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 June 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 June 30, 1998
      -----------------------               ----------------------------
      Common Stock, par value                     18,234,338 Shares(1)
         $.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 six months ended June 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 six months ended June 30, 1998
are not necessarily indicative of the results for the entire fiscal year.




<PAGE>



                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES

                      CONSOLIDATED CONDENSED BALANCE SHEETS

                                               June 30,             December 31,
                                                 1998                  1997
                                              ---------             ------------

                                     ASSETS

 CURRENT ASSETS
  Cash and cash equivalents                   $1,524,643            $1,321,448
  Accounts receivable                            405,864               357,124
  Income taxes receivable                         71,838                82,192
  Inventory                                    2,810,070             2,424,755
  Prepaid expenses                               153,735                90,427
                                             -----------            ----------
    TOTAL CURRENT ASSETS                       4,966,150             4,275,946

PROPERTY AND EQUIPMENT, NET                    1,315,255             1,216,353

OTHER ASSETS                                      94,518                91,002
                                             -----------            ----------
                                              $6,375,923            $5,583,301
                                             ===========            ==========



CURRENT ASSETS
  Cash and cash equivalents                   $1,524,643            $1,321,448
  Accounts receivable                            405,864               357,124
  Income taxes receivable                         71,838                82,192
  Inventory                                    2,810,070             2,424,755
  Prepaid expenses                               153,735                90,427
                                             -----------            ----------
    TOTAL CURRENT ASSETS                       4,966,150             4,275,946

PROPERTY AND EQUIPMENT, NET                    1,315,255             1,216,353

OTHER ASSETS                                      94,518                91,002
                                             -----------            ----------
                                              $6,375,923            $5,583,301
                                             ===========            ==========

                                      -2-
<PAGE>


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses        $    60,504            $  113,751

Income taxes payable                         

                                             -----------            ----------
    TOTAL CURRENT LIABILITIES                     60,504               113,751

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

    TOTAL LIABILITIES                            188,375               241,622
                                             -----------            ----------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized 30,000,000
     shares, $.001 par value, issued and
     outstanding 18,234,338 shares at June 30,
     1998 and 17,434,338 shares at
   December 31, 1997                              18,234                17,434
  Additional paid-in capital                   3,697,421             2,978,221
  Retained earnings                            2,555,901             2,392,080
Less treasury stock at cost (186,200
   shares in 1998 and 93,100 in 1997)            (84,008)              (46,056)
                                             -----------            ----------

    TOTAL STOCKHOLDERS' EQUITY                 6,187,548             5,341,679
                                             -----------            ----------
                                              $6,375,923            $5,583,301
                                             ===========            ==========


     See accompanying Notes to Consolidated Condensed Financial Statements.
                                      -3-
<PAGE>




                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
          CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE
                 MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

                                                  1998           1997
                                              ------------   ------------

REVENUES                                      $ 2,232,328    $ 1,956,957

COST OF GOODS SOLD                                714,994        569,498
                                              -----------    -----------

GROSS PROFIT                                    1,517,334      1,387,459


EXPENSES
  Selling, general and administrative           1,290,408      1,120,960
  Depreciation and amortization                    93,280         74,442
                                              -----------    -----------

     TOTAL EXPENSES                             1,383,688      1,195,402
                                              -----------    -----------

INCOME BEFORE INCOME TAXES                        133,646        192,057

PROVISION FOR INCOME TAXES                         41,920         77,100
                                              -----------    -----------

NET INCOME                                    $    91,726    $   114,957
                                              -----------    -----------

WEIGHTED AVERAGE SHARES OUTSTANDING            17,714,000     17,434,000
                                              ===========    ===========

NET INCOME PER COMMON SHARE                   $       .00    $       .01
                                              ===========    ===========


     See accompanying Notes to Consolidated Condensed Financial Statements.
                                      -4-
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
       CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
                    ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

                                                        1998           1997
                                                    ------------   ------------

REVENUES                                            $ 4,397,906    $ 3,864,356

COST OF GOODS SOLD                                    1,335,546      1,149,228
                                                    -----------    -----------

GROSS PROFIT                                          3,062,360      2,715,128


EXPENSES
  Selling, general and administrative                 2,623,932      2,246,146
  Depreciation and amortization                         179,035        137,164
                                                    -----------    -----------

    TOTAL EXPENSES                                    2,802,967      2,383,310
                                                    -----------    -----------

INCOME BEFORE INCOME TAXES                              259,393        331,818

PROVISION FOR INCOME TAXES                               95,572        133,000
                                                    -----------    -----------

NET INCOME                                          $   163,821    $   198,818
                                                    ===========    ===========

WEIGHTED AVERAGE SHARES OUTSTANDING                  18,066,000     17,434,000
                                                    ===========    ===========

NET INCOME PER COMMON SHARE                         $       .01    $       .01
                                                    ===========    ===========


     See accompanying Notes to Consolidated Condensed Financial Statements.
                                      -5-
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
       CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
                    ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

                                                        1998           1997
                                                    ------------    ------------


CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                          $   163,821    $   198,818
Adjustments to reconcile net income to
     net cash provided by operating activities:
     Depreciation and amortization                      179,035        137,164
     Changes in operating assets and
     liabilities:
     (Increase) Decrease in:
       Accounts receivable                              (48,740)       (73,391)
       Inventory                                       (385,315)      (124,826)
       Prepaid expenses                                 (63,308)       (32,925)
     Increase (Decrease in):

       Accounts payable and accrued expenses            (53,247)        (2,231)
       Income taxes payable                              10,354       (150,990)
                                                    -----------    -----------

NET CASH PROVIDED BY (USED IN)
          OPERATING ACTIVITIES                         (197,400)       (48,381)
                                                    -----------    -----------


CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment                   (275,575)      (307,100)
  Deposits and other assets                              (5,878)           420
                                                    -----------    -----------
     NET CASH USED BY INVESTING

          ACTIVITIES                                   (281,453)      (306,680)
                                                    -----------    -----------


CASH FLOWS FROM FINANCING ACTIVITIES
  Repayment of note payable                             (20,000)
  Sale of common stock                                  720,000
  Purchase of treasury stock                            (37,952)
                                                    -----------    -----------

     NET CASH PROVIDED BY FINANCING

          ACTIVITIES                                    682,048        (20,000)
                                                    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH                203,195       (375,061)

 EQUIVALENTS


CASH AND CASH EQUIVALENTS BALANCE,
  Beginning of period                                 1,321,448      1,886,297
                                                    -----------    -----------
  End of period                                     $ 1,524,643    $ 1,511,236
                                                    -----------    ===========

     See accompanying Notes to Consolidated Condensed Financial Statements.
                                      -6-
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.  COMMENTS

The accompanying unaudited  consolidated  condensed financial statements,  which
are for interim periods,  do not include all disclosures  provided in the annual
consolidated  financial  statements.   These  unaudited  consolidated  condensed
financial  statements  should  be  read in  conjunction  with  the  consolidated
financial statements and the 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  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 six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.


2.  SALE OF COMMON STOCK

In May 1998,  the Company sold 800,000 shares of common stock for $.90 per share
in a private transaction.

                                      -7-
<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 June 30, 1998  increased  $275,371 or 14.1%
when compared to the quarter ended June 30, 1997.

         Management  believes that the increase in sales was due to the addition
of two  locations  (Gilroy and Kenosha)  during the quarter ended June 30, 1997;
two additional  locations  during the remainder of 1997 (Tulare and St. Thomas);
and two additional  locations  opened during the first six months of 1998 (Birch
Run, Michigan, and Michigan City, Indiana).

         As  of  June  30,  1997,  the  Company  operated  22  retail  locations
(including  Steinbeck  Lady) and as of June 30,  1998,  the Company  operated 26
retail  locations.  Two additional  locations ( Grapevine,  Texas,  and Ontario,
California) opened in July 1998.

         The Costs of goods as a percentage of revenues  increased from 29.1% in
the second fiscal quarter of 1997 to 32.0% in the second fiscal quarter of 1998;
however,  the cost of goods as a  percentage  of  revenues  during the six month
period  ended June 30, 1998 stayed  relatively  the same as the six month period
ended June 30, 1997 (approximately  30%).  Management believes that the increase
from the second  quarter of 1997 to the second quarter of 1998 was 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  June  30,  1998,   selling,   general  and
administrative expenses increased when compared to the second quarter of 1997 by
$169,448  (approximately 15.1%). As a percentage of sales, selling,  general and
administrative  expenses increased slightly from approximately  57.3% during the
second quarter of 1997 to approximately 57.8% during the second quarter of 1998.
Management believes that this increase was due to the cost of operating the four
new stores opened in 1997,  the one time costs  associated  with  downsizing the
Kenosha  location,  the costs of opening and operating the two locations  opened
during the first six months of 1998 and the  preliminary  costs  associated with
opening two additional  locations in July 1998  (Grapevine,  Texas, and Ontario,
California).

                                      - 8 -

<PAGE>




         Results of  operations  and expense to revenues  ratios were  generally
affected by the  following  three items  during the  period.  First,  management
anticipated  higher sales at the Kenosha and St. Thomas  locations than actually
occurred during the first months of their respective  operations.  This resulted
in the expenses to sales ratios  being  higher.  Management  has  downsized  the
Kenosha  location and revenues  have  improved;  however  fixed  overhead is not
anticipated  to be  reduced  until the  first  quarter  of 1999 when  management
believes that the Kenosha store will relocate to new smaller premises within the
same foot traffic corridor of this mall.

         Second,  the St. Thomas store opened in a new mall and, until August of
1998,  was the only  tenant open in the mall.  Other  Tenants are now opening in
anticipation  of the upcoming  tourist  season.  Revenues at this  location have
begun to increase. Management chose to open the St. Thomas location when it did,
to obtain favorable lease terms and believes that  the lease terms obtained will
counter the initial results of operations from this location.

         Third,  the two St. Croix  locations  (copy jewelry and fine  jewelry),
usually high revenue producers, experienced reduced foot traffic and revenues as
a result of significantly fewer  Cruise  ships visiting this island.  Management
believes, but cannot assure, that this is a temporary trend.

         Revenues Same Store Locations.

         As of June 30, 1997, the Company  operated 22 locations (which included
Steinbeck  Lady)  that  were  also in  operation  at June 30,  1998:  two in New
Orleans,  three in Monterey,  one in 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 Anchorage  (California)  and one in
Gilroy.  Revenues from the above mentioned  locations for the quarter ended June
30, 1998  increased  approximately  6% from the same period in 1997.  Management
believes  that  this  increase  in same  store  revenues  was due  primarily  to
management's efforts to increase in-store foot traffic.

         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  plans to check  with  its  credit  card
processors to confirm that their systems are year 2000 compliant.

         During the  quarter  ended June 30,  1998,  the Company  maintained  an
inventory that provided a turnover ratio of 1:1.  Management  believes that this
level is appropriate for its 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 a price  that  still
generates a positive gross margin. Accordingly, management does not believe that
its current  inventory  turnover  ratio is indicative of impaired or slow-moving
inventory.  The inventory turnover ratio for the quarter ended June 30, 1997 was
1.12:1.  Management  believes that this slight  change in the ratio  between the
quarters  ended June 30,  1997  and  1998  was due to the  anticipated  increase
in the pace of store openings.

                                      - 9 -

<PAGE>



Liquidity and Capital Resources

         As of June  30,  1998,  the  Company  had  $1,524,643  in cash and cash
equivalents  and  its  current  assets  exceeded  its  current   liabilities  by
$4,905,646.

         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; and four
stores (Birch Run,  Michigan,  Michigan City,  Indiana,  Grapevine,  Texas,  and
Ontario,  California)  during the first seven months of 1998. At this point, the
Company  anticipates  opening  approximately  three additional stores during the
remainder of 1998. The Company has signed leases for two additional  stores, one
in Hawaii (copy jewelry) and one in the US Virgin Islands (fine jewelry), and is
negotiating  a lease  for a copy  jewelry  store on the west  coast of  Florida.
Management believes that the store to be opened at Universal Studios in Orlando,
Florida,  previously  anticipated to open in October 1998, will open in February
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  $830,000 to open the five locations anticipated
to be opened  between July 1998  (including  the two stores opened in July 1998)
and the end of the current  fiscal  year and the  Universal  Studios  store (now
scheduled for February 1999). Based upon past experience,  to open the remaining
17  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 June 30, 1998 and the
date hereof, no funds had been advanced on the 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.





                                      - 10 -

<PAGE>



                           PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

                           None.


Item 2.  Changes in Securities and Use of Proceeds

                           In May 1998,  the Company  raised  $720,000  from the
                           sale  of  800,000  shares  in  a  private   placement
                           pursuant  to  Rule  506 of  Regulation  D  under  the
                           Securities  Act of 1933. The Company plans to use the
                           proceeds  from this private  offering for the opening
                           of new stores pursuant to its expansion plans.


Item 3.  Defaults Upon Senior Securities

                           None.


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

                           None.

Item 5.  Other Information

                           During  the  six  months  ended  June  30,  1998,  in
                           accordance  with Rule  10b-18  under  the  Securities
                           Exchange  Act of 1934,  the  Company  repurchased  an
                           aggregate  of 186,200  shares of its Common  Stock in
                           the  open  market.  The  Company  repurchased  93,100
                           shares during 1997.  The Board of Directors  plans to
                           return   all  of  these   shares  to  the  status  of
                           authorized  but  unissued  shares  of  the  Company's
                           Common Stock.


Item 6.  Exhibits and Reports on Form 8-K

                           None.




                                     - 11 -

<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.



Dated: August 13, 1998         /S/James Cardinal
                                  ---------------------------------------
                                  James Cardinal, Chief Executive Officer




                               /S/ Tamara Gear
                                   ----------------------
                                   Tamara Gear, Treasurer


                                     - 12 -

<PAGE>