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 12/31/97         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.)

        2046 E. Murray Holladay Road, Suite 202
                  Salt Lake City, Utah                         84117
        (Address of principal executive offices)            (Zip Code)

                    Issuer's telephone number: (801) 272-5174

         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: $12,675.

         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
($0.05 per share) on December 31, 1997 was approximately $61,700.

         As  of  March  23,  1998,  the  issuer  had  outstanding  approximately
4,334,000 shares of its Common Stock, $0.001 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

         None.

         Transitional Small Business Disclosure Format (check one):

Yes  [ ]       No  [X] 

<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.


HISTORY

         The  Company  was  organized  under  the  laws of the  State of Utah on
November  26,  1996 under the name  Downstream  Incorporated  - DSI. In 1997 the
Company  conducted a public  offering of its common stock which was completed in
July 1997,  and pursuant to which the Company  raised  approximately  $51,700 in
gross  offering  proceeds.  Downstream  Incorporated  - DSI  will  sometimes  be
referred to hereafter as the Company.

         Downstream  Incorporated  was organized to act primarily as a financial
consulting  firm.  However,  the Company is authorized to, and retains the right
to, engage in any type of lawful business.  On September 3, 1997, a new division
of the Company was formed to engage in the business of Security Consulting.

         The  address  and  telephone  number of the  principal  offices  of the
Company are 2046 E. Murray  Holladay Rd. Suite 202, Salt Lake City,  Utah 84117,
and (801) 272-5174.

BUSINESS - INDUSTRY SEGMENTS

         1. The Company was formed on November  26, 1996 to engage  primarily in
the business of financial  consulting.  Such consulting services focus primarily
in the area of mergers and acquisitions.

         2. A second  division of the Company was formed in September  1997,  to
act as a security  consulting  business,  when the Company was presented with an
opportunity by an individual the Company had approached as a prospective  client
in its financial consulting business. The security division focuses primarily in
the area of commercial  security systems.  Nearly all of the Company's  revenues
through December 31, 1997 have been generated from this division.

         The Company  believes,  as it continues to search for clients in either
or both areas,  it will  locate  suitable  clients  from which  revenues  can be
generated. However, there can be no assurance that such clients will be found by
the Company, or that future revenues of any kind will be generated

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.  After locating such clients, 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.  Through December 31,
1997,  clients have been located.  However,  no mergers or acquisitions have yet
been completed.

GENERAL DESCRIPTION OF BUSINESS - SECURITY CONSULTING

         The Security  Consulting  Division of the Company seeks out  commercial
clients that want security  systems  designed for them and/or installed in their
places of business.  After locating such clients,  the Company then subcontracts
with other security  companies to have such systems designed and installed.  The
types of security  systems the Company  deals with  primarily  are Burglar Alarm
Systems, Fire Detection Systems and Closed Circuit TV Systems.

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         In October  1997,  the Company  entered into and  completed its first 2
contracts with its first client - U. S. Satellite, a division of American Stores
Company. These contracts were for the installation of Burglar Alarm Systems in 2
Osco Drug Stores, in Helena,  Montana. The Company  subcontracted with a Montana
company  specializing  in the  installation  of  security  systems to have these
projects completed.  The Montana contracts were the major source of revenues for
the Company in the year ended December 31, 1997. Since that time the Company has
received 10 more contracts from U. S. Satellite for the  installation of similar
systems in other Osco Drug Stores in various states.  It is anticipated that the
newly received contracts will be completed during the first quarter of 1998.

         The Company does not install such systems itself,  but rather acts only
as  a  consultant  and  overseer.   The  Company   subcontracts  with  qualified
contractors in various  locations where projects are being completed to have the
actual  systems  installed.  Once the  Company has  received a contract  for the
installation  of such a system,  it  locates a suitable  contractor  in the area
where the project is to be completed,  then contracts with them to have the work
done.  The Company  oversees such projects  until they are completed in a manner
which is acceptable and satisfactory to its clients.

         The Company does not  manufacture  or deliver any products,  other than
its services and expertise as either financial or security  consultants.  To the
present, its only products are of a service nature.

PRICING - FINANCIAL CONSULTING

         The Company works on a fee and/or  commission  basis with its financial
consulting  clients.  Fees and commissions are negotiated with each client on an
individual  basis.  The  Company  anticipates  that fees will range from 2 to 10
percent of the value of any acquisition completed,  depending on the size of the
purchase  to be made  and  the  agreement  reached,  or that  such  fees  may be
negotiated  on an  hourly or other  fee  basis.  Such fees are to be paid to the
Company once the Company has located a suitable business to be acquired, and the
acquisition is successfully completed, or when the services are completed.

PRICING - SECURITY CONSULTING

         Once the Company has located a potential  client,  the Company  bids on
specific  projects.  In submitting bids the Company takes into consideration the
general  costs of doing  business,  the  wholesale  costs of the  systems  to be
installed,  the sums it will be charged by its subcontractors for labor, and the
margins it wishes to retain as  profit.  The  Company  tries to  maintain  gross
margins of at least  50%.  However,  to be  awarded  bids,  lesser  margins  are
sometimes  considered.  The  Company's  bids can be  accepted  or  rejected.  If
accepted,  the Company then proceeds to complete said projects by purchasing the
systems to be installed and making  agreements with  subcontractors to have said
systems installed. The Company oversees all such installations.

SALES AND MARKETING; DEPENDENCE ON MAJOR CUSTOMER

         The Company's CEO and President,  Barry A. Ellsworth, does 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  that refer
potential clients to the Company.

         Approximately  97% of the Company's gross revenues in 1997 were derived
from one major account, U. S. Satellite,  a division of American Stores Company.
Loss of this account  would have an extremely  adverse  affect on the  Company's
business.

         The Company is generally paid for its services thirty days net (payment
will be due thirty days from receipt of the invoices for services rendered),  60

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days net and in some cases as late as 90 days net. These terms vary from account
to account  depending  on the  agreement  arrived at between the Company and its
clients.

BACKLOG

         Since the Company does not produce or market  products,  other than its
services,  it does not  experience  problems with backlog.  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 moneys can be allocated to more effectively
market and advertise the Company's services to potential clients.

SEASONALITY

         Neither  of the areas of  business  in which the  Company is engaged is
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  or  security  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.

GOING CONCERN OPINION

         The  Company's  independent  accountant  has  issued a "going  concern"
opinion in which the independent accountant stated "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."

         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. However, the Company's financial resources are limited at this time. The
Company's  only  foreseeable  sources of revenue  are 10  contracts  it has been
awarded by U. S. Satellite.  These contracts require the Company to have burglar
alarm  systems and CCTV systems  installed  in 10 different  Osco Drug Stores in
various states  throughout  the U.S. The Company  anticipates  fulfilling  these
contracts  during the first quarter of 1998. It is believed that the revenues to
be received  from these  contracts  will be  sufficient  to allow the Company to
continue as a going concern for a period of approximately 9 to 12 months.  After
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.  It rents  office  space,
located at 2046 E. Murray Holladay Road,  Suite 202, Salt Lake City,  Utah, from
Intermountain  Mortgage,  for the sum of $300.  per month.  This is not an arm's
length  transaction.  Intermountain  Mortgage  is owned by Joe  Thomas who is an

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officer and director of the Company and Rob Karz who owns a  significant  amount
of stock in the Company.  The sum of $300.  per month is  considered a favorable
rate for the  Company  when  compared  to other  available  office  space in the
surrounding  area.  The  Company's  President  also  maintains  an office of the
Company at his private residence, for which no rent is charged.

EMPLOYEES

         The Company presently has 1 full-time employee, Barry A. Ellsworth, the
Company's CEO and President.  None of the Company's employees are represented by
a union or a  collective  bargaining  agreement,  and the Company  believes  its
employee relations are excellent.

COMPETITION

         There  are  many  large  companies,  as well  as  small  companies  and
individuals,  engaged in the  businesses  of financial  consulting  and security
consulting.  The Company faces  significant  competition in both areas 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,  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 businesses.

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:

         Financing  Source  Needed;  Current  Financing  Limited  The  Company's
available  resources  are extremely  limited.  The  Company's  only  foreseeable
sources of revenue  are 10  contracts  it has been  awarded by U. S.  Satellite.
These contracts are for the Company to arrange to have burglar alarm systems and
CCTV  systems  installed  in 10  different  Osco Drug  Stores in various  states
throughout  the country.  The Company  anticipates  fulfilling  these  contracts
during the first  quarter of 1998.  It is believed  the  revenues to be received
from these  contracts  will be  sufficient to allow the Company to continue as a
going concern for a period of approximately 9 to 12 months. However, to continue
as a going  concern  after  that time it will be  essential  for the  Company to
generate  additional  sales, 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 highly  competitive  businesses
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 and secure contracts in both areas of business.  On the financial
consulting  side  of  the  business,  the  Company  also  must  locate  suitable
acquisitions for its clients after obtaining clients. The competition to do this
is intense.

         Current Trends in the Economy.  The Company's  profitability  and sales
are primarily  dependent on the strength of the U.S. economy. To the extent that

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weaknesses in the U. S. economy occur, sales of 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 sales of 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 fostered 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 Joe Thomas and Jim Slater, who are
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 Mr. Barry A. Ellsworth,  the Company's CEO
and  President.  The  Company's  success will be dependent on the ability of the
Company's President to locate clients in both areas of the Company's businesses.
This will include locating  suitable  acquisitions  for the Company's  financial
consulting  clients and to assist those clients in completing such acquisitions.
His efforts will also be required to secure  contracts for the  installation  of
security  systems for the security  division of the Company.  To accomplish  the
goals of the Company the officers and directors  must also secure either debt or
equity financing to finance the Company's operations and to market its services.
This must 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.

         Control  by  Current  Management.  Current  directors  of  the  Company
collectively own approximately 48.5% of the Company's  outstanding Common Stock.
By virtue of their share  holdings,  as well as their  position 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  4,334,000  shares of Common
Stock outstanding,  approximately 23.85% are unrestricted and can be sold at any
time and approximately 76.15% 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  3,100,000 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 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 conduct evaluations of business  opportunities
in other  areas of  industry,  and  continues  to explore the  possibilities  of
obtaining funding for such opportunities.  Most of this activity is conducted by
the Company's CEO and President Barry A. Ellsworth.  However, no agreements have
been reached with any person for the  commencement  of any such  activities.  No

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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.  It  currently
rents office space from Intermountain  Mortgage for a sum of $300 per month on a
month to month basis.  The office space consists of one private office  occupied
by the Company's president, and the shared use of a computer, photocopy machine,
fax  machine  and  reception  services.  The  agreement  concerning  this rental
arrangement  is verbal.  Intermountain  Mortgage is owned by Mr. Joe Thomas,  an
officer and  director  of the  Company,  and Mr. Rob Karz,  a  shareholder  of a
significant amount of common stock of the Company.

         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 CEO and President, Mr. Barry Ellsworth, also 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.



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


         There were no meetings of the  Company's  shareholders  held during the
fourth quarter of the year ended December 31, 1997. No matters were submitted to
a vote of security  holders,  through the  solicitation of proxies or otherwise,
during the fourth quarter of the year ended December 31, 1997.



                      (This Space Intentionally Left Blank)

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                                     PART II



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


MARKET INFORMATION

         The  Company's  initial  public  offering  was  completed in July 1997.
However,  the  Company's  common  stock did not trade in any  recognized  public
market until December 24, 1997. From December 24, 1997 through December 31, 1997
the  Company's  Common Stock traded on the National  Association  of  Securities
Dealers,  Inc. Automated  Quotation System ("NASDAQ")  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            $0.05             $0.05


NO. OF STOCKHOLDERS OF RECORD

         As of December 31, 1997, there were  approximately 42 holders of record
of the Company's Common Stock. The Company believes that a few beneficial owners
of its Common Stock hold their shares in street name.

DIVIDEND INFORMATION

         The  Company  has not paid  any  dividends  in the  past.  The  Company
currently  intends  to retain  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.

RECENT SALES OF UNREGISTERED SECURITIES

         During the year ended December 31, 1997, the only equity  securities of
the Company sold by the Company that were not  registered  under the  Securities
Act of 1933 (other than any unregistered sales made in reliance on Regulation S)
are described as follows: None.

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

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commenced, and was terminated in July 1997 after the sale of 1,034,000 shares of
the Company's  common stock  (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  who received no
commissions or other offering  compensation for is sale 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.  Since that time,  and for the three month period
ending  December 31, 1997,  the Company has spent net proceeds from the offering
approximately as follows:

                  Rent:                     $    900.00(1)
                  Legal:                       1,431.00
                  Accounting:                  1,381.00
                  Salaries:                    6,000.00(1)
                  Misc. G&A:                   2,050.00
                  Travel Expenses:                 0.00
                  Search for new clients:        114.00
                                              ---------

                  Total:                    $ 11,876.00

(1) These  amounts were paid to officers,  directors or other  affiliates of the
Company.

         The aforementioned  uses of proceeds do not represent a material change
in the use of proceeds described in the 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, and to assist such clients in furthering their business
plans and goals. The Company has a very limited operating  history.  Much of the
Company's  time and efforts  over the past year were  devoted to  completing  an
offering of its Common Stock to fund the operations of the Company.

PLAN OF OPERATION

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

         1. Complete the existing  contracts with U.S.  Satellite to arrange for
the installation of certain security systems in Osco Drug Stores.

         2.  Increase  the  Company's   clientele  in  the  security  consulting
business, and attempt to obtain additional contracts from U.S. Satellite and any
future clients.

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         3. Increase the Company's financial consulting clientele,  and begin to
provide financial consulting services to clients.

         The Company should be able to continue as a going concern for the first
9 to 12  months  of 1998  based  solely  on the  existing  contracts  with  U.S.
Satellite  which the  Company  intends to complete  during the first  quarter of
1998.  Thereafter,  the Company will need to generate  revenues from  additional
security  contracts  which the  Company  will  seek to obtain or from  providing
financial consulting services. Otherwise, the Company would need to seek capital
through  loans or through the issuance of debt or equity  securities to continue
as a going  concern.  The  Company  has no present  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  securities
issuances if it seeks to do so.

         The  Company  does  not  expect:  (a) to  engage  in any  research  and
development  of any kind  during  1998;  (b) to  purchase  or sell any  plant or
significant  equipment during 1998; or (c) any significant changes in the number
of employees during 1998.

RESULTS OF OPERATIONS

         For the year ended  December 31, 1997,  the Company  experienced  a net
loss of  approximately  $25,446  compared  to a net  loss of  $10,991  in  1996.
Management  attributes  the 1997 loss, as well as the increased loss compared to
1996, to costs  associated  with the Company's  initial  public  offering of its
Common Stock,  and increased  operating costs due primarily to the fact that the
Company  was in  business  for  an  entire  year  during  1997  in  contrast  to
approximately  only one month in 1996.  This  resulted  in  increased  operating
expenses in 1997.

         Revenues

         The Company  generated its first 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 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 received
from the sale of stock  which  were  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 American Stores Company.

         The  Company  was  awarded  10 more  contracts  by U. S.  Satellite  in
December 1997. These contracts require the Company arrange to have burglar alarm
systems and CCTV systems  installed in 10 new Osco Drug Stores in various states
throughout the U.S. It is  anticipated by the Company that these  contracts will
be completed during the first quarter of 1998.

         General and administrative costs of $37,820, were offset by revenues of
$12,675, in 1997, in contrast with general and administrative  costs of $10,985,
with no revenues to offset those costs in 1996. General and administrative costs
consisted of costs associated with the Company's  initial public  offering,  the
salary  paid to the  Company's  President,  rent and  general  office  expenses,
expenses associated with locating new clients,  and travel expenses.  These were
the major portions of general and  administrative  expenses  incurred during the
year ended December 31, 1997.

                                       10
<PAGE>

         Expenses

         General  and  administrative  expenses  of $37,820  in 1997,  increased
$26,835 from the $10,985 of general and administrative  expenses incurred during
the period from inception on November 26, 1996 until December 31, 1996.  This is
due primarily to the salary being paid to the  Company's  President and the fact
that the  Company was  conducting  business  for a longer  period of time during
1997.  General and  administrative  costs consisted of costs associated with the
Company's initial public offering,  the salary paid to the Company's  President,
rent and general office expenses, expenses associated with locating new clients,
and travel expenses.

         Cash and Cash Equivalents

         During 1997,  the Company's  cash  position  increased as the Company's
cash amounts were  increased to $16,706 from moneys  received from the Company's
sale of its Common Stock to the public,  and revenues  generated,  less costs of
the offering and general and administrative costs, as compared to cash of $5,765
at years end in 1996.

GOING CONCERN OPINION

         The  Company's  independent  accountant  has  issued a "going  concern"
opinion in which the independent accountant stated "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."

         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. However, the Company's financial resources are limited at this time. The
Company's  only  foreseeable  sources of revenue  are 10  contracts  it has been
awarded by U. S. Satellite.  These contracts require the Company to have burglar
alarm  systems and CCTV systems  installed  in 10 different  Osco Drug Stores in
various states  throughout  the U.S. The Company  anticipates  fulfilling  these
contracts  during the first quarter of 1998. It is believed that the revenues to
be received  from these  contracts  will be  sufficient  to allow the Company to
continue as a going concern for a period of approximately 9 to 12 months.  After
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.

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.

                                       11
<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     44    President, Chief Executive Officer,       1996
                             Treasurer, Chairman of the Board,
                             Director
James G. Slater        50    Vice President, Director                  1996
Joe D. Thomas          43    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  and  speaking,  until the fall of
1996.  At that  time he  helped  organize  Downstream  Incorporated  - DSI,  the
Company. He has since acted as the Company's President, CEO, Treasurer, Chairman
of the Board and as a director.

         JAMES G.  SLATER has acted as the  Company's  Vice  President  and as a
director since the Company's  inception.  In the mid and 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.

         JOE D. THOMAS has served as Secretary  and as a director of the Company
since its  organization  in  November  1996.  From 1983 - 1991 Mr.  Thomas was a
senior  partner in the accounting  firm of Jones and Thomas - a Utah  accounting
firm.  Mr.  Thomas  supervised,  reviewed and performed all aspects of the audit
engagements  of the firm's  clientele  - which  included  over fifty  public and

                                       12
<PAGE>

private  companies - ranging in size from less than $10 million to $100  million
in gross assets. For the past 6 years Mr. Thomas has acted as Vice President and
co-founder of Intermountain  Mortgage,  a Park City, Utah,  based,  multi-office
mortgage company whose loan production has exceeded $400,000,000 in the last six
years.

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 and CEO, Barry A. Ellsworth.  The Company pays
Mr. Ellsworth a yearly salary of $24,000, 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.
<TABLE>
<CAPTION>

                           Annual Compensation                          Long-term Compensation
                           -------------------------------------------  --------------------------------
                                                                                       Securities
                                                                        Restricted     Underlying
                                                    Other Annual        Stock Awards   Options /       All Other
                      Year Salary        Bonus      Compensation                       SARs(#)         Compensation
----------------------------------------------------------------------------------------------------------------------
<S>                   <C>     <C>          <C>              <C>              <C>            <C>         <C>
Barry A. Ellsworth    1997    $12,000      $2,535           0                  -              -                0
                      1996    $ 2,500      $    0           0                  -              -          $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.

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,  but he receives no separate compensation
for the  services he  provides  to the Company as a director,  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 however agreed to pay Mr. Ellsworth,  the
Company's President, a salary of $24,000, for his services in running the day to
day operations of the Company. He, as well as any other officer and/or director,

                                       13
<PAGE>

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.


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


         As of March 23, 1998,  there were  outstanding  4,334,000 shares of the
Company's  Common Stock,  $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 March 23, 1998.
<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                             34.6%
       2046 E. Murray Holladay Road, Suite 202
       Salt lake City, Utah 84117

       Joe D. Thomas                                      500,000                             11.5%
       2046 E. Murray Holladay Road, Suite 202
       Salt Lake City, Utah 84117

       Rob Karz
       2536 Aspen Springs Drive                           500,000                             11.5%
       Park City, Utah 84060

       CMI, L.L.C. (2)                                                                        11.5%
       406 W. South Jordan Pky.                           500,000
       Suite 500
       South Jordan, Utah 84095

       Directors (3)
       Barry A. Ellsworth                               1,500,000                             34.6%
       2046 E. Murray Holladay Road, Suite 202
       Salt lake City, Utah 84117

                                       14
<PAGE>

       Joe D. Thomas                                      500,000                             11.5%
       2046 E. Murray Holladay Road, Suite 202
       Salt Lake City, Utah 84117

       James G. Slater                                    100,000                              2.3%
       6331 Langdon Ave.
       Van Nuys, CA 91411

       All Officers and Directors                       2,100,000                             48.5%
        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.

(3)      All  common  shares  held  by the  Officers,  Directors  and  Principal
         Shareholders 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.  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.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


RENT

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

         From December 1996 through August 1997, the Company paid Mr.  Ellsworth
a total of  $2,700 in rent for the use of an  office  at Mr.  Ellsworth's  home.
Beginning  September  1997,  the Company's  primary  office was moved to 2046 E.
Murray-Holladay  Road,  Suite 202, Salt Lake City, Utah 84107. The Company still
maintains  a  secondary  office  at Mr.  Ellsworth's  home for  which no rent is
presently 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.

                                       15
<PAGE>

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.

                                       16
<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, 1997.

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

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

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

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

10.1       Material Contract with U. S. Satellite to have          Page 19
           burglar alarm systems installed in 2 Osco Drug 
           Stores in Helena, Montana.                  

10.2       Material Contract with U. S. satellite to have          Page 20
           burglar alarm systems and closed circuit TV systems 
           installed in 4 Osco Drug Stores in the Kansas
           City, KS area.                                          

10.3       Material Contract with U. S. satellite to have          Page 21
           burglar alarm systems and closed circuit TV 
           systems installed in 2 Osco Drug Stores in the
           South Boston, MA area.                                       

10.4       Material Contract with U. S. satellite to have          Page 22
           burglar alarm systems and closed circuit TV systems 
           installed in 2 Osco Drug Stores - one in Des Moines,
           IA, another in Davenport, IA.                    

10.5       Material Contract with U. S. satellite to have a        Page 23
           burglar alarm system and a closed circuit TV system 
           installed in an Osco Drug Store in South Bend, IN.           

10.6       Material Contract with U. S. satellite to have a        Page 24
           burglar alarm system and a closed circuit TV system 
           installed in an Osco Drug Store in Waukesha, WI.             

 27.1      Financial Data Schedule                                 Page 25 

                                       17
<PAGE>

                                DOWNSTREAM, INC.
                         (A Development Stage Company)

                              FINANCIAL STATEMENTS

                           December 31, 1997 and 1996





                                      F-1
<PAGE>



                                    CONTENTS


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, 1997 and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1997 and 1996 and from inception on November 26, 1996 through December 31, 1997.
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 audit 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 audit provides 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, 1997 and the results of its operations and its
cash flows for the years ended  December 31, 1997 and 1996 and from inception on
November  26, 1996  through  December  31,  1997 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
February 25, 1998

                                      F-3
<PAGE>

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


                                     ASSETS

                                                                 December 31,
                                                                     1997
                                                                     ----
CURRENT ASSETS

     Cash                                                         $     16,706
                                                                  ------------
          Total Current Assets                                          16,706

FIXED ASSETS (Note 7)                                                    1,120

OTHER ASSETS (Note 4)                                                      241
                                                                  ------------
          TOTAL ASSETS                                            $     18,067
                                                                  ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

     Accounts payable                                             $      -
                                                                  -----------
          Total Current Liabilities                                      -
                                                                  ----------- 
          TOTAL LIABILITIES                                              -
                                                                  -----------
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, 4,334,000 shares
      issued and outstanding                                             4,334
     Additional paid-in capital                                         50,170
     Deficit accumulated during the development stage                  (36,437)
                                                                  ------------ 
          Total Stockholders' Equity                                    18,067
                                                                  ------------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              $     18,067
                                                                  ============

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

                                      F-4
<PAGE>

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

                                                                      From
                                                                    Inception on
                                                                    November 26,
                                      For the Years Ended           1996 through
                                           December 31,             December 31,
                                       1997             1996            1997
                                       ----             ----            ----
REVENUES                          $     12,675        $     -      $     12,675
                                  ------------        -------      ------------

EXPENSES

     General and administrative         37,820           10,985          48,805
     Depreciation and amortization         301                6             307
                                  ------------        ---------     -----------
          Total Expenses                38,121           10,991          49,112
                                  ------------        ---------     -----------
NET LOSS                          $    (25,446)       $ (10,991)    $   (36,437)
                                  ============        =========     =========== 

NET LOSS PER SHARE                $      (0.01)       $   (0.00)
                                  ============        ========= 

WEIGHTED AVERAGE NUMBERS
 OF SHARES OUTSTANDING               3,814,912        1,980,000
                                  ============        =========



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

                                      F-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)
                                        =========    ===========     ============    ========= 
</TABLE>


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

                                      F-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,
                                                           1997            1996            1996
                                                           ----            ----            ----
CASH FLOWS FROM
 OPERATING ACTIVITIES
<S>                                                   <C>                <C>              <C>       
  Net loss                                            $     (25,446)     $  (10,991)      $ (36,437)
  Adjustments to Reconcile Net Income
  (Loss) to Net Cash Used in Operating Activities:
  Stock issued for services                                     -             7,500           7,500
  Depreciation and amortization                                 301               6             307
  (Increase) decrease in fixed assets                        (1,359)            -            (1,359)
  Increase (decrease) in accounts payable                      (559)            559             -
                                                       ------------      ----------       ---------

     Net Cash (Used) By Operating Activities                (27,063)         (2,926)        (29,989)
                                                       ------------      ----------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES

  Organization costs paid                                       -              (309)           (309)
                                                       ------------      ----------       ---------
     Net Cash (Used) By Investing Activities                    -              (309)           (309)
                                                       ------------      ----------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES

  Stock issuance costs                                      (13,696)            -           (13,696)
  Common stock issued for cash                               51,700           9,000          60,700
                                                       ------------      ----------       ---------
     Net Cash Provided By Financing Activities               38,004           9,000          47,004
                                                       ------------      ----------       ---------
NET INCREASE IN CASH AND
 CASH EQUIVALENTS                                            10,941           5,765          16,706

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

Cash Paid For:

  Interest                                             $       -        $       -         $     -
  Income taxes                                         $       -        $       -         $     -

</TABLE>

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

                                      F-7
<PAGE>

                                DOWNSTREAM, INC.
                         (A Development Stage Company)
                       Notes to the Financial Statements
                           December 31, 1997 and 1996

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.       Net Loss Per Share

             The computations of net 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,  1997,   the  Company  had  net  operating   loss
             carryforwards of  approximately  $36,000 that may be offset against
             future  taxable  income  through  2012.  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.

             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.  Depreciation expense for December 31, 1997
             and 1996 was $239 and $0, respectively.

                                      F-8
<PAGE>

                                DOWNSTREAM, INC.
                         (A Development Stage Company)
                       Notes to the Financial Statements
                           December 31, 1997 and 1996

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. The Company
             has begun its primary operations.  Management feels that sales will
             provide sufficient cash for the operation of the Company.

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.

NOTE 4 -ORGANIZATION COSTS

             The Company is amortizing the non-recurring costs of organizing the
             Company over a five year period.  Amortization expense for December
             31, 1997 and 1996 was $62 and $6, respectively.

NOTE 5 -     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.

NOTE 6 -     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 the other  officers a commission of
             up to 20% of revenues generated by their efforts.

NOTE 7 - FIXED ASSETS

             Fixed  assets  at  December  31,  1997  and 1996  consisted  of the
             following:

                                               1997             1996

               Fax Machine                     $     424          $     -
               Televisions                           935                -
                                               ---------          -------   
                                                   1,359                -

               Less accumulated depreciation        (239)               -
                                               ---------          -------
               Net fixed assets                $   1,120          $     -
                                               =========          =======
   
             Depreciation expense for the years ended December 31, 1997 and 1996
             was $239 and $0, respectively.

                                      F-9

<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 28, 1998                By /s/ Barry A. Ellsworth 
                                       ------------------------------------
                                       Barry A. Ellsworth President, Treasurer,
                                       Chief Executive Officer, Principal
                                       Financial Officer, Chairman of the Board
                                       of Directors



         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 28, 1998                By /s/ Barry A. Ellsworth 
                                       ------------------------------------
                                       Barry A. Ellsworth President, Treasurer,
                                       Chief Executive Officer, Principal
                                       Financial Officer, Chairman of the Board
                                       of Directors




Date: March 28, 1998                    /s/ James G. Slater
                                        -------------------
                                        James G. Slater
                                        Vice President, Director



Date: March 28, 1998                    /s/ Joe D. Thomas
                                        -----------------
                                        Joe D. Thomas
                                        Secretary, Principal Accounting Officer,
                                        Director

                                       18