<PAGE>
                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB/A

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

       For the fiscal year ended December 31, 1998
                                        OR
[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

Commission file number 0-28088

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

            California                                  95-4145930
 -------------------------------          ------------------------------------
 (State or other jurisdiction of          (IRS Employer Identification Number)
 incorporation or organization)

    3861 Sepulveda Blvd., Culver City                       90230
----------------------------------------                 ----------
(Address of principal executive offices)                 (Zip Code)

                                  (310) 751-2100
                           ---------------------------
                           (Issuer's telephone number)

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

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

                                  Common Stock
                                ----------------
                                (Title of Class)

Check whether the registrant (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 is not 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. [ ]

The registrant's revenues for its most recent fiscal year were $6,681,280.

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $56,532,146 based on the average bid and asked prices of $13.81
per share as quoted on the Nasdaq National Market on March 25, 1999.

The number of outstanding shares of the registrant's common stock, as of March
25, 1999, was 6,163,874.

Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement to be delivered to shareholders in connection with their Annual
Meeting of Shareholders to be held in June 1999 are incorporated into Part III
of this Annual Report.

Transitional Small Business Disclosure Format: Yes    No  X
                                                  ---    ---
<PAGE>


                                     PART I

Item 1.    Description of Business

Forward-looking Statements

Discussion of certain  matters  contained in this Annual Report on Form 10-K may
constitute   forward-looking  statements  within  the  meaning  of  the  Private
Securities  Litigation  Reform Act of 1995 (the "Reform Act") and, as such,  may
involve risks and  uncertainties.  Those  forward-looking  statements relate to,
among  other  things,  expectations  of the  business  environment  in which the
Company  operates,  projections of future  performance,  product  introductions,
perceived  opportunities  in the market and  statements  regarding the Company's
mission and vision.  The Company's actual results,  performance and achievements
may differ materially from the results,  performance and achievements  expressed
or implied in such  forward-looking  statements.  From time to time, the Company
details  other risks with  respect to its  business  and  financial  results and
conditions in its filings with the Commission.

The Company

ModaCAD,  Inc.  ("ModaCAD"  or the  "Company")  is a developer  and  provider of
technologies  and digital content for electronic  merchandising  in the fashion,
accessories,  footwear,  cosmetics, home furnishing,  decorating and improvement
industries ("the Style Industries"). ModaCAD has developed technologies designed
to manage,  search and display such digital content,  enabling  advanced product
visualization for electronic commerce ("e-commerce").  These technologies enable
the creation of intelligent shopping agents,  allowing compatible search engines
to become  aware of, and match  content  against,  user  searches.  Furthermore,
ModaCAD has developed  visual methods of displaying  such content in graphically
rich environments designed to increase user perception of visual details.

ModaCAD  was founded in 1988 to develop,  market and support  software  products
based  on its  proprietary  modeling  and  rendering  technology  for use in the
apparel,  textile and home  furnishings  industries.  The Company's  goal at its
inception  was to develop  software  that would  enable  non-technical  users to
create and model three-dimensional  ("3-D") objects from two-dimensional ("2-D")
images and to render such objects in real time with  photorealistic  quality for
purposes of  industrial  visualization.  Until 1992,  the Company was  primarily
engaged in research and development and generated  limited revenues from product
sales.   In  late  1992,  the  Company  began  expanding  into  the  larger  and
faster-growing  electronic  merchandising market. Beginning in 1993, the Company
began  broader  marketing  efforts to  commercial  accounts,  which efforts were
increased in 1994 and 1995.

In  the   past   ten   years,   ModaCAD's   primary   focus   has  been  in  the
business-to-business  marketplace, and in the consumer software industry. In the
business-to-business  marketplace,  the Company's initial focus was on designing
computer-aided  design ("CAD") products for the industrial design segment of the
textile and apparel industries. The Company also offered a variety of electronic
merchandising software products to manufacturers and retailers doing business in
the  Style  Industries,  which  have  been  used  to  support  their  customers'
business-to-business  electronic  commerce  efforts  primarily  in the  area  of
merchandising,  store planning,  assortment planning and product development. In
the consumer software industry,  ModaCAD developed a family of consumer software
products aimed at the do-it-yourself home decorating and design marketplace.  It
subsequently  developed  consumer software for use by and in connection with the
fashion apparel industry.

                                       1
<PAGE>

In 1998,  ModaCAD  began to shift its focus to the  emerging  consumer  Internet
electronic commerce market,  using its technologies and data bases developed for
the  business-to-business  market to  position  the  Company as a key enabler of
electronic commerce for the Style Industries.

To  accelerate  this shift of focus,  in early  1999,  ModaCAD  entered  into an
agreement with Lectra Systems, Inc. ("Lectra") the subsidiary of Lectra Systemes
SA of France.  Lectra Systemes SA is one of the world's largest suppliers of CAD
and  computer  aided  manufacture  ("CAM")  systems  to  the  fashion  and  home
furnishing  industries  and  is  active  world-wide  through  a  network  of  35
subsidiaries.  Under this agreement,  ModaCAD sold its CAD  business-to-business
product lines to Lectra,  subject to the rights of RunTime A/S ("Runtime") under
its  distribution   agreement  in  Europe,  and  shifted  most  of  the  related
development and support costs to Lectra,  while retaining  ownership of its core
technology and the right to distribute  cataloging for electronic  merchandising
products  in its own  markets.  ModaCAD  and Lectra  will  cooperate  in linking
business-to-business  technologies  and in  attracting  customers  to  ModaCAD's
business-to-consumer emerging strategies. ModaCAD anticipates that its agreement
with Lectra will  accelerate  its capacity to focus on creating,  marketing  and
servicing  Internet  web  sites  and  other  Internet  applications  in both the
business-to-business  and  business-to-consumer  market places, and software for
electronic commerce.

Products

ModaCAD's  products are divided into three major classes:  (i) consumer software
applications  on CD-ROM for  e-commerce;  (ii) Internet based  e-commerce  sites
intended to search and manage digital content and facilitate  Internet  commerce
targeted at the consumer marketplace; and (iii) business-to-business  electronic
applications  which include Internet  applications and electronic  merchandising
products  that  facilitate  the creation and  visualization  of digital  content
modeled and rendered utilizing the Company's core technologies.

Consumer software, CD-ROM Applications

The  precursor to the  Company's  Internet  e-commerce  strategy was a series of
consumer  software  applications  directed  at  various  aspects  of  the  Style
Industries, which the Company developed beginning in 1996. ModaCAD developed the
software  known  as the  3D  Home  Interiors  product  line,  under  a  Software
Development  and  Publishing   Agreement  with   Broderbund   (the   "Broderbund
Agreement")  which  appointed  Broderbund  as  publisher.  This product line was
extended in 1997 with the  publication  of 3D Home Suite.  These  products offer
consumer  home design and  decorating  tools,  including  shopping and reference
materials  for actual  products of various  participating  vendors.  The Company
amended  its  agreement  with  Broderbund  in 1998 to  provide  for the grant of
exclusive  rights to these products to Broderbund in consideration of a one-time
royalty payment.

Fashion Trip was jointly  developed by ModaCAD and Intel  Corporation  ("Intel")
pursuant  to a  development  agreement  entered  into in late  1997.  The Sierra
Division of Cendant Software  Corporation  which was  subsequently  purchased by
Havas Interactive of France ("Sierra")  published the Fashion Trip CD-ROM in the
second half of 1998 and, pursuant to its agreement with the Company, distributes
portions of Fashion Trip as a shrink-wrapped  software  application  through its
distribution  channels.  Fashion Trip uses the Company's  proprietary  rendering
technology to allow users to access  digital images of  merchandise,  to mix and
match leading brands,  and to see the products on a  photo-realistic  model in a
3-D  environment  that can be  personalized.  Fashion Finder can also make style
proposals  incorporating  the user's  personal  choices  and tastes in  fashion.
ModaCAD has gathered in Fashion Trip content  consisting of name fashion  brands
in a sophisticated but easy-to-use software environment.

                                       2
<PAGE>

Internet Applications

The Company  launched the initial phase of its e-commerce  site as "Gift Finder"
which is located at  www.fashiontrip.com,  in  December  1998.  The  Company has
expanded  this  site  by  launching  Styleclick.com  at the end of  March  1999.
Styleclick.com,  code-named  fashionfinder,  will  represent a new generation of
Internet   shopping  mall  and  search   engine.   The  Company  is  positioning
Styleclick.com to be the one-stop consumer web site for visual  web-searches for
fashion  apparel,  accessories,  footwear,  and home  furnishings and decoration
items, as well as for current fashion news.

Styleclick.com intends to aggregate, over time, a large number of Style Industry
vendors,  including  many vendors  whose  products are featured in the Company's
consumer  software CD-ROM  applications.  For these vendors,  ModaCAD is able to
address the issue of how to build and manage a system that  incorporates  all of
the components (namely  presentation and order  fulfillment)  needed to enable a
vendor to sell its products  through a  direct-to-consumer  e-commerce  channel.
Additionally,  the  Styleclick.com  site will  feature a product  search  engine
capable of finding products in the style category on the Internet in response to
a user inquiry.

Styleclick.com  will offer the end-user the ability to search  through  multiple
manufacturers'  inventories  in the various search  channels,  gather visual and
textual information about products, view detailed product information and visual
detail,  and purchase  merchandise  through use of an  intelligent  style search
engine  capable of  personalization  for each user.  Styleclick.com  will enable
users to conduct side-by-side  comparisons of products from multiple brands, and
it will integrate transactions from multiple vendors.

Additional channels featuring expanded functionality such as home decorating and
cosmetics,  are  expected to be added later in 1999.  There can be no  assurance
that the channels will be launched according to this time frame.

Business-to-Business Applications

The  Company's  CAD  software was designed to perform  modeling,  rendering  and
support tasks. The target market for these products is major  industrial  design
companies.   The   Company's   CAD   software  is  used  to  model  3-D  product
visualizations  from  simple  2-D  images,  render a  photorealistic  picture of
simulated  products and place them inside a 3-D space,  such as a room interior,
and  perform  the entire  rendering  process in real time  without  the need for
special or customized hardware.

ModaCAD's  e-merchandising  products allow retailers to cut the time and expense
of product  development and production by enabling them to create and manipulate
virtual  prototypes  of proposed  products.  This software is used together with
interactive  kiosks and other desktop PC-based  point-of-sale  systems in retail
stores for  special  order  products  to allow  consumers  to  visualize,  in an
interactive  format,  special  order options (such as fabric styles or finishes)
and preview their  "customized"  products  prior to  purchasing.  The ability to
create virtual  prototypes also reduces inventory costs by presenting  "virtual"
samples on a computer screen directly to customers,  thereby decreasing the need
to hold extensive  inventories of physical products.  The Company's products are
also aimed at decreasing the costs of product merchandising, assortment planning
and store design.

Certain of  ModaCAD's  CAD products and  e-merchandising  products  were sold or
licensed to Lectra in early 1999 as a part of the Company's  redirected focus on
the emerging Internet electronic commerce market.

                                       3
<PAGE>

Business Strategy

Business-to-business  applications were previously a major focus of ModaCAD.  In
selling or  licensing  many of its  business-to-business  applications,  ModaCAD
anticipates   to   free   resources   that   were    previously    deployed   on
business-to-business   applications,   which  will  allow  it  to   continue  to
aggressively  transition into an Internet e-commerce company operating primarily
in  the  consumer   marketplace.   ModaCAD's   goal  is  to  leverage  both  its
relationships  with  retailers  and  manufacturers  and its  content  search and
visualization technologies to obtain the participation of a broad range of Style
Industry  vendors,  (retailers  and  manufacturers)  in the  Company's  Internet
e-commerce initiatives.  ModaCAD expects to shift its revenue based increasingly
from licensing of software to revenues  shared in connection  with  transactions
effected on its Internet shopping site.

Consumer software, CD-ROM Applications

Through the development of ModaCAD's  CD-ROM  applications,  ModaCAD has created
business  relationships with a variety of prominent retailers and manufacturers.
In  addition,  the broad  distribution  of the  Company's  CD-ROMs has created a
consumer  audience for its products  and enhanced the  Company's  name and brand
recognition.  The Company  plans to continue to develop  consumer  software and,
over  time,  it plans to  adapt  the  functionalities  of such  software  to the
Internet. By adapting the CD-ROM applications to the Internet, the Company hopes
to broaden significantly its target audience and facilitate the dissemination of
its  technologies.  Additionally,  many of the core  technologies  developed for
CD-ROM products have  applications to the broad-band  Internet  market,  and the
Company  intends to  leverage  them  aggressively  as  broad-band  access to the
Internet emerges. The Company also intends to link consumer CD-ROM products with
ModaCAD's on-line shopping site.

Internet Applications

ModaCAD's new on-line  shopping  site,  which has been  launched  under the name
Styleclick.com  at the end of March,  1999,  features a wide variety of vendor's
products  which may be viewed and  purchased  on the site.  The Company  expects
vendors to benefit from the exposure their  products  receive to a large on-line
consumer  audience and from the order  fulfillment and other services offered in
connection with Styleclick.com.  ModaCAD will receive revenues from the services
it provides to its  vendors,  and it will share in the revenues  generated  from
sales of products and advertising on the site. By outsourcing  order fulfillment
services, ModaCAD anticipates to offer an efficient cost structure and avoid the
inventory costs associated with traditional brick-and-mortar retail operations.

The success of ModaCAD's Internet shopping site will depend in large part on the
ability of the  Company to solicit  vendors  who wish to display  and sell their
products on the site. Vendor representation on the web-site increases the site's
attractiveness  to both  consumers,  who  wish to  find a  broad  assortment  of
fashions,  and to other  potential  vendors,  who wish to reach a broad consumer
audience and who must meet their competitors'  efforts.  The Company has already
secured the  agreement of a wide  assortment  of vendors to  participate  on the
site. The Company  believes that it will continue to attract vendors by removing
barriers to entry into the e-commerce arena and providing  business solutions to
companies  that have no end-user  order  fulfillment  capability;  no e-commerce
enabled  web-site;  no  capacity  to  image or  create  content  for  e-commerce
catalogs;   no  end-user  customer  service   capability;   and/or  no  end-user
transaction capacity.

                                       4
<PAGE>

Additionally,  the  success  of  the  Company's  shopping  site  depends  on the
Company's  execution  of an  aggressive  marketing  campaign  designed to direct
consumer traffic.

Business-to-Business Applications

In early 1999,  ModaCAD  entered  into an agreement  with  Lectra,  whose parent
company,  Lectra Systemes SA, is one of the world's largest suppliers of CAD/CAM
systems to the fashion and home furnishing  industries in the Style  Industries.
Under the agreement,  ModaCAD sold its CAD business-to-business product lines to
Lectra,  subject to the rights of RunTime  under its  distribution  agreement in
Europe. The Company also licensed to Lectra its core technology,  subject to the
rights of  RunTime  under its  distribution  agreement  in Europe.  The  Company
believes  that it will benefit from the broad  exposure its products  will enjoy
due to  Lectra's  global  distribution.  The  Company  also  believes  that  its
arrangement  with  Lectra  will  allow it to  direct a  greater  portion  of its
resources to the further  development  and  promotion  of its consumer  software
CD-ROM applications and to its Internet shopping site.

ModaCAD's  strategy  is to  increasingly  move  all of its  business-to-business
technologies  to the  Internet  with a focus  on  electronic  merchandising  and
electronic cataloguing. The Company believes this strategy complements ModaCAD's
Internet strategy for the consumer business.

Marketing, Sales and Distribution

The Company employs 33 sales and marketing personnel.  The Company maintains, in
addition to its Los Angeles headquarters, an additional sales office in New York
where three members of the sales team are located. An additional sales person is
located in Omaha,  Nebraska.  Since the middle of 1994, the Company has depended
upon an exclusive  arrangement  with a European  distributor for distribution of
certain of its products in specified European countries.

Consumer Software, CD-ROM Applications

In March 1996, the Company  entered into a Software  Development  and Publishing
Agreement ("the Broderbund  Agreement") with Broderbund,  under which Broderbund
published the  ModaCAD-developed  3D Home Interiors product line, and subsequent
ModaCAD authored 3D Home Series software titles.  Broderbund,  a division of The
Learning Company,  is a leading software  publisher and distributor.  Broderbund
has distributed and marketed 3D Home Interiors  domestically and internationally
to PC hardware and software retailers and resellers, home furnishing and fixture
retailers  and home  improvement  stores.  In July  1998,  ModaCAD  amended  its
publishing agreement and provided Broderbund with an exclusive license to the 3D
Home  Interiors  software  application  product  line in exchange for a one-time
royalty  payment.  The  exclusive  terms  apply only to certain  portions of the
product,  and ModaCAD retains  ownership of its core  visualization  and digital
content  creation  technologies.  Broderbund  is  responsible  for marketing and
promotion of the products embodying the technology licensed under the Broderbund
Agreement and for customer support for such products.

In June of 1998, ModaCAD entered into an agreement (the "Sierra Agreement") with
Sierra, a leader in  entertainment  and educational  software.  Under the Sierra
Agreement, Sierra is responsible for the publication,  marketing,  promotion and
distribution  in retail  channels of Fashion Trip and a follow-on  product being
developed by ModaCAD under the Sierra Agreement.

The core  technology  developed for the CD-ROMs are compatible with the Internet
and provide the Company  with a  technology  platform  for  emerging  broad-band
applications  on the  Internet.  As such  broad-band  capabilities  emerge,  the
Company  expects to leverage  these core  technologies  as part of its  consumer
Internet strategies.

                                       5
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Internet Applications

The Company plans to market its Internet  shopping site to the consumer directly
through  direct-to-consumer  channels  such as the  Internet  and other  on-line
services, print and radio advertising, editorial and cross vendor promotions, as
well as through affiliated sites programs.

Business-to-Business

The Company has  traditionally  marketed  its CAD and  electronic  merchandising
products both through its direct sales force and through a network of authorized
dealers and distributors. ModaCAD plans to maintain a limited direct sales force
for key  customers  and major  national  accounts.  In early  1999,  the Company
entered  into an  agreement  with Lectra.  Under the  agreement,  Lectra will be
principally responsible for marketing ModaCAD's CAD and electronic merchandising
products  and will provide  customers  with  appropriate  software for use under
license,  advise customers of any computer  hardware  requirements  necessary to
utilize the  software,  assist  customers in the creation of the database of the
customer's products or designs, and provide on-going training and support in the
use of the product.

Competition

The computer software design,  e-commerce,  and electronic merchandising markets
are  intensely  competitive  and subject to rapidly  changing  technologies  and
evolving  product  standards.  The Company  believes that principal  competitive
factors  in  the  markets  in  which  the  Company   competes   include  product
functionality  and ease of use, product  performance and  reliability,  customer
service and support,  timeliness of product  upgrades,  vendor  credibility  and
brand awareness, technological advantages and price/performance characteristics.
The Company  believes that its products  compete  favorably with the products of
its  competitors  principally  due to the  advantages of the  Company's  imaging
functions,  the ease with which the products may be used with existing operating
systems, its relationships with a variety of manufacturers and retailers, and in
the case of its electronic  merchandising products, the integration of a digital
database of manufacturers' product catalogs.  Although the Company believes that
it competes  favorably in the markets it serves,  there can be no assurance that
new or established  competitors will not offer products superior to, or lower in
price than, those of the Company,  or that completely new technologies  might be
developed to supplant the technologies currently being used by the Company.

Consumer software, CD-ROM Applications

In the broad computer  software design market the Company competes with numerous
companies  providing  rendering  software.   The  consumer  software  market  is
increasingly competitive,  with numerous suppliers directing new products into a
highly  differentiated  and  rapidly  developing   marketplace.   The  Company's
competitors in this market include  several large  companies with  substantially
greater financial, technical, marketing and other resources than the Company, as
well as numerous companies of varying sizes and resources,  including Mattel/The
Learning Company, and Sierra.  Although ModaCAD entered into agreements with The
Learning  Company's  Broderbund  division  and Sierra for the 3D Home  Interiors
product line and Fashion Trip, respectively, and such agreements contain certain
mutual  non-compete  covenants,  the  agreements  do not prohibit  Broderbund or
Sierra  or their  parent  companies  from  publishing  or  distributing  similar
products  which could compete with the  Company's  products.  Additionally,  the
Company expects increased competition from new competitors who may in the future
publish  competitive  home  furnishing,  fashion  or  fashion  related  software
products.  The Company believes that the core visualization  technology embodied
in its products  constitutes  a competitive  advantage in the consumer  software
market.

                                       6
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Internet Applications

Recent years have witnessed an increasing number of entrants into the e-commerce
arena,  and there are a number of  entities  whose  activities  may be  directly
competitive  with  those of  ModaCAD.  In the  apparel  industry,  a  number  of
retailers   who  have   traditionally   conducted   their   activities   out  of
brick-and-mortar  premises are transitioning  into the e-commerce arena in order
to expand their  businesses.  The Company believes that such retailers,  such as
Lands' End, J. Crew, the Gap, L.L. Bean, Macy's,  Bloomingdale's and Eddie Bauer
will not constitute significant  competitive pressures on the Company's Internet
shopping   site  because  they  seek  to  use  the  Internet  as  an  additional
distribution  channel,  while  retaining  their  emphasis on sales through other
traditional  distribution  channels.  Consequently,  the cost structure of these
retailer's products is significantly different than that of ModaCAD. There is no
assurance that these  retailers will not alter their  strategies and concentrate
more of their resources in developing  Internet  shopping portals or other sites
or projects that will compete directly with Styleclick.com.

In the Internet  e-commerce  sector,  the Company competes with numerous product
aggregators and style  destination  sites.  Some of these entities offer product
guides,  search engine  shopping  guides and  destination  shopping  sites,  and
examples  of  some  such  entities  are  Bluefly.com,   Buy.com,   Ivillage.com,
Amazon.com,  Fashionmall.com,  Shopfind.com, Girlshop.com and Shopping.com. Some
of these  entities  have not targeted the Style  Industries,  and their  current
activities are not directly competitive with those of ModaCAD. However, there is
no assurance  that such entities  will not change or expand their  operations to
include activities that are directly competitive with ModaCAD. Other destination
sites,  such as  Elle.com,  Gurl.com,  Cosmopolitan.com  which are  sponsored by
various fashion and decorating  magazines,  have targeted the Style  Industries.
While such sites often offer superior  editorial  content,  the Company believes
that its  technical  and  logistical  infrastructure  constitutes  a competitive
advantage over such actual and potential  competitors.  However, there can be no
assurance that such  competitors  will not be able to overcome the technical and
logistical barriers to entry and, therefore,  exert greater competitive pressure
on ModaCAD.

The home  furnishing  industry is less  competitive  than the apparel  industry.
ModaCAD has not  identified  any major  retailers  whose on-line  operations are
competitive with ModaCAD's operations, and it believes that it has a first mover
advantage  in  this  industry.  While  a  number  of  furniture  retailers  have
established Internet operations in the home decorating segment, these operations
have been  limited  in scope and have  lacked the  support of the  manufacturing
community.  It is possible that one or more of the Internet  portals may in time
target the Style Industries and present a competitive threat to ModaCAD.  At the
same time,  ModaCAD is in active discussion to explore  potential  relationships
with Internet portals. There are no guarantees that such relationships will come
to fruition, however.

Business-to-Business Applications

The CAD and  electronic  merchandising  market  are  intensely  competitive  and
subject to rapidly changing technologies and evolving product standards.  In the
broad  electronic  merchandising  markets,  the Company  competes  with numerous
companies  providing CAD and rendering  software,  including  companies  such as
Lectra Systemes SA, Gerber Garment Technology,  Inc., NED Graphics, Info Design,
Intellitek Computer Corporation,  and MicroD Inc. Some of the Company's existing
and potential  competitors in the software  design and electronic  merchandising
markets have  significantly  greater financial,  technical,  sales and marketing
resources than the Company,  have longer  operating  histories than the Company,
and have better brand name recognition.

                                       7
<PAGE>

Dependence on Significant Customers

During  1997  and  1998,  Broderbund  accounted  for  approximately  7% and 30%,
respectively, of the Company's total revenues. During 1998, Sierra accounted for
approximately  24% of the Company's total revenues.  During 1997 and 1998, Intel
accounted for  approximately  34% and 6%,  respectively,  of the Company's total
revenues.  During  1997 and 1998,  the  Company's  largest  business-to-business
product purchaser, its European distributor,  accounted for approximately 8% and
1%,  respectively,  of the  Company's  total  revenues.  With the  exception  of
Broderbund and the Company's European  distributor,  the Company may continue to
be dependent  on the other two  significant  customers,  the loss of which could
have a material and adverse effect on the Company's business.

Research and Development

ModaCAD  believes  that its  success  will  depend  primarily  on its ability to
develop new  products,  maintain  technological  competitiveness  and fulfill an
expanding range of customer requirements.  To date, the Company has designed and
developed  all of its  key  products  internally.  The  Company's  research  and
development expenditures (including expenses that are required to be capitalized
under FASB 86) totaled  $3,000,000 or 67% of revenues in 1997 and  $6,592,000 or
99% of revenues in 1998. ModaCAD's primary expenses for research and development
include the personnel costs of the Company's  engineers and other specialists in
software  infrastructure,  interface development,  database technologies and 3-D
computer  graphic  design.  Research and  development  expenses also include the
depreciation  and cost of maintenance of computer  hardware used in research and
development.  As of  December  31,  1998,  71 of  the  Company's  121  full-time
employees  were  employed  in  various   aspects  of  research  and  development
activities.  During  1997 and  1998,  no  significant  amount  of the  Company's
research and development expenditures was customer sponsored.

ModaCAD  believes  that it has  completed  most of the  development  of the core
technologies necessary to deploy Styleclick.com. These core technologies include
the search engine, the data harvesting engine,  the visualization  engines,  the
data streaming engine, and the intelligent shopping agents.  Currently the focus
of the Company's product  development efforts is centered on the creation of the
user  interface for the site, art creation and content  acquisition,  optimizing
user  experience  for fast  access  from low  bandwidth  Internet  access;  load
balancing  traffic for optimal  handling of concurrent  transactions;  expanding
ModaCAD's   content   acquisition   technology  to  include  higher  degrees  of
automation;  developing data streaming technologies to increase delivery of rich
content through low bandwidth environments; and expanding the intelligent nature
of shopping agents for smart searches and personal advice.

The Company's  development teams are continuously working towards new extensions
and  enhancements to its core rendering engine in an on-going effort to maintain
and extend its  leadership  in the area.  ModaCAD  also  maintains  research and
development in a variety of advanced technical areas, including  object-oriented
technology,  data management technology,  expert systems and rule-based systems,
rendering and other evolving imaging technologies.

                                       8
<PAGE>

Patents and Proprietary Rights

The Company holds two United States patents. The first covers the Company's core
rendering and modeling  technology.  The second covers 3-D modeling  techniques.
The Company also has received a notice of  allowance  of the  company's  pending
patent  application  covering  the  ability  to  create an  interactive  digital
dressing room that allows apparel to be fitted to specific body  dimensions.  In
addition to patent protection,  the Company relies on a combination of (i) trade
secret,  copyright and trademark laws, (ii)  confidentiality  and  nondisclosure
agreements  and (iii) other  contractual  and technical  measures to protect its
proprietary  rights.  There is no  assurance  that  these  measures  will  deter
misappropriation  of the Company's  proprietary  rights.  The Company  employs a
"lock and key" system with respect to the proprietary information underlying its
software. This system is designed to ensure that only certain key employees have
access  to  such  information,  all of  whom  have  signed  confidentiality  and
nondisclosure agreements. The Company has nine registered trademarks,  including
the mark ModaCAD.  The Company believes that its products,  trademarks and other
proprietary  rights do not infringe on the proprietary  rights of third parties.
There  can  be no  assurance,  however,  that  third  parties  will  not  assert
infringement claims against the Company in the future with respect to current or
future  products  or that any such  asserted  claims  may not  result  in costly
litigation.

Employees

As of December 31, 1998, the Company employed 121 full-time employees, including
33 in sales and marketing, 37 in engineering,  34 in product development,  13 in
administration  and four in customer support services.  The Company also employs
19 consultants who work in product  development.  The Company  believes that its
future success will depend, in part, on its ability to continue to attract, hire
and retain highly qualified personnel. The competition for such personnel in the
computer software,  Internet and e-commerce  industries is intense.  None of the
Company's  employees are represented by a labor union, and the Company has never
experienced a work  stoppage.  The Company  believes that its relations with its
employees are good.

                                       9
<PAGE>

                                     PART II

Item 6.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations

The following  discussion  should be read in  conjunction  with the  information
under "Item 7. Financial  Statements" and the Company's financial statements and
notes  thereto and other  financial  data  included  elsewhere  herein.  Certain
statements under this caption constitute "forward-looking  statements" under the
Reform Act which involve risks and  uncertainties.  The Company's actual results
may differ  significantly  from the results  discussed  in such  forward-looking
statements. Factors that could cause actual results to differ materially include
the following: (i) unforeseen technical or other obstacles in the development or
production  of the  Company's  software and  Internet  products,  (ii)  customer
acceptance of the new, updated or revised versions of the Company's software and
Internet  products,  (iii) the  Company's  ability to produce its  products on a
cost-effective  and timely basis,  and (iv) factors not directly  related to the
Company,  such as the plans and success of the  Company's  vendors,  competitive
pressures on pricing, market conditions in general,  competition,  technological
progression,  product obsolescence and the changing needs of potential customers
and the Style Industries in general.

General

The Company is in the business of developing, marketing, and supporting Internet
sites,  Internet  enabled  applications  and,  business  and  consumer  software
products based on its proprietary  technology for content management,  including
modeling  and  rendering   technology.   The  Company's   products  utilize  its
proprietary  modeling and  rendering  technology,  operate on standard  personal
computers  running  Macintosh or Windows  operating systems and are grouped into
three principal product groups:  consumer software  (including  Internet enabled
software    applications),    Internet    applications    for   e-commerce   and
business-to-business applications CAD and electronic merchandising products).

The Company is leveraging its technology to build and deploy  Internet sites and
Internet enabled applications, such as comparative search and shopping solutions
aimed at facilitating  businesses to use electronic  commerce to reach consumers
in the apparel, footwear, accessories and cosmetics industries.

The  Company's  electronic   merchandising  products  are  used  principally  by
industrial  designers to model  three-dimensional  objects from  two-dimensional
images and to render  such  objects in real time with photo  realistic  imagery.
These products  combine the Company's  technology with digital product  catalogs
produced by the Company or by product manufacturers.

In May 1999, the Company  changed its method of  recognizing  income from barter
transactions during 1998 and restated its financial statements as of and for the
year ended December 31, 1998. The restatement reduces net sales by $1.1 million,
increases the net loss by $1.1 million and reduces assets by $1.1 million.

                                       10
<PAGE>

Results of Operations

The following  table sets forth selected  items from the Company's  statement of
operations (in thousands) for the years ended 1998 and 1997 and the  percentages
that such items bear to net sales:


<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                        ---------------------------------------
                                                1998                 1997
                                        -------------------  ------------------
                                            (As Restated)
<S>                                     <C>         <C>       <C>         <C>
Net sales                               $  6,681    100.0%    $  4,450    100.0%
Cost of sales                                 82      1.2           87      1.9
Selling, general and administrative        8,291    124.1        3,394     76.3
Research and development                   3,541     53.0          172      3.9
Amortization of software development costs 4,890     73.2          774     17.4
                                        --------    -----    ---------    -----
  Total expenses                          16,804    251.5        4,427     99.5
                                        --------    -----    ---------    -----
Income (loss) from operations            (10,123)  (151.5)          23      0.5
Investment income                            435      6.5          331      7.5
                                        --------    -----    ---------    -----
Net income (loss)                       $ (9,688)  (145.0%)   $    354      8.0%
                                        ========    =====    =========    =====
</TABLE>

1998 Compared with 1997

Net Sales

Net sales increased $2,231,000, or 50%, to $6,681,000 in 1998 from $4,450,000 in
1997.  The  increase  was  primarily  due to (i) an increase in the sales of the
Company's consumer  products,  (ii) receipt by the Company of a one-time royalty
payment for the exclusive license of certain of its consumer software  products,
(iii) a $5,000  revenue  increase  from  training  services,  and (iv) a $71,000
revenue increase from maintenance  fees. The revenue  increases were offset by a
$887,000 decrease in sales of the Company's  business-to-business products and a
$131,000 decrease in consulting services revenues.

Sales of business-to-business products decreased $887,000, or 39%, to $1,398,000
in 1998 from  $2,285,000 in 1997  primarily due to $400,000 in the foreign sales
generated by two of the Company's major customers in Europe in 1997, which sales
were not repeated in 1998.  The remaining  decrease  resulted from the Company's
change of its primary business focus from the  business-to-business  marketplace
to the emerging consumer Internet electronic commerce market.

Revenue  generated  from  consumer  products  increased  $3,173,000  or 176%, to
$4,975,000 in 1998 from  $1,802,000  in 1997.  The increase was primarily due to
(i) $1,980,000 of revenue  generated from the exclusive license of the Company's
3D Home  Interiors  product to its  publisher,  and (ii)  $2,995,000  of revenue
generated in  connection  with the  Company's  two newly  developing  e-commerce
projects in 1998.  No such  revenues  were  generated in 1997.  The increase was
offset  by a total of  $1,802,000  revenues  generated  in 1997  which  were not
repeated in 1998,  including (i) a one-time  payment of $1,500,000 in connection
with the Company's  fulfillment of certain  obligations  under an agreement with
Intel in connection with the co-development of consumer software;  (ii) $181,000
royalty  income in connection  with the 3D Home Interiors  product,  and (iii) a
one-time payment of $121,000 for consulting  services rendered by the Company in
connection with its consumer products.

Consulting  services  decreased  by  $131,000,  or 96%,  to  $5,000 in 1998 from
$136,000 in 1997 primarily due to $136,000 revenue  generated in connection with
the  software  consulting  services  provided  to  the  Company's  customers  in
conjunction  with  the  sale of  business-to-business  products  and a  one-time
consulting  service  fee  generated  in  connection  with  one of the  Company's
customer's annual conference meeting in 1997. Such consulting  services were not
repeated in 1998.  Consulting services are performed by the Company from time to
time and the fees  therefore do not  constitute a steady  income  stream for the
Company.

                                       11
<PAGE>

Training  services revenue  increased by $5,000,  or 7%, to $74,000 in 1998 from
$69,000 in 1997  primarily due to services  agreed to be provided by the Company
in connection with its new business-to-business  product line in 1998. Net sales
resulting from product maintenance fees increased $71,000 in 1998 over 1997.

Cost of Sales

Cost of sales decreased  $5,000, or 6%, to $82,000 in 1998 from $87,000 in 1997.
This decrease reflected the sales decrease in business-to-business products from
1997 to 1998. Cost of sales associated with the Company's consumer products does
not have a major impact on the total cost of sales since an insignificant amount
of cost of sales was incurred in connection  with the consumer  products in 1998
and no such cost of sales was incurred in 1997.

Selling, General and Administrative Expenses

Selling,  general and administrative expenses increased $4,897,000,  or 144%, to
$8,291,000  in  1998  from   $3,394,000  in  1997.   Personnel  costs  increased
$1,218,000,  or 78%, to $2,791,000 in 1998 from $1,573,000 in 1997. The increase
in personnel costs resulted from the hiring of additional personnel in late 1997
and 1998 to support the Company's increased operating activities, increasing the
total number of employees  from 86 as of December 31, 1997 to 121 as of December
31, 1998.  Additionally,  certain  related costs  including  travel,  marketing,
telephone,  office supplies expenses, taxes and licenses, repair and maintenance
and depreciation  expense increased  $2,253,000,  or 180%, to $3,505,000 in 1998
from  $1,252,000  in  1997.  $1,420,000  of such  increase  was  related  to the
Company's  increasing marketing activities in 1998 to support its new e-commerce
products. Also, professional services including accounting, legal and consulting
services increased $477,000, or 108%, to $919,000 in 1998 from $442,000 in 1997.
The  increase  in  professional  services  was  primarily  due to the  Company's
increased  requirements  for these  services in 1998 compared to 1997  resulting
from the  Company's  increased  operating  activities.  Further,  rent and lease
expense  increased  $84,000,  or 115%,  to $157,000 in 1998 from $73,000 in 1997
resulting  from the  Company's  relocation  to a larger  facility in March 1998.
Finally,  bad debt expense  increased  $865,000,  or 1,663%, to $917,000 in 1998
from $52,000 in 1997 due to the  Company's  decision in 1998 to increase its bad
debt reserve by $865,000 due to the Company's increasing sales volume, and based
on a review of specific international as well as business-to-business accounts.

Research and Development

The Company  incurred  $6,592,000 of research and development  costs in 1998, as
compared  to  $3,000,000  in  1997.  In  1997,  $3,051,000  of such  costs  were
capitalized as software  development  costs,  while in 1998,  $2,828,000 of such
costs were capitalized as software  development costs. The remaining  $3,541,000
of research and development costs in 1998 were expensed, compared to $172,000 in
1997.  The 102% increase in research and  development  expenditure  from 1997 to
1998 was primarily due to the hiring of additional personnel to perform software
programming services in connection with the further development of the Company's
business-to-business,  consumer and Internet  products.  A lower  percentage  of
research and development  expenditures  were  capitalized in 1998 as compared to
1997 due primarily to the Company's  completion of two of its major  projects at
the  beginning of 1998. A  significant  portion of the research and  development
expenses  incurred  prior to the  completion  of those  two major  projects  was
capitalized as software development costs.

                                       12
<PAGE>

Amortization of Software Development Costs

The amortization of software development costs increased $4,116,000, or 532%, to
$4,890,000  in 1998 from  $774,000 in 1997  partially  because the Company began
marketing  (and  amortizing  development  costs  associated  with)  several  new
versions of software products in late 1997 and in 1998. In addition, the Company
took a one-time  charge to write off a total of  $3,443,000  of its research and
development  cost in 1998.  $1,038,000 of the total write-off was related to the
exclusive  license of the Company's 3D Home  Interiors  product to its Company's
publisher.  The remaining $2,405,000 write-off was primarily attributable to the
software  capitalized  prior to 1998 in  relation  to  certain  products  in the
business-to-business  market  place  which the Company is exiting as a result of
its new business strategy to target the emerging e-commerce market.

Investment Income

Investment income increased $104,000,  or 31%, to $435,000 in 1998 from $331,000
in 1997.  This increase is due to the increase in income  generated from a money
market account in which the proceeds  received in July 1997 upon the exercise by
warrant holders of the Company's  public warrants after notice of redemption was
given in June 1997, along with other amounts,  are maintained.  The increase was
offset by a  $55,000  decrease  resulting  from a loss on the  Company's  equity
investment in 1998.

Income Taxes

The  Company  recorded  no  provision  for  income  taxes  in  1997  due  to the
utilization of net operating loss carryforwards.

Liquidity and Capital Resources

The Company's  accounts  receivable  balance  decreased  $1,358,000,  or 61%, to
$885,000 at December 31, 1998 from $2,243,000 at December 31, 1997. The decrease
was  primarily  due to the  Company's  collection  of certain  major  receivable
balances toward the end of 1998.

On June 19,  1997,  upon  meeting  the  requisite  criteria  for  redemption  of
redeemable  common stock purchase warrants issued in the Company's IPO (i.e. the
closing bid price for the Company's common stock averaged in excess of $7.50 for
a period of 20  consecutive  trading days ending within 15 days of the notice of
redemption),  the Company  notified the holders of the publicly  traded warrants
that it  intended to redeem any  unexercised  warrants  outstanding  on July 29,
1997. As a result of the notification, the warrant holders exercised warrants to
purchase  1,609,084  shares  of the  Company's  common  stock  for an  aggregate
exercise  price of  $10,459,046,  and the Company  redeemed  the  remaining  916
unexercised warrants for $9.

In  connection  with loans made to the Company by a third party in December 1995
and January  1996,  the Company  granted  such  third-party  lender  warrants to
purchase an aggregate of 200,000 units which warrants had a two-year term,  each
with an exercise price of $4.00 per unit. Each warrant  provided the holder with
the right to purchase one unit,  comprised of one share of the Company's  common
stock and one  redeemable  warrant  exercisable  to purchase one share of common
stock at a price of $6.50 per share for a period of five years  beginning  March
27, 1996. In 1997, the warrant holder (or its transferees) exercised warrants to
purchase  200,000 units for an exercise  price of $800,000.  The warrant  holder
further  exercised his  redeemable  common stock  purchase  warrants to purchase
200,000 shares of common stock for an exercise price of $1,300,000.

                                       13
<PAGE>

In  connection  with the  Company's  IPO,  the Company  issued to the  principal
underwriter in the IPO, for $1,400,  a warrant to purchase  140,000 units,  at a
per unit exercise  price of $6.00,  each unit  consisting of one share of common
stock  and one  redeemable  warrant  exercisable  to  purchase  one share of the
Company's  common stock at an exercise  price of $9.10 per share.  Such warrants
are exercisable for a four-year  period which began March 27, 1997. In 1997, the
underwriter  (or  assignees  of the  underwriter)  exercised  a  portion  of the
warrants to purchase an aggregate of 88,300 shares of the Company's common stock
and 88,300 redeemable  common stock purchase warrants for an aggregate  exercise
price  of  $529,800.  The  underwriter  (or  its  assignees)  further  exercised
redeemable  common  stock  purchase  warrants to purchase  30,800  shares of the
Company's common stock for $280,280. In 1998, the underwriter (or its assignees)
exercised a portion of its warrants to purchase an aggregate of 26,400 shares of
the Company's common stock and 26,400  redeemable common stock purchase warrants
for $158,400.

In 1995,  the Company  adopted the 1995 Stock  Option  Plan (the  "Plan")  which
expires in 2006. In June 1997, the Plan was amended, upon receipt of shareholder
approval,  to  increase  the  number of shares of common  stock  authorized  for
issuance  pursuant to the exercise of stock options  granted under the Plan from
300,000 to 750,000  shares.  In April 1998, the Plan was further  amended,  upon
receipt of  shareholder  approval,  to  increase  the number of shares of common
stock authorized for issuance  pursuant to the exercise of stock options granted
under the Plan from 750,000 to 1,650,000  shares. In 1997, nine of the Company's
employees  exercised their stock options to purchase a total of 29,000 shares of
the Company's common stock for a cumulative purchase price of $149,375. In 1998,
18 of the Company's  employees exercised their stock options to purchase a total
of 94,000 shares of the Company's  common stock for a cumulative  purchase price
of $837,875.

In October 1998, the Company entered into a line of credit agreement with a bank
expiring in September  1999,  which provides for borrowings of up to $1,000,000.
Borrowings under the agreement are secured by the Company's accounts  receivable
and bear  interest  at the  bank's  prime  rate  (8.5% per annum at the time the
agreement was signed).  Terms of the  agreement  require the Company to maintain
certain minimum financial ratios which, as of December 31, 1998, the Company has
met. As of December 31, 1998, the Company has not drawn any amounts  against the
line of credit.

The Company  anticipates  using its capital  primarily to shift its focus to the
e-commerce market,  and to fund activities  related to the design,  development,
marketing,  sales  and  support  of the  Company's  new and  existing  products.
Together with its existing  capital received (i) in connection with the exercise
of warrants  after the Company gave notice of the  redemption  of its  warrants,
(ii) in the form of a one-time royalty payment in connection with its license of
its software product in 1998, and (iii) in the form of proceeds from the sale of
its major business-to-business products in the first quarter of 1999, as well as
anticipated  funds  from  operations,  the  Company  believes  that its  capital
resources will be sufficient to provide its  anticipated  cash needs for working
capital and capital  expenditure  for at least the next 12 months,  although the
Company may seek to raise additional  capital before then,  depending on various
considerations and developments.  Thereafter,  if cash generated from operations
is insufficient to satisfy the Company's capital requirements,  if an attractive
opportunity to raise capital arises, or if the Company's need for capital occurs
sooner than the Company projects,  it may have to sell additional equity or debt
securities or obtain other credit  facilities (in addition to the line of credit
agreement into which the Company entered in October 1998), assuming it can do so
on acceptable terms.

                                       14
<PAGE>

Item 7.   Financial Statements
                                  MODACAD, INC.
                              FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1997



                                       15
<PAGE>
                                                                    MODACAD, INC
                                                                        CONTENTS
                                                               December 31, 1998
 ===============================================================================

                                                                          Page

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                         17

FINANCIAL STATEMENTS

       Balance Sheet                                                       18

       Statements of Operations                                            19

       Statements of Stockholders' Equity                                  20

       Statements of Cash Flows                                          21 - 22

       Notes to Financial Statements                                     23 - 37



                                       16
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
ModaCAD, Inc.

We have audited the accompanying  balance sheet of ModaCAD,  Inc. as of December
31, 1998 (as restated), and the related statements of operations,  stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1998 (as restated).  These financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

As discussed in Note 11 to the  financial  statements,  the Company  changed its
method  of  recognizing  income  from  barter  transactions  for the year  ended
December 31, 1998.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of ModaCAD,  Inc. as of December
31, 1998,  and the results of its  operations and its cash flows for each of the
two years in the period ended  December 31, 1998 in  conformity  with  generally
accepted accounting principles.


SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 16, 1999 (Except for
Note 11, as to which the
date is  May 19, 1999)


                                       17
<PAGE>

                                                                   MODACAD, INC.
                                                                   BALANCE SHEET
                                                               December 31, 1998
                                                                   (As Restated)
================================================================================
<TABLE>
<CAPTION>

                                     ASSETS
<S>                                                                 <C>
Current assets
     Cash and cash equivalents                                      $ 6,343,599
     Accounts receivable, net of allowance for doubtful accounts
          of $132,500                                                   752,487
     Prepaid expenses and other current assets                          397,101
                                                                    ------------
               Total current assets                                   7,493,187

Capitalized computer software development costs,
     net of accumulated amortization of $6,039,105                    3,014,043
Furniture and equipment, net of accumulated depreciation              2,459,656
     of $1,069,832
Other assets                                                             83,055
                                                                    ------------
               Total assets                                         $13,049,941
                                                                    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
      Accounts payable and accrued expenses                         $   503,198
      Deferred income                                                   237,052
                                                                    ------------
               Total current liabilities                                740,250
                                                                    ------------
Commitments

Stockholders' equity
     Common stock, no par value
          15,000,000 shares authorized
          6,143,374 shares issued and outstanding                    26,575,627
     Accumulated deficit                                            (14,265,936)
                                                                    ------------
               Total stockholders' equity                            12,309,691
                                                                    ------------
               Total liabilities and stockholders' equity           $13,049,941
                                                                    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       18
<PAGE>
                                                                   MODACAD, INC.
                                                        STATEMENTS OF OPERATIONS
                                                For the Years Ended December 31,
================================================================================

<TABLE>
<CAPTION>

                                                        1998          1997
                                                    ------------    ------------
                                                    (As Restated)
<S>                                                 <C>             <C>
Net sales                                           $ 6,681,280     $ 4,449,857
                                                    ------------    ------------
Expenses
     Cost of sales                                       82,135          87,470
     Selling, general, and administrative             8,290,979       3,393,765
     Research and development                         3,541,300         171,769
     Amortization of capitalized software
          development costs                           4,889,986         774,135
                                                    ------------    ------------
         Total expenses                              16,804,400       4,427,139
                                                    ------------    ------------
Income (loss) from operations                       (10,123,120)         22,718

Other income (expense)
     Loss in equity investment                          (55,324)              -
     Other income                                         2,067          11,190
     Investment income                                  488,738         320,367
                                                    ------------    ------------
         Total other income (expense)                   435,481         331,557

Net income (loss)                                   $(9,687,639)    $   354,275
                                                    ============    ============
Basic earnings (loss) per share                     $     (1.59)    $      0.07
                                                    ============    ============
Diluted earnings (loss) per share                   $     (1.59)    $      0.06
                                                    ============    ============
Weighted-average shares outstanding                   6,088,247       4,800,918
                                                    ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       19
<PAGE>
                                                                   MODACAD, INC.
                                              STATEMENTS OF STOCKHOLDERS' EQUITY
                                                For the Years Ended December 31,
================================================================================

<TABLE>
<CAPTION>

                                    Common Stock       Accumulated
                                 Shares      Amount      Deficit      Total
                             ------------ ------------ ------------ ------------
<S>                          <C>         <C>         <C>            <C>
Balance, December 31, 1996     3,865,790 $11,593,905 $ (4,932,572)  $ 6,661,333

Common stock issued for
   Stock options exercised        29,000     149,376                    149,376
   Warrants exercised          2,128,184  13,369,126                 13,369,126

Warrant redemption cost                     (167,055)                  (167,055)

Issuance of warrants for
   services                                  572,000                    572,000

Net income                                                354,275       354,275
                             ------------ ------------ ------------ ------------
Balance, December 31, 1997     6,022,974  25,517,352   (4,578,297)   20,939,055

Common stock issued for
   Stock options exercised        94,000     837,875                    837,875
   Warrants exercised             26,400     158,400                    158,400

Issuance of warrants for
   services                                   62,000                     62,000

Net loss (As Restated)                                  (9,687,639)  (9,687,639)
                             ------------ ------------ ------------ ------------
Balance, December 31, 1998
         (As Restated)         6,143,374 $26,575,627  $(14,265,936) $12,309,691
                             ============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
                                       20
<PAGE>
                                                                   MODACAD, INC.
                                                        STATEMENTS OF CASH FLOWS
                                                For the Years Ended December 31,
================================================================================

<TABLE>
<CAPTION>

                                                         1998           1997
                                                     ------------  ------------
                                                     (As Restated)
<S>                                                  <C>           <C>
Cash flows from operating activities
     Net income (loss)                               $(9,687,639)  $   354,275
     Adjustments to reconcile net income
       (loss) to net cash provided by
       (used in) operating activities
              Depreciation                               292,671        65,665
              Amortization of capitalized
                 software development costs            4,889,986       774,135
              Provision for loss on accounts
                 receivable                                    -        52,000
              Issuance of warrants for
                 services rendered                        62,000        12,000
              Furniture and equipment acquired
                 in exchange for sales                  (275,000)            -
              Loss in equity investment                   55,324             -
     (Increase) decrease in
         Accounts receivable                           1,408,665      (870,299)
         Prepaid expenses and
            other current assets                         350,675       (34,343)
         Other assets                                      8,593       (69,208)
     Increase (decrease) in
         Accounts payable and accrued expenses           142,477       (10,022)
         Deferred income                                 132,772        29,501

     Net cash provided by (used in)                  ------------  ------------
        operating activities                          (2,619,476)      303,704
                                                     ------------  ------------
Cash flows from investing activities
     Purchase of furniture and equipment              (1,557,680)     (616,166)
     Capitalized computer software development cost   (2,895,512)   (2,682,956)
                                                     ------------  ------------
     Net cash used in investing activities            (4,453,192)   (3,299,122)
                                                     ------------  ------------
Cash flows from financing activities
     Payments on officers/stockholders note payable            -       (75,000)
     Stock options exercised                             837,875       149,376
     Warrants exercised                                  158,400    13,369,126
     Warrant redemption cost                                   -      (167,055)
                                                     ------------  ------------
     Net cash provided by financing activities           996,275    13,276,447
                                                     ------------  ------------
     Net increase (decrease) in cash and cash
        equivalents                                   (6,076,393)   10,281,029

Cash and cash equivalents, beginning of year          12,419,992     2,138,963
                                                     ------------  ------------
Cash and cash equivalents, end of year               $ 6,343,599   $12,419,992
                                                     ============  ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       21
<PAGE>
                                                                   MODACAD, INC.
                                            STATEMENTS OF CASH FLOWS (Continued)
                                                For the Years Ended December 31,
================================================================================


Supplement  disclosures of cash flow information
During the years ended  December  31, 1998 and 1997,  the Company paid no income
taxes or interest.


Supplemental  schedule of non-cash investing and financing activities
During the year ended December 31, 1997,  the Company  issued  126,316  warrants
valued at $560,000 for development expenses that were performed in 1998.
















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

                                       22
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Line of Business
ModaCAD,  Inc. (the  "Company")  was  incorporated  in California on February 4,
1988.  The  Company is a developer  and  provider  of  technologies  and digital
content for  electronic  merchandising  in the fashion,  accessories,  footwear,
cosmetics, home furnishing, decorating and improvement industries.

Cash and Cash  Equivalents
For  purpose  of the  statements  of  cash  flows,  the  Company  considers  all
highly-liquid  investments purchased with original maturities of three months or
less to be cash  equivalents.  As of  December  31,  1998,  the  cash  and  cash
equivalents  included  amounts held in a checking and a money market  account of
approximately $315,229 and $6,026,869, respectively.

Software  Development  Costs
Software  development  costs are  capitalized  in accordance  with  Statement of
Financial  Accounting  Standards  ("SFAS") No. 86,  "Accounting  for the Cost of
Computer Software to Be Sold, Leased, or Otherwise Marketed."  Capitalization of
software  development  costs  begins  upon the  establishment  of  technological
feasibility  and is  discontinued  when the product is available  for sale.  The
establishment  of  technological  feasibility  and the  ongoing  assessment  for
recoverability of capitalized  software  development costs require  considerable
judgment by management with respect to certain external factors,  including, but
not limited to,  technological  feasibility,  anticipated future gross revenues,
estimated  economic  life,  and changes in software and  hardware  technologies.
Capitalized  software  development  costs  are  comprised  primarily  of  direct
overhead,  payroll costs, and consultants' fees of individuals  working directly
on the development of specific software products.

Amortization  of  capitalized  software  development  costs  is  provided  on  a
product-by-product basis on the straight-line method over the estimated economic
life of the  products  (not to  exceed  three  years).  Management  periodically
compares  estimated  net  realizable  value by product to the amount of software
development costs capitalized for that product to ensure the amount  capitalized
is not in excess of the amount to be recovered through revenues. Any such excess
of capitalized  software development costs over expected net realizable value is
expensed at that time.

Furniture  and   Equipment
Furniture and equipment are recorded at cost.  Depreciation and amortization are
provided using the  straight-line  method over an estimated  useful life of five
years.  Maintenance and minor  replacements are charged to expenses as incurred.
Gains and losses on  disposals of furniture  and  equipment  are included in the
results of operations.

                                       23
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Joint  Venture  Investment  and  Advances
The Company had a 40% interest in  ModaMAGIC,  Inc.("ModaMAGIC").  ModaMAGIC was
formed to produce an interactive,  multi-media  CD-ROM for the consumer  market.
During the year ended December 31, 1998, ModaMAGIC was incorporated into a newly
developed project and was written-off as a loss in equity investment.

Revenue Recognition
The Company  recognizes  revenues  related to  software  licenses  and  software
maintenance  in  compliance  with the American  Institute  of  Certified  Public
Accountants   ("AICPA")  Statement  of  Position  No.  97-2,  "Software  Revenue
Recognition."  Product  revenue  is  recorded  at the time of  shipment,  net of
estimated  allowances  and  returns.  Any  insignificant  post-contract  support
obligations  are accrued  for at the time of the sale.  Post  contract  customer
support  ("PCS")  that is bundled with an initial  licensing  fee and is for one
year  or  less  is  recognized  at  the  time  of  the  initial  licensing,   if
collectability  of the  resulting  receivables  is probable.  When a PCS is sold
under a separate  agreement,  the revenue is recognized on a straight-line basis
over the life of the PCS agreement, generally twelve months.

Research and  Development  Costs
Research and development  costs are charged to expense as incurred.  These costs
consist primarily of salaries, consulting fees, and direct overhead.

Income Taxes
Deferred taxes are provided on a liability  method  whereby  deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences.  Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are reduced by a valuation  allowance  when,  in the
opinion of  management,  it is more likely than not that some  portion or all of
the  deferred  tax  assets  will  not  be  realized.  Deferred  tax  assets  and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

Earnings  (Loss) Per Share
For the year  ended  December  31,  1998,  the  Company  adopted  SFAS No.  128,
"Earnings  per Share." Basic  earnings per share is computed by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding.  Diluted  earnings per share is computed  similar to basic earnings
per share  except that the  denominator  is  increased  to include the number of
additional  common  shares  that would have been  outstanding  if the  potential
common shares had been issued and if the additional common shares were dilutive.
For the  year  ended  December  31,  1998,  the  Company  incurred  a net  loss;
therefore, basic and diluted loss per share are the same.

                                       24
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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  disclosures  of
contingent  assets and liabilities at the date of the financial  statements,  as
well as the  reported  amounts of revenues  and  expenses  during the  reporting
period. Actual results could differ from those estimates.

Fair Value of Financial  Instruments
The Company  measures its financial  assets and  liabilities in accordance  with
generally accepted accounting principles. For certain of the Company's financial
instruments,  including  cash and cash  equivalents,  accounts  receivable,  and
accounts payable and accrued  expenses,  the carrying  amounts  approximate fair
value due to their short maturities.

Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash and trade  receivables.  The Company places its cash
with high quality  financial  institutions,  and at times it may exceed the FDIC
$100,000  insurance  limit.  The Company sells products on a worldwide basis and
extends  credit based on an evaluation of the  customer's  financial  condition,
generally  without  requiring  collateral.  Exposure to losses on receivables is
principally  dependent  on each  customer's  financial  condition.  The  Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses. As of December 31, 1998, uninsured portions held at banks were $460,000.
In addition,  amounts of  $6,026,869  held in a money  market  account are fully
insured.

Comprehensive  Income
For the year  ended  December  31,  1998,  the  Company  adopted  SFAS No.  130,
"Reporting  Comprehensive  Income."  This  statement  establishes  standards for
reporting  comprehensive  income and its  components  in a financial  statement.
Comprehensive  income as defined  includes  all changes in equity  (net  assets)
during a period  from  non-owner  sources.  Examples  of items to be included in
comprehensive  income,  which are  excluded  from net  income,  include  foreign
currency   translation   adjustments   and   unrealized   gains  and  losses  on
available-for-sale  securities.  Comprehensive  income is not  presented  in the
Company's financials  statements since the Company did not have any of the items
of comprehensive income in any period presented.

Recently  Issued  Accounting  Pronouncements
In February 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS
No.  132,  "Employers'  Disclosures  about  Pensions  and Other  Post-Retirement
Benefits."  The  Company  does not  expect  adoption  of SFAS No.  132 to have a
material impact, if any, on its financial position or results of operations.

                                       25
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements  (Continued)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is
effective for financial  statements  with fiscal years  beginning after June 15,
1999. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts,  and for hedging activities.  The Company does not expect adoption of
SFAS No. 133 to have a material  effect,  if any, on its  financial  position or
results of operations.

SFAS No. 134,  "Accounting  for  Mortgage-Backed  Securities  Retained after the
Securitization   of  Mortgage  Loans  Held  for  Sale  by  a  Mortgage   Banking
Enterprise," is effective for financial statements with the first fiscal quarter
beginning  after December 15, 1998. The Company does not expect adoption of SFAS
No. 134 to have a material effect, if any, on its financial  position or results
of operations.

SFAS No. 135,  "Rescission of FASB Statement No. 75 and Technical  Corrections,"
is effective for financial statements with fiscal years beginning February 1999.
This statement is not applicable to the Company.


NOTE 2 - FURNITURE AND EQUIPMENT

Furniture and equipment at December 31, 1998 consisted of the following:

   Office equipment                                           $   233,652
   Computer equipment and software                              2,607,578
   Furniture and fixtures                                         255,510
   Leasehold improvements                                         432,748
                                                              ------------
                                                                3,529,488
   Less accumulated depreciation                                1,069,832
                                                              ------------
       Total                                                  $ 2,459,656
                                                              ============

Depreciation expense for the years ended December 31, 1998 and 1997 was $447,628
and $210,712,  respectively, of which $154,957 and $145,047,  respectively, were
capitalized as software development costs.

                                       26
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 3 - COMMITMENTS

Leases
The Company leases certain  facilities for its corporate and operations  offices
under long-term,  non-cancelable  operating lease agreements that expire through
April 30, 2006.

Future minimum  aggregate lease payments under  non-cancelable  operating leases
with initial or remaining terms of one year or more at December 31, 1998 were as
follows:

       Years Ending
       December 31,
      --------------
           1999                         $  399,313
           2000                            395,563
           2001                            411,712
           2002                            437,326
           2003                            463,548
           Thereafter                    1,064,963
                                      -------------
              Total                   $  3,172,425
                                      =============

Rent expense for the years ended  December  31, 1998 and 1997 was  approximately
$451,253  and   $192,000,   respectively,   of  which   $135,121  and  $120,000,
respectively, were capitalized as software development costs.

Employment  Agreements
During the year ended  December  31,  1998,  the  Company  entered  into two new
employment agreements,  expiring on December 31, 2005, with certain key officers
of the  Company.  These  officers  will  receive  aggregate  annual  salaries of
$400,000 and a monthly  aggregate  automobile  allowance of $1,200. In addition,
these officers  received  aggregate  signing bonuses of $200,000.  Further,  the
Company  shall pay an annual  performance  bonus for each  calendar  year of the
employment term in an amount to be determined by the  Compensation  Committee of
the Board.  As of  December  31,  1998,  the  Company  has  accrued $0 for these
bonuses.

                                       27
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 3 - COMMITMENTS (Continued)

Employment Agreements  (Continued)
In connection with the employment agreements, the same key officers were granted
a  five-year  option  to  purchase  up to an  aggregate  400,000  shares  of the
Company's common stock. A portion of the options vest and become  exercisable if
the market value of the Company's common stock is greater than $10 per share for
any 20  consecutive  trading days during any fiscal year. The portion of options
that  become  exercisable  are 50 shares of common  stock for each $1,000 of net
income  before taxes and  executive  bonuses in that fiscal year.  These options
will be  exercisable  at a price  equal to the market  value per share as of the
date of the grant.  The option  exercise price at execution of the agreement was
$15.875 per share,  which is not less than the fair market  value on the date of
grant.

Line of  Credit
In October  1998,  the Company  entered into a line of credit  agreement  with a
bank,  expiring in  September  1999,  which  provides  for  borrowings  of up to
$1,000,000. Borrowings under the agreement are secured by the Company's accounts
receivable  and bear  interest at the bank's  prime rate (8.5% at  December  31,
1998).  Terms of the agreement  require the Company to maintain  certain minimum
financial  ratios.  The Company is in compliance with those financial ratios. As
of December 31, 1998, no amounts have been drawn against the line of credit.


NOTE 4 - STOCKHOLDERS' EQUITY

Sale of Common Stock
In 1996, the Company  completed an initial public offering ("IPO") of its common
stock.  The offering  consisted of 1,400,000  units at $5.01 per unit, each unit
consisting of one share of common stock and one redeemable common stock purchase
warrant.  The 1,400,000  warrants have an exercise  price of $6.50 per share and
expire in March 2001.

On June 19,  1997,  upon  meeting  the  requisite  criteria  for  redemption  of
redeemable  common stock  purchase  warrants  issued in the  Company's  1996 IPO
(i.e.,  the closing bid price for the Company's  common stock averaged in excess
of $7.50 for a period of 20  consecutive  trading days ending  within 15 days of
the notice of  redemption),  the Company  notified  the holders of the  publicly
traded warrants that it intended to redeem any unexercised  warrants outstanding
on July 29, 1997. As a result of the notification, the warrant holders exercised
warrants to  purchase  1,609,084  shares of the  Company's  common  stock for an
aggregate exercise price of $10,459,046,  and the Company redeemed the remaining
916 unexercised warrants for $9.

                                       28
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

Sale of Common Stock  (Continued)
In connection  with the IPO, the Company issued to the principal  underwriter in
the IPO, for $1,400, a warrant to purchase 140,000 units, at a per unit exercise
price of $6.00,  each  unit  consisting  of one  share of  common  stock and one
redeemable  warrant  exercisable  to  purchase  one share of common  stock at an
exercise price of $9.10 per share. Such warrants are exercisable for a four-year
period which began March 27, 1997. In 1997, the underwriter (or assignees of the
underwriter)  exercised a portion of the  warrants to purchase an  aggregate  of
88,300 shares of the Company's common stock and 88,300  redeemable  common stock
purchase warrants for an aggregate  exercise price of $529,800.  The underwriter
(or its assignees)  further exercised  redeemable common stock purchase warrants
to purchase 30,800 shares of the Company's common stock for $280,280. During the
year ended  December 31, 1998,  the  underwriter  further  exercised  redeemable
common stock purchase  warrants to purchase an aggregate of 26,400 shares of the
Company's common stock for $158,400.

In  connection  with loans made to the Company by a third party in December 1995
and January  1996,  the Company  granted  such  third-party  lender  warrants to
purchase an aggregate of 200,000 units which warrants had a two-year term,  each
with an exercise price of $4.00 per unit. Each warrant  provided the holder with
the right to purchase one unit,  comprised of one share of the Company's  common
stock and one  redeemable  warrant  exercisable  to purchase one share of common
stock at a price of $6.50 per share for a period of five years  beginning  March
27, 1996. In 1997, the warrant  holder  exercised  warrants to purchase  200,000
units for an exercise price of $800,000.  The warrant  holder further  exercised
his  redeemable  common stock  purchase  warrants to purchase  200,000 shares of
common stock for an exercise price of $1,300,000.

Warrants
In December  1996,  the Company  issued a warrant to purchase  250,000 shares of
common stock to an outside  consultant  that are exercisable at a price of $5.00
per  share,  expiring  in  December  1999.  In  accordance  with  SFAS No.  123,
"Accounting for Stock-Based Compensation," the Company has valued these warrants
at the  current  market  value of the  services  to be  rendered  by the warrant
holder.  For the years  ended  December  31,  1998 and  1997,  the  Company  has
recognized $5,000 and $12,000,  respectively,  of consulting  expense related to
these warrants. As of December 31, 1998, these warrants have not been exercised.

                                       29
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

Warrants  (Continued)
During the year ended  December 31, 1997,  the Company  entered into a financial
advisory  agreement.  Under the  agreement,  the  Company  issued a  warrant  to
purchase 100,000 shares of common stock at an exercise price of $14.38 per share
for  services to be provided to the Company  under this  agreement,  expiring in
July 2002.  The Company has valued these  warrants in  accordance  with SFAS No.
123. For the year ended December 31, 1998, the Company has recognized $36,000 of
consulting  expense  related to these warrants.  As of December 31, 1998,  these
warrants have not been exercised.

During the year ended December 31, 1997, the Company entered into a distribution
and development agreement.  Under the agreement, the Company issued a warrant to
purchase  126,316  shares of common  stock at an  exercise  price of $19.00  for
services  to be  provided  to the  Company  under this  agreement,  expiring  in
November  2002.  In  accordance  with SFAS No. 123, the Company has valued these
warrants  at the  current  market  value of the  services  to be rendered by the
warrant  holder.  As of December  31,  1997,  the Company had recorded a prepaid
expense of $560,000 for services to be rendered in 1998. The prepaid expense was
charged to operations in 1998. As of December 31, 1998,  these warrants have not
been exercised.

During  the year  ended  December  31,  1998,  the  Company  issued a warrant to
purchase 50,000 shares of common stock to an outside  promotion  agency that are
exercisable  at a price of $17.75 per share,  expiring in May 2003.  The Company
further issued an additional 8,333 common stock warrants at an exercise price of
$20.00 per share,  expiring in November  2003. In accordance  with SFAS No. 123,
the  Company  has valued  these  warrants  at the  current  market  value of the
services to be rendered by the warrant  holder.  For the year ended December 31,
1998, the Company has recognized $21,000 of promotional expense related to these
warrants. As of December 31, 1998, these warrants have not been exercised.

During the years ended  December 31, 1998,  1997,  and 1996,  the Company issued
warrants to purchase  an  aggregate  18,000,  12,000,  and 2,000,  respectively,
shares of common  stock to directors  of the Company  expiring on various  dates
through  October  2008. In October  1998,  the Company  repriced the warrants to
$9.50  per  share.  As of  December  31,  1998,  these  warrants  have  not been
exercised.

                                       30
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

Stock Option Plan
In 1995,  the Company  adopted the 1995 Stock  Option  Plan (the  "Plan")  which
expires in 2006. In June 1997, the Plan was amended, upon receipt of stockholder
approval,  to  increase  the  number of shares of common  stock  authorized  for
issuance  pursuant to the exercise of stock  options under the Plan from 300,000
to 750,000  shares.  In April 1998, the Plan was further amended and approved by
the  stockholders  in June 1998 to increase the number of shares of common stock
authorized for issuance  pursuant to the exercise of stock options granted under
the Plan from 750,000 to 1,650,000 shares.

During  the year  ended  December  31,  1998,  outstanding  options  granted  to
employees in 1997 were repriced in December  1998. Per SFAS No. 123, the Company
should incur  additional  compensation  cost for the excess of the fair value of
the modified  options issued over the value of the original  options at the date
of the exchange. The Company thus added that incremental amount to the remaining
unrecognized compensation cost for the original options at the December 31, 1998
pro forma disclosure and recognized the total amount over the remaining years of
the remaining life of the options. The remaining expected life of the options is
four years at December 31, 1998.

The Company  has  adopted  only the  disclosure  provisions  of SFAS No. 123. It
applies Accounting  Principles  Bulletin ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees,"  and related  interpretations  in accounting for its
plans  and  does  not  recognize   compensation   expense  for  its  stock-based
compensation plans other than for restricted stock and  options/warrants  issued
to outside third parties.  If the Company had elected to recognize  compensation
expense  based upon the fair  value at the grant date for awards  under its plan
consistent  with the  methodology  prescribed by SFAS No. 123, the Company's net
income  (loss) and  earnings  (loss) per share would be reduced to the pro forma
amounts  indicated  below for the years ended  December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                    1998              1997
                                              --------------     --------------
                Net income (loss)
                <S>                            <C>                <C>
                    As reported                $ (9,687,639)      $    354,275
                    Pro forma                  $(15,251,331)      $ (1,365,274)
                 Basic earnings (loss)
                   per common share
                    As reported                $      (1.59)      $       0.07
                    Pro forma                  $      (2.51)      $      (0.28)

</TABLE>

                                       31
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

Stock Option Plan (Continued)
These pro forma amounts may not be representative of future disclosures  because
they do not take into effect pro forma  compensation  expense  related to grants
made before 1995.  The fair value of these  options was estimated at the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
weighted-average  assumptions  for the years ended  December  31, 1998 and 1997:
dividend yields of 0% and 0%, respectively;  expected volatility of 80% and 65%,
respectively;  risk-free  interest  rates of 4.8% and  5.7%,  respectively;  and
expected lives of 4.7 and 4.1 years,  respectively.  The  weighted-average  fair
value of options  granted  during the years ended December 31, 1998 and 1997 was
as follows:

                                                              1998       1997
                                                            -------    -------
     Exercise price exceeds grant date market price         $  5.96    $  7.55
     Exercise price equal to grant date market price        $ 10.83    $  4.23
     Exercise price less than grant date market price       $ 10.77    $  9.76

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

                                       32
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

Stock  Option  Plan  (Continued)
The following  summarizes the stock options  transactions under the stock option
plan:
<TABLE>
<CAPTION>

                                               Weighted-               Weighted-
                                                Average                 Average
                                Stock Options  Exercise      Other     Exercise
                                Outstanding      Price     Warrants      Price
                                ------------- ----------- ----------- ----------
           <S>                       <C>         <C>       <C>          <C>
           Balance, December 31,
             1996                    204,000     $  4.96   2,202,000    $  6.07
               Granted               733,454     $ 16.29     528,616    $ 11.58
               Exercised             (29,000)    $  5.15  (2,128,184)   $  6.28
               Canceled               (6,000)    $  9.50        (916)   $  6.50
                                -------------              ----------
           Balance, December 31,
             1997                    902,454     $ 14.10     601,516    $ 10.16
               Granted               840,000     $  8.92     100,733    $ 13.47
               Exercised             (94,000)    $  6.03     (26,400)   $  6.00
               Canceled             (181,000)    $ 15.70           -          -
                                -------------              ----------
           Outstanding, December
            31, 1998               1,467,454     $ 11.47     675,849    $ 10.99
                                =============              ==========
           Exercisable, December
            31, 1998                 467,454     $ 10.12     659,849    $ 11.03
                                =============              ==========

The weighted-average remaining contractual lives of the options and warrants are
9.2 and 3.3 years, respectively, at December 31, 1998.

</TABLE>

NOTE 5 - SALES

Major  Customers
During the year ended  December  31,  1998,  the Company did  business  with two
customers whose sales comprised approximately 30% and 24% of net sales.

During the year ended  December  31,  1997,  the Company did  business  with one
customer whose sales comprised approximately 34% of net sales.

Export Sales
For the  year  ended  December  31,  1998,  the  Company  had  export  sales  of
approximately $627,422,  principally comprised of $586,725 in Europe and $40,697
in other geographic regions.

                                       33
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 5 - SALES (Continued)

Export Sales  (Continued)
For the  year  ended  December  31,  1997,  the  Company  had  export  sales  of
approximately $957,000,  principally comprised of $761,000 in Europe, $91,000 in
Asia, and $105,000 in other geographic regions.

NOTE 6 - PROFIT SHARING

In 1996, the Company  adopted the ModaCAD 401(k) Plan (the "Plan").  The Plan is
available  to   substantially   all   employees  who  meet  length  and  service
requirements. On September 1, 1996, all permanent and full-time employees of the
Company became participants.  Participants may elect to contribute not less than
3% and no more  than 15% of their  annual  compensation.  The Plan has a Company
discretionary  profit sharing provision which the Company, for years with income
before taxes,  will contribute from 0% to 5% of income before taxes.  The amount
of the profit sharing  contribution will be determined each year by the Company.
For the years ended December 31, 1998 and 1997, employer contributions under the
Plan were approximately $0 and $22,000, respectively.


NOTE 7 - INCOME TAXES

A  reconciliation  of the  provision  for income tax expense  with the  expected
income tax computed by applying the federal  statutory income tax rate to income
before provision for income taxes at December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>

                                                                 1998    1997
                                                                -----   -----
            <S>                                                  <C>     <C>
            Income tax computed at federal statutory tax rate    34.0%   34.0%
            State taxes  (net of federal benefit)                 6.3     6.3
            Utilization of net operating loss carryforwards     (40.3)  (40.3)
                                                                -----   -----
                 Total                                              -%      -%
                                                                =====   =====
</TABLE>

As  of  December  31,  1998,   the  Company  has  federal  net  operating   loss
carryforwards of approximately $13,431,000 which expire through 2018.

                                       34
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 7 - INCOME TAXES (Continued)

Significant  components of the Company's deferred tax liabilities and assets for
federal income taxes consist of the following:

<TABLE>
<CAPTION>
            <S>                                                    <C>
            Deferred tax assets
               Net operating loss carryforwards                    $ 4,994,410
               Capitalized research and development cost for tax       133,861
               Research credits                                        798,565
               Other                                                    96,037
                                                                   -----------
                                                                     6,022,873
            Valuation allowance for deferred tax assets              5,748,785
                                                                   -----------
                                                                       274,088
            Deferred tax liabilities
               Furniture and equipment                                (109,942)
               Deferred state taxe                                    (164,146)
                                                                   -----------
                   Net deferred tax asset                          $         -
                                                                   ===========
</TABLE>

At December 31, 1998,  the Company has  provided a valuation  allowance  for the
deferred  tax asset since  management  has not been able to  determine  that the
realization of that asset is more likely than not.

The net change in the valuation  allowance for the year ended  December 31, 1998
was an increase of $3,920,450.

                                       35
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 8 - EARNINGS PER SHARE

        Earnings per share for the year ended December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                                               Earnings     Shares     Per Share
                                             (Numerator) (Denominator)   Amount
                                             ----------- ------------- ---------
             <S>                             <C>           <C>          <C>
             Basic earnings per share
                 Earnings available to common
                      stockholders           $  354,275    4,800,918    $  0.07

             Effect of dilutive securities
                 Options and warrants                 -      706,664
                                             ----------    ---------

             Diluted earnings per share
                 Earnings available to common
                      stockholders plus
                      assumed conversions    $  354,275     5,507,582   $  0.06
                                             ==========    ==========
</TABLE>

NOTE 9 - YEAR 2000 ISSUE

The Company has  conducted a  comprehensive  review of its  computer  systems to
identify the systems that could be affected by the Year 2000 Issue.

The Issue is whether  computer  systems will properly  recognize  date-sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.  The Company is  dependent  on computer  processing  in the conduct of its
business activities.

Based on the  comprehensive  review  of the  computer  systems,  management  has
determined that the Company's  computer systems will not be materially  affected
and  does  not  believe  the  cost of  implementation  will be  material  to the
Company's financial position and results of operations.

                                       36
<PAGE>
                                                                   MODACAD, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998
================================================================================

NOTE 10 - SUBSEQUENT EVENTS

In March 1999, the Company entered into a sales and license  agreement to sell a
certain  product  line for  $3,000,000.  In  addition,  the Company will provide
technical  development  support and marketing  sales  assistance in exchange for
support fees of up to $2,000,000 over the next 24 months. Furthermore, the buyer
agreed to promote the  Company's  e-commerce  solutions.  In exchange  for these
promotional activities,  the Company issued a warrant to purchase 250,000 shares
of common  stock at an  exercise  price of $16.80 per share,  expiring  in March
2004.

NOTE 11 - RESTATEMENT OF BARTER TRANSACTIONS

During the year ended  December 31, 1998,  the Company  entered into  agreements
with two barter  companies.  Under the agreements,  the Company sold a number of
its  business-to-business  products to these  companies  and recorded a total of
$1.1  million in sales,  which was the fair  market  value of the  products.  In
payment for these  sales,  the barter  companies  provided  the  Company  barter
credits  valued at $1.1 million.  To use the $1.1 million  barter  credits,  the
Company would have to spend approximately $2.7 million with the barter companies
during the periods of the agreements in media  advertising and travel  services.
As of May 19, 1999, no significant  portion of the products had been sold by the
two barter  companies and no barter credits had been used by the Company.  Based
on this current information, the Company has decided to take a more conservative
policy with regard to these  barter  transactions  and has restated its sales in
1998 by  reversing  the sales of $1.1  million and  removing  the assets of $1.1
million in barter credits.

The restatement reduces revenue by $1.1 million,  increases the net loss by $1.1
million  and reduces  assets by $1.1  million.  The  Company  intends to use the
barter  credits of $1.1 million  commencing in the third and fourth  quarters of
1999.


                                       37
<PAGE>

                                   SIGNATURE

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.

                                             ModaCAD, Inc.


Date:  May 24, 1999                  By:   /s/  JOYCE FREEDMAN
                                             -------------------------
                                             Joyce Freedman
                                             Chairman of the Board and
                                             Chief Executive Officer

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.


 /s/  JOYCE FREEDMAN             Chairman of the Board and         May 24, 1999
------------------------         Chief Executive Officer          --------------
      Joyce Freedman                                                   Date


/s/  MAURIZIO VECCHIONE          President,                        May 24, 1999
------------------------         Chief Operating Officer          --------------
     Maurizio Vecchione          and Director                          Date



/s/  LEE FREEDMAN                Vice President, Finance,          May 24, 1999
------------------------         Chief Financial Officer and     ---------------
     Lee Freedman                Director                              Date


/s/  ANDREA VECCHIONE            Secretary and Director            May 24, 1999
------------------------                                          --------------
     Andrea Vecchione                                                  Date


/s/  STEPHEN WYLE                Director                          May 24, 1999
------------------------                                          --------------
     Stephen Wyle                                                      Date


/s/  PETER FRANK                 Director                          May 24, 1999
------------------------                                          --------------
     Peter Frank                                                       Date


/s/  LESLIE SALESON              Director                          May 24, 1999
------------------------                                          --------------
     Leslie Saleson                                                    Date

                                       38