SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended September 30, 1998

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
           For the transition period from ____________ to ___________

                         Commission File Number: 0-28128

                             ELEGANT ILLUSIONS, INC.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

           DELAWARE                                              88-0282654
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

              542 Lighthouse Ave., Suite 5, Pacific Grove, CA 93950
              -----------------------------------------------------
                    (Address of principal executive offices)

Issuer's telephone number, including area code:    (408) 649-1814
                                                   --------------

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 _____

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common equity as of the latest practicable date.

        Class                                  Outstanding at September 30, 1998
-----------------------                        ---------------------------------
Common Stock, par value                                 18,234,338 Shares1
    $.001 per share

     Transitional Small Business Format (check one); Yes _____ No __X__

----------------------
     1 Includes 186,200 treasury shares.


<PAGE>


                          PART I. FINANCIAL INFORMATION
                          -----------------------------

Item 1.  Financial Statements

     The  accompanying  financial  statements  are  unaudited  for  the  interim
periods,  but  include  all  adjustments  (consisting  only of normal  recurring
accruals)  which  management  considers  necessary for the fair  presentation of
results for the three and nine months ended September 30, 1998.

     Moreover,  these  financial  statements do not purport to contain  complete
disclosure in conformity  with  generally  accepted  accounting  principles  and
should be read in conjunction with the Company's  audited  financial  statements
at, and for the fiscal year ended December 31, 1997.

     The results  reflected  for the three and nine months ended  September  30,
1998 are not necessarily indicative of the results for the entire fiscal year.


<PAGE>


                     ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS

                                                     Sepetember 30, December 31,
                                                          1998          1997
                                                     -------------- ------------
                                                      (Unaudited)  (Derived from
                                                                      Audited
                                                                     Financial
                                                                    Statements)
                                     ASSETS

CURRENT ASSETS
    Cash and cash equivalents                          $1,162,949    $1,321,448
    Accounts receivable                                   449,697       357,124
    Income tax receivable                                       0        82,192
    Inventory                                           3,149,941     2,424,755
    Prepaid expenses                                      239,914        90,427
                                                       ----------    ----------
       TOTAL CURRENT ASSETS                             5,002,502     4,275,946


PROPERTY AND EQUIPMENT, NET                             1,647,263     1,216,353

OTHER ASSETS                                               94,712        91,002
                                                       ----------    ----------
                                                       $6,744,476    $5,583,301
                                                       ----------    ----------

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable and accrued expenses                 117,103      $113,751
    Income taxes payable                                   24,640             0
                                                       ----------    ----------
                                                          141,743       113,751

DEFERRED INCOME TAXES                                     127,871       127,871
                                                       ----------    ----------

       TOTAL LIABILITIES                                  269,614       241,622
                                                       ----------    ----------

STOCKHOLDERS' EQUITY
    Common stock-authorized 30,000,000 shares,
     $.001 par value, issued and outstanding
     18,234,338 shares in 1998 and 17,434,338 in 1997      18,234        17,434
    Additional paid in capital                          3,697,421     2,978,221
    Retained earnings                                   2,843,215     2,392,080
    Less treasury stock at cost (186,200 shares in
     1998 and 93,100 shares in 1997)                      (84,008)      (46,056)
                                                       ----------    ----------
                                                        6,474,862     5,341,679
                                                       ----------    ----------
                                                       $6,744,476    $5,583,301
                                                       ----------    ----------


      See Accompanying Notes to Consolidated Condensed Financial Statements

                                      - 2 -

<PAGE>


                     ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997


                                                          1998          1997
                                                    -------------  ------------
REVENUES                                               $2,320,587    $2,134,037

COST OF GOODS SOLD                                        701,619       708,584
                                                    -------------  ------------
GROSS PROFITS                                           1,618,968     1,425,453

SELLING, GENERAL AND ADMINISTRATION                     1,155,883     1,185,931
                                                    -------------  ------------
INCOME BEFORE INCOME TAXES                                463,084       239,522

PROVISION FOR INCOME TAXES                                175,771        96,000
                                                    -------------  ------------
NET INCOME                                               $287,314      $143,522
                                                    =============  ============

WEIGHTED AVERAGE SHARES OUTSTANDING                    18,048,000    17,434,000
                                                    =============  ============

BASIC AND DILUTED INCOME PER SHARE                          $0.01         $0.01
                                                    =============  ============


      See Accompanying Notes to Consolidated Condensed Financial Statements

                                      - 3 -

<PAGE>


                     ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997


                                                          1998          1997
                                                     ------------   -----------
REVENUES                                               $6,718,492    $5,998,393

COST OF GOODS SOLD                                      2,037,164     1,857,812
                                                     ------------   -----------
GROSS PROFITS                                           4,681,328     4,140,581

SELLING, GENERAL AND ADMINISTRATION                     3,960,193     3,569,241
                                                     ------------   -----------
INCOME BEFORE INCOME TAXES                                721,134       571,340

PROVISION FOR INCOME TAXES                                270,000       229,000
                                                     ------------   -----------
NET INCOME                                               $451,134      $342,340
                                                     ============   ===========

WEIGHTED AVERAGE SHARES OUTSTANDING                    17,937,000    17,434,000
                                                     ============   ===========

BASIC AND DILUTED INCOME PER SHARE                          $0.03         $0.02
                                                     ============   ===========


      See Accompanying Notes to Consolidated Condensed Financial Statements

                                      - 4 -

<PAGE>

                     ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997


                                                           1998          1997
                                                        ---------     ---------
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                           $451,134      $342,340
    Adjustments to reconcile net income
     to net cash provided by (used in)
     operating activities:
       Depreciation and amortization                      293,314       211,246
       Changes in operating assets and liabilities:
         (Increase) Decrease in:
           Accounts receivable                            (92,573)     (104,191)
           Inventory                                     (725,186)     (232,374)
           Prepaid expenses                              (149,487)      (59,580)
         Increase (Decrease in):
           Accounts payable and accrued expenses            3,352         6,481
           Income taxes payable                          $106,832      (256,549)
                                                        ---------     ---------
NET CASH PROVIDED BY OPERATIONS                          (112,614)      (92,627)
                                                        ---------     ---------
CASH FLOW FROM INVESTING ACTIVITIES
    Purchase of property and equipment                   (720,679)     (489,620)
    Other assets                                           (7,255)          419
                                                        ---------     ---------
NET CASH USED IN INVESTING ACTIVITIES                    (727,934)     (489,201)
                                                        ---------     ---------
CASH FLOW FROM FINANCING ACTIVITIES
    Repayment of note payable                                           (20,000)
    Sale of common stock                                  720,000
    Purchase of treasury stock                            (37,952)
                                                        ---------     ---------
NET CASH USED IN FINANCING ACTIVITIES                     682,048       (20,000)
                                                        ---------     ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS                (158,499)     (601,828)

CASH AND CASH EQUIVALENT BALANCE,
    Beginning of period                                 1,321,448     1,886,297
                                                        ---------     ---------
CASH AND CASH EQUIVALENT BALANCE,
    End of period                                      $1,162,949    $1,284,469
                                                        =========     =========


      See Accompanying Notes to Consolidated Condensed Financial Statements

                                      - 5 -

<PAGE>


                    ELLEGANT ILLUSIONS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


COMMENTS

The accompanying unaudited  consolidated  condensed financial statements,  which
are for interim  periods,  do not include all disclosure  provided in the annual
consolidated  financial  statements.   These  unaudited  consolidated  condensed
financial  statements  should  be  read in  conjunction  with  the  consolidated
financial  statements  and footnotes  thereto  contained in the Annual Report on
Form 10-KSB for the year ended December 31, 1997 of Elegant Illusions, Inc. (the
"Company"),  as filed with the Securities and Exchange Commission.  The December
31,  1997  consolidated   condensed  balance  sheet  was  derived  from  audited
consolidated financial statements, but does not include all disclosures required
by generally accepted accounting principles.

In the opinion of the Company, the accompanying unaudited consolidated condensed
financial  statements  contain all adjustments  (which are of a normal recurring
nature)  necessary  for a fair  presentation  of the financial  statements.  The
results of operations for the three and nine months ended September 30, 1998 are
not  necessarily  indicative  of the results to be expected  for the full fiscal
year.

                                     - 6 -

<PAGE>


Item 2.  Management's Discussion And Analysis Of Financial Condition And Results
         Of Operations

Cautionary Statement on Forward-Looking Statements

     Except for the  historical  information  contained  herein,  certain of the
matters  discussed in this annual report are  "forward-looking  statements,"  as
defined in Section 21E of the  Securities  Exchange Act of 1934,  which  involve
certain  risks and  uncertainties,  which could cause  actual  results to differ
materially  from those  discussed  herein  including,  but not limited to, risks
relating to changing  economic  conditions,  the Company's  expansion  plans and
competitive pressures.

     The Company cautions readers that any such  forward-looking  statements are
based on management's current expectations and beliefs but are not guarantees of
future performance.  Actual results could differ materially from those expressed
or implied in the forward-looking statements.

Results of Operations

     Sales for the quarter ended  September 30, 1998 increased  $186,550 or 8.7%
when compared to the quarter ended September 30, 1997.

     Management  believes  that the increase in sales was due to the addition of
one location  (St.  Thomas)  during the remainder of 1997;  and five  additional
locations  opened  during the first nine months of 1998  (Birch  Run,  Michigan,
Michigan City, Indiana, Grapevine, Texas, Ontario, California and Maui, Hawaii).

     As of September 30, 1997, the Company  operated 22 retail  locations and as
of September 30, 1998, the Company operated 28 retail locations.

     The Costs of goods as a percentage of revenues  decreased from 33.2% in the
third fiscal quarter of 1997 to 30.2% in the third fiscal quarter of 1998;  and,
the cost of goods as a percentage of revenues during the nine month period ended
September 30, 1997 decreased from 31.0% to 30.2% for the nine month period ended
September 30, 1998.  Management believes that these decreases were due to normal
seasonal fluctuations.  The Company has inventory categories at varying markups;
if one sales category  increases  compared to another,  the cost of goods can be
affected.

     During  the  quarter  ended  September  30,  1998,  selling,   general  and
administrative  expenses decreased when compared to the third quarter of 1997 by
$30,048  (approximately  2.5%). As a percentage of sales,  selling,  general and
administrative  expenses  decreased  from  approximately  55.6% during the third
quarter  of 1997 to  approximately  49.8%  during  the  third  quarter  of 1998.
Management  believes  that this  decrease  was due to the  Company's  ability to
stabilize  the  turnover of store  managers;  reduce all costs  associated  with
replacing and training managers; and reduce advertising  expenditures and public
relations activities.

                                     - 7 -

<PAGE>


Revenues Same Store Locations.

     As of September 30, 1997, the Company  operated 22 locations that were also
in operation at September 30, 1998: two in New Orleans,  three in Monterey,  one
in Old Sacramento, one in San Diego, one in Santa Barbara, two in San Francisco,
one in Palm Springs, one in Salt Lake City, one in Portland, one in Branson, one
in Minneapolis,  one in Laughlin,  two in St Croix, one in Oahu, one in Kenosha,
one in Gilroy and one in Tulare. Revenues from the above mentioned locations for
the quarter ended  September 30, 1998 decreased  approximately  6% from the same
period in 1997.  Management  believes that this decrease in same store  revenues
was consistent with soft revenues generally experienced by retailers during this
period.  Management  does not believe that the  Company's  same store results of
operations for this quarter are indicative of any trend.

Year 2000 Compliance

     Many currently  installed  computer  systems and software  products use two
digits  rather  than  four to  define  the  applicable  year.  In  other  words,
date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year 2000.  This could  result in system  failures  or  miscalculations
causing disruptions of operations.

     Management  does not  believe  that the year  2000  problem  will  have any
material adverse affects on the Company's  operations or revenues.  In 1994, the
Company  adjusted its Point of Sale and Inventory  Control  software in light of
the year 2000 problem. The foregoing software now utilizes a database management
system which provides date management tools. Mathematical date calculations were
changed to store date  information in an eight  character field  (YYYYMMDD).  In
1996,  the credit card  authorization  modules were adjusted to avoid  potential
issues from the year 2000 problem.  Although  years  continue to be expressed in
two  digits,  any two digits  prior to 96 will be read as  expiring in the 2000s
rather than the 1900s. The Company has confirmed with its credit card processors
that their systems are year 2000 compliant.

     During the quarter  ended  September  30, 1998,  the Company  maintained an
inventory that provided a turnover ratio of 1:0.97.  Management does not believe
that it's current  inventory  turnover is indicative of impaired or  slow-moving
inventory.  Management notes that the Company has opened six locations this year
and has  not  had the  opportunity  of a full  year's  sales  nor has it had the
opportunity of the Christmas selling season as of the end of the third Quarter.

     Management believes that it's current inventory turnover ratio of 1:0.97 is
appropriate for it's plan of operation,  including  opening new locations out of
inventory on hand and  maintaining  its strategy of replacing  inventory sold at
its retail  locations within a 2-3 day time frame.  Management  reviews items on
hand, on a regular  basis,  to determine  slow moving items,  then discounts the
price of those items so they are sold at prices  that still  generate a positive
gross margin.  The inventory  turnover ratio for the quarter ended September 30,
1997 was  1:1.05.  Management  believes  that  this  slight  change in the ratio
between  the  quarters  ended  September  30,  1997  and  1998  was  due  to the
anticipated increase in the pace of store openings.

                                     - 8 -

<PAGE>


Liquidity and Capital Resources

     As of  September  30,  1998,  the Company had  $1,162,949  in cash and cash
equivalents  and  its  current  assets  exceeded  its  current   liabilities  by
$4,860,759.

     In October 1997, the Company  announced plans for a 50 store expansion over
a three  year  period,  including  approximately  25  stores by the end of 1999.
Pursuant to the Company's  expansion  plan,  the Company  opened one  additional
store (St.  Thomas,  U.S.  Virgin  Islands)  during the remainder of 1997;  five
stores (Birch Run, Michigan,  Michigan City, Indiana, Grapevine, Texas, Ontario,
California  and Maui,  Hawaii)  during the first three Quarters of 1998; and one
store,  Seaport fine Jewelers in St. Thomas,  Virgin Islands,  subsequent to the
end of the third Quarter.  At this point,  the Company  anticipates  opening one
additional store (Naples, Florida)s during the remainder of 1998.

     Management  believes  that the store to be opened at  Universal  Studios in
Orlando, Florida,  previously anticipated to open in February 1999, will open in
March 1999. The  anticipated  opening date has been pushed back due to delays in
the construction of Universal City Walk. As a result of these delays, management
does not believe that the Company will obtain  possession of its premises  until
at least December 1, 1998.

     The cost of opening new stores generally ranges from approximately $120,000
to $140,000,  depending upon a number of factors.  Management  estimates that it
will cost approximately  $270,000 to open the Naples,  Florida and the Universal
Studios store.  Based upon past  experience,  to open the remaining 16 stores by
the  end of  1999,  management  anticipates  that  it  will  need  approximately
$2,400,000.

     It is anticipated  that the opening of additional new stores will be funded
from current cash reserves,  revenues and bank and/or equity financing.  In this
regard, the Company has an advance line of credit up to $2,000,000 from Comerica
Bank to open new stores and the Company's  subsidiary,  Elegant Illusions,  Inc.
(California),  has a $350,000  revolving  line of credit from  Comerica Bank for
working  capital  purposes.  These  lines of credit  are  collateralized  by the
Company's  assets and the  Company is required  to  maintain  certain  financial
ratios and covenants. As of September 30, 1998 and the date hereof, no funds had
been advanced on either of these lines of credit.

     Additional  Company  management  and  administrative  staff to  handle  the
increased  operations that will result from the planned expansion will be funded
from revenues.

     No  assurance  can be  given  that  the  Company  will be  able  to  secure
additional bank and/or equity financing over and above its current resources, if
required.  Completion of the Company's  planned store expansion may be dependant
on the Company's  ability to obtain adequate  financing on acceptable  terms. In
addition,  no  assurance  can be given as to the actual  number or  location  of
stores that the Company will open in the future.

                                     - 9 -

<PAGE>


                           PART II - OTHER INFORMATION


Item 1.   Legal Proceedings

          None.


Item 2.   Changes in Securities and Use of Proceeds

          None.


Item 3.   Defaults Upon Senior Securities

          None.


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

          None.

Item 5.   Other Information

          None.

Item 6.   Exhibits and Reports on Form 8-K

          None.

                                     - 10 -

<PAGE>


                                   SIGNATURES


Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registration  has duly  caused  this  report to be  signed on its  behalf by the
undersigned thereunto duly authorized.


                                         ELEGANT ILLUSIONS, INC.


                                     /s/ James Cardinal
Dated: November 12, 1998                 ---------------------------------------
                                         James Cardinal, Chief Executive Officer



                                     /s/ Tamara Gear
                                         ---------------------------------------
                                         Tamara Gear, Treasurer

                                     - 11 -