use of our software. Our customers usually make a down payment on the
license fee at the time we grant them a license. The remainder of the license
fee is usually payable by our customers in equal installments over a period of
one to two years.

          Q-Seven Systems GmbH delivers the User Management Software to our
customers and installs and configures it on our customers' servers. These
services are included in the license fee that our customers pay to us. Q-Seven
Systems GmbH provides these services to our customers at no charge to us other
than the portion of our fee that we must pay to them for our own license.

          The User Management Software is a modulized software suite which can
be used to distribute or sell products and services and collect payments for
those products and services through the Internet, and which offers users a
system for the backend administration of various types of e-commerce sites on
the Internet. The following modules of our software are currently available for
licensing to our customers:

          o    the Q-7 User Account Management Server--this is the central
               module of every Internet environment that uses our software,
               which manages not only the accounts of each user who uses our
               customers' websites but also each user's account balances and
               other information;

          o    the Q-7 Billing Module--this is the interface between the Q-7
               User Account Management Server and the online payment system that
               our customers uses (currently the Q-7 Billing Module supports
               credit card and electronic on-line debit-entry payment mechanisms
               provided by Pay@EuroDebit GmbH, ePayment Solutions, and Surefire
               Inc.);

          o    the Q-7 Casino Module--this is a module that allows online casino
               operators to create and manage online casinos and offers a
               variety of online games; and

          o    the Q-7 Auction Module--this is a module that allows Internet
               content providers to host Internet auctions on their websites
               while utilizing other components of our software.

          These modules can be combined and customized by Internet content
providers into any kind of commercial online entertainment, shopping or service
system, including online gaming and adult entertainment, to service and handle
user administration and online transactions.

          Our software is designed to allow Internet service providers to
administer their sites and manage the users of their sites; it also provides an
interface to secure online payment systems. The User Management Software
provides frequent and, management believes, accurate feedback to the
administrator of a website regarding the customers of such website and their
activities. Our software can quickly be integrated into existing Internet
environments and allows Internet service providers to keep up with the rapid
pace of technological change in the Internet. The User Management Software is
designed for the use with standard webbrowsers by non-computer professionals.
Our management believes that our software is so easy to use that even
non-computer professionals can administer a system that utilizes our software.

Internet Adult Entertainment

          Our indirect subsidiary X-Real currently owns and operates four adult
entertainment websites, which are exclusively directed to viewers in Germany.
These websites generate revenues by charging a fee to viewers who access these
websites. Until the end of March 2001, X-Real operated six adult entertainment
websites. At that time, the results of a performance review that X-Real had
conducted for all of its websites revealed that two of the websites were not
profitable. These two websites, which operated both on a subscription and
non-subscription basis, were shut down by X-Real at the end of March 2001. At
the beginning of April 2001, X-Real entered into an oral agreement with a
webmaster who had offered to acquire the two websites that were shut down by
X-Real in consideration of the webmaster's payment of certain liabilities in an
aggregate amount of approximately $58,000 incurred by X-Real in connection with
the operation of these two websites in the period from December 2000 through the
end of March 2001.

          During our fiscal year ended December 31, 2000, four of X-Real's
websites operated on a subscription basis. Subscribers to these sites paid
X-Real a monthly membership fee. X-Real's two other websites operated on both a
subscription and non-subscription basis. Certain areas of those websites were
accessible to subscribing members only; other areas were accessible also to
non-members, who paid a fee based on the amount of time they spend viewing the
site.

          During our fiscal year ended December 31, 2000, X-Real's customers
could settle charges for X-Real's services provided to them either by credit
card or electronic on-line debit-entry payment. Customers had to provide the
information necessary to process these types of payments. In April 2001, X-Real
began offering a new payment option for two of its websites. A customer or
potential new customer of these websites can now request to be billed for the
charges he incurs by using these websites and will regularly receive invoices
from X-Real via e-mail. Invoices are payable by the customer through wire
transfer. If a customer fails to pay an invoice within a certain time period,
his access to the websites will be terminated and proceedings to enforce the
overdue invoice will be initiated if certain criteria are met. The advantage of
the new payment option for customer is that they do not have to transmit
sensitive information, such as credit card or bank account information, over the
Internet, which is necessary to process credit card or electronic on-line
debit-entry payments. A substantial number of new customers have already
selected the new payment option. Advantages for our company include the low
costs that this payment option involves for X-Real as well as the elimination of
charge-back risks. The software for the new payment option, which is still under
development, has been developed by ITraffic GmbH and is currently provided to X-
Real at no charge. Management believes that X-Real is the first adult
entertainment company serving the German market to offer this type of payment
option. See also Item 12, "Certain Relationships and Related Transactions," for
information on ITraffic GmbH, which is an affiliate of our company as well as of
Messrs. Kamp and Cordt.

          In the period since December 31, 1999, webdesign, server hosting,
programming and content delivery services have been provided to X-Real by Alice
Jay Productions Inc. (until March 2000), Cyberotic Media AG (until January
2001), Q-Seven Systems GmbH (from January through March, 2001) and ITraffic GmbH
(since March 2001). Until December 31, 2000, services relating to the collection
of credit card and electronic on-line debit-entry payments made by X-Real's
customers were provided by EuroDebit Systems GmbH and resold to X-Real by
Cyberotic Media AG. Since December 2000, these collection services have been and
are still being provided to X-Real by Pay@EuroDebit GmbH. See also Item 12,
"Certain Relationships and Related Transactions." Since March 2001, content for
one of X-Real's websites and advertising for this website has been directly
provided to X-Real by Mr. Akim Fernandez pursuant to an oral agreement between
Mr. Fernandez and X-Real. Mr. Fernandez, in consideration for his content
delivery and advertising services, receives on a monthly basis 80% of the
revenues generated by the website net of cost of sales.

          COMPETITION

Gaming Software Products and Services

          The Q-7 Casino Module has been the best selling component of our
software. However, sales of the casino module declined during the fiscal year
ended December 31, 2000 due to increased competition in the market for online
gaming software and services. We are faced with many current and potential
competitors in this market which have far greater resources than our company.
The market for online gaming software has become increasingly competitive with
new competitors entering this market at a rapid pace. Our management expects the
number of companies offering online gaming software products and services to
increase further.

          Our management believes that our main competitors in the area of
online gaming software and services are Starnet Communications International
Inc., a Delaware corporation, Boss Media AB, a Swedish company, Microgaming, a
South African company, and CryptoLogic Inc., a Canadian company.

         Many of our competitors focus on the development and delivery of gaming
software which is designed to run on our competitors servers, requiring
customers to (i) acquire a gaming license in the jurisdiction where such servers
are located, (ii) pay high set up fees and (iii) share their gaming revenues
with the gaming software vendor. In contrast, our gaming software products run
on our customer's own servers and our customers only pay us a fixed license fee
which is not linked to the gaming revenues. Our management believes that these
factors could make our software more attractive to potential customers.

Adult Entertainment

          The competition in the area of adult entertainment websites directed
at the German market is steadily increasing. X-Real's sites were some of the
first to enter this market, and our management believes that some of X-Real's
websites have achieved significant brand recognition in Germany. Although the
number of competitors in this area is increasing, our management believes that
X-Real is capable of maintaining and perhaps extending its market position in
Germany.

         PROPRIETARY RIGHTS

          Currently, neither Q-Seven Systems GmbH nor we own any patents or
other registered intellectual property rights regarding the User Management
Software. Our Management believes that Q-Seven Systems GmbH will apply for the
registration of such intellectual property rights. The marks "Q-Seven Systems"
and "Q-7" are currently not protected in the United States by any trademarks.
Q-Seven Systems GmbH owns registered trademarks in Germany and the European
Union concerning the name "Q-Seven Systems" and the "Q-7" logo. We own the
rights to the Internet domain names "www.q-seven.com" and "www.q-seven.net."
Q-Seven Systems GmbH owns the rights to the Internet domain name "www.q-
seven.de." We do not own any registered intellectual property rights regarding
the name "X-Real." X-Real owns the rights to the domain names of the websites
that it owns and operates and certain additional domain names.

          The lack of patent and trademark registrations with regard to key
components of our business operations may work to our detriment in the future.
If competitors of our company develop software that is like ours in a legally
relevant sense, we may not be able to protect our products against such
imitations.

          Our management believes that our products and services do not infringe
on the proprietary rights of third parties. There can be no assurance, however,
that third parties will not assert infringement claims against our company in
the future with respect to current or future features or contents of services or
products or that any such assertion may not result in litigation or require our
company or Q-Seven Systems GmbH to enter into royalty arrangements. Any
assertion of infringement claims against our company or Q-Seven Systems GmbH
could have a material adverse effect on our business, revenues, operating
results and financial condition.

         RESEARCH AND DEVELOPMENT

          We have not spent any amounts on research or the development of our
software because our software has been developed and the rights to our software
are owned by Q-Seven Systems GmbH. All research and development activities with
respect to our software are conducted by Q-Seven Systems GmbH, which also bears
all costs and expenses in connection therewith. Q-Seven Systems GmbH spent on
research and development with respect to our software approximately DM 1,500,000
(which equals approximately $772,306 on the basis of the Federal Reserve Bank of
New York December 31, 1999 noon buying rate of Euro 1 = 1.0070 and the fixed
exchange rate of Euro 1 = DM 1.95583) from its inception in February 1999
through December 31, 1999 and approximately DM 1,500,000 (which equals
approximately $720,001 on the basis of the Federal Reserve Bank of New York
December 29, 2000 noon buying rate of Euro 1 = 0.9388 and the fixed exchange
rate of Euro 1 = DM 1.95583) during the twelve months ended December 31, 2000.
Since January 2001, Q-Seven Systems GmbH has been in the process of converting
the gaming module of the User Management Software into the C++ programming
language, the use of which significantly reduces download times and allows us to
add new features using DirectX(C), a program that improves graphical effects.
Since January 2001, Q-Seven Systems GmbH has also been working on a new
application for the administration of the user management portion of the User
Management Software. No assurance can be made that any of these projects will be
completed or that the completion of any of these projects will have any positive
effect on our business. See Item 12, "Certain Relationships and Related
Transactions," for a description of our relationship with Q-Seven Systems GmbH.

          X-Real has never conducted any research or development activities
regarding its business and, consequently, has not spent any significant amounts
on such activities. In April and May, 2000, X-Real spent approximately $100,000
to redesign and relaunch three of its websites. One of its websites now serves
as a portal site from which the other websites can be accessed.

          GOVERNMENTAL REGULATIONS

Internet Gaming

          Numerous jurisdictions impose licensing requirements or other
restrictions on, or even ban, the operation, or the utilization of the services,
of online casinos in their territory. Our company does not operate online
casinos, but only provides the software that enables our customers to operate
online casinos. The casino software module that we license to our customers as
well as the other parts of our software are installed and operated on our
clients' servers and not on any servers or systems that belong to us or Q-Seven
Systems GmbH. Consequently, our management believes that our company is not
directly affected by laws and regulations prohibiting or restricting Internet
gaming and the operation of online casinos. However, there is a high degree of
uncertainty regarding the scope and the potential addressees of Internet gaming
regulations, and regulators could take the position that our business falls
within the scope of such regulation and initiate enforcement actions against us.
In addition, Internet gaming regulation could change in the future and the laws
could be tightened, which could affect our ability to license our casino
software module. If criminal or civil proceedings were initiated against us or
the licensees of our casino software module in jurisdictions that prohibit or
restrict Internet gaming, such proceedings could involve substantial litigation
expenses, penalties, fines, diversion of the attention of our key executives,
injunctions or the invocation of other prohibitions against us or the licensees
of the casino module of our software. Such proceedings, their results and the
uncertainty surrounding the regulation of Internet gaming in general could have
a material adverse effect on our business, revenues, operating results and
financial condition. Our management believes that the sale of licenses to our
software, including the casino module, is in accordance with currently
applicable U.S. Federal and State laws.

          On May 10, 2000, the House Banking Committee Chairman James A. Leach
(R-Iowa) and the committee's ranking Democrat, Rep. John J. LaFalce (N.Y.),
introduced legislation, the Internet Gambling Funding Prohibition Act (H.R.
4419), that would prohibit the use of credit cards, checks, or electronic fund
transfers in internet gambling. The bill, intended to complement the Internet
Gambling Prohibition Act (H.R. 3125), which the House Judiciary Committee
approved in April 2000, would extend a current ban on gambling over telephone
lines to the Internet. The House Banking Committee approved on June 28, 2000 the
Internet Gambling Funding Prohibition Act (H.R. 4419) with an amendment offered
by Rep. John E. Sweeney (R-N.Y.), applying the restrictions only to betting that
is unlawful under state or federal law. The House voted on the Internet Gambling
Prohibition Act (H.R. 3125) on July 17, 2000. It was considered under a
suspension rule, which meant that it required a two-thirds majority to pass. It
failed by a vote of 245 to 159. The bill's sponsor Rep. Bob Godlatte
(R-Virginia) said he expects it to be returned to the floor soon under rules
that require a simple majority for passage. On February 12, 2001, Mr. Leach
reintroduced legislation, the Unlawful Internet Gambling Funding Prohibition Act
(H.R. 556), which is substantially similar to H.R. 4419. H.R. 556 has been
referred to the House Financial Services Committee and the House Judiciary
Committee. On July 20, 2001, Mr. LaFalce introduced legislation, the Internet
Gambling Payments Prohibition Act (H.R. 2579). H.R. 2579 has been referred to
the House Financial Services Committee and the House Judiciary Committee. If any
of these bills were enacted, it could affect our customers' interest in our
gaming module software and could have a material adverse effect on our business,
revenues, operating results and financial condition.

Internet Adult Entertainment

          Numerous jurisdictions prohibit and restrict the operation of adult
entertainment websites. As users of the Internet are located around the globe,
there is uncertainty regarding which government has jurisdiction to regulate
various aspects of the Internet industry. Although X-Real's websites are
exclusively directed at the German market and believed by our management not to
violate any German laws or regulations, regulators from other jurisdictions
could take the position that X-Real's websites fall within the scope of
regulations regarding adult entertainment websites imposed by their jurisdiction
and initiate enforcement actions against X-Real. In addition, the regulations in
Germany regarding adult entertainment websites could change in the future and
laws could be tightened, which could affect X-Real's ability to offer its
services to the German market. If criminal or civil proceedings were initiated
against X-Real in jurisdictions that prohibit or restrict the operation of adult
entertainment websites, such proceedings could involve substantial litigation
expenses, penalties, fines, diversion of the attention of our key executives,
injunctions or the invocation of other prohibitions against us. Such changes,
proceedings and their results, and the uncertainty surrounding the regulation of
the operation of Internet adult entertainment websites in general could have a
material adverse affect on X-Real's and our business, revenues, operating
results and financial condition. Our management believes that the operation of
X-Real's adult entertainment websites does not violate currently applicable U.S.
Federal and State laws.

          German regulators impose strict regulations on the content of adult
entertainment websites. An organization with the name Jugendschutz.net has been
formed in Germany which tries to ensure that minors will not be able to gain
access to adult content of webpages. X-Real cooperates with Jugendschutz.net as
well as with German regulators to maintain a process for its websites that
ensures that only adults are able to gain access to the restricted areas of
those websites. Our management believes that the content of X-Real's websites
complies with German law and that the areas of X-Real's webpages which are
accessible for every viewer comply with German as well as U.S. Federal and State
laws and are suitable for every viewer.

          Our management believes that the restricted areas of X-Real's websites
can only be accessed by German citizens, because every viewer who wishes to
visit the restricted areas of X-Real's websites is required to enter certain
personal information from his/her official German ID card. X-Real uses a
verification process (the "Verification Process") to ensure that only German
adults can gain access to the restricted areas of its websites. This process was
developed in Germany with the help of the German authorities that issue the
official German ID cards and was provided to X-Real by Cyberotic Media AG until
January 2001. Since that time, the Verification Process has been provided to
X-Real by Pay@EuroDebit GmbH. See Item 6, "Management's Discussion and
Analysis--Liquidity and Capital Resources," for additional information regarding
Pay@EuroDebit GmbH, and Item 12, "Certain Relationships and Related
Transactions," for information on Cyberotic Media AG. The Verification Process
requires every person who would like to gain access to the restricted areas of
X-Real's websites to first register with X-Real as a member and pay a certain
membership fee to X-Real. One step in the registration process requires the
potential new member to enter the ID card number from his/her official German ID
card. This 26 digit number is based on a certain logical format and includes
various coded information, including the holder's date of birth. The ID card
number also contains certain verification digits that are based on a
mathematical algorithm. The Verification Process allows to decode the date of
birth from the ID number and check, based on the verification digits, the
plausibility of the ID card number that was provided. A potential new member who
enters an ID card number that is not plausible or was issued to a person who is
too young to be allowed access to the websites will automatically be rejected as
a new member.

          EMPLOYEES

          Neither our company nor any of our subsidiaries has currently any
employees. All of our and our subsidiaries' business operations are conducted by
using the services of other companies for which we pay those companies. Some of
the companies that provide or have provided services to us and our subsidiaries
are affiliated with us. See Item 12, "Certain Relationships and Related
Transactions."

          During the twelve months ended December 31, 2000, services in
connection with the sale of licenses to our software were provided by employees
of Q-Seven Systems GmbH. We did not pay a fee for these services to Q-Seven
Systems GmbH other than the royalty fee that we pay to them for our right to
license the User Management Software to our customers. See also Item 12,
"Certain Relationships and Related Transactions."

          During the twelve months ended December 31, 2000, webdesign, server
hosting, programming and content delivery services were provided to X-Real by
Cyberotic Media AG pursuant to an oral agreement and a written agreement dated
March 6, 2000 and until March 2000 by Alice Jay Productions Inc. pursuant to an
oral agreement. X-Real paid to Cyberotic Media AG a fee of approximately DM
494,000 (which equals approximately $237,120 on the basis of the Federal Reserve
Bank of New York December 29, 2000 noon buying rate of Euro 1 = 0.9388 and the
fixed exchange rate of Euro 1 = DM 1.95583) and to Alice Jay Productions Inc.
approximately DM 263,000 (which equals approximately $126,240 on the basis of
the Federal Reserve Bank of New York December 29, 2000 noon buying rate of Euro
1 = 0.9388 and the fixed exchange rate of Euro 1 = DM 1.95583 and includes a fee
for the termination of our agreement with Alice Jay Production Inc.). From
January 2001 through March 2001, such services were provided to X-Real by
Q-Seven Systems GmbH pursuant to an oral agreement for a fee of approximately
$10,000 per month. Since that time, these services have been and are still being
provided to X-Real by ITraffic GmbH pursuant to an oral agreement for a fee of
approximately $10,000 per month. In the period from December 31, 1999 to
December 31, 2000, services relating to the collection of credit card and
electronic on-line debit-entry payments made by X-Real's customers were provided
by EuroDebit Systems GmbH and resold to X-Real by Cyberotic Media AG. EuroDebit
Systems GmbH charged for these services fees in the amount of approximately
$291,000, which amount was withheld from the funds transferred by EuroDebit
Systems GmbH to Cyberotic Media AG for release to X-Real. In addition, EuroDebit
Systems GmbH withheld approximately $116,000 for charge-backs. Since December
2000, these collection services have been and are still being provided to X-Real
by Pay@EuroDebit GmbH pursuant to an agreement dated July 13, 2001. See also
Item 12, "Certain Relationships and Related Transactions," for a description of
our relationship with Cyberotic Media AG, Alice Jay Productions Inc., Q-Seven
Systems GmbH, and ITraffic GmbH, and Item 6, "Management's Discussion and
Analysis--Liquidity and Capital Resources," for additional information about
Pay@EuroDebit GmbH.

Item 2. Description of Property.

          Our company does not own any real property. From August 1999 through
April 2001, our headquarters were located at Mittelstr. 11-13, 40789 Monheim,
Germany, and consisted of approximately 430 square meters of office space. We
shared this space with Q-Seven Systems GmbH, which rented it from Mediacenter
Betriebsgesellschaft mbH. The office space was provided to us by Q-Seven Systems
GmbH at no charge.

          In April 2001, our offices were relocated to new premises at
Boettgerstr. 25, 40789 Monheim, Germany, which consist of approximately 350
square meters of office space. We share this office space with ITraffic GmbH,
which rents it from Hiller & Maldaner Alu-Profiltechnik GmbH, and Q-Seven
Systems GmbH. Q-Seven Systems GmbH pays a fee to ITraffic GmbH for the use of
the office space. We do not pay a fee to ITraffic GmbH or Q-Seven Systems GmbH
for the use of the office space. Our direct and indirect subsidiaries Q-Seven
Nevada and X-Real continue to share our office space. We do currently not intend
to rent our own office space. The lack of any own facilities for our operations
may work to our detriment in the future. There can be no assurance that ITraffic
GmbH and Q-Seven Systems GmbH will continue to provide office space to us at no
charge. See also Item 12, "Certain Relationships and Related Transactions," for
a description of our relationship with Q-Seven Systems GmbH and ITraffic GmbH.

Item 3. Legal Proceedings.

          There are currently no material actions, suits, proceedings or
governmental investigations pending, or to the knowledge of our management,
threatened against our company or any of our subsidiaries.

          It has come to our management's attention that the receiver appointed
in connection with the insolvency proceedings involving Cyberotic Media AG, the
company which provided services to X-Real until January 2001, has reserved the
right to demand repayment of funds previously paid by Cyberotic Media AG to
X-Real. The relevant funds were collected by Cyberotic Media AG/EuroDebit
Systems GmbH on behalf of X-Real from X-Real's customers who made credit card or
electronic on-line debit-entry payments. Our management, based on advice from
our legal counsel in Germany, believes that there is no legal basis for the
receiver or Cyberotic Media AG to demand repayment of such funds. Our management
intends to vigorously defend X-Real against any such claim if it were brought.
The receiver also reserved the right to bring claims against Mr. Kamp and Mr.
Cordt, the directors of Cyberotic Media AG. Mr. Kamp is a Vice President,
Treasurer and Director of our company; Mr. Cordt is our Secretary. Our
management, based on advice from our legal counsel in Germany, believes that
such claims would be without merit. See also Item 6, "Management's Discussion
and Analysis--Liquidity and Capital Resources."

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

          No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 2000 to a vote of security holders, through the solicitation
of proxies or otherwise.

                                     PART II

Item 5. Market For Common Equity and Related Stockholder Matters.

                               Market Information

          Our common stock trades in the over-the-counter market. Prior to June
15, 1999, our common stock was quoted on the Over-The-Counter Bulletin Board
(the "OTC Bulletin Board") under the trading symbol DWNS. From June 15, 1999
through May 29, 2001, our common stock was quoted on the OTC Bulletin Board
under the trading symbols QSSY and QSSYE, respectively. Effective May 30, 2001,
our common stock ceased being quoted on and was deleted from the OTC Bulletin
Board because of our failure to file on a timely basis all reports required to
be filed by Section 13 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").

          Until June 1, 2001, our common stock also was quoted on the
over-the-counter market of the Frankfurt Stock Exchange under the trading symbol
QSV. From August 1999 through January 2000, our common stock was quoted on the
over-the-counter market of the Berlin Stock Exchange.

          The following table sets forth high and low bid prices of the shares
of our common stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The quotations set forth below were provided by
the OTC Bulletin Board. Since December 31, 2000, our common stock has traded as
low as $.001.


For the quarter ended:          High Bid Price        Low Bid Price

March 31, 1999                          $1.375                $0.25
June 30, 1999                          $2.625*                $0.5*
                                        $5.25*                $1.5*
September 30, 1999                    $5.78125             $1.78125
December 31, 1999                       $2.875               $1.125

March 31, 2000                            $3.5                $1.25
June 30, 2000                         1.8125**             0.4375**
September 30, 2000                     $1.1875                 $0.5
December 31, 2000                      $0.7185                $0.25

--------

* The OTC Bulletin Board provided us with two sets of bid prices for this period
due to the fact that our trading symbol was changed in the second quarter of
1999 from DWNS to QSSY. The first set of bid prices reflects the low and high
bid prices of our common stock for the time during the second quarter of 1999
when it was traded under the symbol DWNS; the second set of bid prices reflects
the low and high bid prices of our common stock for the time during the second
quarter of 1999 when it was traded under the symbol QSSY.

** The OTC Bulletin Board was unable to provide us with information on the high
and low bid prices of our common stock for the month of May 2000. Consequently,
the prices shown for the quarter ended June 30, 2000 reflect the high and low
bid prices for the months of April and June, 2000.

                                     Holders

          As of September 4, 2001, there were approximately 27 holders of record
of our common stock. Some of these holders were institutions that probably were
holding our stock on behalf of various beneficial owners.

                                    Dividends

          We have never paid cash dividends on our common stock and do not
anticipate paying dividends in the foreseeable future.

Item 6. Management's Discussion and Analysis or Plan of Operation.

          The following discussion should be read in conjunction with our
audited financial statements for the fiscal year ended December 31, 2000 and the
notes thereto.

                       Consolidated Results of Operations

          REVENUES

          The following table and discussion highlights our revenues for the
fiscal years ended December 31, 2000 and December 31, 1999:


<TABLE>
<CAPTION>
                                                       Fiscal Year Ended               Fiscal Year Ended
                                                       December 31, 2000               December 31, 1999

<S>                                                <C>                 <C>          <C>              <C>
Revenues from the sale of licenses to the User     $252,878            14.31%       $200,487         15.47%
Management Software
Revenues from X-Real's adult entertainment       $1,513,517            85.69%     $1,095,667         84.53%
websites
Total revenues                                   $1,766,395              100%     $1,296,154           100%
</TABLE>

          For the fiscal year ended December 31, 2000, our total revenues
increased from $1,296,154 to $1,766,395, or approximately 36.28%, over the
fiscal year ended December 31, 1999. For the fiscal year ended December 31,
2000, our net loss increased from $(33,217) to $(427,656), or approximately
1,186%, over the fiscal year ended December 31, 1999.

User Management Software Revenues

          Since September 1999, we have generated revenues from the sale of
licenses to our software. For the fiscal year ended December 31, 2000, revenues
from the sale of licenses to our software increased from $200,487 to $252,878
over the fiscal year ended December 31, 1999.

          During the fiscal year ended December 31, 2000, we attended the
following tradeshows at which we presented our software: International Casino
Exhibition ICE 2000 (January 2000) in London, United Kingdom; Online Gaming
Symposium (May 2000) in Montreal, Canada; and Interactive (IA) 2000 (September
2000) in New Orleans, Louisiana. Subsequently, we attended the International
Casino Exhibition ICE 2001 (January 2001) in London, United Kingdom. Contacts
made by our management during these tradeshows led to discussions and
negotiations with potential new customers. No assurance can be made that any of
these discussions and negotiations will ultimately result in the sale of new
licenses to our software.

          Not all of the fees relating to the sale of licenses to our software
have been paid in full. Instalment payments relating to the sale of licenses to
Advanced Media Group, domincana S.A., Setec Astronomy Ltd., World Network Ltd.,
Global Net Gamble Limited, KGMB and Euflex AG, aggregating approximately
$886,000, are not yet due. Instalment payments relating to the sale of licenses
to Setec Astronomy, World Network Ltd., and Global Net Gamble Ltd., aggregating
approximately $199,000, were overdue as of September 4, 2001.

Adult Entertainment Revenues

          Revenues generated by X-Real from fees charged to viewers of its adult
entertainment websites increased by approximately 38.14%, from $1,095,667 in the
fiscal year ended December 31, 1999 to $1,513,517 in the fiscal year ended
December 31, 2000. The revenue increase was primarily attributable to increased
subscriptions for X-Real's websites.

          We have previously reported that X-Real, in March 2000, received the
first tranche of an investment (the "Infobridge Investment") by Infobridge
International Ltd. ("Infobridge"). The balance of the Infobridge Investment in
an amount of DM 500,000 (which equals approximately $226,706 on the basis of the
Federal Reserve Bank of New York September 4, 2001 noon buying rate of Euro 1 =
$0.8868 and the fixed exchange rate of Euro 1 = DM 1.95583), has not been paid
to X-Real, although our management on February 24, 2001 requested payment from
Infobridge, and X-Real has not yet issued any shares to Infobridge. After
further discussions with a representative of Infobridge, our management does not
expect that the second tranche of the Infobridge Investment will be paid. Based
on these discussions, our management does currently not expect that we will
repay to Infobridge the full amount of the first tranche. Instead, our
management expects to reach an agreement with Infobridge, pursuant to which we
will either repay a portion of the first tranche to Infobridge or issue a
reduced number of X-Real shares to Infobridge. X-Real plans to utilize the
remaining funds from the first tranche of the Infobridge Investment to improve
the marketing for X-Real's services and products, including the launch of an
advertising campaign for X-Real's portal site. There can be no assurance that
the contemplated marketing and advertising activities will have any positive
effects on X-Real's business. There is also a risk that we could be required to
repay the full amount of the first tranche of the Infobridge Investment, if no
agreement can be reached with Infobridge. If we would have to repay the full
amount of the first tranche of the Infobridge Investment, this could have a
material adverse effect on our business, revenues, operating results and
financial condition. Revenues contributed by X-Real to our financial statements
could decrease in the 2001 fiscal if we were to issue shares of X-Real to
Infobridge, because our ownership interest and our share of X-Real's revenues
would decrease.

                                Cost and Expenses

          The following table and discussion highlights our costs and expenses
for our fiscal years ended December 31, 2000 and December 31, 1999:


<TABLE>
<CAPTION>
                                                   Fiscal Year Ended                      Fiscal Year Ended
                                                   December 31, 2000                      December 31, 1999
                                                   -----------------                      -----------------
<S>                                             <C>                <C>              <C>                <C>
Total revenues                                     $1,766,395           100%           $1,296,154            100%

Cost of sales                                        $634,470         35.92%             $554,249          42.76%
Operating expenses:                                $1,567,317         88.73%             $743,623          57.37%
         Selling, general and
         administrative                            $1,251,406         70.85%             $743,533          57.36%
         Depreciation and
         amortization                                    $272          0.02%                  $90           0.01%
         Bad debt expense                            $315,639         16.87%                  ---             ---

Total costs and expenses                           $2,207,787        124.65%           $1,297,872         100.13%
</TABLE>


          COST OF SALES

          Cost of sales for our fiscal year ended December 31, 2000 includes
primarily costs associated with the management, operation and maintenance of
X-Real's adult entertainment websites, computer and network equipment costs in
connection with X-Real's servers and royalties paid to Q-Seven Systems GmbH for
our right to license the User Management software. Cost of sales for the fiscal
year ended December 31, 1999 includes the same items.

          For the fiscal year ended December 31, 2000, cost of sales increased
from $554,249 to $634,470 over the fiscal year ended December 31, 1999, and
decreased as a percentage of total revenues from approximately 42.76% to
approximately 35.92%. The increase in cost of sales is primarily attributable to
increased costs associated with the operation of X-Real's websites and since
September 1999 the payment of a royalty fee to Q-Seven Systems GmbH for our
right to license the User Management Software to our customers. For the fiscal
year ended December 31, 2000, approximately $406,880, or 64.13%, of our total
cost of sales were attributable to the operation of X-Real's websites, whereas
approximately $227,590, or approximately 35.87%, related to the sale of licenses
of our software. For the fiscal year ended December 31, 1999, approximately
$373,254, or 67.34%, of our total cost of sales were attributable to the
operation of X-Real's websites, whereas approximately $180,995 or 32.66% related
to the sale of licenses to our software. During the fiscal year ended December
31, 2000, we paid to Cyberotic Media AG approximately DM 494,000 (which equals
approximately $237,000 on the basis of the Federal Reserve Bank of New York
December 29, 2000 noon buying rate of Euro 1 = $0.9388 and the fixed exchange
rate of Euro 1 = DM 1.95583) and to Alice Jay Productions Inc. approximately DM
263,000 (which equals approximately $126,240 on the basis of the Federal Reserve
Bank of New York December 29, 2000 noon buying rate of Euro 1 = $0,9388 and the
fixed exchange rate of Euro 1 = DM 1.95583 and includes a fee in the amount of
$82,000 for the termination of X-Real's agreement with Alice Jay Productions
Inc. at the end of March 2000) for managing, operating and maintaining X-Real's
websites. For services in connection with the collection of credit card and
electronic on-line debit-entry payments from X-Real's customers, we paid to
EuroDebit Systems GmbH approximately $291,000 in fees and $116,000 in connection
with charge-backs; these amounts were withheld by EuroDebit Systems GmbH from
the funds transferred by EuroDebit Systems GmbH to Cyberotic Media AG for
release to X-Real. See also Item 12, "Certain Relationships and Related
Transactions," and "--Liquidity and Capital Resources." During the same period,
we paid approximately $227,590 to Q-Seven Systems GmbH in royalty fees for our
right to license the User Management Software to our customers.

          SELLING, GENERAL AND ADMINISTRATIVE

          Selling, general and administrative expenses for the fiscal year ended
December 31, 2000 consisted primarily of recurring legal and accounting expenses
in connection with the compliance with periodic reporting requirements under the
securities laws, advertising costs for X-Real's websites and certain non-
recurring expenses discussed below. Selling, general and administrative expenses
for the fiscal year ended December 31, 1999 consisted primarily of non-recurring
legal and accounting expenses in connection with the Q-Seven Nevada Acquisition,
advertising costs for X-Real's websites and recurring legal and accounting
expenses in connection with the compliance with periodic reporting requirements
under the securities laws.

          Selling, general and administrative expenses increased substantially
by approximately 68.31% from $743,533 in the fiscal year ended December 31, 1999
to $1,251,406 in the fiscal year ended December 31, 2000. Our selling, general
and administrative expenses as a percentage of total revenues in the fiscal year
ended December 31, 2000 were approximately 70.85% as compared to approximately
57.36% in the fiscal year ended December 31, 1999. Approximately $959,808, or
76.70%, of our selling, general and administrative expenses during the fiscal
year ended December 31, 2000 were attributable to the sale of licenses to our
software, whereas approximately $291,598, or 23.30%, of such expenses were
attributable to the operation of X-Real's websites. Approximately $506,976, or
68.18%, of the selling, general and administrative expenses during the 1999
fiscal year were attributable to the operation of X-Real's websites, whereas
approximately $236,557, or 31.82%, of such expenses were attributable to the
sale of licenses to our software.

          The substantial increase in our selling, general and administrative
expenses in the fiscal year ended December 31, 2000 was primarily attributable
to the following factors and events:

          o    increased legal and accounting expenses in connection with the
               compliance with periodic reporting requirements under the U.S.
               securities laws (since there is a lag in billing us for legal
               services, the bills we have actually received may not reflect all
               costs of this type which we may incur);

          o    increased advertising expenses relating to X-Real's websites; and

          o    the payment of certain non-recurring expenses incurred by us
               during the three months ended June 30, 2000 in connection with
               (i) the redesign and relaunch of three of X-Real's websites, (ii)
               the termination of an agreement between X-Real and Alice Jay
               Productions Inc. and (iii) the payment of commissions to certain
               freelance workers employed by X-Real.

          DEPRECIATION AND AMORTIZATION

         Depreciation and amortization expenses increased from $90 for the
fiscal year ended December 31, 1999 to $272 for the fiscal year ended December
31, 2000.

          BAD DEBT EXPENSE

          For the fiscal year ended December 31, 2000, we recorded a bad debt
expense in the amount of $315,639. The bad debt expense resulted from the write
off of receivables due to X-Real from Cyberotic Media AG as December 31, 2000 in
the amount of $427,707 and payables due from X-Real to Cyberotic Media AG at
December 31, 2000 in the amount of $112,068. The net amount of $315,639 was
expensed as bad debt. Insolvency proceedings were initiated in Germany against
Cyberotic Media AG in January 2001. Mr. Kamp, an officer, director and principal
shareholder of our company, is an officer and a principal shareholder of
Cyberotic Media AG. Mr. Cordt, an officer (and until March 2001, a director) of
our company, is an officer and a principal shareholder of Cyberotic Media AG.
See also "--Liquidity and Capital Resources," and Item 9, "Directors, Executive
Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act--Involvement in Certain Legal Proceedings." No bad debt expense was
recorded in the fiscal year ended December 31, 1999.

                         Liquidity and Capital Resources

          We have been and are currently financing our operations primarily
through cash generated from operating activities. As discussed below, our
company has faced, and is still experiencing, liquidity problems.

          Net cash provided by (used in) operating activities was $(198,593) and
$44,133 in the fiscal years ended December 31, 2000 and December 31, 1999,
respectively. Net cash provided by financing activities was $250,000 and $13,397
for the fiscal years ended December 31, 2000 and December 31, 1999,
respectively, and increased primarily due to the receipt of the first tranche of
the Infobridge Investment in March 2000. We expect to continue financing our
ongoing operations primarily through cash generated from operating activities.
Our management anticipates that, after the steps described below have been
implemented, cash on hand, cash provided by operating activities and cash
available from the capital markets will be sufficient to fund our operations for
the next twelve months.

          Our cash flow in the fiscal year ended December 31, 2000 was affected
by delays in the receipt of payments from Cyberotic Media AG. Cyberotic Media AG
was until December 2000 the reseller of services provided by EuroDebit Systems
GmbH, the company which until December 2000 processed and collected credit card
and electronic on-line debit-entry payments from X-Real's customers. EuroDebit
Systems GmbH's services were provided to X-Real pursuant to an oral agreement
and a written agreement dated March 6, 2000 between X-Real and Cyberotic Media
AG. From January through December, 2000, funds collected by EuroDebit Systems
GmbH from X-Real's customers were not transferred to X-Real by Cyberotic Media
AG within the time frame provided for in the oral agreement between X-Real and
Cyberotic Media AG. The delay in transferring such funds was caused by liquidity
problems at Cyberotic Media AG and its subsequent insolvency. Prior to Cyberotic
Media AG's insolvency, X-Real permitted Cyberotic Media AG to defer the payments
due to X-Real. At December 31, 2000, X-Real had past due receivables due from
Cyberotic Media AG in an amount of approximately DM 888,000 (which equals
approximately $426,240 on the basis of the Federal Reserve Bank of New York
December 29, 2000 noon buying rate of Euro 1 = $0.9388 and the fixed exchange
rate of Euro 1 = DM 1.95583). Our management does not expect that any of the
amounts due to X-Real from Cyberotic Media AG will be recoverable. Therefore,
all receivables due to X-Real from Cyberotic Media AG as of December 31, 2000
have been written off. See "--Costs and Expenses--Bad Debt Expense." EuroDebit
Systems GmbH ceased processing and collecting credit card and electronic on-line
debit-entry payments for X-Real on December 15, 2000, at which time all of its
assets were acquired by Pay@EuroDebit GmbH (formerly known as E-Click Net
Commerce GmbH). Since that time, all such payments have been processed and
collected for X-Real by Pay@EuroDebit GmbH. EuroDebit Systems GmbH is currently
also in insolvency proceedings in Germany. EuroDebit Systems GmbH is a 90% owned
subsidiary of EuroDebit Systems, Inc., a company of which Messrs. Kriependorf,
Kamp and Cordt are the principal shareholders. Mr. Kamp was the Chief Financial
Officer of EuroDebit Systems, Inc. until November 2000 and is the managing
director of EuroDebit Systems GmbH. Cyberotic Media AG is a company owned by
Messrs. Kamp and Cordt. Mr. Kriependorf is the chairman of Cyberotic Media AG's
supervisory board. See Item 1, "Description of Business--Business Development,"
for a description of the relationship of Messrs. Kriependorf, Kamp and Cordt to
our company, and Item 12, "Certain Relationships and Related Transactions."

          The initial delays in the receipt of payments from Pay@EuroDebit GmbH,
which we previously reported, seem to have been resolved. During the last few
months, Pay@EuroDebit GmbH has regularly transferred to X-Real the amounts due
to X-Real from the collection of credit card and electronic on-line debit-entry
payments from X-Real's customers. Currently, receivables due from Pay@EuroDebit
GmbH to X-Real equal approximately DM 6,000 (which equals approximately $2,720
on the basis of the Federal Reserve Bank of New York September 4, 2001 noon
buying rate of Euro 1 = $0.8868 and the fixed exchange rate of Euro 1 = DM
1.95583). Although Pay@EuroDebit GmbH currently provides services to X-Real at
approximately the same price as such services were previously provided by
Cyberotic Media AG and EuroDebit Systems GmbH, the price for such services is
likely to increase in the near future. There is also a risk that Pay@EuroDebit
GmbH could decide to discontinue providing services to X-Real. While our
management has identified other companies which could provide processing and
collection services to X-Real at the current cost level, the change from
Pay@EuroDebit GmbH to a new processing company could be difficult or even
impossible to achieve because of the following circumstances: Pay@EuroDebit GmbH
has in its possession unique electronic data containing information about
X-Real's customers. This data is essential for the processing and collection of
recurring payments from X-Real's customers. Our management believes that this
data is the property of our company. However, if Pay@EuroDebit GmbH would refuse
to provide or delay the provision of this data to us or a new processing company
selected by us, it might not be possible, for an indefinite period of time, to
process continuing payments to be made by existing customers of X-Real. If this
were to occur, it could have a material adverse effect on our business,
revenues, operating results and financial condition.

          Our current assets decreased by $25,757 from $445,646 at December 31,
1999 to $419,889 at December 31, 2000, while our current liabilities increased
by $401,277, or approximately 99.49%, from $403,318 to $804,595, over the same
period. The decrease in current assets was primarily attributable to a decrease
in cash and accounts receivable generated by our operations. The increase in our
current liabilities was primarily due to an increase in accrued expenses and
accounts payable resulting from our operations. At December 31, 1999, our
current assets and liabilities were $445,646 and $403,318, respectively, as
compared to current assets and liabilities at December 31, 2000 of $419,889 and
$804,595, respectively. Based on the foregoing, our working capital at December
31, 1999 was $42,328. At December 31, 2000, we had a negative working capital of
$(384,706). Our fixed assets at December 31, 2000 and December 31, 1999
consisted of office equipment valued at $350 and $622, respectively.

          Due to the decrease in the amount of cash available to us and in our
working capital, our company has faced, and is still experiencing liquidity
problems and, consequently, has not been able to make timely payments to all of
our creditors. As of December 31, 2000 and September 4, 2001, we had past due
payables in the amount of approximately $136,000 and approximately $120,000,
respectively. Among the creditors which we at certain times have not been able
to pay on a timely basis are our auditors, the accounting firm which previously
assisted us in preparing our financial statements, and our legal advisers. Our
failure to timely pay our auditors and the accounting firm resulted in delays in
the preparation and completion of our interim financial statements for the
periods ended June 30, 2000 and September 30, 2000, our financial statements for
the fiscal year ended December 31, 2000 and our interim financial statements for
the period ended March 31, 2001. Due to these delays, we were unable to file on
a timely basis complete reports with the United States Securities and Exchange
Commission (the "Commission") for the quarterly periods ended June 30, 2000 and
September 30, 2000 as well as for the fiscal year ended December 31, 2000 and
the quarterly periods ended March 31, 2001 and June 30, 2001. Although the
reports for the quarterly periods ended June 20, 2000 and September 30, 2000
have since then been filed, our reports on Form 10-QSB for the periods ended
March 31, 2001 and June 30, 2001 are currently overdue. There is a risk that the
Commission might commence enforcement proceedings against us because of these
incidents, in particular if we should continue to fail complying with our
periodic filing obligations in a timely manner.

          Our management believes that our liquidity problems in the fiscal year
ended December 31, 2000 were primarily caused by the following factors, which
have been discussed above in more detail:

          o    slow sales of our software;

          o    substantially increased operating expenses; and

          o    delays in the receipt of payments from the companies which
               processed and collected electronic on-line debit-entry and credit
               card payments from X-Real's customers.

          If we were to issue shares of X-Real to Infobridge in connection with
the Infobridge Investment, cash generated by the activities of X-Real may become
even less available to us, because dividends and deemed dividends will then have
to be shared proportionally with Infobridge. Our management is currently
exploring different steps to address our liquidity problems, reduce our net loss
in future periods and provide us with cash and working capital sufficient to
fund both delinquent balances and our ongoing operations. The following are
among the steps our management is considering:

          o    We are in discussions with Q-Seven Systems GmbH regarding a
               reduction of the royalty fee that we have to pay them for the
               right to license the User Management Software to our customers.
               Currently, this royalty fee is equal to 90% of the revenues that
               we generate from the sale of licenses to our software.

          o    We plan on escalating our efforts (e.g., by attending additional
               tradeshows) to sell additional licenses to our software to
               increase the amount of our revenues.

          o    We plan to take steps to ensure and, if necessary, enforce the
               timely payment of balances due from the company which processes
               and collects credit card and electronic on-line debit-entry
               payments from X-Real's customers.

          o    We would also consider raising funds by issuing and selling,
               publicly or privately, additional equity securities to one or
               more interested purchasers if this opportunity were to arise.

          o    We have offered to acquire all shares of Partner Air Plc., which
               we reported in our Current Report on Form 8-K filed April 11,
               2001. See Item 11, "Security Ownership of Certain Beneficial
               Owners--Change in Control Arrangements."

          There can be no assurance that any of these measures will be
successful and sufficiently improve our liquidity and cash flow. If our
liquidity and cash flow problems persist, some or all of our creditors may
decide to discontinue providing services to us and/or enforce their claims for
payment against us. In addition, we would in all likelihood be unable to comply
with our periodic reporting requirement and would continue to face the risk of
becoming the subject of enforcement proceedings by the Commission. If one or
more of these events were to occur, it could have a material adverse effect on
our business, revenues, operating results and financial condition.

                           Forward Looking Statements

          This report and other oral and written statements made by our company
to the public contain and incorporate by reference forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. They use such words as "may," "will," "expect,"
"believe," "plan" and other similar terminology. In particular statements
regarding the following subjects are forward-looking: future financial and
operating results; new and developing markets, products, services, features and
content; the anticipated steps to reduce our liquidity problems and the effects
of such steps; regulatory developments; plans to attend additional tradeshows;
future developments with respect to the processing and collection of on-line
debit-entry and credit card payments from X-Real's customers; and the future
developments with respect to the Infobridge Investment. Forward-looking
statements reflect our management's current expectations or beliefs and involve
a number of risks and uncertainties. Actual results could differ materially from
those described in the forward-looking statements. Some of the factors and
uncertainties that could cause actual results to differ materially are:
Commission enforcement proceedings against our company; continued cash flow and
liquidity problems; failure of Pay@EuroDebit GmbH to pay to X-Real on a timely
basis the funds collected from X-Real's customers; failure of Pay@EuroDebit GmbH
to provide us or a new processing company selected by us with the data necessary
to process electronic on-line debit-entry and credit card payments by X-Real's
customers; repayment to Infobridge of the full amount of the first tranche of
the Infobridge Investment; success of operating initiatives, advertising and
promotional efforts; changes in global and local business and economic
conditions; currency exchange and interest rates; labor and other operating
costs; political or economic instability in local markets; competition; consumer
preferences, spending patterns and demographic trends; legislation and
government regulation, including regulation affecting online-gaming and adult
entertainment; and accounting policies and practices.

Item 7. Financial Statements.

          The consolidated financial statements of our company, including notes
thereto, and the report of independent auditors are included in this annual
report beginning at page F-1 after the signature page and are incorporated
herein by reference.

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

          Not applicable.



                                    PART III

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

                                    Directors

          The following table sets forth certain information as of September 4,
2001 with respect to those individuals who are members of our Board of Directors
and whose term will expire once their successors are chosen and qualified after
the next annual meeting of stockholders:


<TABLE>
<CAPTION>
                                             Year First Elected or
             Name                 Age        Appointed As Director     Positions With The Company
<S>                             <C>               <C>                <C>
Philipp S. Kriependorf             27                1999              Director, President and Chief Executive Officer
Philip Kamp                        28                1999              Director, Vice President and Treasurer
Hans L. Kuhnen                     42                2001              Director
</TABLE>


Philipp Sebastian Kriependorf serves as President, Chief Executive Officer and
Director of our company. He also serves as a managing director of Q-Seven
Systems GmbH. Mr. Kriependorf also served as a management consultant for
Mediacenter Betriebsgesellschaft mbH, which has since become insolvent. He also
has prior experience as a project manager for Q-5 Internet Marketing GmbH, which
has since become insolvent. Mr. Kriependorf is the supervisory board chairman of
Cyberotic Media AG, a company against which insolvency proceedings have been
initiated in Germany. Mr. Kriependorf studied economics at the University of
Cologne in Germany. See also Item 12, "Certain Relationships and Related
Transactions," for a description of our relationship to Q-Seven Systems GmbH,
Mediacenter Betriebsgesellschaft mbH, Q-5 Internet Marketing GmbH, and Cyberotic
Media AG.

Philip Kamp serves as Vice President, Treasurer and Director of our company. He
also serves as managing director of EuroDebit Systems GmbH and as a director of
Cyberotic Media AG; both of these companies are currently in insolvency
proceedings in Germany. Mr. Kamp also served as a management consultant for
Mediacenter Betriebsgesellschaft mbH, which has since become insolvent. Mr. Kamp
previously worked for D.M. Griffith, Inc. Consulting. In 1997, Mr. Kamp founded
Q-5 Internet Marketing GmbH and, in 1999, Cyberotic Media AG. Both companies are
currently in insolvency proceedings in Germany. Mr. Kamp has a bachelors degree
in economics, specializing in international business administration, from the
University of Utrecht in the Netherlands. See also Item 12, "Certain
Relationships and Related Transactions," for a description of our relationship
to EuroDebit Systems GmbH, Cyberotic Media AG, Q-5 Internet Marketing GmbH, and
Mediacenter Betriebsgesellschaft mbH.

Hans Ludger Kuhnen became a director of our company in March 2001. He also
serves as managing director of Partner Air Luftfahrtreederei GmbH (since 1999)
and as a director of Partner Air Plc. (since 2000). From 1990 through 1999, Mr.
Kuhnen worked as a sales representative for Geutebrueck GmbH, a German company
which develops and sells closed circuit TV security systems. See also Item 12,
"Certain Relationships and Related Transactions," for a description of our
relationship with Partner Air Luftfahrtreederei GmbH and Partner Air Plc.

                               Executive Officers

          The names of, and certain information regarding, executive officers of
our company, who are not Directors of our company, are set forth below. The
executive officers serve at the pleasure of our Board of Directors and our Chief
Executive Officer:


              Name                     Age        Position with the Company
              ----                     ---        -------------------------
         Olaf D. Cordt                  30        Secretary

Olaf Dominik Cordt serves as Secretary of our company. He served as a Director
of our company until his resignation in March 2001. Mr. Cordt serves as a
director of Cyberotic Media AG, against which insolvency proceedings have been
initiated in Germany. He also worked as a consultant for Q-Seven Systems GmbH
and Mediacenter Betriebsgesellschaft mbH, which has since become insolvent. Mr.
Cordt has Internet-related experience through his work at Q-5 Internet Marketing
GmbH, of which he is currently the Managing Director. Insolvency proceedings
have been initiated in Germany against Q-5 Internet Marketing GmbH. Mr. Cordt
studied computer sciences at the University of Dortmund in Germany. See also
Item 12, "Certain Relationships and Related Transactions," for a description of
our relationship with Cyberotic Media AG, Q-Seven Systems GmbH, Mediacenter
Betriebsgesellschaft mbH and Q-5 Internet Marketing GmbH.

                              Significant Employees

          Neither we nor our subsidiaries have currently any employees. See Item
1, "Description of Business--Business of Issuer--Employees."

                              Family Relationships

          Our management is not aware of any family relationships among our
directors, executive officers or other persons nominated or chosen by us to
become officers or executive officers of our company.

                    Involvement in Certain Legal Proceedings

          Insolvency proceedings have recently been initiated in Germany against
EuroDebit Systems GmbH, Cyberotic Media AG and Q-5 Internet Marketing GmbH.
Certain of our directors and executive officers are executive officers,
directors, or principal shareholders of some of these companies, as described in
more detail below. Insolvency proceedings have also been initiated in Germany
against Mediacenter Betriebsgesellschaft mbH. Certain of our directors and
executive officers are the principal shareholders of this company. See also Item
12, "Certain Relationships and Related Transactions."

          Philipp S. Kriependorf, the President, CEO and a director of our
company, is the chairman of Cyberotic Media AG's supervisory board. Mr.
Kriependorf served until September 2000 as a director of EuroDebit Systems,
Inc., the parent company of EuroDebit Systems GmbH. Mr. Kriependorf is also a
principal shareholder of each of Mediacenter Betriebsgesellschaft mbH and Q-5
Internet Marketing GmbH.

          Philip Kamp, a director and executive officer of our company, is the
managing director of EuroDebit Systems GmbH and a director of Cyberotic Media
AG. Mr. Kamp also served as Chief Financial Officer (until December 2000) and as
a director (until September 2000) of EuroDebit Systems, Inc., the parent company
of EuroDebit Systems GmbH. Mr. Kamp is also a principal shareholder of
Mediacenter Betriebsgesellschaft mbH and Q-5 Internet Marketing GmbH.

          Olaf D. Cordt, the Secretary of our company, is a director of
Cyberotic Media AG. He is also the Managing Director of Q-5 Internet Marketing
GmbH. Mr. Cordt served until September 2000 as a director of EuroDebit Systems,
Inc., the parent company of EuroDebit Systems GmbH. Mr. Cordt is also a
principal shareholder of Mediacenter Betriebsgesellschaft mbH and Q-5 Internet
Marketing GmbH.

          Our management is not aware of any other material legal proceedings
involving any of our directors, director nominees, executive officers, promoters
or control persons. See, however, Item 3, "Legal Proceedings," regarding
potential legal proceedings involving Messrs. Kamp and Cordt.

             Section 16(a) Beneficial Ownership Reporting Compliance

          Section 16(a) of the Exchange Act requires our Directors and executive
officers to file with the Commission reports of holdings and transactions in
stock of our company. Based solely on our record and other information, we
believe that all filing requirements applicable to our Directors and executive
officers with respect to the fiscal year ended December 31, 2000 were complied
with.

Item 10. Executive Compensation.

          The following table sets forth certain summary information concerning
compensation paid to our Chief Executive Officer and each of the other executive
officers of our company (determined as of the end of the 2000 fiscal year) (the
"Named Executive Officers") for services rendered to our company for each of the
fiscal years ended December 31, 2000, 1999 and 1998:

                                            Summary Compensation Table


<TABLE>
<CAPTION>
                                 Annual Compensation                     Long-Term Compensation
                                                                         Awards                    Payouts
                                                                         Restricted Securities
                                                           Other Annual  Stock      Underlying     LTIP     All Other
Name and                         Salary         Bonus      Compensation  Award(s)   Optional SARs  Payouts  Compensation
Principal Position        Year   ($)            ($)        ($)           ($)        (#)            ($)      ($)
<S>                     <C>     <C>             <C>        <C>           <C>       <C>             <C>      <C>
Philipp S. Kriependorf    2000   ca. $76,800 (5)         0             0          0              0         0             0
President, Chief Executive1999   ca. $50,000 (3)         0             0          0              0         0             0
Officer and Director (1)  1998                0          0             0          0              0         0             0
Philipp Kamp              2000            0 (6)          0             0          0              0         0             0
Vice President, Treasurer 1999            0 (4)          0             0          0              0         0             0
and Director (1)          1998                0          0             0          0              0         0             0
Olaf D. Cordt             2000            0 (6)          0             0          0              0         0             0
Secretary (1) (2)         1999            0 (4)          0             0          0              0         0             0
                          1998                0          0             0          0              0         0             0
</TABLE>

--------------
(1)  Since May 24, 1999.
(2)  Mr. Cordt served as a director of our company until his resignation on
     March 26, 2001.
(3)  Mr. Kriependorf, during our fiscal year ended December 31, 1999, did not
     receive any compensation directly from our company. During that period, Mr.
     Kriependorf received an aggregate compensation of DM 100,000 (which amount
     equals approximately $51,487 on the basis of the Federal Reserve Bank of
     New York December 31, 1999 noon buying rate of Euro 1 = 1.0070 and the
     fixed exchange rate of Euro 1 = DM 1.95583) from Mediacenter
     Betriebsgesellschaft mbH for his services to Q-Seven Systems GmbH and other
     companies directly or indirectly owned or controlled by Messrs.
     Kriependorf, Kamp or Cordt. This amount included the monetary benefits
     relating to the use of a car provided to Mr. Kriependorf. Q-Seven Systems
     GmbH is an affiliate of our company. See also Item 12, "Certain
     Relationships and Related Transactions."
(4)  Messrs. Kamp and Cordt, during our fiscal year ended December 31, 1999, did
     not receive any compensation directly from our company. During that period,
     each of Messrs. Kamp and Cordt received an aggregate compensation of DM
     100,000 (which amount equals approximately $51,487 on the basis of the
     Federal Reserve Bank of New York December 31, 1999 noon buying rate of Euro
     1 = $1.0070 and the fixed exchange rate of Euro 1 = DM 1.95583) from
     Mediacenter Betriebsgesellschaft mbH for services to companies directly or
     indirectly owned or controlled by Messrs. Kriependorf, Kamp or Cordt. This
     amount included for Mr. Kamp the monetary benefits relating to the use of a
     car provided to Mr. Kamp. Mediacenter Betriebsgesellschaft mbH is an
     affiliate of our company. See also Item 12, "Certain Relationships and
     Related Transactions."
(5)  Mr. Kriependorf, during our fiscal year ended December 31, 2000, did not
     receive any compensation directly from our company. During that period, Mr.
     Kriependorf received an aggregate compensation of DM 160,000 (which equals
     approximately $76,800 on the basis of the December 29, 2000 Federal Reserve
     Bank of New York noon buying rate of Euro 1 = $0.9388 and the fixed
     exchange rate of Euro 1 = DM 1.95583) from Mediacenter Betriebsgesellschaft
     mbH (January through June, 2000) and Q-Seven Systems GmbH (July through
     December, 2000) for his services to Q-Seven Systems GmbH and other
     companies directly or indirectly owned or controlled by Messrs.
     Kriependorf, Kamp or Cordt. This compensation included the monetary
     benefits relating to the use of a car provided to Mr. Kriependorf. Q-Seven
     Systems GmbH is an affiliate of our company. See also Item 12, "Certain
     Relationships and Related Transactions."
(6)  Messrs. Kamp and Cordt, during our fiscal year ended December 31, 2000, did
     not receive any compensation directly from our company. During that period,
     Mr. Kamp received an aggregate compensation of DM 160,000 (which equals
     approximately $76,800 on the basis of the December 29, 2000 Federal Reserve
     Bank of New York noon buying rate of Euro 1 = $0.9388 and the fixed
     exchange rate of Euro 1 = DM 1.95583) from Mediacenter Betriebsgesellschaft
     mbH (January through June, 2000, and October through December, 2000) and
     EuroDebit Systems GmbH (July through September, 2000) for his services to
     EuroDebit Systems GmbH and other companies directly or indirectly owned or
     controlled by Messrs. Kriependorf, Kamp or Cordt. This amount included for
     Mr. Kamp the monetary benefits relating to the use of a car provided to Mr.
     Kamp. During that period, Mr. Cordt received an aggregate compensation of
     DM 160,000 (which equals approximately $76,800 on the basis of the December
     29, 2000 Federal Reserve Bank of New York noon buying rate of Euro 1 =
     $0.9388 and the fixed exchange rate of Euro 1 = DM 1.95583) from
     Mediacenter Betriebsgesellschaft mbH (January through June, 2000) and
     Cyberotic Media AG (July through December, 2000) for his services to
     Cyberotic Media AG and other companies directly or indirectly owned or
     controlled by Messrs. Kriependorf, Kamp and Cordt. Mediacenter
     Betriebsgesellschaft mbH, EuroDebit Systems GmbH and Cyberotic Media AG are
     affiliates of our company. See Item 12, "Certain Relationships and Related
     Transactions."

          We have not granted to the Named Executive Officers during the fiscal
year ended December 31, 1999 any options or SARs or any long-term incentive plan
awards.

          COMPENSATION OF DIRECTORS

          The members of our Board of Directors do neither receive any
compensation from us for their service as directors of our company nor are they
reimbursed by us for actual expenses incurred by them in attending our board
meetings or otherwise.

          EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE IN
          CONTROL ARRANGEMENTS

          During our fiscal year ended December 31, 2000, there were neither any
written employment contracts between us and the Named Executive Officers nor any
compensatory plans or arrangements involving a Named Executive Officer. During
the same period, oral employment contracts existed between Mediacenter
Betriebsgesellschaft mbH and each of Messrs. Kriependorf (January through June,
2000), Kamp (January through June, 2000 and October through December, 2000) and
Cordt (January through June, 2000) relating to services rendered by Messrs.
Kriependorf, Kamp and Cordt to companies directly and indirectly owned or
controlled by them or any of them, including Q-Seven Systems GmbH. An oral
employment agreement has existed between Mr. Kriependorf and Q-Seven Systems
GmbH since July 2000 relating to services rendered and to be rendered to Q-Seven
Systems GmbH and other companies directly or indirectly owned or controlled by
Messrs. Kriependorf, Kamp or Cordt. An oral employment agreement existed between
Mr. Kamp and EuroDebit Systems GmbH from July until September, 2000 for services
rendered to EuroDebit Systems GmbH and other companies directly or indirectly
owned or controlled by Messrs. Kriependorf, including Q-Seven Systems GmbH. An
oral employment agreement existed between Mr. Cordt and Cyberotic Media AG from
July through December, 2000 for services rendered to Cyberotic Media AG and
other companies directly or indirectly owned or controlled by Messrs.
Kriependorf, Kamp or Cordt. None of these oral employment agreements provides
for an annual compensation exceeding, in each case, $100,000 or includes any
change-in-control arrangements. See also Item 12, "Certain Relationships and
Related Transactions."

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

         Security Ownership of Certain Beneficial Owners and Management

          Except as otherwise indicated, the table below sets forth information,
as of September 4, 2001, with respect to the beneficial ownership of our common
stock (a) by each person known by us to be the beneficial owner of more than 5%
of our outstanding common stock, (b) by each of our directors and Named
Executive Officers and (c) by all of our officers and directors as a group.
Unless otherwise noted, each such shareholder is the record and beneficial owner
and has the sole investment and voting power with respect to the shares owned.


<TABLE>
<CAPTION>
                                                                        Amount of Beneficial
Title of Class       Name And Address of Beneficial Owner               Ownership of Common Stock           Percent of Class
--------------       -------------------------------------              -------------------------           ----------------
<S>                 <C>                                                <C>                                  <C>
Common Stock,        Philipp S. Kriependorf                             2,633,334 shares                          21.07%
$0.001 par value     c/o Q-Seven Systems, Inc., Boettgerstr. 25,
per share            D-40789 Monheim, Germany

Common Stock,        Philip Kamp                                        2,633,333 shares                          21.07%
$0.001 par value     c/o Q-Seven Systems, Inc., Boettgerstr. 25,
per share            D-40789 Monheim, Germany

Common Stock,        Olaf D. Cordt                                      2,633,333 shares                          21.07%
$0.001 par value     c/o Q-Seven Systems, Inc., Boettgerstr. 25,
per share            D-40789 Monheim, Germany

Common Stock,        Barry A. Ellsworth                                 910,000 shares (1)                         7.28%
$0.001 par value     6120 W. Tropicana Ave. A16-299, Las
per share            Vegas, NV 89103

Common Stock,        All directors and executive officers of our        7,900,000 shares                           63.2%
$0.001 par value     company as a group (3 persons).
per share
</TABLE>

----------
(1)  This information is based on a Schedule 13G, dated February 12, 2001, which
     was filed by Mr. Ellsworth.


                         Change in Control Arrangements

          As described in our Current Report on Form 8-K filed with the
Commission on April 11, 2001, which is incorporated herein by reference, we have
offered to acquire shares of Partner Air Plc. in exchange for newly issued
shares of our company. If the transactions contemplated by our April 11, 2001
Form 8-K were consummated, a change in control would occur with respect to our
company. There can be no assurance that these transactions will be consummated
or that a change in control will occur. Representatives of our company and
Partner Air Plc. have orally agreed that no exchange will take place unless our
company becomes current in its filings with the Commission, which our company is
attempting to do. Mr. Kuhnen, our director, is also a director of Partner Air
Plc. See also Item 12, "Certain Relationships and Related Transactions."

          If the transactions contemplated by our Current Report on Form 8-K
filed on April 11, 2000 were consummated and a change of control were to occur
with respect to our company, the persons who would control our company upon such
change in control might decide to sell X-Real or X-Real's operations. They might
also decide to sell or discontinue our gaming software business.

Item 12. Certain Relationships and Related Transactions.

          Some of the principal stockholders, directors and officers of our
company are or were during our 2000 fiscal year also principal stockholders,
directors and officers of other companies. In certain instances, our company
engages or engaged during our 2000 fiscal year in transactions with these
companies.

          Messrs. Kriependorf and Kamp are principal stockholders, officers and
directors of our company. Mr. Cordt is a principal stockholder and officer of
our company; he also served as a director of our company until his resignation
in March 2001. Mr. Kuhnen has been a director of our company since March 2001.

          Q-Seven Systems GmbH, a German corporation founded in February 1999,
is owned by Messrs. Kriependorf, Kamp and Cordt. Mr. Kriependorf is the managing
director of Q-Seven Systems GmbH and received in 2000 a salary for such services
from Mediacenter Betriebsgesellschaft mbH and Q-Seven Systems GmbH. Q-Seven
Systems GmbH owns the User Management Software that we license to our customers.
We have entered into a license agreement with Q-Seven Systems GmbH pursuant to
which we have been granted the exclusive and unlimited right to license the User
Management Software to our customers. We pay Q-Seven Systems GmbH a royalty fee
of 90% of the fees arising upon the sale of licenses for the User Management
Software. Q-Seven Systems GmbH allows us to use its office space at Boettgerstr.
25, 40789 Monheim, Germany, certain of its office equipment (e.g., telephone and
facsimile) and certain of its employees at no charge other than the royalty fee
that we pay to Q-Seven Systems GmbH in connection with our right to license the
User Management Software to our customers. No written agreements exist between
us and Q-Seven Systems GmbH regarding our use of their office space, office
equipment and employees. From January through March, 2001, Q-Seven Systems GmbH
provided webdesign, server hosting, programming and content delivery services to
X-Real for a fee of approximately $10,000 per month. Mr. Kriependorf was
employed by Q-Seven Systems GmbH from July through December, 2000, and pursuant
to an oral employment agreement with Q-Seven Systems GmbH received a salary from
Q-Seven Systems GmbH during that period for services to Q-Seven Systems GmbH and
other companies directly or indirectly owned or controlled by Messrs.
Kriependorf, Kamp or Cordt. See also Item 10, "Executive Compensation."

          EuroDebit Systems, Inc, a Nevada corporation which has developed an
electronic on-line debit-entry payment and clearing system, is approximately 42%
owned by Messrs. Kriependorf, Kamp and Cordt. Messrs. Kriependorf, Kamp and
Cordt served as directors of EuroDebit Systems, Inc. until September 2000. Mr.
Kamp served as Chief Financial Officer of EuroDebit Systems, Inc. until his
resignation in December 2000. EuroDebit Systems, Inc. owns 90% of EuroDebit
Systems GmbH.

          EuroDebit Systems GmbH, a German corporation against which insolvency
proceedings were initiated in Germany in January 2001, is a 90% owned subsidiary
of EuroDebit Systems, Inc. X-Real, our indirect Bahamian subsidiary, was,
through its arrangements with Cyberotic Media AG, the main customer of EuroDebit
Systems GmbH until December 2000. EuroDebit Systems GmbH charged for the
collection of credit card and electronic on-line debit entry payments from
X-Real's customers fees in an amount of approximately $291,000, which amount was
withheld from the funds transferred by EuroDebit Systems GmbH to Cyberotic Media
AG for release to X-Real. In addition, EuroDebit Systems GmbH withheld
approximately $116,000 for charge-backs. See also Item 6, "Management's
Discussion and Analysis--Liquidity and Capital Resources." Mr. Kamp was employed
by EuroDebit Systems GmbH from July through September, 2000, and pursuant to an
oral employment agreement with EuroDebit Systems GmbH received a salary from
EuroDebit Systems GmbH during that period for services to EuroDebit Systems GmbH
and other companies directly or indirectly owned or controlled by Messrs.
Kriependorf, Kamp or Cordt. See also Item 10, "Executive Compensation." Mr. Kamp
serves as managing director of EuroDebit Systems GmbH.

          Mediacenter Betriebsgesellschaft mbH, a German corporation against
which insolvency proceedings were initiated in Germany in January 2001, is owned
by Messrs. Kriependorf, Kamp and Cordt. Q-Seven Systems GmbH leased from
Mediacenter the office space in Monheim that we used during our 2000 fiscal year
as well as certain of the office equipment that Q-Seven Systems GmbH and we used
in 2000. Mr. Kriependorf was employed by Mediacenter Betriebsgesellschaft mbH
until June 2000 and, pursuant to an oral agreement between Mediacenter
Betriebsgesellschaft mbH and Q-Seven Systems GmbH and an oral employment
agreement between Mediacenter Betriebsgesellschaft mbH and Mr. Kriependorf,
received from Mediacenter Betriebsgesellschaft mbH a salary from January through
June, 2000 for his services to Q-Seven Systems GmbH and other companies directly
or indirectly owned or controlled by Messrs. Kriependorf, Kamp or Cordt. Messrs.
Kamp and Cordt were also employed by Mediacenter Betriebsgesellschaft mbH until
June 2000 and Mr. Kamp was employed again by Mediacenter Betriebsgesellschaft
mbH from October through December, 2000. Pursuant to oral employment agreements
with Mediacenter Betriebsgesellschaft mbH, each of Messrs. Kamp and Cordt
received from Mediacenter Betriebsgesellschaft mbH a salary for their services
to companies directly or indirectly owned or controlled by Messrs. Kriependorf,
Kamp or Cordt. See also Item 10, "Executive Compensation."

          Cyberotic Media AG, a German corporation against which insolvency
proceedings were initiated in Germany in January 2001, is owned by Messrs. Kamp
and Cordt. Mr. Kriependorf is the chairman of Cyberotic Media AG's supervisory
board and Messrs. Kamp and Cordt are directors of Cyberotic Media AG. Until
December 2000, Cyberotic Media AG resold EuroDebit Systems GmbH's services to
X-Real and managed the operations of X-Real, leased to X-Real the content for
its websites and provided maintenance services with respect to X-Real's servers.
During our fiscal year ended December 31, 2000, X-Real paid a fee to Cyberotic
Media AG for such services in an amount of approximately DM 494,000 (which
equals approximately $237,120 on the basis of the Federal Reserve Bank of New
York December 29, 2000 noon buying rate of Euro 1 = $0.9388 and the fixed
exchange rate of Euro 1 = DM 1.95583). Mr. Cordt was employed by Cyberotic Media
AG from July through December, 2000 and, pursuant to an oral employment
agreement with Cyberotic Media AG, received from Cyberotic Media AG a salary for
his services to Cyberotic Media AG and other companies directly or indirectly
owned or controlled by Messrs. Kriependorf, Kamp or Cordt. See also Item 10,
"Executive Compensation."

          Alice Jay Productions Inc., based on an oral agreement with X-Real,
provided support services to X-Real until the end of March 2000, when the
agreement between X-Real and Alice Jay Productions Inc. was terminated, and
received in 2000 from X-Real an amount of DM 263,000 (which equals approximately
$126,240 on the basis of the Federal Reserve Bank of New York December 29, 2000
noon buying rate of Euro 1 = $0.9388 and the fixed exchange rate of Euro 1 = DM
1.95583 and includes a fee in the amount of $82,000 for the termination of
X-Real's agreement with Alice Jay Production Inc.). Messrs. Kamp and Cordt each
own a 10% interest in Alice Jay Productions Inc. Due to common ownership and
control, Alice Jay Productions Inc. is an affiliate of EuroDebit Systems, Inc.

          ITraffic GmbH, a German corporation, is owned by Messrs. Kamp and
Cordt. Mr. Kamp is the managing director of ITraffic GmbH. Since March, 2001,
ITraffic GmbH has provided all webdesign, server hosting, programming and
content delivery services to X-Real for a fee of approximately $10,000 per
month. It also provides to X-Real, currently at no charge, newly developed
software which allows X-Real to bill customers through e-mailed invoices.
ITraffic GmbH has rented the office space at Boettgerstr. 25, 40789 Monheim,
Germany, that has been sublet to Q-Seven Systems GmbH and that we are currently
using.

          Partner Air Plc. is a company organized under the laws of Ireland, one
of whose directors is Mr. Kuhnen, one of our directors. Partner Air Plc. has a
fleet of three aircraft which it leases to Partner Air Luftfahrtreederei GmbH
and other charter airline companies. Of these aircraft, two currently belong to
Partner Air Plc., and one is leased. We have recently offered to acquire shares
of Partner Air Plc. in exchange for newly issued shares of our company. See Item
11, "Security Ownership of Certain Beneficial Owners and Management--Change in
Control Arrangements."

          Partner Air Luftfahrtreederei GmbH, a German corporation, operates a
brokerage business for executive charter flights. Partner Air Luftfahrtreederei
GmbH is not a subsidiary of Partner Air Plc. and vice versa. However, Partner
Air Luftfahrtreederei GmbH and Partner Air Plc. are affiliated as a result of
common ownership and control. Mr. Kuhnen, one of our directors, is the managing
director of Partner Air Luftfahrtreederei GmbH.

          Pay@EuroDebit GmbH acquired in December 2000 the business of EuroDebit
Systems GmbH. Pay@EuroDebit GmbH is not affiliated with our company or any of
our executive officers or directors. Pursuant to an agreement dated July 13,
2001, Pay@EuroDebit GmbH provides services to X-Real in connection with the
collection from X-Real's customers of credit card and electronic on-line
debit-entry payments.

          In other instances, as is the case with respect to Q-5 Internet
Marketing GmbH, a company whose principal shareholders are Messrs. Kriependorf,
Kamp and Cordt and whose managing director is Mr. Cordt, there are no
intercompany transactions, but only commonality of ownership and control. In
January 2001, insolvency proceedings were initiated in Germany against Q-5
Internet Marketing GmbH.

          Because control of Cyberotic Media AG, EuroDebit Systems GmbH,
Mediacenter Betriebsgesellschaft mbH and Q-5 Internet Marketing GmbH is or was
held by a common group of people, under certain circumstances our company could
possibly be held liable for the debt of one of those companies, each of which
has become insolvent. If this were to occur, it could have a significant adverse
effect on our business and financial condition. See also Item 3, "Legal
Proceedings."


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

          EXHIBITS


<TABLE>
<CAPTION>
                                                                         Incorporated by Reference
    Exhibit                                                           Form           Date       Exhibit         Filed
     Number              Exhibit Description                          Type          Filed        Number        Herewith
    --------     ---------------------------------                   ------        -------      --------      ---------
<S>             <C>                                                <C>           <C>           <C>           <C>
         3.1     Articles of Incorporation, as amended                10-QSB       8/16/99          3.1

         3.2     Amended and Restated By-laws as                      10-QSB       8/14/00          3.2
                 currently in effect

         3.3     Form of Stock Certificate                               8-A      10/29/99          3.3

        10.1     License Agreement between Q-Seven                    10-QSB       8/16/99         10.1
                 Systems GmbH and Q-Seven Nevada

        10.2     Agreement and Plan of Share Exchange                    8-K        6/9/99          III
                 dated May 24, 1999

        10.3     Consulting Agreement dated May 27, 1999              10-KSB       4/14/00         10.3
                 between Q-Seven Systems, Inc. and Mr.
                 Barry A. Ellsworth

        10.4     Termination Agreement dated April 17,                10-QSB       5/16/00         10.4
                 2000 between Q-Seven Systems, Inc. and
                 Mr. Barry A. Ellsworth

        10.5     Agreement dated May 24, 2000 between Q-            10-QSB/A       5/26/00         10.5
                 Seven Systems, Inc. and Omni Software
                 Systems, Inc.*

        21.1     Subsidiaries                                         10-KSB       4/14/00         21.1
</TABLE>

     --------

     *    Certain material from this agreement has been omitted and confidential
          treatment has been requested therefor pursuant to Rule 24b-2 under the
          Securities Exchange Act of 1934, as amended. All such omitted material
          has been filed separately with the Commission.


          REPORTS ON FORM 8-K

          No Current Reports on Form 8-K were filed during the last quarter of
the fiscal year ended December 31, 2000. We filed a Current Report on Form 8-K
on April 11, 2001, in which we reported information under Items 1, 5 and 7.


<PAGE>


          In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                            Q-SEVEN SYSTEMS, INC.


              Date: September 7, 2001       By:    /s/ Philipp S. Kriependorf
                                                   --------------------------
                                            Name:  Philipp S. Kriependorf
                                            Title: President, Chief Executive
                                                   Officer, Chief Financial
                                                   Officer and Chief Accounting
                                                   Officer


          In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.


              Date: September 7, 2001       /s/ Philipp S. Kriependorf
                                            --------------------------
                                            Philipp S. Kriependorf
                                            Director


              Date: September 7, 2001       /s/ Philip Kamp
                                            --------------------------
                                            Philip Kamp
                                            Director


              Date: September 7, 2001       /s/ Hans L. Kuhnen
                                            --------------------------
                                            Hans L. Kuhnen
                                            Director

<PAGE>




                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2000












                                      F-1

<PAGE>







                                 C O N T E N T S


Independent Auditors' Report............................................... F-3

Consolidated Balance Sheet................................................. F-4

Consolidated Statements of Operations...................................... F-5

Consolidated Statements of Stockholders' Equity (Deficit).................. F-6

Consolidated Statements of Cash Flows...................................... F-7

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



                                      F-2

<PAGE>









                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Q-Seven Systems, Inc. and Subsidiaries
Monheim, Germany


We have audited the accompanying consolidated balance sheet of Q-Seven Systems,
Inc. and Subsidiaries at December 31, 2000 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 2000 and 1999. 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 auditing standards generally accepted
in the United States of America. 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 Subsidiaries as of December 31, 2000 and the consolidated
results of their operations and their cash flows for the years ended December
31, 2000 and 1999 in conformity with accounting principles generally accepted in
the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company's recurring losses from operations and working
capital deficit raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
8. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.


/s/ HJ & Associates, LLC

HJ & Associates, LLC
Salt Lake City, Utah
August 3, 2001



                                      F-3
<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheet


<TABLE>
<CAPTION>
                                     ASSETS
                                                                               December 31,
                                                                                   2000
<S>                                                                       <C>
CURRENT ASSETS

   Cash                                                                      $         108,941
   Accounts receivable (Notes 1 and 3)                                                 293,197
   Due from related party (Note 9)                                                      11,868
   Interest receivable - related party (Note 9)                                          5,533
                                                                             -----------------

     Total Current Assets                                                              419,539
                                                                             -----------------

PROPERTY AND EQUIPMENT - NET (Notes 1 and 2)                                               350
                                                                             -----------------

     TOTAL ASSETS                                                            $         419,889
                                                                             =================


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES

   Accounts payable                                                          $         242,081
   Accounts payable - related party (Note 7)                                            60,191
   Accrued expenses (Note 5)                                                           216,649
   Income taxes payable (Note 1)                                                        35,674
   Investor deposit (Note 6)                                                           250,000
                                                                             -----------------

     Total Current Liabilities                                                         804,595
                                                                             -----------------

COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS' EQUITY (DEFICIT)

   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 deficit                                                                   (388,863)
                                                                             -----------------

     Total Stockholders' Equity (Deficit)                                             (384,706)
                                                                             -----------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                    $         419,889
                                                                             =================
</TABLE>



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


                                       F-4

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                For the Years Ended
                                                                    December 31,
                                                        -------------------------------------
                                                              2000               1999
                                                        ------------------  -----------------
<S>                                                    <C>                <C>
SALES                                                   $        1,766,395  $       1,296,154

COST OF SALES                                                      634,470            554,249
                                                        ------------------  -----------------

GROSS MARGIN                                                     1,131,925            741,905
                                                        ------------------  -----------------

OPERATING EXPENSES

   Depreciation                                                        272                 90
   Selling, general and administrative                           1,251,406            743,533
   Bad debt expense                                                315,639             -
                                                        ------------------  -----------------

     Total Operating Expenses                                    1,567,317            743,623
                                                        ------------------  -----------------

OPERATING (LOSS)                                                  (435,392)            (1,718)
                                                        ------------------  -----------------

OTHER INCOME

   Interest income                                                   7,736              4,175
                                                        ------------------  -----------------

     Total Other Income                                              7,736              4,175
                                                        ------------------  -----------------

NET INCOME (LOSS) BEFORE INCOME TAXES                             (427,656)             2,457

INCOME TAXES (Note 1)                                               -                  35,674
                                                        ------------------  -----------------

NET INCOME (LOSS)                                       $         (427,656) $         (33,217)
                                                        ==================  =================

BASIC INCOME (LOSS) PER SHARE (Note 1)                  $            (0.03) $           (0.00)
                                                        ==================  =================

WEIGHTED AVERAGE NUMBER OF SHARES
 OUTSTANDING                                                    12,500,000         10,685,206
                                                        ==================  =================
</TABLE>


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


                                       F-5

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
            Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>

                                                                                Additional
                                                                                 Paid-In         Retained
                                                 Common Stock                    Capital         Earnings
                                    -------------------------------------
                                         Shares               Amount            (Deficit)         (Deficit)
                                    -----------------  ------------------  ------------------  -----------------
<S>                                <C>                <C>                 <C>                 <C>
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

Net loss for the year ended
 December 31, 2000                             -                   -                   -                (427,656)
                                    -----------------  ------------------  ------------------  -----------------

Balance,
 December 31, 2000                         12,500,000  $           12,500  $           (8,343) $        (388,863)
                                    =================  ==================  ==================  =================
</TABLE>

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


                                       F-6

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                    For the Years Ended
                                                                                        December 31,
                                                                           --------------------------------------
                                                                                 2000               1999
                                                                           ------------------  -----------------
<S>                                                                     <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES

   Net (loss)                                                              $         (427,656) $         (33,217)
   Adjustments to reconcile net loss to net cash (used)
    provided by operating activities:
     Depreciation                                                                         272                 90
     Bad debt expense                                                                 315,639             -
   Changes in operating assets and liabilities:
     Increase in interest receivable                                                   (5,533)            -
     (Increase) in due from related parties                                           (11,868)            -
     (Increase) in accounts receivable                                               (220,724)          (285,826)
     Increase in accounts payable                                                      41,510            200,571
     Increase in accounts payable - related party                                      60,191             -
     Increase in accrued expenses                                                      49,576            126,841
     Increase in income taxes payable                                                  -                  35,674
                                                                           ------------------  -----------------

       Net Cash (Used) Provided in Operating Activities                              (198,593)            44,133
                                                                           ------------------  -----------------

CASH FLOWS FROM INVESTING ACTIVITIES                                                   -                  -
                                                                           ------------------  -----------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Investor deposit                                                                   250,000             -
   Capital contribution                                                                -                  13,397
                                                                           ------------------  -----------------

       Net Cash Provided by Financing Activities                                      250,000             13,397
                                                                           ------------------  -----------------

NET INCREASE  IN CASH                                                                  51,407             57,530

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           57,534                  4
                                                                           ------------------  -----------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                     $          108,941  $          57,534
                                                                           ==================  =================

SUPPLEMENTAL CASH FLOW INFORMATION

Cash Payments For:

   Income taxes                                                            $           -       $          -
   Interest                                                                $           -       $          -

</TABLE>




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


                                       F-7

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


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 certain Internet user management
          software programs, 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 the Company and its wholly-owned subsidiaries, Q-Seven
          Nevada and 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.



                                       F-8

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


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, 2000.

          f. Basic (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,
                                          -------------------------------------
                                                 2000               1999
                                          ------------------  -----------------

          Basic (loss) per share:

            (Loss) (numerator)            $         (427,656) $         (33,217)
            Shares (denominator)                  12,500,000         10,685,206
            Per share amount                           (0.03) $           (0.00)

          There were no common stock equivalents outstanding for the years ended
          December 31, 2000 and 1999. Accordingly, only the basic (loss) per
          share has been calculated.

          g. Change in Accounting Principle

          The Company has adopted the provisions of FASB Statement No. 138
          "Accounting for Certain Derivative Instruments and Hedging Activities
          (an amendment of FASB Statement No. 133)". Because the Company had
          adopted the provisions of FASB Statement No. 133, prior to June 15,
          2000, this statement is effective for all fiscal quarters beginning
          after June 15, 2000. The adoption of this principle had no material
          effect on the Company's consolidated financial statements.



                                       F-9

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


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

          g. Change in Accounting Principle (Continued)

          The Company has adopted the provisions of FASB Statement No. 140
          "Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities (a replacement of FASB Statement No.
          125)". This statement provides accounting and reporting standards for
          transfers and servicing of financial assets and extinguishments of
          liabilities. Those standards are based on consistent application of a
          financial- components approach that focuses on control. Under that
          approach, the transfer of financial assets, the Company recognized the
          financial and servicing assets it controls and the liabilities it has
          incurred, derecognizes financial assets when control has been
          surrendered, and derecognizes liabilities when extinguished. This
          statement provides consistent standards for distinguishing transfers
          of financial assets that are sales from transfers that are secured
          borrowings. This statement is effective for transfers and servicing of
          financial assets and extinguishments of liabilities occurring after
          March 31, 2001. This statement is effective for recognition and
          reclassification of collateral and for disclosures relating to
          securitization transactions and collateral for fiscal years ending
          after December 15, 2000. The adoption of this principle had no
          material effect on the Company's consolidated financial statements.

          The Company has adopted the provisions of FIN 44 "Accounting for
          Certain Transactions Involving Stock Compensation (an interpretation
          of APB Opinion No. 25)". This interpretation is effective July 1,
          2000. FIN 44 clarifies the application of Opinion No. 25 for only
          certain issues. It does not address any issues related to the
          application of the fair value method in Statement No. 123. Among other
          issues, FIN 44 clarifies the definition of employee for purposes of
          applying Opinion 25, the criteria for determining whether a plan
          qualifies as a noncompensatory plan, the accounting consequence of
          various modifications to the terms of a previously fixed stock option
          or award, and accounting for an exchange of stock compensation awards
          in a business combination. The adoption of this principle had no
          material effect on the Company's consolidated financial statements.

          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.



                                      F-10

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


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

          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. At this time, no
          current operating losses have been taken back to claim any reduction
          in this or prior year amounts. 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. For the years ended December 31, 2000 and 1999,
          the Company incurred advertising expenses of $336,480 and $67,527,
          respectively.

          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.





                                      F-11

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


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

          n. Income Taxes

          The income tax benefit differs from the amount computed at the federal
          statutory rates as follows:

                                                               For the
                                                             Period Ended
                                                             December 31,
                                                                 2000

          Income tax benefit at statutory rate            $          94,840
          Change in valuation allowance                             (94,840)
                                                          -----------------

                                                          $          -
                                                          =================

          Deferred tax assets at December 31, 2000 are comprised of the
          following:

          Net operating loss carryforward                 $         187,030
          Depreciation                                               -
          Valuation allowance                                      (187,030)
                                                          -----------------

                                                          $          -
                                                          =================

          At December 31, 2000, the Company had net operating loss carryforwards
          of approximately $187,030 that may be offset against future taxable
          income through 2020. If substantial changes in the Company's ownership
          should occur, there would also be an annual limitation of the amount
          of the NOL carryforwards which could be utilized. No tax benefit had
          been reported in the financial statements, because the Company
          believes there is a 50% or greater chance the carryforwards will
          expire unused. The tax benefits of the loss carryforwards are offset
          by a valuation allowance of the same amount.

NOTE 2 -  PROPERTY AND EQUIPMENT

          Property and equipment consists of the following at December 31, 2000:

          Office equipment                                $           1,359
          Accumulated depreciation                                   (1,009)
                                                          -----------------

          Net property and equipment                      $             350
                                                          =================

          Depreciation expense for the years ended December 31, 2000 and 1999
          was $272 and $90, respectively.



                                      F-12

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


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.

          The servicing companies are Cyberotic Media A.G. and EuroDebit Systems
          GmbH. Cyberotic Media A.G. is controlled and operated by two principal
          shareholders of the Company who also served as officers and directors
          during 2000. EuroDebit Systems GmbH is a 90% owned subsidiary of Euro
          Debit Systems, Inc., a Nevada corporation. Shareholders of the Company
          own approximately 42% of the outstanding common stock of EuroDebit
          Systems, Inc.

          In January 2001, insolvency proceedings were initiated against
          Cyberotic Media A.G., one of the corporations that X-Real entered into
          a service agreement. At December 31, 2000, X-Real had a receivable of
          $427,707 from the collection of X-Real's revenue. X-Real also had a
          payable to this company in the amount of $112,068 for web page design.
          Both items have been written off with the net amount, $315,639, being
          expensed as bad debt. These items have been directly written off
          without an allowance created due to the uncollectability.

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. This
          agreement was terminated in February of 2000. At the same time X-Real
          entered into a new agreement with a new provider in which the provider
          is compesated for the same services but on a hourly basis.

          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 $227,590 and $180,995 for the years ended December
          31, 2000 and 1999, respectively.




                                      F-13

<PAGE>



                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 5 -  ACCRUED EXPENSES

          At December 31, 2000, accrued expenses consisted of the following:

                                                               December 31,
                                                                   2000

          Advertising                                        $         216,648
                                                             -----------------

                   Total Accrued Expenses                    $         216,648
                                                             =================

          This amount is due to other internet pay sites which the Company has
          advertisements and links to their own internet pay sites.

NOTE 6 -  INVESTOR DEPOSIT

          During the year ended December 31, 2000, X-Real verbally agreed to
          issue new shares to a Bahamian 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 number of shares to be issued
          will be approximately equal to the number of X-Real's shares currently
          outstanding. The shares are to be issued when the entire consideration
          is received. As of December 31, 2000, only $250,000 had been received
          by X-Real. Negotiations are still ongoing to complete the sale.

NOTE 7 -  ACCOUNTS PAYABLE - RELATED PARTY

          The Company owes Q-Seven Systems GmbH, a German corporation which
          shares common ownership with the Company but neither entity owns any
          stock in each other, $61,069 as part of the Licensing Agreement
          discussed in Note 4.

NOTE 8 -  GOING CONCERN

          The Company's consolidated financial statements are prepared using
          generally accepted accounting principles applicable to a going
          concern. However, the Company has experienced operating losses and has
          a working capital deficit. The Company has not established revenues
          sufficient to cover its operating costs and allow it to continue as a
          going concern. It is the intent of the Company to acquire a new
          subsidiary, as discussed in Note 10.

NOTE 9 -  RELATED PARTY RECEIVABLES

          During the year ended December 31, 2000, the Company advanced $11,868
          to two shareholders in the Company. The Company has accrued $5,533 of
          interest on the receivable.



                                      F-14

<PAGE>


                     Q-SEVEN SYSTEMS, INC. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 10 - SUBSEQUENT EVENT

          The Company has entered into negotiations to acquire Partner Air Plc.,
          an Irish corporation. The Company has entered into a Letter of Intent
          with a principal shareholder of Partner Air Plc., in which the parties
          have expressed their intent that the Company acquire a majority of the
          shares of Partner Air Plc. in exchange for newly issued shares of the
          Company.

NOTE 11 - PRONOUNCEMENTS ISSUED NOT YET ADOPTED

          In July, 2001, the Financial Accounting Standards Board issued two
          statements - Statement 141, Business Combinations, and Statement 142,
          Goodwill and Other Intangible Assets, which will potentially impact
          the Company's accounting for its reported goodwill and other
          intangible assets.

          Statement 141:

          o    Eliminates the pooling method for accounting for business
               combinations.

          o    Requires that intangible assets that meet certain criteria be
               reported separately from goodwill.

          o    Requires negative goodwill arising from a business combination to
               be recorded as an extraordinary gain.

          Statement 142:

          o    Eliminates the amortization of goodwill and other intangibles
               that are determined to have an indefinite life.

          o    Requires, at a minimum, annual impairment tests for goodwill and
               other intangible assets that are determined to have an indefinite
               life.

          Upon adoption of these Statements, the Company is required to:

          o    Re-evaluate goodwill and other intangible assets that arose from
               business combinations entered into before July 1, 2001. If the
               recorded other intangible assets do not meet the criteria for
               recognition, they should be reclassified to goodwill. Similarly,
               if there are other intangible assets that meet the criteria for
               recognition but were not separately recorded from goodwill, they
               should be reclassified from goodwill.

          o    Reassess the useful lives of intangible assets and adjust the
               remaining amortization periods accordingly.

          o    Write-off any remaining negative goodwill.

          The company has not yet completed its full assessment of the effects
          of these new pronouncements on its financial statements and so is
          uncertain as to the impact. The standards generally are required to be
          implemented by the Company in its 2002 financial statements.



                                      F-15