SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                                  Annual Report
     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 For the fiscal year ended 12/31/98              Commission file number 333-6440

                          DOWNSTREAM INCORPORATED - DSI
                 (Name of small business issuer in its charter)


                   Utah                                     87-0567618
     (State or other jurisdiction of               (IRS Employer Identification
      incorporation or organization)                            No.)

         808 E. 7440 S. Suite #30
           Salt Lake City, Utah                                84047
 (Address of principal executive offices)                   (Zip Code)

                    Issuer's telephone number: (801) 916-1371

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

                   Common Stock - Par Value: $0.001 Per Share
                                (Title of class)

         Check whether the issuer (1) 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 X No _

         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  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         The issuer's revenues for its most recent fiscal year: $104,017.

         The aggregate  market value of the voting and non-voting  common equity
held by non-affiliates computed by reference to the average bid and asked prices
($0.25 per share) on December 31, 1998 was approximately $683,500.

         As of  December  31,  1998 the  issuer  had  outstanding  approximately
4,500,000 shares of its Common Stock, $0.001 par value.

         The  issuer  has  not  incorporated  by  reference  herein  any  of the
following  documents:  1) any  annual  report to  shareholders;  2) any proxy or
information  statement;  or 3) any prospectus  filed pursuant to Rule 424 (b) or
(c) of the Securities Act of 1933.

           Transitional Small Business Disclosure Format (check one):

                                    Yes    No X
<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

HISTORY

         Downstream Incorporated - DSI will sometimes be referred to hereinafter
as the "Company".

         The  Company  was  organized  under  the  laws of the  State of Utah on
November 26, 1996 as Downstream  Incorporated  - DSI. The Company was formed for
the purpose of consulting  with small to medium sized  businesses,  then to help
them grow their  businesses  and achieve  their  desired  goals.  Its  corporate
charter authorizes it to assist its clients in assessing their current financial
condition and their future financial needs - and to transact any lawful activity
for which corporations may be organized. Soon after being organized, the Company
issued  3,300,000  shares  of  its  common  stock  to  its  founders  and  other
shareholders.  The Company conducted a public offering of its common stock which
was completed in July 1997.  The Company raised  approximately  $51,700 in gross
offering proceeds and issued an additional  1,034,000 shares of its common stock
to the public.  In 1998, the Company issued an additional  166,000 shares of its
common stock in a private transaction for services rendered.

         On  September  3, 1997,  a new  division  of the  Company was formed to
engage in the business of security  consulting.  The security  division supplied
the Company  with the majority of its revenues  during 1998.  However,  due to a
change in management at U.S. Satellite,  its primary client, the Company was not
awarded any further contracts after the first quarter of 1998. Subsequently, the
security division of the Company was closed during the third quarter of 1998.

         During the third  quarter of 1998,  the  Company's  Board of  Directors
considered  entering the cosmetic hair removal  business  using a new technology
known as intense pulsed light.  Robert W. Later, M.D., was made an officer and a
director of the Company on an interim  basis to consult with the Company.  After
further  investigation,  the Board decided against  entering into said business.
The Board  discovered  that the technology did not perform nearly as well as the
Company had been led to believe by salesmen of the  machines,  and that  several
doctors who had opened centers  utilizing  said  technology had later closed the
centers due to a lack of revenues.  When the decision not to enter the field was
made, Dr. Later's  relationship with the Company,  which was greatly appreciated
and extremely helpful, ended, and the positions he filled were vacated.

         In the final quarter of 1998, the Company's Board of Directors  decided
that, in addition to its continued search for financial  consulting  clients, it
would be in the best interest of the Company,  and its shareholders,  to attempt
to locate and  acquire the assets and  business  of a company  that is already a
going  concern.  The Company has begun its search  with  emphasis on  businesses
related to the internet. Locating additional consulting clients, and/or locating
and  acquiring  the business and assets of a going concern will be the Company's
primary objectives in the coming year.

         The address of the  principal  offices of the Company is 808 E. 7440 S.
Suite #30, Midvale, Utah 84047. Its telephone number is (801) 916-1371.

                                        2
<PAGE>

BUSINESS - INDUSTRY SEGMENTS

         1. The Company was formed on November  26, 1996 to engage  primarily in
the business of financial  consulting.  Such  consulting  services  have focused
mostly in the area of mergers and acquisitions. The Company has also worked with
businesses interested in going public. The Company has attempted to consult with
and  act  as an  intermediary  between  businesses  desiring  to go  public  and
brokerage  firms that might be interested  in taking them public.  In the coming
year, the Company will continue to seek out clients in its financial  consulting
business.  However,  the Board of  Directors  has also  decided to search for an
already going concern that is preferably internet related and attempt to acquire
the assets and business of such a concern.

         The Company believes that it can locate financial  consulting  clients,
or that a suitable  business can be located and acquired to create  revenues for
the Company. However, there can be no assurance that consulting clients, or such
a business, will be obtained by the Company, or that future revenues of any kind
will be generated.

         2. A  security  division  of the  Company  was  formed  during the last
quarter of 1997.  The  division was awarded  contracts by U.S.  Satellite in the
final  quarter of 1997 to have security  systems  installed in various Osco Drug
Stores  across the  country.  The  division  subcontracted  with  installers  of
security  systems in the  geographic  areas where  contracts were awarded to the
Company. The Company then oversaw the installation of said security systems. Due
to a change in management at U.S.  Satellite,  no further contracts were awarded
to the Company after the first quarter of 1998. Subsequently,  the Board decided
to close the Security  Division in the third  quarter of 1998.  The Company does
not anticipate re-entering the security business in the future.


GENERAL DESCRIPTION OF BUSINESS - FINANCIAL CONSULTING 

         The financial  consulting  division of the Company is engaged primarily
in locating  clients that are  interested  in growing their  businesses  through
mergers and  acquisitions,  or are interested in going public.  After locating a
client  interested in making an acquisition,  the Company  searches for suitable
acquisitions for its clients.  Once the Company has located a suitable  business
to be acquired by its clients,  the Company  assists its clients in  negotiating
agreements and in completing the acquisitions.

         Businesses  that are  interested in taking their  companies  public are
helped by being  informed  about the steps  necessary to go public.  The Company
helps them prepare the documents necessary for an Initial Public Offering - i.e.
financial statements, business plans, etc. The Company then attempts to locate a
brokerage firm that will underwrite the client's business and conduct an IPO.

         The Company has not yet earned  revenues from its financial  consulting
business.  However,  the  Company  believes  that  significant  revenues  can be
generated from financial consulting services,  and the Company is still pursuing
financial consulting clients.

                                        3
<PAGE>

GENERAL DESCRIPTION OF BUSINESS - SECURITY CONSULTING

         Prior  to  closure,  the  Security  Division  of the  Company  received
contracts from U.S. Satellite to have security systems installed in various Osco
Drug Stores  across the country.  The Company then  subcontracted  with security
installation  companies  to have such systems  installed.  The types of security
systems  the Company  dealt with were  Burglar  Alarm  Systems,  Fire  Detection
Systems and Closed Circuit TV Systems.

         In October  1997,  the Company  entered into and  completed its first 2
contracts with U. S. Satellite,  a division of American Stores.  These contracts
were for the  installation  of Burglar  Alarm  Systems in 2 Osco Drug  Stores in
Helena, Montana. The Company received 10 more contracts from U. S. Satellite for
the  installation  of similar  systems  in 10 other Osco Drug  Stores in various
parts of the country. These contracts were completed during the first quarter of
1998.

         After the aforementioned  change in management at U.S.  Satellite,  the
Company received no further contracts and the Security Division was subsequently
closed.

         The Company does not  manufacture or sell any products,  other than its
services  and  expertise  as financial  consultants.  To the  present,  its only
products have been of a service nature.

PRICING - FINANCIAL CONSULTING 

         The Company works on a fee basis with its financial consulting clients.
Fees are negotiated with each client on an individual basis.  Concerning clients
interested in making an acquisition,  the Company  attempts to negotiate fees in
the form of retainers,  and additional  fees ranging from 2 to 10 percent of the
value of any acquisition completed.

         In the case of a  client  that is  interested  in  completing  a public
offering, the Company attempts to negotiate a monthly consulting fee, as well as
a finder's fee to be paid upon completion of the offering for helping the client
prepare for an offering and for locating a brokerage  firm willing to underwrite
the offering. Said finder's fees are based on the size of the offering. Fees may
be  negotiated  on an hourly or other fee  basis.  Such fees will be paid to the
Company once the Company has located a suitable  business to be acquired and the
acquisition is successfully  completed;  when an IPO is completed; or when other
services are completed.

PRICING - SECURITY CONSULTING

         The  Company  was  awarded  contracts  after  submitting  bids  to U.S.
Satellite.  In submitting bids, the Company took into  consideration the general
costs of doing business, the wholesale costs of the systems to be installed, the
amounts it would be  charged by  subcontractors  for labor,  and the  margins it
wished to retain as profit.  The Company  tried to maintain  gross margins of at
least  50%.  However,   to  be  awarded  bids,  lesser  margins  were  sometimes
considered.  The  Company's  bids were  accepted or rejected.  If accepted,  the
Company then proceeded to complete said projects by purchasing the systems to be
installed  and  making  agreements  with  subcontractors  to have  said  systems
installed. The Company oversaw all such installations.

                                        4
<PAGE>

SALES AND MARKETING; DEPENDENCE ON MAJOR CUSTOMER

         The Company's  President  has done the majority of the Company's  sales
and marketing  work. He does this primarily by phone,  fax, mail,  attendance at
various  conventions  and  conferences,  and by utilizing the internet.  He also
maintains  numerous  professional  relationships  with  individuals  that  refer
potential clients to the Company.

         Approximately  99% of the Company's gross revenues in 1998 were derived
from one account - U. S.  Satellite,  a division of the American Stores Company.
The loss of this account has had an adverse affect on the Company's business and
revenues.

         The  Company  was  generally  paid  for its  services  thirty  days net
(payment  will be due thirty  days from  receipt of the  invoices  for  services
rendered).  In other cases, 60 days net, and in others, 90 days net. These terms
varied from account to account depending on the agreement arrived at between the
Company and its clients.


BACKLOG

         The  Company  does not  produce  or  market  products,  other  than its
services.  Therefore, it does not experience problems with backlogs. The Company
does not consider backlog to be an indicator of future performance.


MERCHANDISING AND ADVERTISING

         The  Company's  ability to promote and market its services is important
to  the  success  of  the  Company.   However,  at  present  the  only  type  of
merchandising  and  advertising the Company engages in is through the efforts of
the  Company's  President  as he markets  the  Company's  services.  The Company
believes its ability to  establish  and maintain  favorable  relations  with its
clients is essential to the success of the Company. It is hoped that as, and if,
the Company  continues to grow, that monies can be allocated to more effectively
market and advertise the Company's services to potential clients.


SEASONALITY

         The area of business  in which the Company is engaged is not  sensitive
to seasonality. The Company does not anticipate its business will be affected by
any seasonal factors or changes.


PRODUCT PROTECTION

         The Company does not produce or  manufacture  any products,  other than
its  services  as  financial  consultants.  It does  not  own  any  intellectual
properties,  trademarks,  copyrights or patents of any kind. Therefore,  product
protection  is not  something  the Company  believes  will  influence its future
success or failure.

                                        5
<PAGE>

GOING CONCERN OPINION

         The  Company's  independent  accountant  has  issued a "going  concern"
opinion in which the  independent  accountant  stated "the Company does not have
significant  cash or other  material  assets,  nor  does it have an  established
source of revenues  sufficient to cover its operating costs and to continue as a
going concern."

         The Company presently has no financing arrangements with any persons or
institutions.  Nor is the Company  indebted to any person or institution for any
amount,  other than accounts  payable of $117 as of December 31, 1998.  However,
the Company's financial resources are limited at this time. The Company's future
success  will  depend  on  continued  sales,  the  Company's  ability  to secure
financing of some kind, or to produce sufficient  revenues from other sources to
allow the Company to continue its operations.


FACILITIES; RELATED PARTY TRANSACTION

         The Company  presently  owns no  facilities.  The  Company's  President
maintains  an  office  of the  Company  at his  residence.  The  Company  is not
currently being charged rent.


EMPLOYEES

         The  Company  presently  has  1  full-time   employee,   the  Company's
President.  None of the  Company's  employees  are  represented  by a union or a
collective bargaining agreement. Its employee relations are excellent.


COMPETITION

         There  are  many  large  companies,  as well  as  small  companies  and
individuals,  engaged in the business of financial consulting. The Company faces
significant  competition  from  such  companies  and  individuals.  Many  of the
Company's  competitors have much greater  financial and human resources than the
Company.  Competition  is  intense  and  there are many  intangibles,  including
pricing, locating clients and/or businesses, locating suitable acquisitions, and
bringing those acquisitions to fruition.  It is difficult to predict whether the
Company will be successful at its business in the future.

         Many of the Company's  competitors also have much greater  resources to
market and merchandise their services.  There can be no assurance given that the
Company will be able to overcome the many  obstacles it faces and to continue as
a "going concern".  However, it is the belief of management that it will be able
to continue as a business and continue to grow the Company and its business.


RISK FACTORS

         The Company  considers  the  following  matters to be risks which could
have a material adverse effect on the financial  condition and operations of the
Company:

                                        6
<PAGE>


         Financing  Source  Needed;  Current  Financing  Limited.  The Company's
available  resources  are  limited.  To continue  as a going  concern it will be
essential for the Company to locate  clients and generate  additional  revenues,
acquire an already going concern, or secure either debt or equity financing from
some source. The Company presently has no commitments from any lender to provide
credit financing to the Company. No assurance can be given that the Company will
be able to obtain any debt or equity  financing to permit expansion or continued
operations.


         Competition.  The Company is engaged in a highly  competitive  business
and competes  directly  with many  companies  which have  substantially  greater
financial  resources,  experience and more substantial  marketing  organizations
than the Company. The Company's ability to compete will depend on its ability to
obtain  clients in its area of  business,  or to locate and acquire the business
and assets of an already going concern. Concerning clients who are interested in
mergers and/or acquisitions,  the Company must also locate suitable acquisitions
for its clients after obtaining clients. The competition to do this is intense.


         Current Trends in the Economy. The Company's revenues are, to a limited
extent,  dependent  on the  strength  of the U.S.  economy.  To the extent  that
weaknesses in the U. S. economy occur,  revenues from the Company's services may
be adversely  impacted.  If weakness in the economy  were to occur,  the Company
cannot  predict  if,  and, if so, to what extent or for what period such a trend
will adversely impact revenues from its services.


         Earnings  Fluctuations.  Because the  services  provided by the Company
often  take a  significant  amount  of time  to  complete,  due to the  personal
relationships that must be developed to gain the trust of clients, especially in
the area of financial  consulting,  the Company  expects that it will experience
frequent and perhaps large fluctuations in both revenues and operating results.


         Dependence on Management  and Key Personnel;  No Key Man Insurance;  No
Director's  and  Officer's  Insurance.  Although  James G. Slater and Richard S.
Cutler,  both  officers  and  directors  of  the  Company,  participate  in  the
management  decisions affecting the Company, the Company's day to day operations
are primarily dependent on the efforts of the Company's President. The Company's
success will be dependent  on the ability of the  Company's  President to locate
clients for the  Company.  This will  include  locating  clients that wish to go
public,  and brokerage  firms willing to underwrite  public  offerings for them;
locating  suitable  acquisitions  for the  Company's  clients  that wish to make
acquisitions,  then to assist those clients in completing such acquisitions;  or
in locating a suitable business that the Company may acquire.  To accomplish the
goals of the Company,  the officers and  directors  might need to secure  either
debt or equity  financing to finance the Company's  operations and to market its
services.  If this  becomes  necessary,  it will be done  with  terms  that  are
favorable to the Company.

         The  Company  has  no  written  employment  agreement  with  any of its
officers.  The Company  presently  has no key man  insurance or  director's  and
officer's liability insurance.

                                        7
<PAGE>

         Control  by  Current  Management.  Current  directors  of  the  Company
collectively own approximately 39.2% of the Company's  outstanding Common Stock.
By virtue of their share  holdings,  as well as their positions as directors and
officers of the Company,  they have a  significant  influence  over the power to
elect the entire Board of Directors  and to approve or  disapprove  of corporate
action submitted to a vote of the Company's stockholders.

         Shares  Eligible for Future  Sale.  Of the  4,500,000  shares of Common
Stock outstanding,  approximately 59.1% are unrestricted, or are entitled on the
basis of Rule 144 (h) to have "restricted"  legends removed,  and can be sold at
any time, and approximately  40.9% are "restricted" shares within the meaning of
Rule 144 under the Securities Act of 1933 (the  "Securities  Act" or "Act").  Of
the  restricted  shares,  approximately  1,766,000  are  beneficially  owned  by
directors or executive  officers or other affiliates of the Company.  Generally,
under Rule 144, a person  who has held  restricted  shares for one year may sell
such  shares,  subject to certain  volume  limitations  and other  restrictions,
without registering them under the Act. Rule 144 generally also permits sales of
shares, without any volume limitations, by a person who is not an "affiliate" of
the Company (and who has not been an  affiliate of the Company  during the prior
three months) and who has held restricted shares for at least two years.

         Sales of  shares of the  Company's  Common  Stock  may have an  adverse
affect on the market price of the Common Stock.  Sales of such securities  could
also adversely affect the Company's  ability to raise additional  capital in the
equities market in the future.

OTHER OPPORTUNITIES

         The Company continues to search for clients and conducts evaluations of
business  opportunities in other areas of business.  It continues to explore the
possibilities of obtaining funding for such  opportunities.  As the December 31,
1998, no agreements  have been reached with any person for the  commencement  of
any such  activities.  No assurance  can be given as to when or whether any such
opportunities  may become  available to the Company,  or as to the nature of any
such opportunities.

ITEM 2. DESCRIPTION OF PROPERTY.

         The Company does not own any  facilities at this time.  The Company has
purchased  and owns a small  amount  of office  equipment  to run the day to day
operations of the Company.  The Company's  President  maintains an office of the
Company at his private residence, for which the Company pays no rent.

ITEM 3. LEGAL PROCEEDINGS.

         The Company is not a party to any material  pending legal  proceedings.
The Company's property is not subject to any material pending legal proceedings.
To the best of the Company's knowledge, no governmental authority or other party
has threatened or is contemplating  the filing of any material legal proceedings
against  the  Company.  To the best of the  Company's  knowledge,  no  director,
officer, affiliate of the Company or any owner of record or beneficially of more
than 5% of the Company's common stock is a party adverse to the Company or has a
material interest adverse to the Company in any material legal proceeding.

                                        8
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         There were no meetings of the  Company's  shareholders  held during the
year ended  December 31, 1998.  No matters were  submitted to a vote of security
holders through the  solicitation of proxies or otherwise  during the year ended
December 31, 1998.





                      (This Space Intentionally Left Blank)


                                        9
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

         The Company's  initial  public  offering was completed in July of 1997.
The Company's  common stock did not trade in any recognized  public market until
December  24,  1997.  From  December  24,  1997  through  December  31, 1998 the
Company's  Common Stock has traded on the OTC Bulletin  Board,  under the symbol
"DWNS".  The following table sets forth, for the respective  periods  indicated,
the prices of the Company's Common Stock in the  over-the-counter  market, based
on inter-dealer bid prices,  without retail markup,  markdown,  commissions,  or
adjustments  (which may not  necessarily  represent  actual  transactions).  The
quotations  have been provided by market  makers of the  Company's  Common Stock
and/or the National Quotation Bureau.

            Quarter Ended                       High Bid              Low Bid

            December 31, 1997                   $.05                  $.05

            March 31, 1998                      $.125                 $.05

            June 30, 1998                       $.375                 $.25

            September 30, 1998                  $.4375                $.25

            December  31, 1998                  $0.25                 $0.125


NO. OF STOCKHOLDERS OF RECORD

         As of December 31, 1998, there were  approximately 41 holders of record
of the Company's  Common Stock.  The Company  believes  there are numerous other
owners of its Common Stock whose shares are held in street name.


DIVIDEND INFORMATION

         The  Company  has not paid  any  dividends  in the  past.  The  Company
currently  intends to retain any and all earnings to finance the development and
expansion of its  operations  and does not  anticipate  paying cash dividends or
making any other  distributions on its shares of Common Stock in the foreseeable
future.  The Company's future dividend policy will be determined by its Board of
Directors on the basis of various  factors,  including the Company's  results of
operations,    financial   condition,   business   opportunities   and   capital
requirements.

     Under Utah state  corporate  law, no dividends may be paid if, after giving
effect to the  dividends:  (a) the Company would not be able to pay its debts as
they  become due in the usual  course of  business;  or (b) except as  otherwise
specifically  allowed by the Company's Articles of Incorporation,  the Company's
total assets would be less than the sum of its total liabilities plus the amount
that  would  be  needed,  if the  Company  were to be  dissolved  at the time of
distribution,   to  satisfy  the   preferential   rights  upon   dissolution  of
stockholders  whose  preferential  rights are  superior to those  receiving  the
dividend.

                                       10
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES

         During the year ended December 31, 1998, one hundred sixty six thousand
(166,000)  shares of unregistered,  "restricted"  shares of the Company's common
stock were issued to James G. Slater for  services  rendered to the Company over
the past two years.  The shares were not registered  under the Securities Act of
1933, and were issued in reliance on exemptions from registration. There were no
other  securities  sold or issued by the Company  during the year ended December
31, 1998.

INITIAL PUBLIC OFFERING

         On April 28, 1997,  the Company's  registration  statement on Form SB-2
was declared effective  (Registration No. 333-6440).  The offering then promptly
commenced, and was terminated in July of 1997 after the sale of 1,034,000 shares
of the Company's common stock at an offering price of $.05 per share (before the
sale of all  4,000,000  shares of common  stock  offered)  for which the Company
received  $51,700  in gross  offering  proceeds.  The  offering  was sold by the
Company's  President and Secretary who received no commissions or other offering
compensation for their sales efforts.  All shares sold in the offering were sold
by the Company. There were no selling shareholders involved.

         For the period  ending July 28, 1997 a Form SR was filed by the Company
in which it reported that after deducting the expenses of the underwriting,  the
Company was left with net offering proceeds of approximately  $40,516.00.  Other
expenses of  approximately  $5,450.00 were then reported in the filing.  For the
three month period ending  September 30, 1997,  the Company  reported  other net
proceeds uses of  approximately  $9,864 that were reported in the Company's Form
10-QSB covering that period. A similar report for the quarter ended December 31,
1997 was made by the Company in its 1997 Annual Report to  Shareholders as filed
with the SEC.

         During 1998,  subsequent  reports were made in the Company's  Quarterly
Reports,  accounting for and describing the use of all offering  proceeds.  Once
all offering  proceeds had been  expended and  accounted  for, no further use of
proceeds reports were made, or were required to be made.

         The aforementioned uses of proceeds did not represent a material change
in the use of proceeds described in the Company's prospectus.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

GENERAL

         The Company was formed on November 26, 1996 to engage  primarily in the
business of financial  consulting.  Its corporate charter  authorizes it to seek
out and assist  clients in  evaluating  their  current  financial  condition and
future  financial  needs.  The  Company  attempts  to  assist  such  clients  in
furthering  their  business  plans and goals.  In the final quarter of 1998, the
Company's  Board  decided  that,  in  addition  to its  efforts  as a  financial
consulting  business,  it would be in the best  interest  of the Company and the
Company's  shareholders,  to seek out an already  going  concern  and attempt to
acquire  its assets and  business  for the  Company.  The  Company has a limited
operating  history.  Much of the Company's time and efforts during the past year
were  devoted to  completing  the  security  contracts  awarded to the  Company,
evaluating the possibilities of entering the cosmetic hair removal business, and
searching for consulting clients.
                                 
                                       11
<PAGE>

PLAN OF OPERATION

         The Company's plan of operations for the next twelve months is to focus
on the following:

         1. To  increase  the  Company's  financial  consulting  clientele,  and
provide financial consulting services to its clients.

         2. To seek out an already going  concern that is preferably  engaged in
an internet related business, then attempt to acquire the business and assets of
such a concern.

         The Company's assets are limited at the present time. The Company hopes
to generate  revenues  from  financial  consulting  services,  or to acquire the
business and assets of an already  going  concern.  Otherwise,  the Company will
need to seek  capital  through  loans or through the  issuance of debt or equity
securities to continue as a "going concern".  The Company presently has no plans
to seek loans or raise capital through the sale of its securities.  No assurance
can be given that the Company will be able to obtain any loans or raise  capital
through the  issuance  of  securities  if it seeks to do so.  Unless the Company
produces revenue from its consulting  business or other sources,  or the Company
acquires capital through loans or the issuance of debt or equity securities,  or
through an  acquisition,  the Company  will only be able to satisfy it estimated
cash requirements for approximately 6 months.

         The  Company  does  not  expect:  (a) to  engage  in any  research  and
development  of any kind  during  1999;  (b) to  purchase  or sell any  plant or
significant  equipment during 1999; or (c) any significant changes in the number
of employees during 1999.


RESULTS OF OPERATIONS

         For the year ended  December 31, 1998,  the Company  experienced  a net
loss of  approximately  $91,440  compared  to a net  loss of  $25,446  in  1997.
Management  attributes  the 1998 loss, as well as the increased loss compared to
1997, to increased general and  administrative  costs which include the issuance
of 166,000 shares of common stock to James G. Slater,  an officer and a director
of the Company,  for services rendered over the past two years. The stock issued
to Mr. Slater was valued at $.50 per share at the time it was issued.

         Revenues

         The Company generated its first operating revenues during the months of
October  and  November  of 1997.  These  revenues  were the result of  contracts
awarded to the Security  Division of the Company by U. S. Satellite,  a division
of the American  Stores  Company,  to have burglar alarm systems  installed in 2
Osco Drug Stores in Helena,  Montana.  These were the only revenues generated by
the Company during the year ended December 31, 1997,  other than interest income
on funds  invested  in a money  market  account.  The  Security  Division of the
Company was formed on  September  3, 1997 at a meeting of the Board of Directors
after the Company's  President had been  presented  with an  opportunity to have
security  systems  installed  for U. S.  Satellite,  a Division of the  American
Stores Company.

                                       12
<PAGE>

         The  Company  was  awarded  10 more  contracts  by U. S.  Satellite  in
December of 1997.  These  contracts  required the Company to have burglar  alarm
systems and CCTV systems  installed in 10 new Osco Drug Stores in various states
throughout the U.S. These  contracts were completed  during the first quarter of
1998 and supplied the Company with the majority of its revenues for the year.

         Cost of Sales

         During the year ended  December 31, 1998,  the Company's  cost of sales
were $45,473, as compared to $0.00 during the year ended December 31, 1997.

         General  and  administrative  costs were  $150,375  in 1998,  offset by
revenues of  $104,017,  in contrast  with  general and  administrative  costs of
$37,820,  in 1997,  offset by revenues of  $12,675.  General and  administrative
costs  consisted  of  costs  associated  with  the day to day  operation  of the
Company: rent and general office expenses, expenses associated with locating new
clients (which included travel and entertainment expenses) sales bonuses and the
salary paid to the Company's President,  and the compensation paid to Mr. Slater
by issuing  shares of the  Company's  common stock to him.  These were the major
portions of general and  administrative  expenses incurred during the year ended
December 31, 1998.

         Expenses

         General and  administrative  expenses  of  $150,375 in 1998,  increased
$112,555 from the $37,820 of general and administrative expenses incurred during
the same  period  in 1997.  This was due  primarily  to the  166,000  shares  of
"restricted" common stock issued to James G. Slater for services rendered to the
Company over the past two years.  The stock was valued at a "fair market  value"
of $.50 per share  ($83,000) which was determined by the average price of trades
occurring during the year in the thinly traded market of the common stock of the
Company on the OTC Bulletin Board - as required by the SEC reporting  standards.
Other  general and  administrative  costs  consisted  of costs  associated  with
salaries, rent, general office expenses, sales bonuses, expenses associated with
locating new clients  (which  included  travel and  entertainment  expenses) and
certain  costs  (other  than  cost of  sales)  associated  with  completing  the
contracts  awarded to the Company's  Security  Division to have security systems
installed in 10 new Osco Drug Stores throughout the country.

         Cash and Cash Equivalents

         During 1998,  the Company's  cash  position  decreased as the Company's
cash amounts were reduced to $8,896 at December 31, 1998, as compared to cash of
$16,706 at year end in 1997.


GOING CONCERN OPINION

         The  Company's  independent  accountant  has  issued a "going  concern"
opinion in which the  independent  accountant  stated "the Company does not have
significant  cash or other  material  assets,  nor  does it have an  established
source  of  revenues  sufficient  to cover its  operating  costs and to allow to
continue as a going concern."

                                       13
<PAGE>

         During the year  ended  December  31,  1998,  approximately  99% of the
Company's  revenue  was  generated  from its  security  division  which has been
discontinued.

         The Company presently has no financing arrangements with any persons or
institutions,  nor is the Company  indebted to any person or institution for any
amount,  other than  amounts  incurred  in the normal  course of  business.  The
Company's  financial  resources are extremely  limited at this time. The Company
has no foreseeable sources of revenue.  The Company's future success will depend
on the  acquisition  of clients and revenues  received  from such  clients,  the
acquisition  of the  business  and  assets  of an  already  going  concern,  the
Company's  ability to secure  financing of some kind,  or to produce  sufficient
revenues from other sources to allow the Company to continue its operations.


FORWARD LOOKING STATEMENTS

         This document includes various forward-looking  statements with respect
to future operations of the Company that are subject to risks and uncertainties.
Forward-looking  statements include the information  concerning  expectations of
future results of operations  and such  statements  preceded by,  followed by or
that  otherwise   include  the  words  "believes,"   "expects,"   "anticipates,"
"intends," "estimates" or similar expressions. For those statements, the Company
claims  the  protection  of  the  safe  harbor  for  forward-looking  statements
contained in the Private Litigation Reform Act of 1995.



ITEM 7.  FINANCIAL STATEMENTS.

         The  financial  statements  required by this Item No. 7 are attached to
this Report as Appendix "A."



ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.




                      (This Space Intentionally Left Blank)

                                       14
<PAGE>



                                                     PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.


         The table below sets forth the name, age, and position of each director
and  executive  officer of the Company,  and all persons  nominated or chosen to
become such:

--------------------------------------------------------------------------------
                                                                    Year First
                                                                      Became
Name                      Age    Position*                           Director

Barry A. Ellsworth         45    President, Treasurer, Director        1996

Richard S. Cutler          52    Vice President, Director              1998

James G. Slater            51    Secretary, Director                   1996

       * The term of office of each director is one year, or until his successor
         is  elected  at  the  Company's  annual  shareholders'  meeting  and is
         qualified. Each director is subject to removal by the shareholders. The
         term of office for each officer is for one year, and, until a successor
         is  elected  at the annual  meeting  of the Board of  Directors  and is
         qualified.  Each  officer  is  subject  to  removal  by  the  Board  of
         Directors.



BIOGRAPHICAL INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS

         Set forth below is certain biographical  information  regarding each of
the Company's officers and directors.

         BARRY A.  ELLSWORTH  assumed his present  positions with the Company in
November of 1996 when the Company was first organized. Mr. Ellsworth worked as a
stock  broker  for  the  firms  of  Dean  Witter  Reynolds,   Wilson-Davis,  and
Prudential-Bache  Securities in the early 1980s. In 1984 he formed the financial
consulting firm of Ellsworth & Associates.  The firm  specialized in mergers and
acquisitions.  In 1988, Mr. Ellsworth wrote a best-selling  book and focused the
majority  of his time and efforts on writing,  speaking,  and travel,  from that
time until the fall of 1996. In the fall of 1996, he helped organize  Downstream
Incorporated  - DSI,  the  Company.  He has  acted as the  Company's  President,
Treasurer, and as a Director since its inception.

         RICHARD S. CUTLER became a member of the Board of Directors on December
2,  1998.  Mr.  Cutler  graduated  from the  University  of Utah in 1968  with a
Bachelors  degree in History.  He worked in sales and as a sales trainer for the
Xerox  Corporation from 1970 to 1973.  Since that time, and to the present,  Mr.
Cutler has been an independent investor, directing his own accounts.

                                       15
<PAGE>

         JAMES G. SLATER has acted as the  Company's  Secretary  since August of
1998, and as a director since the Company's inception. In the mid to late 1980s,
Mr. Slater worked as a consultant for the financial consulting firm of Ellsworth
& Associates.  From February 1990 to October 1995 he served as Vice President of
Theatrical and Ancillary Sales for Imperial  Entertainment  of Los Angeles,  CA.
From  October 1995 to August 1997 he worked at Full Moon Studios in Los Angeles,
CA. as  Director  of TV Sales.  Since  February 1, 1998 he has worked as a Sales
Representative at 24/7 Media, Inc. in Los Angeles, CA.


COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Securities Exchange Act of 1934 does not presently
apply to the Company's officers and directors,  or persons who own more than 10%
of the Company's Common Stock.


ITEM 10.  EXECUTIVE COMPENSATION


         The only officer or director of the Company that  currently  receives a
salary is the  Company's  President,  Barry A.  Ellsworth.  The Company pays Mr.
Ellsworth  a monthly  salary of $2,000,  plus,  up to a 20% bonus on any and all
revenues  generated by the Company as a result of Mr.  Ellsworth's  efforts.  No
officers or  directors  of the  Company  have been paid sums of $100,000 or more
since the Company's inception.

         The following table includes compensation information for the Company's
Chief Executive Officer,  the Company's four most highly  compensated  executive
officers,  other than the CEO, who were serving as executive officers at the end
of the last fiscal year, and up to two additional highly compensated individuals
who were not serving as executive officers as of the end of the last fiscal year
(collectively,  the "Named Executive  Officers").  However,  the named executive
officers  shall not include any person whose total  annual  salary and bonus did
not exceed $100,000.
<TABLE>
<CAPTION>

                           Annual Compensation                          Long-term Compensation
                           -------------------------------------------  --------------------------------

                                                                                       Securities
                       Yr  Salary        Bonus      Other Annual        Restricted     Underlying      Other Com-
                                                    Compensation        Stock Awards   Options/SARs    pensation
----------------------------------------------------------------------------------------------------------------------
<S>                    <C>    <C>          <C>           <C>                 <C>            <C>            <C>            
Barry A. Ellsworth     98     $22,000      $19,300          -                  -              -              -

                       97     $12,000      $2,535           -                  -              -              -

                       96     $ 2,500         -             -                                            $7,500(1)
----------------------------------------------------------------------------------------------------------------------
</TABLE>

         (1) Mr.  Ellsworth  received  1,500,000  shares of the Company's common
stock in 1996 for his efforts in organizing  and founding the Company,  which at
that time was valued at $7,500.

                                       16
<PAGE>

STOCK OPTIONS

         The Company currently has no Stock Option Plans of any kind with any of
its officers or directors,  or with anyone else. No options have been granted to
any officer, director or principal stockholder of the Company.


COMPENSATION OF DIRECTORS

         Directors of the Company are not  compensated  for serving on the board
of directors or on committees. All persons currently serving as directors of the
Company also serve as officers and/or  employees of the Company.  Mr.  Ellsworth
receives  compensation as an employee,  and Mr. Slater was issued 166,000 shares
of restricted  stock (valued at $.50 per share) during the year for his services
as an officer  for the past two years,  but  neither of them  receives  separate
compensation  for the services they provide to the Company as directors,  nor do
any  of  the  other  officers  of  the  Company.   They  receive  no  additional
compensation for any committee participation or special assignments. The Company
presently has no committees.


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

         There currently are no written employment contracts between the Company
and a Named Executive Officer. The employment of each Named Executive Officer is
on an "at  will"  basis.  The  Company  has  agreed  to pay Mr.  Ellsworth,  the
Company's  President,  a salary of $2,000 per month for his  services in running
the day to day  operations  of the  Company.  He, as well as any  other  officer
and/or  director,  is  allowed  to  receive  a bonus of up to 20% on any and all
revenues generated by the Company as a direct result of his or their efforts.

         There  currently are no compensatory  plans or  arrangements  including
payments to be received  from the  Company,  with  respect to a Named  Executive
Officer,  which plan or arrangement results or will result from the resignation,
retirement or any other termination of such Named Executive Officer's employment
with the Company or from a  change-in-control  of the Company or a change in the
Named Executive Officer's responsibilities following a change in control.


RETIREMENT AND REIMBURSEMENT PLANS

         The  Company  has no  retirement,  pension,  profit  sharing or medical
reimbursement  plans covering its officers and directors.  However,  the Company
does provide medical insurance for the Company's President.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         As of December 31, 1998,  there were 4,500,000  shares of the Company's
Common Stock issued and outstanding - $0.001 par value per share.  The following
table sets forth the names,  addresses and stock  ownership of all persons known
to the Board of  Directors  of the Company  who own, of record or  beneficially,
five per cent (5%) or more the Company's outstanding Common Stock, together with
the stock ownership of the Company's  directors  individually,  and all officers
and directors as a group, as of December 31, 1998.

                                       17
<PAGE>
<TABLE>
<CAPTION>
      --------------------------------------------------------------------------------------------------------
      Name and Address of                              Amount and Nature of                   Percent of
      Beneficial Owner                                 Beneficial Ownership(1)                Class
<S>                                                    <C>           <C>                      <C>                 
      5% Beneficial Owners:
      Barry A. Ellsworth                                1,500,000    Shares                   33.3%
      6337 Highland Drive
      Salt Lake City, Utah 84121

      CMI, L.L.C. (2)                                     425,000    Shares                    9.4%
      406 W. South Jordan Pky.
      Suite 500
      South Jordan, Utah 84095

      James G. Slater                                     266,000    Shares                    5.9%
      6331 Langdon Ave.                                       
      Van Nuys, CA 91411

      Directors (3)
      Barry A. Ellsworth                                1,500,000    Shares                   33.3%
      6337 Highland Drive
      Salt Lake City, Utah 84121

      Richard S. Cutler                                      -                                  -
      278 D Street #11
      Salt Lake City, Utah 84103

      James G. Slater                                     266,000    Shares                    5.9%
      6331 Langdon Ave.
      Van Nuys, CA 91411

      All Officers and Directors                        1,766,000    Shares                   39.2%
       as a Group (3 persons)
      --------------------------------------------------------------------------------------------------------
</TABLE>

(1)      Except as otherwise  indicated,  all shares represent Common Stock held
         of record and beneficially.

(2)      CMI, L.L.C. is a  limited  liability company  that  is engaged  in  the
         commercial   mortgage   business.   Its  principal   owner  is  Dan  E.
         Christensen.  CMI,  L.L.C.  is not  affiliated  with the Company or its
         management  other than through  CMI,  L.L.C.'s  stock  ownership in the
         Company.  As of December 31, 1998, CMI,  L.L.C.  owned 200,00 shares of
         record and an additional 225,000 shares beneficially.

(3)      All common shares held by the Officers and  Directors  listed above are
         "restricted  or  control   securities"  and  as  such  are  subject  to
         limitations  on resale.  The shares  may be sold  pursuant  to Rule 144
         under certain circumstances.  The shares held by CMI/Dan E. Christensen
         listed  above,  are  not  restricted  shares  and  may be  sold  at the
         shareholder's  discretion.  There are no  contractual  arrangements  or
         pledges of the Company's securities, known to the Company, which may at
         a subsequent date result in a change of control of the Company.

                                       18
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


RENT

         From  September  1997 through  August  1998,  the Company paid $300 per
month to  Intermountain  Mortgage as rent for office space which  consisted of a
private office and the shared use of a computer network,  photocopy machine, fax
machine and reception services. The agreement concerning this rental arrangement
was verbal. Intermountain Mortgage is owned by Joe D. Thomas, who was an officer
and a director of the Company  until August 17, 1998,  and a major  shareholder,
and Rob  Karz,  who  was a major  shareholder  of the  Company.  The sum of $300
dollars a month was  considered a favorable rate to the Company when compared to
the prices of similar office space in the surrounding area.

         The Company currently maintains its offices at Mr. Ellsworth's home for
which no rent is presently being charged.


ISSUANCE OF STOCK

         Mr. Ellsworth  received  1,500,000 shares of the Company's common stock
in 1996 for his efforts in organizing and founding the Company. At that time the
shares were valued at a total of $7,500.

         Mr. Slater  received  166,000  shares of the Company's  common stock in
1998 for his services to the Company  over the previous two years.  At the time,
the shares were valued by the Company's accountant for reporting purposes to the
SEC at $83,000 or $.50 per share.  This value was based on the  average  trading
price of the Company's stock. However, the stock was "restricted stock" that can
not be sold in the open market until the requirements of Rule 144 have been met.


MANAGEMENT COMPENSATION

         Mr. Ellsworth receives a salary of $2,000 per month, plus a bonus of up
to 20%  of all  revenues  that  he  produces  for  the  Company.  In  1998,  Mr.
Ellsworth's  bonuses  totaled  $19,300.  Other  officers and  directors are also
entitled to earn bonuses  equal to 20% of the revenues that they produce for the
Company.


MANAGEMENT'S OPINION

         Each of the above described  transactions  when entered into,  were, in
the  opinion  of  management,  as  favorable  to the  Company as could have been
obtained from independent third parties.

                                       19

<PAGE>

                                     PART IV


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.


(1)      Reports on Form 8-K

         Registrant  filed no  reports  on Form 8-K  during  the  quarter  ended
December 31, 1998.


(2)      Exhibits

                          ANNUAL REPORT ON FORM 10-KSB
                          DOWNSTREAM INCORPORATED - DSI
                                  SEC FILE NO.
                                  EXHIBIT INDEX

Exhibit    Exhibit
Number     Description                                           Location

 3.1       Certificate of Incorporation of Registrant -          Incorporated by
           Incorporated  by reference from  Registrant's         Reference 
           Registration  Statement on Form SB-2 as filed
           on April 28, 1997

 3.2       Bylaws of Registrant - Incorporated by reference      Incorporated by
           from Registrant's Registration Statement on Form      Reference 
           SB-2 as filed on April 28, 1997                       

 3.3       Amendment  of  Articles  of  Incorporation  of        Incorporated by
           Downstream Incorporated - DSI Incorporated by         Reference      
           reference  from   Registrant's   Registration         
           Statement  on Form SB-2 as filed on April 28,
           1997

 3.4       Amendment of Bylaws of Downstream Incorporated -      Incorporated by
           DSI  -   Incorporated   by   reference   from         Reference      
           Registrant's  Registration  Statement on Form         
           SB-2 as filed on April 28, 1997

10.1       Material Contract with U. S. Satellite to have        Incorporated by
           burglar alarm  systems and closed  circuit TV         Reference      
           systems  installed  in 4 Osco Drug  Stores in         
           the Kansas  City,  KS area.  Incorporated  by
           reference from  Registrant's  Form 10-KSB for
           the period ended  December 31, 1997, as filed
           on March 31, 1998.

10.2       Material Contract with U. S. Satellite to have        Incorporated by
           burglar alarm  systems and closed  circuit TV         Reference      
           systems  installed  in 2 Osco Drug  Stores in         
           the South Boston,  MA area.  Incorporated  by
           reference from  Registrant's  Form 10-KSB for
           the period ended  December 31, 1997, as filed
           on March 31, 1998.

                                       20
<PAGE>


10.3       Material Contract with U. S. satellite to have        Incorporated by
           burglar alarm  systems and closed  circuit TV         Reference      
           systems installed in 2 Osco Drug Stores - one         
           in Des Moines, IA, another in Davenport,  IA.
           Incorporated  by reference from  Registrant's
           Form 10-KSB for the period ended December 31,
           1997, as filed on March 31, 1998.

10.4       Material Contract with U. S. satellite to have        Incorporated by
           a burglar  alarm system and a closed  circuit         Reference      
           TV system  installed in an Osco Drug Store in         
           South Bend,  IN.  Incorporated  by  reference
           from  Registrant's Form 10-KSB for the period
           ended  December 31,  1997,  as filed on March
           31, 1998.

10.5       Material Contract with U. S. satellite to have        Incorporated by
           a burglar  alarm system and a closed  circuit         Reference      
           TV system  installed in an Osco Drug Store in         
           Waukesha,  WI. Incorporated by reference from
           Registrant's Form 10-KSB for the period ended
           December  31,  1997,  as filed  on March  31,
           1998.

27.1       Financial Data Schedule                               Page   33



                      (This Space Intentionally Left Blank)



                                       21
<PAGE>

                                   SIGNATURES


   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.


                          DOWNSTREAM INCORPORATED - DSI


Date:  March 1, 1999                          By /s/ Barry A. Ellsworth
                                                --------------------------------
                                              Barry A. Ellsworth, Chief
                                              Executive Officer, President,
                                              Principal Financial and Accounting
                                              Officer, Treasurer, Director



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


Date:  March 1, 1998                       By /s/ Barry A. Ellsworth
                                              ----------------------------------
                                              Barry A. Ellsworth, Chief
                                              Executive Officer, President,
                                              Principal Financial and Accounting
                                              Officer, Treasurer, Director

Date: March 1, 1998                           /s/ Richard S. Cutler
                                              ----------------------------------
                                              Richard S. Cutler
                                              Vice President, Director


Date: March 1, 1998                           /s/ James G. Slater
                                              ----------------------------------
                                              James G. Slater
                                              Secretary, Director


                                       22
<PAGE>


                                DOWNSTREAM, INC.
                          (A Development Stage Company)

                              FINANCIAL STATEMENTS

                           December 31, 1998 and 1997





<PAGE>



                                 C O N T E N T S


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

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

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

Statements of Stockholders' Equity...................................... F-6

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

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

   
                                       F-2
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Downstream, Inc.
(A Development Stage Company)
Salt Lake City, Utah

We  have  audited  the  accompanying  balance  sheet  of  Downstream,   Inc.  (a
development stage company) as of December 31, 1998 and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1998 and 1997 and from inception on November 26, 1996 through December 31, 1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Downstream, Inc. (a development
stage company) as of December 31, 1998 and the results of its operations and its
cash flows for the years ended  December 31, 1998 and 1997 and from inception on
November  26, 1996  through  December  31,  1998 in  conformity  with  generally
accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial  statements,  the  Company  is a  development  stage  company  with no
significant  operating results to date which raises  substantial doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also  described in Note 2. The  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ Jones, Jensen & Company 

Jones, Jensen & Company
Salt Lake City, Utah
February 3, 1999


                                      F-3

<PAGE>
<TABLE>
<CAPTION>


                                                 DOWNSTREAM, INC.
                                           (A Development Stage Company)
                                                   Balance Sheet


                                                      ASSETS

                                                                                                  December 31,
                                                                                                     1998         
                                                                                            --------------------
CURRENT ASSETS
<S>                                                                                         <C>                 
   Cash                                                                                     $              8,896
                                                                                            --------------------

     Total Current Assets                                                                                  8,896

FIXED ASSETS (Note 6)                                                                                        848
                                                                                            --------------------

     TOTAL ASSETS                                                                           $              9,744
                                                                                            ====================

                                       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

   Accounts payable                                                                         $                117
                                                                                            --------------------

     Total Current Liabilities                                                                               117

     TOTAL LIABILITIES                                                                                       117

STOCKHOLDERS' EQUITY

   Preferred stock: 50,000,000 shares
    authorized of $0.001 par value, -0-
    shares issued and outstanding                                                                         -
   Common stock: 100,000 shares authorized
    of $0.001 par value, 4,500,000 shares
    issued and outstanding                                                                                 4,500
   Additional paid-in capital                                                                            133,004
   Deficit accumulated during the development stage                                                     (127,877)
                                                                                            --------------------

     Total Stockholders' Equity                                                                            9,627

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                             $              9,744
                                                                                            ====================
</TABLE>

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

                                        4
<PAGE>
<TABLE>
<CAPTION>



                                                 DOWNSTREAM, INC.
                                           (A Development Stage Company)
                                             Statements of Operations

                                                                                                     From
                                                                                                  Inception on
                                                                                                  November 26,
                                                           For the Years Ended                   1996 through
                                                                December 31,                      December 31,
                                                          1998                1997                    1998       
                                                   ------------------    -----------------     -----------------
<S>                                                <C>                   <C>                   <C>              
REVENUES                                           $          104,017    $          12,675     $         116,692

COST OF SALES                                                  45,473               -                     45,473
                                                   ------------------    -----------------     -----------------

GROSS PROFIT                                                   58,544               12,675                71,219
                                                   ------------------    -----------------     -----------------

EXPENSES

   General and administrative                                 150,375               37,820               199,170
   Depreciation and amortization                                  513                  301                   830
                                                   ------------------    -----------------     -----------------

     Total Expenses                                           150,888               38,121               200,000
                                                   ------------------    -----------------     -----------------

NET LOSS FROM OPERATIONS                                      (92,344)             (25,446)             (128,781)  

OTHER INCOME                                                      904               -                        904
                                                   ------------------    -----------------     -----------------

NET LOSS                                           $          (91,440)   $         (25,446)    $        (127,877)  
                                                   ==================    =================     =================

BASIC NET LOSS PER SHARE                           $            (0.02)   $           (0.00)  
                                                   ==================    =================

WEIGHTED AVERAGE SHARES
 OUTSTANDING                                                4,458,500            3,814,912
                                                   ==================    =================
</TABLE>

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

                                        5
<PAGE>
<TABLE>
<CAPTION>


                                                 DOWNSTREAM, INC.
                                           (A Development Stage Company)
                                        Statements of Stockholders' Equity

                                                                                                                             Deficit
                                                                                                                         Accumulated
                                                                                   Additional       During the
                                                          Common Stock              Paid-in          Development
                                                    Shares          Amount          Capital           Stage     
                                               --------------   --------------   --------------   --------------
<S>                                              <C>           <C>              <C>              <C> 
Balance, November 26, 1996                             -        $       -        $       -        $       -

Common stock issued for services
 rendered valued at $0.005 per share                1,500,000            1,500            6,000           -

Common stock issued for cash
 valued at $0.005 per share                         1,800,000            1,800            7,200           -

Net loss from inception on
  November 26, 1996 through
  December 31, 1996                                    -                -                -               (10,991)
                                               --------------   --------------   --------------   --------------

Balance, December 31, 1996                          3,300,000            3,300           13,200          (10,991)

Common stock issued for cash
 valued at $0.05 per share                          1,034,000            1,034           50,666           -

Stock offering costs                                   -                -               (13,696)          -

Net loss for the year ended
 December 31, 1997                                     -                -                -               (25,446)
                                               --------------   --------------   --------------   --------------

Balance, December 31, 1997                          4,334,000            4,334           50,170          (36,437)

Common stock issued for services
 at $0.50 per share                                   166,000              166           82,834           -

Net loss for the year ended
 December 31, 1998                                     -                -                -               (91,440)
                                               --------------   --------------   --------------   --------------

Balance, December 31, 1998                          4,500,000   $        4,500   $      133,004   $     (127,877)
                                               ==============   ==============   ==============   ==============
</TABLE>

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

                                        6
<PAGE>
<TABLE>
<CAPTION>



                                DOWNSTREAM, INC.
                          (A Development Stage Company)
                            Statements of Cash Flows


                                                                                                                From
                                                                                                            Inception on
                                                                                                            November 26,
                                                                    For the Years Ended                    1996 Through
                                                                         December 31,                       December 31,
                                                                 1998                  1997                    1998         
                                                            -----------------     -----------------     -------------------
CASH FLOWS FROM
 OPERATING ACTIVITIES
<S>                                                         <C>                   <C>                   <C>                   
  Net loss                                                  $         (91,440)    $         (25,446)    $          (127,877)  
  Adjustments to Reconcile Net Income
  (Loss) to Net Cash Used in Operating Activities:
  Stock issued for services                                            83,000                -                       90,500
  Depreciation and amortization                                           513                   301                     820
  Increase (decrease) in accounts payable                                 117                  (559)                    117
                                                            -----------------     -----------------     -------------------

     Net Cash (Used) By Operating Activities                           (7,810)              (25,704)                (36,440)  
                                                            -----------------     -----------------     -------------------

CASH FLOWS FROM INVESTING ACTIVITIES

  Purchase of fixed assets                                             -                     (1,359)                 (1,359)  
  Organization costs paid                                              -                     -                         (309)  
                                                            -----------------     -----------------     -------------------

     Net Cash (Used) By Investing Activities                           -                     (1,359)                 (1,668)  
                                                            -----------------     -----------------     -------------------

CASH FLOWS FROM FINANCING ACTIVITIES

  Stock issuance costs                                                 -                    (13,696)                (13,696)  
  Common stock issued for cash                                         -                     51,700                  60,700
                                                            -----------------     -----------------     -------------------

     Net Cash Provided By Financing Activities                         -                     38,004                  47,004
                                                            -----------------     -----------------     -------------------

NET INCREASE IN CASH AND
 CASH EQUIVALENTS                                                      (7,810)               10,941                   8,896

CASH AND CASH EQUIVALENTS AT
 BEGINNING OF PERIOD                                                   16,706                 5,765                  -     
                                                            -----------------     -----------------     -------------------

CASH AND CASH EQUIVALENTS AT END
 OF PERIOD                                                  $           8,896     $          16,706     $             8,896
                                                            =================     =================     ===================


Cash Paid For:

  Interest                                                  $          -          $          -          $            -
  Income taxes                                              $          -          $          -          $            -
</TABLE>

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

                                        7
<PAGE>

                                DOWNSTREAM, INC.
                          (A Development Stage Company)
                        Notes to the Financial Statements
                           December 31, 1998 and 1997


NOTE 1 -      ORGANIZATION AND HISTORY

              a.  Organization

              The financial statements  presented are those of Downstream,  Inc.
              (a development stage company).  The Company was incorporated under
              the laws of the State of Utah on November  26,  1996.  The Company
              was   incorporated   to  engage  in  the   business  of  financial
              consulting.  During 1997,  the Company formed a dba named Security
              Solutions,  Inc. to engage in the business of installing  security
              systems.

              b.  Accounting Method

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

              c.  Cash and Cash Equivalents

              Cash equivalents  include  short-term,  highly liquid  investments
              with   maturities   of  three  months  or  less  at  the  time  of
              acquisition.

              d.  Basic Loss Per Share

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

              e.  Provision for Taxes

              At  December  31,  1998,   the  Company  had  net  operating  loss
              carryforwards of approximately  $53,000 that may be offset against
              future  taxable  income  through  2013.  No tax  benefit  has been
              reported in the financial  statements because the Company believes
              there  is  a  50%  or  greater   chance  the  net  operating  loss
              carryforwards will expire unused.  Accordingly,  the potential tax
              benefits of the net operating loss  carryforwards  are offset by a
              valuation allowance of the same amount.

              f.  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.

                                        8
<PAGE>

                                DOWNSTREAM, INC.
                          (A Development Stage Company)
                        Notes to the Financial Statements
                           December 31, 1998 and 1997


NOTE 1 -      ORGANIZATION AND HISTORY (Continued)

              g.  Property, Equipment and Depreciation

              Property  and  equipment  are  carried  at cost.  Depreciation  is
              calculated  using the  straight-line  method over their  estimated
              useful life of 5 years.

NOTE 2 -      GOING CONCERN

              The Company's  financial  statements are prepared using  generally
              accepted accounting principles applicable to a going concern which
              contemplates   the   realization  of  assets  and  liquidation  of
              liabilities in the normal course of business. However, the Company
              does not have significant cash or other material assets,  nor does
              it have an established source of revenues  sufficient to cover its
              operating  costs and to allow it to continue  as a going  concern.
              The   accompanying   financial   statements  do  not  include  any
              adjustments   that  might   result   from  the   outcome  of  this
              uncertainty.  In addition to its  continued  search for  financial
              consulting  clients,  the Company's Board of Directors  decided it
              would be in the best  interest of the Company to attempt to locate
              and acquire the assets and  business of an already  going  concern
              that was in some way related to the internet.  Locating additional
              consulting clients, and/or locating and acquiring the business and
              assets  of an  internet  related  concern  will  be the  Company's
              primary objectives in the coming year.

NOTE 3 -      STOCK TRANSACTIONS

              On December  10,  1996,  the Company  issued  1,500,000  shares of
              common stock for services  rendered by a related party. The shares
              were valued at $0.005 per share.

              On December 10, 1996, the Company issued 1,800,000 shares of stock
              for cash at $0.005 per share.

              On October 2, 1998, the Company issued 166,000 shares of stock for
              services  rendered by a related  party.  The shares were valued at
              $0.50 per share.

NOTE 4 -      PUBLIC OFFERING

              The Company has  completed an offering of 1,034,000  shares of its
              previously unissued common stock to the public at $0.05 per share.
              The Company  incurred  offering costs of $13,696 which were offset
              against the proceeds of the offering.

                                        9
<PAGE>

                                DOWNSTREAM, INC.
                          (A Development Stage Company)
                        Notes to the Financial Statements
                           December 31, 1998 and 1997


NOTE 5 -      COMMITMENTS

              Officer  Compensation  - The Company has  committed  to paying the
              President  $2,000 per month since more than  $50,000 was raised in
              the public offering. In addition to the salaries,  the Company has
              agreed to pay its President and its other officers a commission of
              up to 20% of revenues generated by their efforts.

NOTE 6 -      FIXED ASSETS

              Fixed assets at December 31, 1998 consisted of the following:

                                                      December 31,
                                                         1998       

              Fax machine                        $              424
              Televisions                                       935
                                                 ------------------

              Less accumulated depreciation                    (511)
                                                 ------------------

              Net fixed assets                   $              848
                                                 ==================

              Depreciation  expense  for the years ended  December  31, 1998 and
              1997 was $272 and $204, respectively.

                                       10