SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
(Mark One)                           FORM 10-K



 X        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
For the fiscal year ended           December 31, 1998                           
                        -------------------------------------------------------
                                       OR
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
For the  transition  period  from                        to                   
                                  ----------------------   ---------------------
                         Commission file number 0-13121
                                                -------
                            HMG WORLDWIDE CORPORATION
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             (Exact name of registrant as specified in its charter)
    DELAWARE                                                 13-3402432 
    --------                                                 ---------- 
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

475 Tenth Avenue, New York, New York                                      10018 
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     (Address of principal executive offices)                         (Zip Code)
Registrant's telephone number, including area code (212) 736-2300               
                                                  ------------------------------
Securities registered pursuant to Section 12(b) of the Act:
    Title of each class                Name of each exchange on which registered
    -------------------                -----------------------------------------
           None                                                                 
    -------------------                -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
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                                (Title of class)

     Indicated  by check mark whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes..X... No......

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein and will not 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-K or any amendment to this
Form 10-K. (X)

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the  Registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes....... No.........

     The  number of  shares  outstanding  of the  Registrant's  common  stock is
11,083,205 (as of 3/19/99).  The aggregate market value of the voting stock held
by non-affiliated stockholders of the Registrant is $26,375,207 (as of 3/19/99).

                       DOCUMENTS INCORPORATED BY REFERENCE


                                                         1

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                                                      PART I

Item 1. Business.

General Development of Business

     HMG Worldwide Corporation ("the Company"),  which was incorporated in 1984,
is one of the leading companies in the in-store marketing industry.  The Company
identifies  the  in-store  marketing  objectives  of its clients and  integrates
research, creative design, engineering,  production,  package design and related
services to provide point-of-purchase  merchandising fixture and display systems
intended  to meet such  objectives.  The  Company's  merchandising  systems  are
designed to increase retail sales by attracting and influencing consumers at the
point of sale. Such systems frequently  incorporate  interactive  displays (from
basic flip-charts to touchscreen  computer systems) to guide purchase decisions.
The Company's  merchandising  systems are also designed to improve  retail space
utilization and product organization, facilitate retail inventory management and
reduce retail labor costs.

     The Company's clients include national and multi-national consumer products
companies.  The Company is  increasingly  providing  its  products  and services
directly to mass merchandisers, chain drugstores and supermarkets.

     The   Company's   operations   are  conducted   principally   through  five
wholly-owned subsidiaries being, respectively, HMG Worldwide In-Store Marketing,
Inc. ("HMG"), HMG Intermark Worldwide Manufacturing, Inc. ("HMG Intermark"), HMG
Schutz International,  Inc. ("HMG Schutz"), Display Depot, Inc. and HMG Griffith
Worldwide In- Store  Marketing,  Inc. ("HMG  Griffith")  with  facilities in New
York, Pennsylvania, Illinois and Toronto, Canada.

Recent Developments

     The  Company  continued  to expand in 1998 as its  strategy  to expand  its
existing  client  base  through  organic  growth  and to  strategically  acquire
complementary  businesses  has  resulted  in the  Company's  eighth  consecutive
quarterly  profit.  Net revenues  increased  47.8% to $68.5 million for the year
ended  December 31, 1998. The Company  generated net income of $1.9 million,  or
$0.21 basic earnings per share, in 1998 as compared to $529,000,  or $0.06 basic
earnings per share, for the year ended December 31, 1997.

     For the  year  ended  December  31,  1998,  the  Company  accomplished  the
following:   (i)   consummated   the  acquisition  of  the  business  of  Schutz
International,  Inc., now known as HMG Schutz, a Chicago-based point-of-purchase
company,  effective  August 1,  1998,  (ii)  issued a  Promissory  Note for $1.6
million,  net of imputed interest of $278,000,  and issued 100,000 shares of its
Common  Stock  valued at $110,000 for the purchase of HMG Schutz and the Company
agreed to make certain future contingency payments based upon revenues generated
by HMG Schutz,  (iii)  acquired an option to purchase  for $2.3  million the HMG
Schutz  office and  warehouse  facilities,  (iv) further  expanded the Company's
Reading,  Pennsylvania manufacturing facilities to include a third 60,000 square
foot warehouse and distribution  center, (v) relocated and expanded the Canadian
operations through HMG Griffith, to a new 25,000 square foot office,  production
and  distribution  center and (vi)  continued to focus on retail  innovation and
client  service  to  expand  the  revenue  base with  both  retailers  and brand
manufacturers.

     In addition,  in February 1999, the Company's convertible debenture holders
elected to convert the outstanding  $2.2 million of debentures into Common Stock
at $1.25 per share pursuant to the terms of the debentures.  As a consequence of
the conversion,  the Company issued 1,728,000 shares of Common Stock and retired
the  convertible  debentures.  In addition,  on February  24, 1999,  the Company
issued  $5.0  million  7%  Convertible  Notes  Due  February  24,  2002  to  two
institutional  investors.  The principal amount of the Notes is convertible into
shares of the  Company's  Common  Stock at a  conversion  price of the lesser of
$4.00 per share or a price based on the  prevailing  market  price of the Common
Stock,  subject to a maximum issuance of 2,160,000 shares upon conversion of the
Notes,  taken  together.  The Notes  were  issued  through a private  placement;
however,  the Company has  undertaken to register,  for resale by the holders of
the Notes,  the shares which may be acquired  upon the  conversion  of the Notes
under the Securities Act of 1933.


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     Furthermore,  during the fourth  quarter of 1998 the  Company  engaged  BNY
Capital  Markets  ("BNY  Capital"),  a division of The Bank of New York,  and an
independent  financial  consultant  to  assist  the  Company  in  targeting  and
financing new,  strategic  acquisitions.  The Company,  in conjunction  with BNY
Capital, currently is seeking to refinance its existing revolving line of credit
and term loans under more favorable terms and to provide a source of acquisition
financing  in the form of debt.  The Company is seeking a $35.0  million  credit
facility. As part of the acquisition and refinancing activities sponsored by the
Company, the Company recorded a $221,000 increase to additional paid in capital,
using the Black  Scholes  option  pricing  model,  for the  issuance  of 650,000
warrants to acquire the Company's  Common Stock at an average  exercise price of
$1.10 per share.

     Management  believes that each of the above  accomplishments  positions HMG
well as a leading,  innovative,  client service oriented company in the in-store
marketing industry.  Furthermore, HMG will continue to seek to acquire strategic
businesses  which will  expand the  Company's  products  and  services,  provide
improved distribution and reduce operating and manufacturing costs.

     The above statements and certain other statements  contained in this annual
report on Form 10-K are  based on  current  expectations.  Such  statements  are
forward  looking  statements  that involve a number of risks and  uncertainties.
Factors  that could  cause  actual  results  to differ  materially  include  the
following (i) general economic  conditions at retail,  (ii)  competitive  market
influences,  (iii)  client  budgetary  restrictions,  (iv) delays in shipment of
scheduled programs to clients, (v) delay in or inability to expand the Company's
client  base  and/or  (vi) the loss of or  reduction  in  spending  of  existing
clients.

Executive Offices

     The Company's  executive offices are located at 475 Tenth Avenue, New York,
New York 10018 and its  telephone  number is (212)  736-2300.  Unless  otherwise
indicated, all references to the Company include all of its subsidiaries.


Industry Overview

     The in-store marketing industry is an estimated $12.7 billion industry. The
Company  believes   point-of-purchase   merchandising  systems  provide  a  more
effective, measurable and low-cost means of attracting and influencing consumers
than television, print or other traditional mass advertising media.

     While  television  advertising  costs have risen, the number of viewers per
commercial  has decreased  because cable  television has increased the number of
channels   available  to  viewers.   Furthermore,   remote   control  units  and
videocassette  recorders have enabled viewers to avoid commercials.  The growing
number of special-interest  magazines,  which segment reader  demographics,  has
similarly  limited the effectiveness of print advertising while the cost of such
advertising  has also  increased.  The Company  believes  that a majority of all
consumer brand purchase decisions are made on impulse at the point of sale. With
consumers making so many decisions at the point of sale,  retailers and consumer
products  companies  are paying  greater  attention  to how  products  and brand
categories are organized and presented in-store. Point-of-purchase merchandising
systems  attract  and  influence  consumers  at the time  when the  majority  of
purchase decisions are made.

     The  Company  believes  retailers  are also  driving the growth of in-store
marketing. Computerized bar-coding and scanner systems have enabled retailers to
identify high-margin, high-turnover products and more effectively allocate floor
or shelf space to such products. Concurrently,  consumer products companies have
been  faced  with  an  increasing  number  of  competitive  products,  including
private-label  offerings  of  retailers.  As a result,  many  consumer  products
companies have sought to maximize the appeal and  efficiency of their  allocated
space in retail stores.  In-store merchandising systems are designed to increase
retail sales by attracting and influencing  consumers at the point of sale. Such
systems  also are  designed  to improve  retail  space  utilization  and product
organization,  facilitate  retail  inventory  management and reduce retail labor
costs.  In-store  merchandising  systems also become an  important  component of
merchandising  products and brand  categories  to create  competitive  points of
differentiation between each retail chain.


                                                         3

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Operations

General
     The Company identifies the strategic,  in-store marketing objectives of its
clients and  integrates  research,  creative  design,  engineering,  production,
package design and related services to provide  point-of-purchase  merchandising
display systems  intended to meet such objectives.  The Company's  merchandising
systems are  generally  strategic  in nature,  "solutions  oriented"  and custom
designed to fit each client's requirements and specifications. Typically, at the
request of a client,  the Company  creates a customized  prototype,  which often
includes  packaging  for  the  client's  product  in  addition  to the  in-store
merchandising  display.  Although  clients  occasionally  provide the  Company's
creative design department with specific  merchandising ideas, in most instances
clients merely indicate the general nature of the fixture or display they desire
and rely upon the Company's  creative  design  department to conceive and create
the merchandising system.

     The  Company's  design  and  engineering   departments  work  closely  from
conception  through  final  assembly and field  installation  with each client's
marketing  and  sales  representatives  and  the  retailers  to  facilitate  the
development of a  merchandising  system.  The Company's  design  department,  in
concert  with the  client,  develops  alternative  marketing  ideas,  which  the
Company's engineering  department,  upon approval by the client, develops into a
prototype  system.  The  Company's  design and  engineering  departments  employ
Auto-CAD  and Solid  Works  equipment  which,  among other  things,  enables the
Company to design proprietary stock components which can be easily  incorporated
into various  projects as well as change project designs more easily and quickly
in response to a client's needs.

     If  a  client,  after  reviewing  the  Company's   prototype,   decides  to
test-market the fixture or display,  the Company provides  in-store research and
market  feasibility  services to test such prototype.  A client is often able to
ascertain from the results of the Company's market studies whether the Company's
merchandising  systems are likely to lead to improved sales. If indicated by the
results of its  research,  the Company will  fine-tune  or modify its  prototype
system for the client.  The period from  development to a volume  purchase order
typically spans 6 to 18 months.  There can be no assurances that the development
and  test-marketing  of a  prototype  for a client will  ultimately  lead to any
volume orders.

Production and Assembly
     The  Company  has  the  internal   capability  to  injection  mold  plastic
components,  fabricate  wire and metal  components,  assemble its  merchandising
systems,  and warehouse and distribute its products,  as compared to many of its
competitors  which have no  injection  molding,  wire or metal  fabrication,  or
assembly facilities,  and warehouse or distribution  capacity and must outsource
to third  parties.  Once the  Company  enters  into a contract  with a client to
manufacture merchandising fixture and display units for installation, it makes a
determination,  generally based upon cost  considerations,  whether to undertake
the  production and assembly in its own facilities or to outsource it to others.
The Company's  production and assembly  facilities are principally  employed for
larger orders and facilitate  better client  service,  inventory  management and
production controls.

     All  merchandising  systems,  whether  assembled  by  the  Company  or  its
independent  subcontractors,  are delivered to the Company's clients or directly
to retail locations.  Typically, there is some simple on-site assembly required,
which is usually  performed by the client's  own  personnel,  or through a third
party  contractor,  although  the  Company  will  assist in on-site  assembly if
requested.  The Company often provides clients with an "800" telephone  customer
service number to call for assistance in connection with on-site assembly.

Suppliers
     The Company uses and has  available a variety of outside  sources to supply
the raw materials and fabricated  components used in its merchandising  systems.
Such material and  components  are readily  available  from a number of sources.
Although the Company designs the software for its interactive  computer systems,
it procures hardware components from a variety of third parties,  which are also
readily available from a number of sources. The Company


                                                   4

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has not  experienced  any  significant  disruptions  from  shortages or delivery
delays, and believes that its present sources of supply are adequate.

International
     Effective  July 1, 1997,  the Company  opened a full  service  office,  HMG
Griffith,  in Toronto,  Canada. For the year ended December 31, 1998 and the six
months ended December 31, 1997, net revenues in Canada were  approximately  $3.5
million  and  $494,000,  respectively,  and the  Company  realized  income  from
operations  of $218,000 and a loss from  operations  of  approximately  $31,000,
respectively.


Products

     The Company's  merchandising  systems are designed to increase retail sales
by  attracting  and  influencing  consumers  at the point of sale.  Such systems
frequently   incorporate   interactive   displays  (from  basic  flip-charts  to
touchscreen  computer  systems)  to  guide  purchase  decisions.  The  Company's
merchandising  systems are also designed to improve retail space utilization and
product  organization,  facilitate retail inventory management and reduce retail
labor costs.

Custom Displays
     The Company designs,  assembles and markets  in-store custom  merchandising
fixtures and display systems for consumer products companies as well as national
and regional retailers. Its systems include in-store fixtures, shelf- management
and  category-management  systems,  freestanding  displays  and sales  promotion
materials.  Examples of the  Company's  systems  include the  L'eggs(R)  hosiery
merchandising  systems,  the Pillsbury(R) dough display system and the shelf and
pegboard  systems  for  Procter  &  Gamble's  Cover  Girl(R)  and Max  Factor(R)
cosmetics lines. The Company has also developed  several  "store-within-a-store"
systems,  whereby retail space is specifically  devoted to a particular brand or
category and is distinctly  identifiable by appearance within the context of the
overall  retail  environment.  An  example  of a  "store-within-a-store"  system
designed and  produced by the Company is the Thom McAn shoe  centers  located in
Kmart Corporation  ("Kmart") stores and Wal*Mart Stores ("Wal*Mart")  electronic
centers.

Stock Displays
     Although  many  of  the  Company's  clients  require  custom  merchandising
systems,  certain components therein can frequently be used in other systems. As
a result,  the Company has  accumulated  tools and molds for component parts and
displays  which are  included in a catalogue  and  marketed to existing  and new
clients.  Since  the  investment  in time  and  money  for the  development  and
production of the tooling for the components and displays has already been made,
the Company can provide many of its clients with a timely,  low-cost solution to
certain of their in-store merchandising needs. For example, the Company's System
35 is a freestanding display that can be ordered in 30 different size variations
with multiple shelf  configurations.  The System 35 addresses  consumer products
companies'  and retailers'  needs for permanent  island  displays that,  through
color,  size, number of shelves and header  treatments,  can be customized for a
multitude  of  consumer  products.   The  Company  also  markets  a  variety  of
standardized  on-shelf  modifications  such as extrusions  and  dividers.  These
modifications  offer the ability to  differentiate  display space by identifying
brand or category space and provide an area for communication of information.

Interactive Systems
     The  Company's   interactive   display  systems   include   shelf-edge  and
freestanding flip-charts, mechanical demonstration units and battery-powered and
touchscreen  computer  systems.  Computer-based  systems  are  useful  both as a
point-of-purchase  merchandising  tool and an effective  means of collecting and
disseminating information.  The interactive computer-based systems ask consumers
to respond to a series of questions.  After analyzing the consumer's  responses,
the system makes  recommendations of appropriate  products which are immediately
available for purchase on the surrounding display.  Computer-based  systems also
enable consumer products companies to retrieve market research information based
upon consumers'  responses,  give consumers  comprehensive  and accurate product
information  and assist  consumers  when sales  personnel are  unavailable.  The
Company's  sales of  computer-based  systems are directed  toward large consumer
products  companies  and  mass  merchandisers,  which  potentially  can use such
systems in quantities of 250 or more units.

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Clients

     The Company's clients include national and multi-national consumer products
companies  such as Sara  Lee  Corporation  ("Sara  Lee")  and  Procter  & Gamble
("P&G"),  both of which  have been  clients  for more than 20 years,  as well as
Clairol Corporation  ("Clairol"),  CVS/Pharmacy ("CVS"),  Foster Grant Group LLP
("FGG"),  Hallmark Cards, Inc.  ("Hallmark"),  Kmart,  Microsoft,  The Pillsbury
Company, Target Stores, Inc., Walgreen Stores, Inc. and Wal*Mart.

     With the greater  availability of information  regarding  in-store  product
turnover,  the Company is  increasingly  providing  its  products  and  services
directly to mass merchandisers, chain drugstores and supermarkets. Wal*Mart, for
example,  has engaged the Company to design and assemble  "store-within-a-store"
systems to provide its stores with visually discreet merchandising displays that
maximize  space  efficiencies.  In  addition,  the  Company  works with  certain
consumer products companies and retailers which have recently entered into joint
arrangements  to develop and purchase their own  "store-within-a-store"  display
systems with the  intention of leasing  portions  thereof to yet other  consumer
products companies.

     For  the  year  ended   December  31,  1998,  P&G  and  CVS  accounted  for
approximately 12% and 11%,  respectively,  of the Company's net revenue. For the
year ended December 31, 1997,  Bristol Meyers Squibb, P&G and Wal*Mart accounted
for approximately 12%, 12% and 11%, respectively, of the Company's net revenues.
For the year ended December 31, 1996,  P&G, Sara Lee and Wal*Mart  accounted for
approximately  17%, 12%, and 11%,  respectively,  of the Company's net revenues.
Although  the  Company's  relationship  with many of its larger  accounts  spans
several  years,  none of these accounts is  contractually  bound to purchase the
Company's  products or  services.  The loss of any one such client  would have a
material adverse effect on the Company.

Backlog

     At December 31, 1998, the Company's aggregate backlog was $48.8 million, as
compared  to $32.0  million  and $15.6  million at  December  31, 1997 and 1996,
respectively.  Of such  aggregate  backlog at December 31,  1998,  no one client
exceed 10% of such backlog.  The Company anticipates that substantially all such
backlog at December 31, 1998,  will be filled during the next twelve months.  In
addition to the $48.8 million backlog at December 31, 1998, the Company's Supply
Contract  with  Foster  Grant   requires   Foster  Grant,   subject  to  certain
limitations,  to purchase at least 70% of all its in-store merchandising display
purchases  from the Company with average  annual  purchases to aggregate no less
than $2.5 million.  The aggregate  value of the Foster Grant Supply  Contract at
December  31, 1998 was $23.9  million of which the Company  estimates  that $2.5
million will be shipped within the next twelve months. Due to quarter to quarter
fluctuations in the Company's backlog levels due to the timing,  nature and size
of its  merchandising  system programs for its clients,  such backlog levels are
not necessarily an indicator of future net revenue levels.


Marketing and Sales

     Sales  of  the  Company's   merchandising  displays  and  point-of-purchase
services are generated by Michael Wahl, its Chief Executive  Officer,  and by 43
other sales and account  management  employees.  The Company typically sells its
in-store  fixture and display  systems  pursuant  to  separate  purchase  orders
following  customer approval of a prototype.  However,  the Company is also paid
for its  services in creating,  developing  and testing  in-store  merchandising
systems  and in  assembling  prototypes  prior  to  receipt  of  production  run
approvals.  To a limited extent,  sales are also generated  through  independent
sales representatives.






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Warranties

     The Company generally does not warrant its merchandising systems to be free
from defects in materials or workmanship but generally replaces any system found
to be defective.  Such replacement  costs  historically  have been minimal.  The
Company generally warrants its interactive  point-of-purchase systems to be free
from  defects in  materials  or  workmanship  for periods  ranging  from 3 to 12
months. The particular warranty granted on each sale is generally  determined on
a client-by-client, product-by-product basis.


Patents

     The Company  has been  issued  various  United  States and foreign  patents
relating  to certain  components  of its  merchandising  systems and has several
additional  patent  applications  pending.  The Company  does not regard  patent
protection  as being of  material  importance  to its  ability  to  successfully
compete in the in-store  merchandising  display  industry.  The Company does not
hold any patents or material  copyrights with respect to its computer  software.
The Company relies upon confidentiality  agreements,  as well as restrictions on
dissemination  of  information  to  employees,  to  safeguard  its  confidential
information.


Competition

     The custom  merchandising  fixture  and  display  segment  of the  in-store
marketing  industry in which the Company  primarily  competes is very fragmented
and highly competitive. Certain of the Company's competitors,  including several
diversified  companies that not only design and assemble  merchandising  systems
for  their  own  products,  but  also  provide  such  systems  and  services  to
unaffiliated  concerns,  may have greater financial and other resources than the
Company. In addition, although the Company believes that it has certain creative
design,  technological,  managerial and other  advantages over its  competitors,
there can be no assurance that the Company will maintain such advantages.

     Most  competitors   generally   operate  on  a  local  or  regional  level.
Additionally,  competitors often specialize in only one particular aspect of the
custom merchandising  fixture and display business.  As a result, the Company is
one of the largest  participants in this field. As consumer  products  companies
and retailers  increasingly require vendors to offer comprehensive  services and
sophisticated   technologies,   many  smaller  operators,  which  are  primarily
privately  held,  may not have the  capital  resources,  management  skills  and
technical expertise necessary to compete. Consequently, the Company believes the
demand for its products and services  will  increase and industry  consolidation
will occur.  The Company further believes it is well positioned to capitalize on
such consolidation.


Employees

     As of March 19,  1999,  the  Company  employed  425  persons,  including  4
executive  officers,  214  in  production  and  assembly,  38 in  design,  55 in
purchasing and engineering,  43 in marketing and sales and 71 in administration.
Approximately  102  of the  Company's  employees  are  covered  by a  collective
bargaining  agreement  between  the  Company  and  Local  241  of  the  National
Federation of Independent Unions, which expires December 31, 1999. Approximately
60 of the Company's employees are covered by a collective  bargaining  agreement
between  the Company and Local 810 of the Alloys and  Hardware  Fabricators  and
Warehousemen,  which  expires  April 30,  2000.  The Company  believes  that its
current labor relations are good.


Financial Information about Foreign Operations and Export Sales

     Reference is made to Note 11 in Notes to Consolidated  Financial Statements
included in Item 8 hereof.

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Item 2. Facilities.

     The Company's  executive offices are located at 475 Tenth Avenue, New York,
New York 10018, where it leases approximately 48,000 square feet pursuant to two
leases that expire in October 2002.  The aggregate  annual base rentals for such
floors is approximately  $482,000. The Company sublets 8,750 square feet of such
space for  approximately  $92,000 annually under a sublease  expiring in October
2002. The Company also leases approximately 4,500 square feet of office space at
230  East  Ohio  Street  in  Chicago,  Illinois  at an  annual  base  rental  of
approximately  $70,000  pursuant  to a lease  which  expires in June  2000.  The
Company leases  approximately  35,000 square feet of space at 8710 Ferris Avenue
in Morton  Grove,  IL on a month to month basis while the Company  evaluates its
option to purchase such facility for $2.3 million.  The purchase  option expires
no earlier than March 2000. The Company leases  approximately 25,000 square feet
of office and  warehouse  space at 9 City View  Drive in  Toronto,  Canada,  for
approximately $63,000 annually expiring in August 2003.

     The Company  operates three production and assembly  facilities  located in
Reading, Pennsylvania. Two of the Company's Reading, Pennsylvania facilities are
owned by the Company and are comprised of (i) a 140,000 square foot  multi-story
production  facility on three acres of  property  and (ii) a 72,500  square foot
single story production facility on five acres of property. The third production
and assembly  facility is  comprised  of 60,000  square feet of space at current
annual base rental of  approximately  $165,000  annually  which  expires in June
2003.

     The Company operates a production  facility located in Brooklyn,  New York.
The Company  leases  approximately  21,000  square feet,  which expires in April
2002, at an annual base rent of $63,000. Additionally, the Company has an option
to renew  this  lease  for an  additional  five year  term  subject  to a rental
increase based upon the change in the Consumer Price Index from the base year of
1997.

Item 3. Legal Proceedings.

     The Company is subject to certain legal  proceedings  and claims which have
arisen in the ordinary  course of its business.  These  actions when  ultimately
concluded will not, in the opinion of management, have a material adverse effect
upon the financial position, results of operations or liquidity of the Company.

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

     The Company's Annual Meeting of shareholders was held on November 10, 1998.
The following matters were submitted to a vote of stockholders of the Company:


   1.  The Company's stockholders elected seven directors for the ensuing year
       as follows:
            Ivan Berkowitz              For:    7,380,821     Withheld:    5,780
            Robert V. Cuddihy, Jr.      For:    7,380,821     Withheld:    5,780
            Herbert F. Kozlov           For:    7,380,821     Withheld:    5,780
            L. Randy Riley              For:    7,380,821     Withheld:    5,780
            Lawrence J. Twill, Sr.      For:    7,380,821     Withheld:    5,780
            Andrew Wahl                 For:    7,380,821     Withheld:    5,780
            Michael Wahl                For:    7,380,821     Withheld:    5,780

   2.  The Company's  stockholders  ratified and approved the  Company's  1998
       Stock  Option  Plan with  2,603,003  votes for,  889,000  against,  and
       3,894,598 abstain.

   3.  The  Company's  stockholders  ratified and  approved  the  selection of
       Friedman Alpren & Green LLP as the Company's  independent  auditors for
       the fiscal year ending December 31, 1998. This motion was approved with
       7,366,787 votes for, 10,500 against and 9,314 abstain.
     
                                                         8

<PAGE>



                                                      Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

Market Information

     The  Company's  Common  Stock  is  quoted  on The  Nasdaq  SmallCap  Market
("Nasdaq")  tier of the  Nasdaq  Stock  Market  under  the  symbol  "HMGC".  The
following  table  sets  forth the range of the high and low  quotations  for the
common  stock  for  the  periods  indicated.   Such  market  quotations  reflect
inter-dealer  prices,  without  mark-up,  markdown  or  commission  and  may not
necessarily represent actual transactions.

                                                             High      Low
             1998
         First quarter . . . . . . . . . . . . . . . . . .$  1-3/8     $ 1
         Second quarter . . . . . . . . . . . . . . . . .    2-1/16      1-1/8
         Third quarter  . . . . . . . . . . . . . . . . .    1-7/8       1-15/16
         Fourth quarter . . . . . . . . . . . . . . . . .    2-7/16         3/4


              1997
         First quarter. .. . . . . . . . . .. . . . . . . $ 1-7/16     $ 1
         Second quarter. . . . . . . . . . . . .. . . . .   1-1/2        7/8
         Third quarter. . . . . . . . . . . . . . . . . .   2            7/8
         Fourth quarter. . . . . . . . . . . . . . . . . .  1-1/2       31/32

     At March 19, 1999, there were 225 holders of record and approximately 1,325
beneficial  stockholders  of the  Company's  Common  Stock and the  closing  bid
quotation of the Common Stock on Nasdaq was $3-7/8 per share.

Dividend Policy

     The Company has not paid dividends on the Common Stock since its inception.
The Company  intends to reinvest any earnings in its business to finance  future
growth.  Accordingly,  the Board of Directors does not anticipate  declaring any
cash dividends in the foreseeable  future.  In addition,  under the terms of its
revolving credit facility, the Company is prohibited from paying cash dividends.
See Note 5 in Notes to the Consolidated  Financial Statements included in Item 8
hereof.


                                                         9

<PAGE>



Item 6. Selected Historical Financial Data.

     The selected  historical  financial data presented below as of December 31,
1998 and 1997 and for each of the years in the three year period ended  December
31, 1998, 1997 and 1996 have been derived from and should be read in conjunction
with the Company's audited  Consolidated  Financial Statements and related notes
thereto and with  "Management's  Discussion and Analysis of Financial  Condition
and Historical  Results of Operations"  included  elsewhere herein.  All of such
selected  financial  data of the Company has been derived from the  Consolidated
Financial Statements of the Company,  which have been audited by Friedman Alpren
& Green LLP, Independent  Certified Public Accountants.  The selected historical
financial data,  which include Balance Sheet data at December 31, 1996, 1995 and
1994 and Statement of Operations  data for the years ended December 31, 1995 and
1994 has been derived  from  Consolidated  Financial  Statements  not  presented
herein.

<TABLE>

                                                             Year Ended December 31,                      
                                            ----------------------------------------------------------
                                            1998         1997         1996          1995          1994
                                            ----         ----         ----          ----          ----
                                                      (in thousands, except per share data)
<S>                                        <C>           <C>          <C>           <C>           <C>    
 Statement of Operations Data


Net revenues ........................     $ 68,457     $ 46,311     $ 45,552      $ 47,641      $ 55,578

Income (loss) from operations .......        3,299        1,079       (5,040)      (10,009)         (795)

Net income (loss) ...................     $  1,904     $    529     ($ 5,535)     ($10,118)     ($   963)
                                          ========     ========     ========      ========      ========

Basic earnings per share data
  Net income (loss) per common shares     $   0.21     $   0.06     ($  0.73)     ($  1.34)     ($  0.17)
                                          ========     ========     ========      ========      ========

  Weighted average number of
   common shares outstanding ........        9,094        8,638        7,614         7,568         5,643
                                          ========     ========     ========      ========      ========

Diluted earnings per share data
  Net income (loss) per common and
   common equivalent shares .........     $   0.19     $   0.05     ($  0.73)     ($  1.34)     ($  0.17)
                                          ========     ========     ========      ========      ========

  Weighted average number of common
   and common equivalent shares .....       10,712       11,206        7,614         7,568         5,643
                                          ========     ========     ========      ========      ========

</TABLE>
<TABLE>

                                                                    December  31,                                 
                                          ------------------------------------------------------------
                                            1998         1997         1996          1995          1994
                                            ----         ----         ----          ----          ----
 Balance Sheet Data:                                              (in thousands)

<S>                                       <C>          <C>          <C>           <C>           <C>     
  Cash and cash equivalents. . . . . . . .$  5,730     $  6,439     $  6,950      $  8,139      $  6,469
  Working capital. . . . . . . . . . . . .     804         (426)      (3,236)        2,624        14,119
  Total assets. . . . . . . . . . . . . .   51,729       33,645       28,755        32,648        36,718
  Long-term debt. . . . . . . . . . . . .    4,251        2,878          266           -           3,182
  Stockholders' equity. . . . . . . . . .    9,068        6,470        5,191        10,076        20,223

</TABLE>



                                                          10

<PAGE>



Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.

General

     The  Company  continued  to expand in 1998 as its  strategy  to expand  its
existing  client  base  through  organic  growth  and to  strategically  acquire
complementary  businesses  has  resulted  in the  Company's  eighth  consecutive
quarterly  profit.  Net revenues  increased  47.8% to $68.5 million for the year
ended  December 31, 1998. The Company  generated net income of $1.9 million,  or
$0.21 basic earnings per share, in 1998 as compared to $529,000,  or $0.06 basic
earnings per share, for the year ended December 31, 1997.

     For the  year  ended  December  31,  1998,  the  Company  accomplished  the
following:   (i)   consummated   the  acquisition  of  the  business  of  Schutz
International,  Inc., now known as HMG Schutz, a Chicago-based point-of-purchase
company,  effective  August 1,  1998,  (ii)  issued a  Promissory  Note for $1.6
million,  net of imputed interest of $278,000,  and issued 100,000 shares of its
Common  Stock  valued at $110,000 for the purchase of HMG Schutz and the Company
agreed to make certain future contingency payments based upon revenues generated
by HMG Schutz,  (iii)  acquired an option to purchase  for $2.3  million the HMG
Schutz  office and  warehouse  facilities,  (iv) further  expanded the Company's
Reading,  Pennsylvania manufacturing facilities to include a third 60,000 square
foot warehouse and distribution  center, (v) relocated and expanded the Canadian
operations through HMG Griffith, to a new 25,000 square foot office,  production
and  distribution  center and (vi)  continued to focus on retail  innovation and
client  service  to  expand  the  revenue  base with  both  retailers  and brand
manufacturers.

     In addition,  in February 1999, the Company's convertible debenture holders
elected to convert the outstanding  $2.2 million of debentures into Common Stock
at $1.25 per share pursuant to the terms of the debentures.  As a consequence of
the conversion,  the Company issued 1,728,000 shares of Common Stock and retired
the  convertible  debentures.  In addition,  on February  24, 1999,  the Company
issued  $5.0  million  7%  Convertible  Notes  Due  February  24,  2002  to  two
institutional  investors.  The principal amount of the Notes is convertible into
shares of the  Company's  Common  Stock at a  conversion  price of the lesser of
$4.00 per share or a price based on the  prevailing  market  price of the Common
Stock,  subject to a maximum issuance of 2,160,000 shares upon conversion of the
Notes,  taken  together.  The Notes  were  issued  through a private  placement;
however,  the Company has  undertaken to register,  for resale by the holders of
the Notes,  the shares which may be acquired  upon the  conversion  of the Notes
under the Securities Act of 1933.

     Furthermore,  during the fourth  quarter of 1998,  the Company  engaged BNY
Capital  Markets  ("BNY  Capital"),  a  division  of The Bank of New York and an
independent  financial  consultant,  to assist  the  Company  in  targeting  and
financing new,  strategic  acquisitions.  The Company,  in conjunction  with BNY
Capital,  is currently  seeking to refinance  its  exsisting  revolving  line of
credit and term  loans  under  more  favorable  terms and to provide a source of
acquisition  financing  in the form of debt.  The  Company  is  seeking  a $35.0
million credit facility.  As part of the acquisition and refinancing  activities
sponsored by the Company, the Company recorded a $221,000 increase to additional
paid in capital,  using the Black Scholes option pricing model, for the issuance
of 650,000 warrants to acquire the Company's Common Stock at an average exercise
price of $1.10 per share.

     Management  believes that each of the above  accomplishments  positions HMG
well as a leading,  innovative,  client service oriented company in the in-store
marketing industry.  Furthermore, HMG will continue to seek to acquire strategic
businesses  which will  expand the  Company's  products  and  services,  provide
improved distribution and reduce operating and manufacturing costs.








                                                          11

<PAGE>



Results of Operations

Year Ended December 31, 1998 as Compared to
  Years Ended December 31, 1997 and 1996

     Net revenues increased by approximately  $22.2 million to $68.5 million for
the year ended  December 31, 1998 from $46.3 million for the year ended December
31, 1997.  This 47.8% increase in net revenues from 1997 to 1998 was principally
due to the effects of (i) the net revenues from HMG Schutz,  acquired  effective
August 1, 1998 of approximately  $8.9 million,  (ii) an increase of net revenues
from  HMG  Griffith,  acquired  effective  July 1,  1997 of  approximately  $3.0
million,  and (iii) an increase of net revenues of  approximately  $10.2 million
from a more diversified client base and through the national roll out of several
new  retailer   sponsored   merchandising   programs.   Net  revenues  increased
approximately  $759,000 million to $46.3 million for the year ended December 31,
1997 from $45.6 million for the year ended  December 31, 1996.  This 2% increase
in net  revenues  from  1996 to 1997 was  principally  the net  effect of (i) an
increase of net revenues from the Company's new Toronto office of  approximately
$494,000,  (ii) an increase of net revenues from a more diversified  client base
of approximately  $2.6 million and (iii) a decrease in the combined net revenues
of the  Company's top three  clients of 1997 versus 1996 of  approximately  $2.3
million due to the timing of marketing expenditures by major clients in addition
to the timing of national  roll-outs of merchandising  systems  developed by the
Company.

     Gross profit increased  approximately $6.2 million to $19.2 million for the
year ended  December 31, 1998 from $13.0 million for the year ended December 31,
1997 due to the  increase in the  Company's  net  revenues.  For the years ended
December 31, 1998 and 1997,  the gross margin  remained  stable at 28.1%.  Gross
margins  remained  stable  principally  due to the  Company's  emphasis  in more
direct, internal production of its merchandising systems. Gross profit increased
approximately $5.1 million to $13.0 million for the year ended December 31, 1997
from $7.9  million for the year ended  December  31, 1996 due to the increase in
the Company's  net revenues and an increase in gross margin.  For the year ended
December  31,  1997,  the gross  margin was 28.1% as  compared  to 17.5% for the
comparable  1996 period.  The 10.6% increase in gross margin was principally due
to a favorable production revenue mix resulting in an 11.7% increase, reflecting
the Company's efforts of more direct,  internal  production of its merchandising
systems,  lower labor costs and the  elimination  of the Company's high cost New
Jersey plant and the under absorption of fixed overhead expenses as a percentage
of net revenues of 1.2%. The favorable  production  revenue mix was  principally
the result of an increase in the number of programs  manufactured  and assembled
at  the  Company's  Pennsylvania  and  Brooklyn  facilities  and  the  increased
operational efficiencies on the specific programs shipped.

     Selling,   general   and   administrative   expenses   ("SG&A")   increased
approximately $3.9 million to $15.9 million for the year ended December 31, 1998
as compared to $12.0 million for the year ended  December 31, 1997. The increase
in SG&A from 1997 to 1998 was  principally  a result of (i) the  addition of HMG
Schutz  SG&A,  $2.7  million,  (ii)  the  expansion  of HMG  Griffith,  $607,000
increase,  and (iii) an  increase  in other  general  expenses.  SG&A  decreased
approximately $1.0 million to $12.0 million for the year ended December 31, 1997
as compared to $13.0 million for the year ended  December 31, 1996. The decrease
in SG&A from 1996 to 1997 was principally a result of (i) the continuing  effect
of the consolidation of manufacturing facilities,  (ii) a reduction in personnel
cost of  $532,000,  (iii)  expenses  of  $175,000  related  to the  discontinued
European operation and (iv) decreased spending in other general expenses

     For the year ended December 31, 1998, the Company generated interest income
of $274,000 as compared to $323,000 and $351,000,  for the  comparable  1997 and
1996 periods,  respectively.  The decrease in interest  income of  approximately
$49,000  from 1997 to 1998 and the  decrease  of  $28,000  from 1996 to 1997 was
attributable principally to a reduction in cash and cash equivalents invested in
interest bearing marketable securities and commercial paper.

     Interest  expense was $1.7 million for the year ended  December 31, 1998 as
compared to $1.1 million and $834,000 for the comparable  1997 and 1996 periods,
respectively.  The increase in interest expense of  approximately  $553,000 from
1997 to 1998 and $264,000 from 1996 to 1997 was principally due to the increased
average borrowing in the respective years.


                                                          12

<PAGE>



     Other  income of  $267,000  for the year ended  December  31,  1997 was the
result of common stock  received by the Company from a client in lieu of payment
for services rendered to such client. In March 1997, the Company sold the shares
of common stock and generated a net gain of $267,000.

     As a consequence of the foregoing factors,  the Company realized net income
of approximately  $1.9 million,  or $0.21 basic earnings per share, for the year
ended  December 31, 1998 as compared to net income of  $529,000,  or $0.06 basic
earnings per share,  for the year ended  December  31, 1997.  For the year ended
December 31, 1996, the Company incurred a net loss of $5.5 million, or $0.73 per
share.


Stockholders' Equity

     Stockholders'  equity increased  approximately $2.6 million to $9.1 million
at December 31, 1998 from $6.5 million at December 31, 1997. The net increase in
stockholders' equity was principally due to (i) net income of $1.9 million, (ii)
proceeds  derived from the HMG Private  Placement  of Common  Stock  whereby the
Company  issued  150,000  shares  of  Common  Stock  for an  aggregate  value of
$169,000,  (iii) the issuance of 100,000  shares of Common Stock pursuant to the
acquisition  of HMG Schutz  valued at  $110,000,  (iv) the  issuance of warrants
valued at $221,000 and (v) the issuance of 123,055 shares of Common Stock by the
Company to the HMG Worldwide  Corporation  Capital  Accumulation  Plan valued at
$154,000.


Income Taxes

     At  December  31,  1998,  the Company had  available  $34.6  million of net
operating  loss carry  forwards which expire during the years 2001 through 2013.
The  Company's  income tax  provision  for the year ended  December 31, 1998 was
$31,000 as compared to $42,000 and $12,000 for the years ended December 31, 1997
and December 31, 1996,  respectively,  and resulted  principally  from state and
local alternative minimum taxes.


Backlog

     At December 31, 1998,  the Company's  aggregate  backlog was  approximately
$48.8  million,  as compared to $32.0  million and $15.6 million at December 31,
1997 and 1996, respectively.  Of such aggregate backlog at December 31, 1998, no
one  client  exceeded  10%  of  such  backlog.   The  Company  anticipates  that
substantially  all such backlog at December 31, 1998,  will be filled during the
next twelve  months.  In addition to the $48.8  million  backlog at December 31,
1998, the Company's  Supply  Contract with Foster Grant  requires  Foster Grant,
subject to certain  limitations,  to purchase  at least 70% of all its  in-store
merchandising  display  purchases from the Company with average annual purchases
to aggregate no less than $2.5 million.  The aggregate value of the Foster Grant
Supply  Contract  at December  31,  1998 was $23.9  million of which the Company
estimates that $2.5 million will be shipped  within the next twelve months.  Due
to quarter to quarter  fluctuations  in the Company's  backlog levels due to the
timing,  nature and size of its  merchandising  system programs for its clients,
such  backlog  levels are not  necessarily  an  indicator  of future net revenue
levels.


Inflation

     The  effect  of  inflation  on  the  Company's   operations  has  not  been
significant to date.







                                                          13

<PAGE>



Liquidity and Capital Resources

     Cash and cash  equivalents at December 31, 1998,  1997 and 1996  aggregated
approximately $5.7 million, $6.4 million and $6.9 million, respectively. For the
years ended  December  31,  1998,  1997 and 1996 the  Company's  cash flows from
operating, investing and financing activities are summarized below:

<TABLE>

                                                                    Year Ended December 31,
                                                                 -----------------------------
                                                                 1998        1997         1996
                                                                 ----        ----         ----
                                                                         (in millions)
<S>                                                              <C>         <C>          <C>   
Net cash used in operating activities ........................  ($ 3.2)     ($ 3.3)      ($ 2.0)
                                                                ------      ------       ------ 
                                                                  
Investing activities:
  Acquisition, net of cash acquired ..........................     0.1
  Proceeds from sale of an investment ........................                 0.4
  Capital expenditures .......................................    (1.5)       (1.8)        (1.6)
                                                                  ----        ----         ---- 
  
   Net cash provided by (used in) investing activities .......    (1.4)       (1.4)        (1.6)
                                                                  ----        ----         ---- 


Financing activities:
  Net proceeds from sale of common stock .....................     0.2         0.5           0.4
  Proceeds from exercise of stock options ....................                               0.3
  Proceeds derived from the sale of convertible debentures ...                 2.2
  Net increase in indebtedness ...............................     3.7         1.5           1.7
                                                                   ---         ---           ---
  
    Net cash provided by financing activities ................     3.9         4.2           2.4
                                                                   ---         ---           ---

  Net increase (decrease) in cash and cash equivalents .......  ($ 0.7)     ($ 0.5)        ($1.2)
                                                                 =====       =====          ==== 
                                                                                      
</TABLE>


     The  Company's  decrease  in cash and  cash  equivalents  of  approximately
$709,000  for the year ended  December 31, 1998 was  principally  due to (i) net
cash used in operating  activities of $3.2 million,  used principally to finance
increases in the  Company's  accounts  receivable  and  inventory  levels,  (ii)
capital  expenditures of $1.5 million,  offset by, (iii) net borrowing under the
Company's credit facility of $3.7 million and (iv) net proceeds derived from the
HMG Private Placement of $169,000.

     The  Company's  decrease  in cash and  cash  equivalents  of  approximately
$511,000  for the year ended  December 31, 1997 was  principally  due to (i) net
cash used in operating  activities of $3.3 million,  used principally to finance
increases in the  Company's  accounts  receivable  and  inventory  levels,  (ii)
capital  expenditures of $1.8 million,  offset by, (iii) net borrowing under the
Company's  credit  facility of $1.5  million,  (iv) proceeds from the sale of an
investment of $356,000,  (v) net proceeds derived from the HMG Private Placement
of $540,000 and (vi) proceeds from the sale of debentures of $2.2 million.

     The Company's decrease in cash and cash equivalents of $1.2 million for the
year  ended  December  31,  1996 was  principally  due to (i) net  cash  used in
operating  activities  of $2.0  million and (ii)  capital  expenditures  of $1.6
million,  offset by, (iii) net borrowing under the Company's  credit facility of
$1.7  million,  (iv) net proceeds  from the sale of Common  Stock  pursuant to a
private  placement of $377,000  and (v) net proceeds  from the exercise of stock
options of $273,000.  The Company's  negative cash flow from  operations for the
year ended  December 31, 1996  principally  resulted  from (i) the net loss from
operations  of  $5.5  million  and  (ii)  the  aggregate  reduction  in  general
liabilities of $780,000,  offset by (iii) decreases in current and other assets,
other than cash and cash  equivalents of $3.5 million and (iv) non-cash  charges
of $856,000 for depreciation and amortization.

     The Company  maintains a $17.0 million  Credit  Agreement  with a financial
institution in the form of a revolving credit and term loan facility. The Credit
Agreement  provides for a secured revolving credit facility which advances up to
the sum of (i) 85% of eligible  accounts  receivable,  (ii) the lesser of 60% of
eligible finished goods inventory or $750,000 and (iii) the Company's cash, cash
equivalents and marketable securities. The Credit Agreement is secured by a lien
on and a security interest in the Company's cash, cash  equivalents,  marketable
securities, accounts receivable, inventory, equipment and certain

                                                          14

<PAGE>



real estate and all other  tangible  and  intangible  assets and a pledge of the
common stock of each of the Company's wholly-owned subsidiaries.

     Borrowing  under the Credit  Agreement  bear interest at the  institution's
prime  rate plus 3/4% per annum.  The  Company is  required  to pay a  quarterly
commitment  fee at the rate of one half of 1% per  annum  of the  average  daily
unused amount of funds available.  Additionally,  the Credit Agreement  contains
certain customary  affirmative and negative  covenants which require the Company
to maintain certain financial ratios, and, among other things,  restrict (i) the
declaration  or  payment  of  dividends,   (ii)  the  incurrence  of  additional
indebtedness  and  (iii)  the  sale  of  certain  assets.  The  average  balance
outstanding  under the Company's credit  agreements for the years ended December
31, 1998, 1997 and 1996 was approximately $17.2 million,  $10.8 million and $8.8
million,  respectively,  at the weighted average interest rate of 9.7%, 9.6% and
8.6%, respectively.

     Pursuant to the terms of the Credit Agreement, the lender can advance up to
$1.6 million in the form of a term loan  collateralized by the Company's current
and  future  real  estate  and  equipment.  The term loan  portion of the Credit
Agreement is amortized on a sixty-month  basis with a final payment due upon the
termination  of the Credit  Agreement  and bears  interest at the  institution's
prime rate plus 1% per annum.  At December 31, 1998,  1997, and 1996 the balance
outstanding  on the term loan  component of the Credit  Agreement  was $772,000,
$866,000 and $334,000 respectively.

     Effective   September  30,  1997,  the  Company  issued  $2.2  million  10%
Convertible  Debentures due September 30, 2000 ("Debentures")  through a private
placement ("Private Placement"). The Debentures bear interest at the rate of 10%
per annum and were converted in February 1999 at the  conversion  price of $1.25
per share.  As a consequence of the  conversion,  the Company  issued  1,728,000
shares of Common Stock and retired the convertible debentures.

     On February 24, 1999, the Company issued $5.0 million 7% Convertible  Notes
Due February 24, 2002 to two  institutional  investors.  The principal amount of
the  Notes  is  convertible  into  shares  of the  Company's  Common  Stock at a
conversion  price of the  lesser  of  $4.00  per  share or a price  based on the
prevailing  market price of the Common Stock,  subject to a maximum  issuance of
2,160,000  shares upon conversion of the Notes,  taken together.  The Notes were
issued  through a private  placement;  however,  the Company has  undertaken  to
register,  for  resale by the  holders of the  Notes,  the  shares  which may be
acquired upon the conversion of the Notes under the Securities Act of 1933.

     The Company's working capital at December 31, 1998 was $729,000,  inclusive
of borrowing of $14.8 million pursuant to the three-year Credit Agreement.  From
time to time, the Company  experiences  temporary  liquidity problems due to the
timing of cash flows while the Company is in production and building  inventory.
However  management  believes  that its current cash and cash  equivalents,  its
backlog,  anticipated future cash flows from operations,  availability under its
Credit  Agreement  and the proceeds  derived from the HMG Private  Placement and
issuance of  Convertible  Notes will be  sufficient  to support its debt service
requirements and its other capital and operating needs for the next fiscal year.
Furthermore,  during the fourth quarter of 1998 the Company  engaged BNY Capital
to assist the Company in  refinancing  its current  revolving line of credit and
term loans  under more  favorable  terms and to provide a source of  acquisition
financing  in the form of debt.  The Company is seeking a $35.0  million  credit
facility. Management believes its pending financing, an expanded client base and
future cash flows from operations  developed by the Company provide an important
basis for future profitability and liquidity, however, there can be no assurance
that such belief will prove to be correct, that additional financing will not be
required,  or  that  any  such  financing  will  be  available  on  commercially
reasonable terms or otherwise.











                                                          15

<PAGE>



Year 2000

     The Company is aware of the issues  associated with the programming code in
existing computer systems as the millennium ("Year 2000")  approaches.  The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected  in some way by the  rollover of the two digit year value to 00. 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 utilizing both internal and external  resources to identify,
correct  or  reprogram  and  test the  systems  for Year  2000  compliance.  The
Company's  Year 2000 strategy  includes the  evaluation of all critical  Company
software applications, client/server applications, PC's and workstations, vendor
supplied  software,  equipment  and  clients and  suppliers.  An  inventory  and
assessment  of all areas have been  completed  and the  Company  has  inspected,
remediated  and  performed  testing  of  each  of  its  systems  for  Year  2000
compliance.

     As of January 31,  1999,  the  Company  believes  that it has  successfully
remediated its client/server  business  applications for the millennium  change.
The Year 2000 project is now in its final  verification  testing which is due to
be completed at the end of the first quarter of 1999.  During the second quarter
of 1999,  the Company is  scheduled to bring HMG Schutz and HMG Griffith on line
with its client/server  business  applications such that all Company  operations
will be tied  together and data can be accessed and  exchanged  through a common
shared technology  platform.  The Company's  suppliers are also engaged in their
Year 2000 testing and the Company is monitoring their progress.  In addition, in
the event that a supplier is unable to become Year 2000 compliant, the Company's
supplier  network is sufficient,  and material and services are available to the
Company to adjust to a change in a production  supply without  compromising  the
manufacturing  schedule  established  by the Company.  However,  there can be no
assurance  that the systems of other  companies on which the  Company's  systems
rely  also will be timely  converted  or that any such  failure  to  convert  by
another company would not have an adverse effect on the Company's systems.

     It is anticipated that the Year 2000 project will be completed by mid-1999.
To date, the Company has incurred expenses of approximately $375,000 in hardware
upgrades and software enhancements.  The Company projects that the total cost of
the Year 2000 project will approximate $475,000 to $550,000.

     The above statements and certain other statements  contained in this annual
report on Form 10-K are  based on  current  expectations.  Such  statements  are
forward  looking  statements  that involve a number of risks and  uncertainties.
Factors  that could  cause  actual  results  to differ  materially  include  the
following (i) general economic  conditions at retail,  (ii)  competitive  market
influences,  (iii)  client  budgetary  restrictions  (iv)  delays in shipment of
scheduled  programs to clients (v) delay in or inability to expand the Company's
client  base  and/or  (vi) the loss of, or  reduction  in  spending  of existing
clients.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The Company is exposed to the impact of  interest  rate,  market  risks and
currency  fluctuations.  In the normal course of business,  the Company  employs
internal  processes  to manage its exposure to interest  rate,  market risks and
currency  fluctuations.  The  Company's  objective in managing its interest rate
risk is to limit the impact of interest  rate changes on earnings and cash flows
and to lower its overall  borrowing  costs.  To achieve  these  objectives,  the
company refinances debt when advantageous.  The Company is exposed to the impact
of currency fluctuations because of its international operations. At the present
time, the Company does not swap or hedge its foreign currency  obligations,  but
will review its policy on hedging on a  continuous  basis.  The Company does not
hold or issue derivative or other financial instruments for trading purposes.

                                                          16

<PAGE>



Item 8.  Financial Statements and Supplementary Data.




              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



HMG WORLDWIDE CORPORATION AND SUBSIDIARIES                                 PAGE
                                                                           ----


     Independent Auditors' Report                                           18

     Consolidated Balance Sheets at December 31, 1998 and 1997              19

     Consolidated Statements of Operations for the Years Ended
       December 31, 1998, 1997 and 1996                                     20

     Consolidated Statements of Cash Flows for the Years Ended
       December 31, 1998, 1997 and 1996                                     21

     Consolidated Statements of Changes in Stockholders' Equity
       for the Years Ended December 31, 1998, 1997 and 1996                 23

     Notes to Consolidated Financial Statements                             24



























                                                          17

<PAGE>



                                             INDEPENDENT AUDITORS' REPORT


TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HMG WORLDWIDE CORPORATION



     We  have  audited  the  accompanying  consolidated  balance  sheets  of HMG
WORLDWIDE CORPORATION AND SUBSIDIARIES as of December 31, 1998 and 1997, and the
related  consolidated  statements  of  operations,  cash  flows and  changes  in
stockholders'  equity for each of the three years in the period  ended  December
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in  all  material  respects,  the  financial  position  of HMG
WORLDWIDE CORPORATION AND SUBSIDIARIES as of December 31, 1998 and 1997, and the
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1998 in  conformity  with  generally  accepted
accounting principles.




                                                     FRIEDMAN ALPREN & GREEN LLP



New York, New York
March 24, 1999

















                                                          18

<PAGE>




                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)


                                                                December 31,   
                                                           ------------------- 
                                                           1998           1997
                                                           ----           ----

                                     ASSETS

Current assets:
  Cash and cash equivalents (Note 1) ................... $ 5,730        $ 6,439
  Accounts receivable - less allowance
    for doubtful accounts of $453 and $273 (Note 14) ...  15,505          8,445
  Inventory (Notes 1 and 3) ............................  15,335          6,671
  Prepaid expenses .....................................     816            414
  Other current assets .................................     263            317
                                                         -------        --------
     Total current assets ..............................  37,649         22,286

Property and equipment - net (Notes 1 and 4) ...........   6,319          4,682
Excess of cost over fair value
  of assets acquired, less accumulated
  amortization of $2,053 and $1,615 (Notes 1 and 2) ....   7,528          6,544
Other assets ...........................................     233            133
                                                         -------        -------
                                                         $51,729        $33,645
                                                         =======        =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current maturities of long-term obligations (Note 5) ..$14,801        $10,942
  Accounts payable ...................................... 15,933          8,729
  Accrued employee compensation and benefits ............  1,353          1,418
  Deferred revenue (Note 1) .............................  2,970            604
  Accrued expenses ......................................  1,575            673
  Other current liabilities .............................    213            346
                                                         -------        -------
    Total current liabilities ........................... 36,845         22,712

Pension obligation (Notes 1 and 6) ......................  1,147          1,175
Convertible debentures (Notes 5 and 15) .................  2,160          2,200
Promissory note (Note 2) ................................  1,600
Term loans (Note 5) .....................................    491            678
Other long-term liabilities (Note 6) ....................    418            410
                                                         -------        -------
                                                          42,661         27,175
                                                         -------        -------
Stockholders' equity:
  Common stock, par value $0.01; 50,000,000 shares
    authorized; 9,329,205 and 8,924,150 shares
    issued and outstanding (Note 8) .....................     93             89
  Additional paid-in capital (Note 8) ................... 35,335         34,645
  Accumulated deficit ...................................(26,360)       (28,264)
                                                         -------        -------
                                                           9,068          6,470
                                                         -------        -------
                                                         $51,729        $33,645
                                                         =======        =======


          See accompanying notes to consolidated financial statements.


                                                          19

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        (in thousands, except share data)


                                                      Year Ended December 31, 
                                                 ------------------------------
                                                  1998       1997        1996
                                                  ----       ----        ----

Net revenues (Notes 1 and 10) .............    $ 68,457    $ 46,311   $ 45,552

Cost of revenues ..........................      49,220      33,273     37,589
                                               --------    --------   --------

  Gross profit ............................      19,237      13,038      7,963

Selling, general and administrative
  expenses ................................      15,938      11,959     13,003
                                               --------    --------   --------

  Income (loss)  from operations ..........       3,299       1,079     (5,040)

Interest income ...........................         274         323        351

Interest expense (Note 5) .................      (1,651)     (1,098)      (834)

Other income ..............................          13         267        -   
                                               --------    --------   ---------

  Income (loss) before provision for income
    taxes .................................       1,935         571     (5,523)

Provision for income taxes (Note 7) .......         (31)        (42)       (12)
                                               --------    --------   --------

  Net income (loss) .......................    $  1,904    $    529   ($ 5,535)
                                               ========    ========   ========

Basic earnings per share (Note 8)
  Net income (loss) per common shares .....    $   0.21    $   0.06   ($  0.73)
                                               ========    ========    =======

  Weighted average number of common
  shares outstanding ......................    9,093,715   8,637,528  7,614,356
                                               =========   =========  =========

Diluted earnings per share (Note 8)
  Net income (loss) per common and
  common equivalent shares ................    $   0.19    $   0.05   ($ 0.73)
                                               ========    ========    ======

  Weighted average number of common
  and common equivalent shares ............   10,711,659  11,206,460  7,614,356
                                              ==========  ==========  =========










          See accompanying notes to consolidated financial statements.


                                                          20

<PAGE>

<TABLE>


                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


                                                                        Year Ended December 31, 
                                                                 -------------------------------
                                                                 1998          1997         1996
                                                                 ----          ----         ----
<S>                                                           <C>                 <C>         <C>    
Cash flows from operating activities:

  Cash received from customers ...........................     $ 64,536      $ 43,091     $ 48,930
  Interest received ......................................          282           321          351
  Cash paid to suppliers .................................      (51,312)      (36,481)     (39,739)
  Cash paid to employees .................................      (15,024)       (9,112)     (10,671)
  Income taxes paid ......................................           (3)          (30)         (12)
  Interest paid ..........................................       (1,651)       (1,098)        (816)
                                                               --------      --------     --------
    Net cash used in operating
       activities ........................................       (3,172)       (3,309)      (1,957)
                                                               --------      --------     --------

Cash flows from investing activities:
  Acquisition, net of cash acquired ......................          138
  Proceeds from the sale of an investment ................                        356
  Capital expenditures ...................................       (1,517)       (1,807)      (1,654)
                                                               --------      --------     --------
    Net cash used in
       investing activities ..............................       (1,379)       (1,451)      (1,654)
                                                               --------      --------     --------

Cash flows from financing activities:
  Net proceeds from the sale of common
    stock as part of  a private placement ................          169           540          377
  Net proceeds from exercise of stock options ............                                     273
  Proceeds derived  from a term loan .....................                        600          340
  Proceeds derived from the sale of convertible debentures                      2,200
  Proceeds derived from a credit agreement, net ..........        3,860         1,315        1,814
  Principal payments of outstanding debt obligations .....         (187)         (406)        (382)
                                                               --------      --------     --------
    Net cash provided by financing
       activities ........................................        3,842         4,249        2,422
                                                               --------      --------     --------

Net decrease in cash and cash equivalents ................         (709)         (511)      (1,189)

Cash and cash equivalents at beginning of year ...........        6,439         6,950        8,139
                                                               --------      --------     --------

Cash and cash equivalents at end of year .................     $  5,730      $  6,439     $  6,950
                                                               ========      ========     ========






</TABLE>








          See accompanying notes to consolidated financial statements.


                                                          21

<PAGE>

<TABLE>


                                      HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
                                                    (in thousands)


                                                                       Year Ended December 31,      
                                                                 --------------------------------      
                                                                 1998          1997          1996
                                                                 ----          ----          ----
<S>                                                           <C>             <C>              <C>     
Reconciliation of net income (loss) to net cash
 used in operating activities:

  Net income (loss) ...............................              $1,904        $  529     ($5,535)

Adjustments to reconcile net income (loss) to net
 cash used in operating activities:
  Depreciation and amortization ...................               1,118           882         856
  Other income ....................................                               267

Decrease (increase) in assets, net of effects
 of acquisition:
    Accounts receivable ...........................              (5,448)       (1,991)       2,227
    Inventory .....................................              (7,210)       (2,457)       1,040
    Prepaid expenses ..............................                (347)         (319)         345
    Other assets ..................................                 (47)          (77)        (110)

Increase (decrease) in liabilities, net of effects
 of acquisition:
    Accounts payable ..............................               6,381         2,926        1,472
    Deferred revenue ..............................               1,537        (1,231)       1,139
    Accrued expenses ..............................              (1,032)       (1,329)      (1,760)
    Restructuring costs ...........................                                         (1,350)
    Pension obligation ............................                 (28)         (509)        (281)
                                                                -------      --------     --------
   Net cash used in operating activities ..........             ($3,172)      ($3,309)     ($1,957)
                                                                 ======        ======       ======


Non-cash investing and financing activities:
  Fair value of assets acquired in
    connection with an acquisition ................              $4,059
  Fair value of liabilities assumed
    in connection with an acquisition .............              $5,481
  Common stock issued in connection
    with an acquisition ...........................              $  110
  Promissory note, net of imputed
    interest, issued in connection with
    an acquisition ................................              $1,600
  Common stock issued in connection
    with an employee benefit plan .................              $  154        $  160
 Common stock issued in connection with
    the conversion of a debenture .................              $   40
  Warrants issued as part of a consulting agreement              $  221        $   50


</TABLE>



          See accompanying notes to consolidated financial statements.


                                                          22

<PAGE>

<TABLE>


                                      HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                           (in thousands, except share data)




                                                                  Additional                    Total
                                             Common Stock          Paid-in    Accumulated    Stockholders'
                                             ------------
                                            Shares    Amount       Capital     Deficit          Equity
                                            ------    ------       -------     -------          ------

<S>                                         <C>       <C>          <C>         <C>            <C>    
Balance at December 31, 1995 .......      7,567,517   $ 76        $33,258     ($23,258)        $10,076

Issuance of shares as part of
  exercise of stock options ........        184,572      2            271                          273
Shares sold as part of a
  private placement ................        377,500      3            374                          377
Net loss ...........................                                            (5,535)         (5,535)
                                          ---------   ----         ------      -------         -------

Balance at December 31, 1996 .......      8,129,589     81         33,903      (28,793)          5,191

Shares sold as part of a
  private placement ................        635,000      6            534                          540
Issuance of warrants as part of a
  consulting agreement .............                                   50                           50
Issuance of shares as a contribution
  to HMG Worldwide Corporation
  Capital Accumulation Plan ........        159,561      2            158                          160

Net income .........................                                               529             529
                                          ---------   ----         ------      -------         -------

Balance at December 31, 1997 .......      8,924,150     89         34,645      (28,264)          6,470

Shares sold as part of a
  private placement ................        150,000      2            167                          169
Issuance of shares as part of
  an acquisition ...................        100,000      1            109                          110
Issuance of shares pursuant
  to conversion of debentures ......         32,000                    40                           40
Issuance of warrants as part of a
  consulting agreement .............                                  221                          221
Issuance of shares as a contribution
  to HMG Worldwide Corporation
  Capital Accumulation Plan ........        123,055      1            153                          154

Net income .........................                                             1,904           1,904
                                          ---------   ----         ------      -------         -------

Balance at December 31, 1998 .......      9,329,205   $ 93        $35,335     ($26,360)       $  9,068
                                          =========   ====        =======      =======        ========



</TABLE>



          See accompanying notes to consolidated financial statements.


                                                          23

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Note 1 - Organization and Significant Accounting Policies

     Organization:  The  Company  was  incorporated  in New  York  in  1984,  as
MarkitStar,  Inc.  and changed its  corporate  domicile to Delaware in 1986.  On
October 4,  1993,  MarkitStar,  Inc.  effected  a name  change to HMG  Worldwide
Corporation (the "Company").

     The Company, using its marketing resources and expertise, is engaged in the
design, development,  production and assembly of in-store, or point-of-purchase,
marketing  and  merchandising   fixture  and  display  systems.   The  Company's
operations  are  conducted  principally  through  five  operating   wholly-owned
subsidiaries being respectively HMG Worldwide In-Store Marketing,  Inc. ("HMG"),
HMG Intermark Worldwide  Manufacturing,  Inc. ("HMG Intermark"),  Display Depot,
Inc.  ("DDI"),  HMG Schutz  International,  Inc. ("HMG Schutz") and HMG Griffith
Worldwide In-Store  Marketing,  Inc. ("HMG Griffith").  The Company conducts its
operations in New York, Illinois, Pennsylvania and Toronto, Canada.

     Principles  of  Consolidation:   The  accompanying  Consolidated  Financial
Statements  include  the  accounts  of the  Company  and its  subsidiaries.  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

     Use of Estimates:  Management  uses estimates and  assumptions in preparing
financial  statements.  Those  estimates  and  assumptions  affect the  reported
amounts of assets and  liabilities,  the  disclosure  of  contingent  assets and
liabilities, and the reported revenues and expenses.

     Cash  and  Cash  Equivalents:  The  Company  considers  all  highly  liquid
investments  purchased  with an original  maturity of three months or less to be
cash equivalents.

     Inventory:  Inventory,  consisting  principally  of  merchandising  display
components,  is stated at the lower of cost or market on a  standard  cost basis
which approximates  average cost. Costs incurred in the design,  development and
engineering of merchandising  fixtures and display programs,  including salaries
and preproduction expenses, are capitalized as part of work-in-process inventory
(see Note 3).

     Property  and  Equipment:  Property  and  equipment  are  stated  at  cost.
Equipment  under  capital  leases are  recorded at the present  value of minimum
lease  payments at the inception of the lease.  Depreciation  is computed  based
upon the estimated  useful lives of the assets using the  straight-line  method.
Equipment held under capital leases and leasehold  improvements are amortized on
the straight-line  method over the shorter of the lease term or estimated useful
life of the asset.













                                                          24

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 1 - Organization and Significant Accounting Policies  (continued)

     Excess of Cost Over Fair Value of Assets Acquired:  The excess of cost over
fair value of assets  acquired  arising  from  acquisitions  is amortized on the
straight-line method over a period of twenty years for acquisitions  consummated
prior to 1998 and over fifteen years for the  acquisition  consummated  in 1998.
Related amortization expense was approximately $438,000,  $408,000 and $408,000,
for the years ended December 31,1998, 1997 and 1996,  respectively (see Note 2).
The periods of  amortization  are  reviewed on a  quarterly  basis to  determine
whether events and circumstances warrant revised estimates of useful lives. This
evaluation  considers,  among other factors,  expected cash flows and profits of
the  businesses  to which the excess of cost over fair value of assets  acquired
relates.  The excess of cost over fair value of assets  acquired will be written
off if it becomes evident that it has been permanently impaired.

     Fair Value of Financial Instruments: The fair value of the revolving credit
facility,  promissory note, term loans and convertible  debentures  approximates
carrying value due to the short maturities.

     Foreign Currency  Translation:  The functional  currency of HMG Griffith is
the Canadian  Dollar.  Assets and liabilities  are translated into U.S.  dollars
using the current  exchange rate at the Balance  Sheet date.  Income and expense
items are  translated  at the  average  exchange  rates  during  the  respective
periods. All translation  adjustments realized by the Company during 1998, which
in total were not material, were charged to operations.

     Revenue  Recognition:  Revenue is recognized when a merchandise  fixture or
display system is shipped and when marketing consulting services are performed.

     Reclassifications:  Certain reclassifications have been made to conform the
presentation of prior years to the current year presentation.

     Income  Taxes:  Income  taxes are provided on the  liability  method on all
revenues and expenses  included in the  Consolidated  Statements of  Operations,
regardless  of the  period in which  such  items are  recognized  for income tax
purposes,  except for items representing a permanent  difference between pre-tax
accounting  income or loss and  taxable  income or loss (see Note 6).  Under the
liability  method of accounting  for income taxes,  deferred  taxes are based on
rates that are expected to be in effect when temporary differences are scheduled
to reverse.

     Earnings  Per Share:  Earnings  (loss) per share are based on the  weighted
average number of common shares  outstanding  during each period.  Common shares
issuable  upon  exercise  of stock  options  and  warrants  are  included in the
computation of diluted earnings per share,  unless they are  anti-dilutive  (see
Note 8), in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128.

     Employee Benefit Plans:  The Company and its subsidiaries  sponsor a series
of defined  benefit and defined  contribution  plans for its union and non-union
employees.  For the defined  benefit plans,  the Company has adopted SFAS No. 87
"Employers'  Accounting for Pensions",  SFAS No. 106 "Employers'  Accounting for
Post-retirement  Benefits  Other Than  Pensions"  and SFAS No.  132  "Employers'
Disclosures About Pensions and Other Post-retirement Benefits" (see Note 6).




                                                          25

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 1 - Organization and Significant Accounting Policies  (continued)

     Accounting for Stock-Based Compensation: The Company accounts for its stock
option plans in accordance with Accounting  Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees,  and related  interpretations.  As
such,  compensation  expense  would be recorded on the date of grant only if the
current market price of the underlying  stock  exceeded the exercise  price.  On
January 1, 1996, the Company  adopted SFAS No. 123,  Accounting for  Stock-Based
Compensation,  which  permits  entities to recognize as expense over the vesting
period  the  fair  value  of all  stock-based  awards  on  the  date  of  grant.
Alternatively,  SFAS No.  123 also  allows  entities  to  continue  to apply the
provisions  of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock grants made in 1995 and future
years  as if the  fair-value-based  method  defined  in SFAS  No.  123 had  been
applied.  The Company has elected to continue to apply the provisions of APB No.
25 in accounting for its plan and,  accordingly,  no compensation  cost has been
recognized for its stock options in the financial statements (see Note 8).


Note 2 - Acquisition of HMG Schutz Operations

     Effective  August 1, 1998, the Company  consummated  the acquisition of the
business of HMG Schutz, a Chicago-based point-of-purchase company pursuant to an
Asset Purchase Agreement  ("Purchase  Agreement").  Pursuant to the terms of the
Purchase  Agreement,  the Company  issued a $1.6  million  Promissory  Note,  as
adjusted,  net of imputed interest of $278,000, and issued 100,000 shares of the
Company's  Common Stock,  valued at $1.10 per share,  in  consideration  for the
acquired assets.  The payments  required under the Promissory Note commence upon
the second  anniversary of the Purchase  Agreement  after which the Company will
make 20 equal quarterly  principal  installments,  plus accrued  interest at the
prime rate per annum,  over five years.  In addition,  the Company has agreed to
make certain future  contingent  payments  based upon revenues  generated by HMG
Schutz over the next three years.  To date,  the Company has recorded  aggregate
contingent payments of $179,000 pursuant to the terms of the Purchase Agreement.
The  Company  also  acquired  an option to  purchase  at a future date yet to be
determined,  the office and  warehouse  facilities  and related  land  currently
occupied by HMG Schutz for approximately $2.3 million.

     The Company  recorded the assets and  liabilities  of HMG Schutz based upon
their estimated fair market values as of the acquisition date. Additionally, the
Company  recorded  $1.4 million as the excess of cost over the fair market value
of assets acquired.  At August 1, 1998, the financing and the acquisition of the
fair market value of the assets acquired of HMG Schutz was as follows:

                                                               Amount
                                                               ------
                                                           (in thousands)
 
     Consideration:
       Promissory note                                        $1,600
       Issuance of 100,000 shares of Common Stock                110
       Contingent payments earned in 1998                        179
       Transaction costs and related expenses                    778
                                                              ------
                                                               2,667
     Fair market value of assets acquired                      1,245
                                                               -----
     Excess cost over fair market value of assets acquired    $1,422
                                                              ======






                                                          26

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 2 - Acquisition of HMG Schutz Operations (continued)

     The Pro Forma Statement of Operations of the Company,  giving effect to the
acquisition,  (i) for the year ended  December  31, 1998  combine the  unaudited
historical Statement of Operations of HMG Schutz and the Company for such period
as if the acquisition were consummated on January 1, 1998, and (ii) for the year
ended  December 31, 1997 combine the  historical  Statement of Operations of HMG
Schutz and the Company for such period as if the acquisition were consummated on
January 1, 1997.  These Pro Forma  results have been  prepared  for  comparative
purposes  only and do not purport to be  indicative  of what would have occurred
had the  acquisition  been in effect for the  periods  indicated  or the results
which may occur in the future.

                                       Pro Forma for the Year Ended December 31,
                                       -----------------------------------------
                                                 1998                1997
                                                 ----                ----
                                           (in thousands, except per share data)

     Net revenues                              $77,205             $67,903
     Cost of revenues                           55,168              48,789
                                               -------             -------
      Gross profit                              22,037              19,114
     Selling, general and
       administrative expenses                  19,926              20,696
                                               -------             -------
      Income (loss) from operations              2,111              (1,582)
     Interest income                               274                 323
     Interest expense                           (1,718)             (1,359)
     Other income                                   13                 267
                                               -------             -------
      Income (loss) before income taxes            680              (2,351)
     Provision for income taxes                    (27)               -     
                                               -------             -------
       Net income (loss)                       $   653            ($ 2,351)
                                               =======             =======

     Basic earnings per share
       Net income (loss) per common shares     $  0.07            ($  0.27)
                                               =======             =======

       Weighted averaged number of
         common shares outstanding               9,152               8,738
                                               =======             =======

     Diluted earnings per share
       Net income (loss) per common and
       common equivalent shares                $  0.07            ($  0.27)
                                               =======             =======

       Weighted average number of
         common and common
         equivalent shares                       9,152               8,738
                                               =======             =======








                                                          27

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 3 - Inventory

     Inventory  consisted of the  following  components at December 31, 1998 and
1997:

                                             December 31,   
                                        --------------------
                                        1998          1997
                                        ----          ----
                                             (in thousands)

     Finished goods                    $ 3,549      $ 1,210
     Work-in-process                     3,789        1,015
     Raw materials                       7,997        4,446
                                       -------      -------
                                       $15,335      $ 6,671
                                       =======      =======


Note 4 - Property and Equipment

     The  following is a summary of property  and  equipment,  estimated  useful
lives and  accumulated  depreciation  and  amortization at December 31, 1998 and
1997:

                                        December 31,               
                                        ------------               
     Description                     1998        1997     Estimated Useful Life
     -----------                     ----        ----     ---------------------
                                       (in thousands)
     Land                           $   528    $   528
     Buildings and improvements       2,876      2,829      40 years
     Equipment                        2,047      1,511      3-7 years
     Furniture and fixtures             911        243      5 years
     Leasehold improvements             518        483      Lesser of lease term
                                                            or eight years
     Tooling                          1,983        952      3-10 years
                                     ------    -------
                                      8,863      6,546
     Less:  accumulated
       depreciation and
       amortization                   2,544      1,864
                                    -------    -------

                                    $ 6,319    $ 4,682
                                    =======    =======

     Depreciation  and  amortization  expense for property and equipment for the
years  ended  December  31,  1998,  1997 and 1996  was  approximately  $680,000,
$474,000 and $448,000, respectively.











                                                          28

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 5 - Long-term Obligations

     Long-term obligations at December 31, 1998 and 1997 are as follows:

                                         December 31,            
                                     ------------------
                                     1998          1997
                                     ----          ----
                                       (in thousands)
     Revolving credit facility      $14,614      $10,754
     Term loan                          678          866
     Promissory note                  1,600         -
     Convertible debentures           2,160        2,200
                                     -------     -------
                                     19,052       13,820
     Less: current maturitie         14,801       10,942
                                    -------      -------
                                    $ 4,251      $ 2,878
                                     =======     =======

Revolving Credit Facility

     On November 22, 1996,  the Company  consummated  a $17.0 million three year
Loan and Security Agreement,  as amended,  ("Credit Agreement") with a financial
institution  in the form of a revolving  credit  facility  and a term loan.  The
Credit Agreement provides for a secured revolving credit facility which advances
up to of the sum of (i) 85% of eligible accounts receivable,  (ii) the lesser of
60% of eligible  finished  goods  inventory or $750,000 and (iii) the  Company's
cash,  cash  equivalents  and marketable  securities..  The Credit  Agreement is
secured  by a lien  on and a  security  interest  in the  Company's  cash,  cash
equivalents, marketable securities, accounts receivable, inventory and equipment
and all other tangible and intangible assets and a pledge of the common stock of
each of the Company's wholly-owned subsidiaries.

     Borrowings  under the Credit  Agreement bear interest at the  institution's
prime  rate plus 3/4% per annum.  The  Company is  required  to pay a  quarterly
commitment  fee at the rate of one half of 1% per  annum  of the  average  daily
unused amount of funds available.  Additionally,  the Credit Agreement  contains
certain customary  affirmative and negative  covenants which require the Company
to maintain certain financial ratios, and, among other things,  restrict (i) the
declaration  or  payment  of  dividends,   (ii)  the  incurrence  of  additional
indebtedness and (iii) the sale of certain assets.

     Pursuant to the terms of the Credit Agreement, the lender can advance up to
$1.6 million in the form of a term loan  collateralized by the Company's current
and  future  real  estate  and  equipment.  The term loan  portion of the Credit
Agreement is amortized on a sixty month basis with a final  payment due upon the
termination  of the Credit  Agreement  and bears  interest at the  institution's
prime rate plus 1% per annum. The balance outstanding on the term loan component
of the Credit Agreement at December 31, 1998 and 1997 was $678,000 and $866,000,
respectively.

     Prior to November 22, 1996, the Company maintained a credit facility with a
bank which provided for a secured  revolving line of credit which advanced up to
the lesser of 80% of eligible  accounts  receivable  and the Company's  cash and
cash equivalents and marketable  securities,  or $10.0 million.  Borrowing under
the prior credit facility were charged  interest at either the bank's prime rate
plus 1% per annum or the  Eurodollar  rate plus 2% per  annum and  required  the
Company to pay a quarterly  commitment fee at a rate of one half of 1% per annum
of the average unused amount of funds available.

     The average balance  outstanding  under the Company's credit agreements for
the  years  ended  December  31,  1998,  1997 and 1996 was  approximately  $17.2
million, $10.9 million and, $8.8 million,  respectively, at the weighted average
interest rate of 9.7%, 9.6% and 8.6%, respectively.



                                                          29

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 5 - Long-term Obligations (continued)

Convertible Debentures
     Effective   September  30,  1997,  the  Company  issued  $2.2  million  10%
Convertible  Debentures due September 30, 2000 ("Debentures")  through a private
placement ("Private Placement"). The Debentures bear interest at the rate of 10%
per annum and are  convertible,  at the option of the  holder at any time,  into
shares of the Company's  Common Stock  ("Conversion  Shares"),  $0.01 par value,
based upon the conversion  price of $1.25 per share.  The Company may prepay the
Debentures,  on 30 days prior notice,  at such time as the average closing price
of the Common Stock  exceeds $1.75 per share for a 30 day period prior to notice
of such  prepayment  provided that the  Conversion  Shares have been  registered
under the  Securities  Act at the time of such  prepayment.  In  December  1998,
$40,000 of Debentures  were  converted into 32,000 shares of Common Stock at the
election of the debenture holders.  Subsequent to December 31, 1998, the balance
of the debentures were converted pursuant to their terms (see Note 15).

     At December 31, 1998, future minimum payments under the Company's long term
obligations,  excluding  the  effects of the  conversion  of the  Debentures  in
February 1999, are as follows:

                           Year                            Amount
                           ----                            ------
                                                        (in thousands)
                           1999                            $  187
                           2000                               187
                           2001                               277
                           2002                               320
                           2003                               320
                           Thereafter                         800
                                                           ------
                                                           $2,091
                                                           ======

Note 6 - Employee Benefit Plans

     The Company and its  subsidiaries  sponsor a series of defined  benefit and
defined  contribution  employee  benefit plans covering both union and non-union
personnel. A summary of each of these sponsored plans follows:

HMG Intermark Pension and Health Care Plans
     HMG Intermark  sponsors a defined benefit plan ("Pension  Plan") and a post
retirement  plan for certain health care benefits  ("Health Care Plan") covering
all union employees  pursuant to agreements  between HMG Intermark and Local 241
of the National Federation of Independent Unions.

     Pursuant to the terms of the Pension Plan, HMG Intermark's union employees,
with  dates of hire  prior  to April 1,  1996,  generally  become  eligible  for
retirement benefits after reaching age 55 with 10 years of continuous service or
after reaching age 65. Retirees are entitled to receive pension benefits,  based
upon date of retirement,  of between $4.00 and $13.50 per month for each year of
credited  service.  HMG Intermark funds the actuarially  determined costs of the
Pension Plan,  including the  amortization of prior service costs over 30 years.
HMG  Intermark's  actuarial  assumptions  are based upon an  expected  return on
assets of 8% and a discount rate of 6-3/4%.  HMG Intermark  union employees with
dates of hire  subsequent  to March 31,  1996 are not  eligible  for  retirement
benefits  pursuant to the terms of this Pension Plan.  Alternatively,  such post
March 31, 1996 hirees and all other HMG Intermark  union  employees are covered,
effective  January 1, 1997, by the HMG Intermark  Capital  Accumulation  Plan, a
defined  contribution  plan qualifying  under the IRC Section  401(k).  The plan
permits all  employees  who are 21 years of age and who have one year of service
to  contribute up to 10% of their salary to the plan.  Additional  discretionary
contributions can be made at the option of HMG Intermark.



                                                          30

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 6 - Employee Benefit Plans  (continued)

     The  following is a summary of the  components of defined  benefit  pension
costs  for  the  periods  ending  December  31,  1998,  1997  and  1996  and the
accumulated pension obligation of HMG Intermark at December 31, 1998 and 1997:


                                               For the Years Ended December 31,
                                               --------------------------------
                                                   1998        1997      1996
                                                   ----        ----      ----
                                                          (in thousands)
  Net periodic cost
  Service cost - benefits earned during
    the period with interest                      $   42      $  41     $ 45
  Interest cost on accumulated
    benefit obligation                               345        342      341
 Expected return on assets                          (302)      (257)    (215)
                                                  ------      -----    -----
    Net periodic pension cost                     $   85       $126     $171
                                                  ======      =====     ====


                                                      December 31, 
                                                      ------------ 
                                                   1998         1997
                                                   ----         ----
                                                    (in thousdands)
Accumulated pension obligation:
  Benefit obligation at beginning of year          $5,129     $5,083
  Service costs                                        42         41
  Interest costs                                      345        342
  Actuarial loss                                       86         38
  Benefits paid                                      (385)      (375)
                                                   ------     ------
    Vested benefits obligation at end of year       5,217      5,129
                                                   ------     ------
  Fair value of plan assets at beginning of year    3,829      3,230
  Actual return on plan assets                        594        613
  Employer contribution                               302        361
  Benefits paid                                      (385)      (375)
                                                  -------     ------
    Fair market value of plan assets at end of year 4,340      3,829
                                                  -------     ------
  Funded status                                      (877)    (1,300)
    Unrecognized net actual gain                     (355)      (148)
                                                  -------     ------
    Accrued pension benefit obligation             (1,232)    (1,448)
    Less: current portion                              85        273
                                                  -------     ------
    Pension obligation - long-term               ($ 1,147)   ($1,175)
                                                  =======     ======

     Pursuant  to the  terms  of the  Health  Care  Plan,  HMG  Intermark  union
employees,  with  dates of hire prior to March 31,  1996,  become  eligible  for
retirement  health care benefits after the years of credited  service plus their
age at the time of  retirement  is equal to or greater  than 85 (Rule of 85). If
any  employee,  at the time of their  retirement,  meets the Rule of 85 prior to
reaching age 65, HMG Intermark  shall  continue to provide  health care benefits
under the Health Care Plan until the retiree  reaches age 65. HMG Intermark does
not  pre-fund  the cost of the Health Care Plan.  At December 31, 1998 and 1997,
the  Company  has  included  as  a  component  of  other  long-term  liabilities
approximately  $326,000  and  $329,000,  respectively,  relating to the unfunded
Health Care Plan  obligation.  The accrued post retirement  obligation under the
Health Care Plan is actuarially  determined based upon the following significant
assumptions,  (i) retirement age of 63, (ii) a discount rate of 6-3/4% and (iii)
a gross medical cost increase of an average of 9% for the next five years and 6%
increase thereafter.

                                                          31

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 6 - Employee Benefit Plans  (continued)

     The following is a summary of the  components of the Health Care Plan costs
for the periods  ended  December  31,  1998,  1997 and 1996 and the  accumulated
health care obligation of HMG Intermark at December 31, 1998 and 1997:

                                              For the Years Ended December 31,
                                              --------------------------------
                                                  1998        1997        1996
                                                  ----        ----        ----
                                                       (in thousands)
  Net periodic cost:
   Service cost - benefits earned during
     the period with interest                      $  3       $   6        $  5
   Interest cost on accumulated benefit obligation   21          32          33
   Recognized net actuarial (gain) loss              (2)          7           6
                                                  ------      -------    ------
       Net periodic health care cost               $ 22       $  45        $ 44
                                                   ====       =====        ====


                                                      December 31, 
                                                      ------------ 
                                                  1998        1997
                                                  ----        ----
                                                    (in thousands)
Accumulated health care obligation:
  Benefit obligation at beginning of year          $327       $489
  Service costs                                       3          3
  Interest costs                                     21         32
  Actuarial gain                                    (32)      (150)
  Benefits paid                                     (37)       (50)
                                                   ----       ----
    Benefit obligation at end of year               282        327
  Employer contribution                              37         50
  Benefits paid                                     (37)       (50)
                                                   ----       ----
    Funded status                                  (282)      (327)
  Unrecognized net actuarial gain                   (82)       (52)
                                                   ----       ----
     Accrued health care obligation                (364)      (379)
     Less: current portion                           38         50
                                                   ----       ----
     Health care obligation - long-term           ($326)     ($329)
                                                   ====       ====

     At December  31,  1998,  the effect of a 1% increase in the assumed  health
care cost trend rates for each future year on the  aggregate  of the service and
interest  components of net periodic  post-retirement  health care benefits cost
and the accumulated  post-retirement benefit obligation is an increase of $2,000
and $17,000, respectively.

Capital Accumulation Plan

     The HMG  Worldwide  Corporation  Capital  Accumulation  Plan and Trust is a
defined  contribution  plan  qualifying  under IRC Section  401(k)  covering all
employees  not  participating  in a collective  bargaining  agreement.  The plan
permits all  employees  who are 21 years of age and who have one year of service
to contribute up to 10% of their salary to the plan subject to Internal  Revenue
Code limitations. In addition the HMG Worldwide Corporation Capital Accumulation
Plan and Trust  provides  an  employer  matching  provision  whereby the Company
contributes  fifty cents for every dollar of employee  contribution  up to 6% of
base compensation. Company contributions of approximately $145,000, $149,000 and
$155,000  were made and charged to  operations  for the years ended  December 31
1998, 1997 and 1996 respectively.


                                                          32

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 6 - Employee Benefit Plans  (continued)

     The HMG Worldwide Corporation Capital Accumulation Plan also provides for a
fixed contribution  provision whereby the Company annually  contributes up to 3%
of base  compensation for any plan participant  employed on December 31. Company
contributions  of  approximately  $161,000,  $154,000 and $160,000 were made and
charged to  operations  for the years ended  December 31,  1998,  1997 and 1996,
respectively.   The  plan  also  allows  the   Company  to  make   discretionary
contributions  at the  end of the  plan  year.  The  Company  did not  make  any
discretionary contributions for these years.

Multi-Employer Benefit Plans

     For  the  year  ended   December  31,  1996,   HMG   participated   in  two
multi-employer benefit plans covering all union employees pursuant to agreements
between HMG and Local 2682, United Brotherhood of Carpenters and Joiners.  These
plans were defined  benefit  plans;  however,  specific  benefit levels were not
negotiated  with,  or known by the  employer.  The pension plan  required HMG to
contribute 6% of each employee's wages,  excluding overtime, on a monthly basis.
Pension plan  contributions  of  approximately  $82,000 were made and charged to
operations  for the year ended  December 31, 1996. The welfare plan required HMG
to make a specified  contribution  for each employee per month and for each hour
for all regular  and  overtime  hours  worked.  Welfare  plan  contributions  of
approximately  $142,000 was made and charged to income  during the periods noted
above.  Subsequent  to the  closing of HMG's New Jersey  manufacturing  facility
effective  December 31, 1996,  the Company is no longer  participating  in these
plans.


Note 7 - Income Taxes

     The components of the provisions for income taxes are as follows:

                                                      Year Ended December 31,
                                                      -----------------------
                                                  1998        1997        1996
                                                  ----        ----        ----
                                                        (in thousands)
        Current:
           State and local                        $ 31        $ 42        $ 12
                                                  ----        ----        ----
                                                    31          42          12
                                                  ----        ----        ----

        Deferred:
           Federal                                  -          -            -
           State and local                          -          -            - 
                                                  ----        ----        ----
                                                    -          -            -  
                                                  ----        ----        ----
                                                  $ 31        $ 42        $ 12
                                                  ====        ====        ====











                                                          33

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 7 - Income Taxes (continued)

     The following is a summary of the  significant  components of the Company's
deferred taxes:

                                                     December 31, 
                                                     ------------ 
                                                    1998        1997
                                                    ----        ----
                                                     (in thousands)
     Deferred taxes:
       Net operating loss carry forwards          $15,404     $10,662
       Accruals not currently deductible               89         138
       Inventory capitalization                        54           9
       Depreciation                                   757         434
       Other                                          193         149
                                                  -------     -------
         Subtotal                                  16,497      11,392
     Less: Valuation allowance                    (16,497)    (11,392)
                                                  -------     -------
       Net deferred taxes                         $  -        $  -   
                                                  =======     =======

     At December 31, 1998,  the Company had net operating loss carry forwards of
approximately $34.6 million which expire during the years 2001 through 2013.

     A reconciliation of the tax provisions and amounts computed by applying the
federal  income tax rate of 35% to the income  (loss)  before income taxes is as
follows:

                                                     Year Ended December 31, 
                                                     ----------------------- 
                                                  1998        1997        1996
                                                  ----        ----        ----
                                                         (in thousands)
  Computed tax benefit, net of
    valuation allowance                           $ -         $ -         $ -
  State and local income taxes                      31          42          12
                                                  ----        ----        ----
                                                  $ 31        $ 42         $12
                                                  ====        ====         ===



















                                                          34

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 8 - Common Stock

     In December 1996, the Company  initiated a private  placement ("HMG Private
Placement")  whereby  the  Company  offered  for sale up to 2 million  shares of
Common  Stock at $1.00  per  share.  Pursuant  to the  terms of the HMG  Private
Placement,  as of December  31, 1997 the Company  sold an aggregate of 1,012,500
shares of its Common Stock at $1.00 per share from which it derived net proceeds
of approximately  $917,000.  Contemporaneous with the HMG Private Placement,  in
December 1996 the Company derived net proceeds of approximately $272,000 through
the exercise of stock options for which the Company issued 184,572  shares.  For
the year ended  December  31,  1998,  the Company  sold an  aggregate of 150,000
shares of its Common Stock pursuant to a private placement from which it derived
net proceeds of approximately  $169,000 and the Company issued 100,000 shares of
its Common Stock, valued at $110,000,  pursuant to the Purchase Agreement of HMG
Schutz.  Additionally,  for the years  ended  December  31,  1998 and 1997,  the
Company  contributed  123,055 and 159,561 shares of Common Stock,  respectively,
valued  at  $1.25  and  $1.00  per  share,  respectively,  to the HMG  Worldwide
Corporation  Capital  Accumulation Plan. In December 1998, $40,000 of debentures
were  converted  into  32,000  shares of  Common  Stock at the  election  of the
debenture holders.

     The Company  maintains six stock option plans ("Stock  Option Plans") which
have been adopted by the Board and  subsequently  approved by its  stockholders.
The total number of shares  reserved and available  under the Stock Option Plans
are 3,253,012  shares.  During 1997, the Company issued 210,000  incentive-based
stock options and 250,000 stock warrants  outside of the Stock Option Plans. The
stock options were granted to certain employees and directors of the Company. In
addition, the Company issued 50,000 warrants exercisable at $1.00 per warrant in
connection  with the  purchase  of  certain  assets for the  Company's  Canadian
office. The Company also issued an aggregate of 226,000 warrants  exercisable at
$1.25 per warrant to Ivan Berkowitz, a director to the Company, and an associate
in connection with the Company's  Private  Placement of the Debentures and other
financial  consulting services performed on behalf of the Company.  During 1998,
the Company  issued  175,000  incentive  based stock  options  outside the Stock
Option Plan to certain employees and directors of the Company.  Additionally, as
part of the acquisition and refinancing activities sponsored by the Company, the
Company  recorded a $221,000  increase to additional paid in capital,  using the
Black Scholes  option  pricing  model,  for the issuance of 650,000  warrants to
acquire the  Company's  Common Stock at an average  exercise  price of $1.10 per
share. Of such warrants, 31,250 warrants were issued to Ivan Berkowitz.

     The following is a summary of stock option and warrant transactions for the
years ended December 31, 1998, 1997 and 1996:
                                                 1998        1997        1996
                                                 ----        ----        ----
Options and warrants outstanding at January 1  3,078,828   2,427,328  2,031,450
Incentive options granted at $1.00                           480,950
Incentive options granted at $1.25               305,500                599,450
Incentive options granted at $1.375                          120,000
Incentive options granted at $1.50                75,000
Incentive options granted at $1.75               385,000
Incentive options granted at $2.00
Incentive options granted at $2.50                75,000
Warrants granted at $1.00                                     50,000
Warrants granted at $1.063                       250,000
Warrants granted at $1.125                       400,000
Warrants granted at $1.25                                    226,000
Warrants granted at $2.00                                                50,000
Options exercised                                                      (184,572)
Options canceled                                 (10,900)   (225,450)   (69,000)
                                               ---------   ---------  ----------
                                               4,558,428   3,078,828  2,427,328
                                               =========   =========  =========

                                                          35

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 8 - Common Stock (continued)

     At December 31, 1998, the Company has 173,300,  507,450,  250,000, 400,000,
1,130,450,  150,000,  75,000,  40,200,  1,322,028,  385,000,  50,000  and 75,000
options  outstanding  exercisable  at $0.9375,  $1.00,  $1.063,  $1.125,  $1.25,
$1.375,  $1.50, $1.56, $1.625,  $1.75, $2.00 and $2.50 per share,  respectively.
The weighted  average  exercise price and period of exercise of all  outstanding
stock options and warrants at December 31, 1998 and 1997 was $1.38 per share and
6.2 years, respectively, and $1.35 per share and 6.6 years, respectively.

     The Company  applies APB  Opinion  No. 25 and  related  interpretations  in
accounting for its employee stock options. Under APB Opinion No. 25, because the
exercise  price of the Company's  employee  stock options  equals or exceeds the
market  price of the  underlying  stock on the date of  grant,  no  compensation
expense is recognized.

     Pro forma  information  regarding  net  income  and  earnings  per share is
required by SAS No. 123 and has been  determined as if the Company had accounted
for its employee  stock  options under the fair value method of SAS No. 123. The
weighted  average fair value of options  granted during 1998,  1997 and 1996 was
$0.35, $0.25 and $0.31 per share, respectively. The fair value for these options
was  estimated at the date of grant using a Black Scholes  option  pricing model
with the  following  weighted  average  assumptions;  risk free interest rate of
5.2%;  volatility  factor of expected market price of the Company's Common Stock
of 43% and a weighted  average  expected life of the option of 6.2 years.  Under
the  provisions of SFAS No. 123, the Company's  pro forma  compensation  expense
arising from the grant of stock options for the year ended December 31, 1998 was
approximately  $351,000 and pro forma net income,  basic  earnings per share and
dilutive earnings per share would have been  approximately  $1.6 million,  $0.17
per share and $0.16 per share,  respectively.  For the year ended  December  31,
1997, pro forma  compensation  expense was approximately  $111,000 and pro forma
net income,  basic earnings per share and diluted  earnings per share would have
been  $418,000,  $0.05 per share and  $0.02,  respectively.  For the year  ended
December 31, 1996, pro forma compensation expense was approximately $160,000 and
pro  forma net loss and basic and  diluted  net loss per share  would  have been
approximately $5.7 million and $0.75 per share, respectively.























                                                          36

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 8 - Common Stock (continued)

     The following is the  reconciliation  of the numerators and denominators of
the basic  and  diluted  earnings  per share  computations  for the years  ended
December 31 1998 and 1997:

                                     For the Year Ended December 31, 1998   
                                     ------------------------------------   
                                 Income         Shares          Per Share
                               (Numerator)    (Denominator)       Amount
                               -----------    -------------       ------
                                  (in thousands, except per share data)

Net income ..................     $1,904
                                  ======

Basic earnings per share
  Income available to

    common stockholders .....     $1,904         9,094          $0.21
                                                                =====

Effect of dilutive securities
  10% convertible debentures         165         1,320
  Stock options and warrants         -             298
                                  ------        ------          

Diluted earning per share
  Income available to common
    stockholders ............     $2,069        10,712          $0.19
                                  ======        ======          =====

                                     For the Year Ended December 31, 1997   
                                     ------------------------------------   
                                 Income          Shares         Per Share
                               (Numerator)    (Denominator)       Amount
                               -----------    -------------       ------
                                      (in thousands, except per share data)

Net income ..................     $  529

Basic earnings per share
  Income available to
    common stockholders .....     $  529         8,638          $0.06
                                                                =====

Effect of dilutive securities
  Stock options and warrants         -           2,568
                                  ------        ------

Diluted earning per share
  Income available to common
    stockholders ............     $  529        11,206          $0.05
                                  ======        ======          =====








                                                          37

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 9 - Lease Commitments

     The Company leases  manufacturing,  warehousing  and office  facilities and
production and office equipment, under leases expiring at various dates. Certain
facility leases contain renewal  provisions and generally require the Company to
pay increases over base period amounts for taxes and other  operating  expenses.
At December 31, 1998,  future minimum  payments under  noncancellable  operating
leases are as follows:

                           Year                           Amount
                           ----                           ------
                                                      (in thousands)
                           1999                           $1,106
                           2000                            1,035
                           2001                              946
                           2002                              793
                           2003                              226
                           Thereafter                          4
                                                          ------
                                                          $4,110
                                                          ======

     Rent  expense  for the years ended  December  31,  1998,  1997 and 1996 was
approximately $1.3 million, $800,000 and $1.6 million, respectively.


Note 10 - Significant Clients

     Net revenues from individual  clients of the Company  accounting for 10% or
more of net revenues for the years ended December 31, 1998, 1997 and 1996 are as
follows:

                                             1998    1997     1996
                                             ----    ----     ----
     Procter & Gamble Co.                     12%     12%      17%
     CVS/Pharmacy, Inc.                       11%
     Bristol Meyers Squibb, Co.                       12%
     Wal*Mart Stores, Inc.                            11%      11%
     Sara Lee Corporation                                      12%


Note 11 - Foreign Operations

     The Company opened an office in Toronto, Canada effective July 1, 1997. For
the year ended December 31, 1998 and the six months ended December 31, 1997, the
Company  generated   revenues  of  approximately   $3.5  million  and  $494,000,
respectively,  realized  income from  operations of $218,000 and incurred a loss
from operations of $31,000,  respectively,  and had identifiable  assets of $1.7
million and $447,000, respectively.









                                                          38

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 12 - Acquisition of HMG Intermark and Long-Term Supply Contract with 
          Foster Grant

     Pursuant to a Purchase  Agreement  dated  September  30, 1995,  the Company
consummated a series of transactions with Benson Eyecare Corporation  ("Benson")
whereby Benson's Foster Grant subsidiary entered into the in-store merchandising
display  Supply  Contract  with the Company and the  Company  acquired  Benson's
merchandising display operations, now known as HMG Intermark.

     The Supply Contract requires Foster Grant,  subject to certain  conditions,
to purchase at least 70% of its in-store  merchandising  display  purchases from
the Company through  December 2005 with average annual purchases to aggregate no
less than $2.5 million.  The Supply Contract  contains  provisions which include
(i)  Foster  Grant's  right  to  competitively  bid  its  merchandising  display
purchases with comparable  suppliers of the Company,  (ii) the Company must meet
certain price  criteria with its services and (iii) the Company has the right of
last refusal on all merchandising  display programs on which it has placed a bid
with Foster Grant.


Note 13 - Related Party Transactions

     For the years ended December 31 1998, 1997 and 1996, the Company incurred a
total of  approximately  $170,000,  $433,000  and  $200,000,  respectively,  for
various  legal and  consulting  services  provided  by firms  whose  members  or
officers are stockholders or directors of the Company.


Note 14 - Commitments and Contingent Liabilities

     The Company from time to time is subject to certain legal  proceedings  and
claims which have arisen in the ordinary  course of its business.  These actions
when  ultimately  concluded  will not,  in the  opinion  of  management,  have a
material  adverse effect upon the financial  position,  results of operations or
liquidity of the Company.

     In  April  1984,  HMG  entered  into an  agreement  with  one of its  sales
representatives,  Howard Displays, Inc. ("HDI"), whereby HMG is required to make
contingent  consideration  payments to the former principal  shareholder of HDI.
Such  payments are based upon the net revenues  derived from sales to active HDI
clients.  These  payments  continue  until  one  year  after  the  death of this
individual.  For the years ended December 31, 1998, 1997 and 1996, approximately
$112,000,  $26,000 and $234,000,  respectively,  related to this  agreement were
charged to operations.

     The Company is potentially subject to significant  concentrations of credit
risk on its cash and  short-term  investments  (cash  equivalents)  and accounts
receivable.  Short-term investments are in commercial paper of corporations with
high credit ratings and securities of U.S.  Government  agencies and are held by
one financial institution with a high credit standing.  Receivables, which under
normal  trade  terms are not  secured,  are from a large  number  of retail  and
consumer  products  companies.  The three  customers  with the largest  balances
account for approximately 30% of accounts receivable at December 31, 1998.









                                                          39

<PAGE>



                   HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 15 - Subsequent Events

     In February 1999, the Company's  convertible  debenture  holders elected to
convert the outstanding  $2.2 million  debentures into Common Stock at $1.25 per
share  pursuant  to  the  terms  of  the  debentures.  As a  consequence  of the
conversion,  the Company issued 1,728,000 shares of Common Stock and retired the
convertible debentures.

     On February 24, 1999, the Company issued $5.0 million 7% Convertible  Notes
Due February 24, 2002 to two  institutional  investors.  The principal amount of
the  Notes  is  convertible  into  shares  of the  Company's  Common  Stock at a
conversion  price of the  lesser  of  $4.00  per  share or a price  based on the
prevailing  market price of the Common Stock,  subject to a maximum  issuance of
2,160,000  shares upon conversion of the Notes,  taken together.  The Notes were
issued  through a private  placement;  however,  the Company has  undertaken  to
register,  for  resale by the  holders of the  Notes,  the  shares  which may be
acquired upon the conversion of the Notes under the Securities Act of 1933.



                                                          40

<PAGE>




Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
        Financial Disclosure.

     There  have  been  no  changes  in  accountants  due  to  disagreements  on
accounting and financial  disclosure  during the 24 months prior to December 31,
1998.


                                    PART III


Item 10. Directors and Executive Officers of the Registrant.

     The executive officers and directors of the Company are as follows:

                                                                      Associated
                                                                       with the
                                                                        Company
Name                       Age          Offices Held                     Since  
----                       ---          ------------                     -----  

Michael Wahl               61           Chairman of the Board and        1984
                                        Chief Executive Officer

Andrew Wahl                38           President and Director           1984

Robert V. Cuddihy, Jr.     39           Executive Vice President,        1987
                                        Chief Operating Officer,
                                        Chief Financial Officer
                                        and Director

L. Randy Riley             47           Executive Vice President and     1993
                                        Director

Herbert F. Kozlov          46           Secretary and Director           1988

Ivan Berkowitz             53           Director                         1998

Lawrence J. Twill, Sr.     61           Director                         1987


     MICHAEL WAHL has been a Director of the Company  since its inception in May
1984.  Mr. Wahl  became the  Company's  Chairman  and Chief  Executive  Officer,
effective  October 1, 1993.  Since 1984,  Mr. Wahl has served as the Chairman of
the Board of the Company.  Since May 1986, Mr. Wahl has also served as the Chief
Executive  Officer of the Company.  Mr. Wahl served as the President of HMG from
1976 to April 1986.

     ANDREW WAHL has been a Director of the Company  since its  inception in May
1984. Mr. Wahl became the President  effective October 1, 1993, and relinquished
his roles as  Chairman  and Chief  Executive  Officer.  From May 1984 to October
1993,  Mr. Wahl served as the Company's  Chief  Executive  Officer.  In December
1990,  Mr. Wahl became the  Secretary of the Company.  From July 1987 to October
1993,  Mr.  Wahl  has  also  served  as the  Company's  Chairman  of the  Board.
Additionally,  Mr. Wahl served as the  Company's  President  from May 1984 until
December  1990.  From  September  1980 until May 1984,  Mr.  Wahl served as Vice
President for HMG, where his primary  responsibilities  were in the areas of new
business development and pension and profit-sharing management.


                                                          41

<PAGE>



     ROBERT V. CUDDIHY,  JR. has been the Company's Chief Financial  Officer and
Secretary since July 1987 and a Director since February 1988. In March 1989, Mr.
Cuddihy  also assumed the  responsibilities  of Chief  Operating  Officer of the
Company.  In December  1990,  Mr.  Cuddihy  became the  Company's  President and
discontinued his function as its Secretary. Mr. Cuddihy relinquished his role as
President,  effective  October  1, 1993.  From July 1981  until  July 1987,  Mr.
Cuddihy was with KPMG Peat Marwick, Certified Public Accountants,  where he last
served as a senior audit manager.

     L. RANDY  RILEY has been a Director of the  Company  since March 1994.  Mr.
Riley is, and for at least the past five years has been,  employed  by HMG in an
executive  capacity,  most  recently  as  President  of HMG.  He was  previously
employed  by Ernest & Julio  Gallo and by  Colgate-Palmolive  Company  in senior
marketing positions.

     HERBERT F. KOZLOV has been a Director of the Company since  February  1988.
Effective October 1, 1993, Mr. Kozlov assumed the  responsibilities of Corporate
Secretary. Mr. Kozlov is a member of Parker Duryee Rosoff & Haft, counsel to the
Company. Mr. Kozlov has been a practicing attorney for more than ten years.

     IVAN  BERKOWITZ has been a Director of the Company since January 1998.  Mr.
Berkowitz has been the President of Great Court Holdings Corporation since 1989.
Mr.  Berkowitz is also the  Managing  General  Partner of Steib & Company  since
1993. From 1995 to 1997, Mr. Berkowitz served as the Chief Executive  Officer of
PolyVision Corporation.

     LAWRENCE J. TWILL,  SR. has been a Director of the Company since July 1987.
Mr. Twill has been Chairman of Ashwood  Capital,  a private merchant bank, since
March 1991.  From  February 1990 to February  1991, he was Managing  Director of
Peers & Co., which at the time was a subsidiary of Kemper Securities,  Inc. From
June 1988 to February  1990, he served as Executive Vice  President,  Investment
Banking  and a member  of the  Executive  Committee  of  Bateman  Eichler,  Hill
Richards,  a subsidiary  of Kemper  Securities,  Inc. From February 1986 to June
1988,  Mr.  Twill was the  Chairman  and Chief  Executive  Officer of Woolcott &
Company,  an investment  banking firm,  and from April 1984 to March 1985 he was
the President and Chief Executive Officer of New York Air, Inc.

     Michael  Wahl is the  father of  Andrew  Wahl.  There  are no other  family
relationships among the Company's officers and directors.

     All directors hold office until the next annual meeting of stockholders and
the election  and  qualification  of their  successors.  Executive  officers are
elected  annually  by the  Board of  Directors  to hold  office  until the first
meeting of the Board following the next annual meeting of stockholders and until
their successors are chosen and qualified.

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
the Company's  officers and directors,  and persons who own more than 10% of the
Company's  Common  Stock,  to file reports of ownership and changes in ownership
with the Securities and Exchange  Commission  ("SEC").  Officers,  directors and
greater than 10% stockholders are required by the SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.

     Based  solely on its review of the copies of such forms  received by it, or
written  representations  from  certain  reporting  persons that no Forms 5 were
required for those persons, the Company believes that through December 31, 1998,
all filing requirements  applicable to its officers,  directors and greater than
10% beneficial owners were complied with.












                                                          42

<PAGE>



Item 11. Executive Compensation.

Summary Compensation

     Set forth below is the aggregate  compensation for services rendered in all
capacities to the Company during its fiscal years ended December 31, 1998,  1997
and 1996 by its chief executive officer and each of its executive officers whose
compensation exceeded $100,000 during its fiscal year ended December 31, 1998.

<TABLE>

                                              Summary Compensation Table

                                                                         Long-Term Compensation        
                                                                         ----------------------        
                                    Annual Compensation                    Awards              Payouts 
                                    -------------------                    ------              ------- 
                                                       Other                      Number of               All
Name and                                               Annual        Restricted   Securities   Long-Term  Other
Principal                                              Compen-       Stock        Underlying   Incentive  Compen-
Position                   Year     Salary    Bonus    sation (1)    Awards       Options      Payouts    sation  
---------                  ----     ------    -----    ----------    ------       -------     ---------- ---------

<S>                        <C>      <C>       <C>                                <C>   
Michael Wahl               1998     $250,000  $    -                             60,000
  Chief Executive          1997     $250,000  $    -                             35,000
  Officer                  1996     $250,000  $    -                            140,000

Andrew Wahl                1998     $250,000  $    -                             60,000
  President                1997     $250,000  $    -                             35,000
                           1996     $250,000  $    -                            140,000

Robert V. Cuddihy, Jr.     1998     $250,000  $    -                             60,000
  Chief Operating Officer  1997     $250,000  $    -                             35,000
  Chief Financial Officer  1996     $200,000  $    -                             70,000

L. Randy Riley             1998     $250,000  $149,022 (2)                       60,000
  Executive Vice President 1997     $250,000  $    -                             35,000
                           1996     $250,000  $  70,000                         129,450
</TABLE>


(1)Personal  benefits provided to Messrs.  Michael Wahl, Andrew Wahl,  Cuddihy
   and Riley did not exceed the disclosure  thresholds  established  under SEC
   rules and therefore are not included in this table.
(2)Messrs Riley received in 1998 incentive compensation of $149,022 based upon
   his marketing and sales initiatives as established by the Board of Directors.


     Set forth below is  information  with  respect to options to  purchase  the
Company's  Common  Stock  granted in the year ended  December 31, 1998 and prior
years under the Company's Stock Option Plans.


                                                          43

<PAGE>
<TABLE>



                              Aggregated Option Exercises in Last Fiscal Year
                                     and Fiscal Year End Option Values

                                           Number of Securities
                  Number of                Underlying Unexercised    Value of Unexercised
                  Shares                   Options at                In-the-Money Options
                  Acquired                 December 31, 1998         at December 31, 1998      
                                           ------------------------  --------------------------
                  on           Value                        Unexer-                     Unexer-
Name              Exercise     Realized    Exercisable      cisable   Exercisable       cisable
----              --------     --------    -----------      -------   -----------       -------
<S>                                           <C>                          <C>     

Michael Wahl                                  694,828                      $383,960

Andrew Wahl                                   616,750                      $396,222

Robert V.
 Cuddihy, Jr.                                 318,850                      $229,743

L. Randy Riley                                318,850                      $215,325

</TABLE>


Employment Agreements

     The Company maintains an employment agreement ("Wahl Employment Agreement")
with Michael Wahl,  Chairman of the Board and Chief Executive Officer, at a base
salary of no less than  $250,000 per year.  He is also  entitled to receive such
bonuses  as may be  awarded  to him from  time to time by the  Board in its sole
discretion. The Wahl Employment Agreement expires December 31, 2002.

     Upon  termination of the Wahl  Employment  Agreement by the Company for any
reason  other than for cause,  the Company will be obligated to continue to make
salary  payments to Mr. Wahl, or to his estate in the event of his death,  for a
period of up to two years after such termination.  The Wahl Employment Agreement
also  precludes  Mr.  Wahl from  competing  with the Company for a period of two
years following termination of employment.

     With the  exception  of Michael  Wahl,  none of the  executive  officers is
employed by the Company pursuant to an employment agreement.

Compensation of Directors

     The Company's policy is to reimburse directors for travel and out-of-pocket
expenses incurred, if any, to attend its directors' meetings.  See "Compensation
Committee Interlocks and Insider Participation".


Board Compensation Committee Report on Executive Compensation

     Although  the Company has a  Compensation  Committee,  the Board as a whole
rather than the  Compensation  Committee has set  compensation for its executive
officers for each of the past three years. Four of such directors  received cash
compensation as executive officers of the Company.

     Compensation  levels  afforded  to Michael  Wahl,  Andrew  Wahl,  Robert V.
Cuddihy,  Jr., L. Randy Riley and to the Company's other executive  officers are
based in substantial  part upon a comparative  evaluation by the Company's Board
of Directors of each such person's functional  responsibility and performance in
that  particular   aspect  of  the  Company's   operations  for  which  each  is
responsible.


                                                          44

<PAGE>



     During 1998, the Board approved the grant of stock options,  to a number of
employees,  including  executive  officers.  The grant of options were  approved
after considering the Company's  continued  expansion in 1998 as its strategy to
expand its existing  client base  through  organic  growth and to  strategically
acquire  complementary  businesses  resulted in the Company's eighth consecutive
quarterly  profit.  Net revenues  increased  47.8% to $68.5 million for the year
ended  December 31, 1998. The Company  generated net income of $1.9 million,  or
$0.21 basic earnings per share, in 1998 as compared to $529,000,  or $0.06 basic
earnings per share, for the year ended December 31, 1997.

     For the year ended  December 31, 1998, the Board noted that the Company and
its  executive  management  accomplished  the  following:  (i)  consummated  the
acquisition  of the  business of Schutz  International,  Inc.,  now known as HMG
Schutz,  a Chicago-based  point-of-purchase  company,  effective August 1, 1998,
(ii)  issued a  Promissory  Note for $1.6  million,  net of imputed  interest of
$278,000 and issued 110,000  shares of its Common Stock valued at $110,000,  for
the  purchase  of HMG  Schutz  and the  Company  agreed to make  certain  future
contingency payments based upon revenues generated by HMG Schutz, (iii) acquired
an option to  purchase  for $2.3  million  the HMG Schutz  office and  warehouse
facilities,   (iv)  further   expanded  the  Company's   Reading,   Pennsylvania
manufacturing  facilities  to include a third 60,000  square foot  warehouse and
distribution  center, (v) relocated and expanded the Canadian operations through
HMG Griffith,  to a new 25,000 square foot office,  production and  distribution
center and (vi)  continued to focus on retail  innovation  and client service to
expand the revenue base with both retailers and brand manufacturers.

     In addition,  in February 1999, the Company's convertible debenture holders
elected to convert the outstanding  $2.2 million of debentures into Common Stock
at $1.25 per share pursuant to the terms of the debentures.  As a consequence of
the conversion,  the Company issued 1,728,000 shares of Common Stock and retired
the  convertible  debentures.  In addition,  on February  24, 1999,  the Company
issued  $5.0  million  7%  Convertible  Notes  Due  February  24,  2002  to  two
institutional  investors.  The principal amount of the Notes is convertible into
shares of the  Company's  Common  Stock at a  conversion  price of the lesser of
$4.00 per share or a price based on the  prevailing  market  price of the Common
Stock,  subject to a maximum issuance of 2,160,000 shares upon conversion of the
Notes, taken together.






     March 1, 1999
                             Michael Wahl - Chairman      Herbert F. Kozlov
                             Andrew Wahl                  Robert V. Cuddihy, Jr
                             Ivan Berkowitz               L. Randy Riley
                             Lawrence J. Twill, Sr.

Performance Graph

     The following graph compares the yearly change in the Company's  cumulative
total  stockholder  return on its Common Stock (based on the market price of the
Company's  Common Stock) with the cumulative  total return of U.S.  companies on
The Nasdaq Stock Market and non-financial companies on The Nasdaq Stock Market.


                   1/1/94    12/31/94    12/31/95   12/31/96  12/31/97  12/31/98
                   ------    --------    --------   --------  --------  --------
HMG Worldwide        $100      $  35       $  31       $ 12     $  13     $ 21

Nasdaq US            $100      $  98       $ 138       $170      $209     $293

Nasdaq Non-Financial $100      $  96       $ 134       $163      $191     $280



                                                          45

<PAGE>



Compensation Committee Interlocks and Insider Participation

     Each member of the Board of Directors  participated in the determination of
the level of  compensation  of the Company's  executive  officers.  Five of such
directors  are officers of the  Company,  i.e.,  Michael Wahl - Chief  Executive
Officer,  Andrew Wahl -  President,  Robert V.  Cuddihy,  Jr. - Chief  Operating
Officer and Chief Financial  Officer,  L. Randy Riley,  Executive Vice President
and Herbert F. Kozlov - Secretary.

     Herbert F. Kozlov, a director of the Company,  is a member of Parker Duryee
Rosoff & Haft, counsel to the Company. Fees paid to such firm by the Company for
the year ended December 31, 1998 were approximately $170,000.

     Lawrence J. Twill,  Sr., a director of the Company,  is Chairman of Ashwood
Capital.  Such firm,  from time to time,  also serves as an  investment  banking
advisor to the Company.


                                                          46

<PAGE>



Item 12. Security Ownership of Certain Beneficial Owners and Management.

     The following  table sets forth  information  as of March 19, 1999 based on
information  obtained  from  the  persons  named  below,  with  respect  to  the
beneficial  ownership  of  shares  of the  Company's  Common  Stock  by (i) each
director of the Company,  (ii) certain executive officers of the Company,  (iii)
each  person  known  by the  Company  to be the  owner  of  more  than 5% of its
outstanding shares of Common Stock and (iv) all executive officers and directors
as a group:

Name and Address of                          Number of       Approximate
Beneficial Holder                            Shares(1)       Percentage of Class
-----------------                            ---------       -------------------

Michael Wahl                                 1,376,725 (2)          11.7%
475 Tenth Avenue
New York, NY 10018

Andrew Wahl                                    957,803 (3)           8.2%
475 Tenth Avenue
New York, NY 10018

Robert V. Cuddihy, Jr.                         459,408 (4)           4.0%
475 Tenth Avenue
New York, NY  10018

Herbert F. Kozlov                              305,476 (5)           2.7%
529 Fifth Avenue
New York, NY  10017

L. Randy Riley                                 429,194 (6)           3.8%
475 Tenth Avenue
New York, NY  10018

Lawrence J. Twill, Sr.                         186,150 (7)           1.7%
111 East 30th Street (16A)
New York, NY  10016

Gilmour 1994 Jersey Trust                      972,222 (8)           8.8%
7 Bond Street
St. Helier
Jersey, Channel Island

State of Wisconsin Investment Board            740,000               6.7%
P.O. Box 7842
Madison, WI  53707

Great Court Analysis LLC                       640,000 (9, 10)       5.8%
5150 Overland Avenue
Culver City, CA 90230

Wynnefield Partners Small Cap Value L.P.       617,000               5.6%
One Penn Plaza
Suite 4720
New York, NY 10119

Ivan Berkowitz                                 234,250 (9, 10)       1.8%
1790 Broadway
Suite 1500
New York, NY 10009

All executive officers                       4,589,006 (11)         33.4%
and directors as a group
(7 persons)






                                                          47

<PAGE>



(1)   Includes shares  issuable  pursuant to currently  exercisable  options and
      options which will be exercisable within 60 days of March 19, 1999. Except
      as  otherwise  indicated,  the persons  named  herein have sole voting and
      disposition power with respect to the shares beneficially owned.
(2)   Includes 694,828 shares issuable upon exercise of options.
(3)   Includes 611,750 shares issuable upon exercise of options.
(4)   Includes 318,850 shares issuable upon exercise of options.
(5)   Includes 287,600 shares issuable upon exercise of options.
(6)   Includes 318,850 shares issuable upon exercise of options.
(7)   Includes 175,400 shares issuable upon exercise of options.
(8)   The trustee of the Gilmour 1994 Jersey Trust (the  "Trust") is Hill Samuel
      (Channel Islands) Trust Company Limited. The directors of the trustee have
      indirect shared voting and dispositive powers with respect to such shares.
(9)   Ivan Berkowitz, a director of the Company, is the President of Great Court
      Analysis LLC which beneficially owned 640,000 shares.
(10)  Includes  203,000  shares  issuable upon exercise of options and warrants.
      Ivan Berkowitz, a director of the Company, is the President of Great Court
      Analysis LLC which beneficially owned 640,000 shares
(11)  Includes  2,641,528  shares issuable upon exercise of options and warrants
      owned by such executive officers and directors.

Item 13.      Certain Relationships and Related Transactions.

     In 1994,  the  Company  advanced  $250,000  to Robert V.  Cuddihy,  Jr., an
officer and  Director.  Such amount is due to be repaid in one  installment  due
January 1, 2000. Unpaid amounts bear interest at a fluctuating rate equal to the
six months U.S.  Treasury bill rate. Mr. Cuddihy made aggregate  prepayments for
the period 1995 - 1998 of $208,854, plus accrued interest. At December 31, 1998,
the unpaid balance of such advance was $41,146.

     In 1995,  the  Company  advanced  $100,000 to Andrew  Wahl,  an officer and
Director.  Such  amount is due to be repaid in one  installment  due  January 1,
2000. Unpaid amounts bear interest at a fluctuating rate equal to the six months
U.S.  Treasury bill rate. In 1995,  1997 and 1998, Mr. Wahl made  prepayments of
$25,000,  $20,000 and $25,000,  respectively.  At December 31, 1998,  the unpaid
principal  balance of such  advance was $30,000 and no interest  was paid during
1998.

     Herbert F. Kozlov, a director of the Company,  is a member of Parker Duryee
Rosoff & Haft, counsel to the Company. Fees paid to such firm by the Company for
the year ended December 31, 1998 were approximately $170,000.

     Lawrence J. Twill, Sr., a director of the Company,  is President of Ashwood
Capital.  Such firm,  from time to time,  also serves as an  investment  banking
advisor to the Company.


                                                          48

<PAGE>



                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)  (1)  Financial Statements.  See Index to Consolidated Financial Statements
          in Item 8 hereof.

     (2)  Financial Statement Schedule.
              Schedule II - Valuation and Qualifying Accounts and Reserves

     (3)  Exhibits

     Exhibit
     Number       Description of Exhibit
     ------       ----------------------

      3(a)  Certificate of Incorporation, as amended (6)
       (b)  By-laws(1)
     10(a)  1986 Stock Option  Plan(1)*
       (b)  1991 Stock Option  Plan(2)*
       (c)  1993 Stock Option  Plan(3)*
       (d)  1997 Stock Option  Plan(4)*
       (e)  1998 Stock Option  Plan(5)*
       (d)  Agreement between Louis Adler Realty Company and Registrant, dated
            December  16,  1993,  for the lease of the 12th Floor at 475 Tenth
            Avenue, New York, New York(6)
       (e)  Agreement between Louis Adler Realty Company and Registrant, dated
            December  16,  1993,  for the  lease of the 8th Floor at 475 Tenth
            Avenue, New York, New York(6)
       (f)  Employment Agreement, dated April 30, 1993, between Registrant,
            Marlboro Marketing, Inc., a New York corporation, and Michael
            Wahl(3)*
       (g)  Stock Purchase Agreement,  dated as of September 30, 1995, between
            Benson Eyecare Corporation and Intermark Corp (7)
       (h)  Display Purchase Agreement, dated as of September 30, 1995, between
            HMG Worldwide In-Store Marketing, Inc., and Foster Grant Group L.P.
            and Benson Eyecare Corporation (7)
       (i)  Loan and Security Agreement between Congress Financial Corporation
            and Registrant dated November 22, 1996 (9)
       (j)  Issuance of $2.2 million, 10% convertible debentures (8)
       (k)  Asset  Purchase  Agreement,  dated  August 1, 1998  between  HWO
            Ventures, Inc. And  Registrant (10) (l) Issuance of $5.0 million, 7%
            convertible debentures (11)
     21  Subsidiaries of the Registrant     (6)
     23  Consents of Friedman Alpren & Green LLP
     27  Financial Data Schedule

(1)  Denotes document filed as an exhibit to Registrant's Proxy Statement, dated
     November 25, 1986, and incorporated herein by reference.
(2)  Denotes document filed as an exhibit to Registrant's Proxy Statement, dated
     February 7, 1992, and incorporated herein by reference.
(3)  Denotes document filed as an exhibit to Registrant's Proxy Statement, dated
     September 7, 1993, and incorporated herein by reference.
(4)  Denotes document filed as an exhibit to Registrant's Proxy Statement, dated
     July 8, 1997, and incorporated herein by reference.
(5)  Denotes document filed as an exhibit to Registrant's Proxy Statement, dated
     October 7, 1998, and incorporated herein by reference.
(6)  Denotes document filed as an exhibit to Registrant's Registration Statement
     on Form S-2 dated August 9, 1994 (File No. 33-44832) and incorporated
     herein by reference.
(7)  Denotes document filed as an exhibit to Registrant's  Annual Report on Form
     10-K dated December 31, 1995, and incorporated herein by reference.

                                                          49

<PAGE>



(8)  Denotes document filed as on exhibit to Registrant's Form 8-K dated October
     31, 1997 and incorporated herein by reference.
(9)  Denotes document filed as an exhibit to Registrant's  Annual Report on Form
     10-K dated December 31, 1997, and incorporated herein by reference.
(10) Denotes  document filed as an exhibit to  Registrants Form 8-K dated August
     12, 1998 and incorporated herein by reference
(11) Denotes  document filed as on exhibit to  Registrant's Form 8-K dated March
     22, 1999 and incorporated herein by reference.

*    Management contract or compensatory plan or arrangement

                                                          50

<PAGE>



                                   SIGNATURES


     Pursuant to the  requirements  of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                            HMG WORLDWIDE CORPORATION

Date: March 27, 1999                         By:/s/Robert V. Cuddihy, Jr.
                                                -------------------------
                                                  Robert V. Cuddihy, Jr.
                                                  Executive Vice President Chief
                                                  Operating Officer, Principal
                                                  Accounting and Chief Financial
                                                  Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
Report has been signed below by the following  persons in the  capacities and on
the dates indicated:


/s/Michael Wahl                                 
---------------------------      Chairman of the                  March 27, 1999
Michael Wahl                     Board and Chief
                                 Executive Officer


/s/Andrew Wahl                   
---------------------------      President and                    March 27, 1999
Andrew Wahl                      Director


/s/Robert V. Cuddihy, Jr.        
---------------------------      Executive Vice                   March 27, 1999
Robert V. Cuddihy, Jr.           President Chief Operating
                                 Officer, Principal Accounting and
                                 Chief Financial Officer
                                 and Director

/s/L. Randy Riley                
---------------------------      Executive Vice                   March 27, 1999
L. Randy Riley                   President and
                                 Director


/s/Ivan Berkowitz                
---------------------------      Director                         March 27, 1999
Ivan Berkowitz


/s/Herbert F. Kozlov             
---------------------------      Director                         March 27, 1999
Herbert F. Kozlov


/s/Lawrence J. Twill, Sr.        
---------------------------      Director                         March 27, 1999
Lawrence J. Twill, Sr.


                                                          51

<PAGE>



                     INDEX TO FINANCIAL STATEMENT SCHEDULES


The following financial statement schedule is filed as part of this Report:


                                                                           PAGE 
                                                                           ---- 

     Independent Auditors' Report                                           A-2

     Schedule II - Valuation and Qualifying Accounts and Reserves           A-3

Schedule other than the one listed are omitted as not required or applicable.









































                                                          52

<PAGE>




               INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT






TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HMG WORLDWIDE CORPORATION


     We have audited,  in accordance with generally accepted auditing standards,
the financial  statements included in HMG WORLDWIDE  CORPORATION'S annual report
to  shareholders  in this Form 10-K,  and have issued our report  thereon  dated
March,  24 1999.  Our audits  were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in the index is presented
for purposes of complying with the Securities  and Exchange  Commission's  rules
and is not  part of the  basic  financial  statements.  This  schedule  has been
subjected  to the  auditing  procedures  applied  in  our  audits  of the  basic
financial statements and, in our opinion, fairly states in all material respects
the information set forth therein in relation to the basic financial  statements
taken as a whole.




                                                     FRIEDMAN ALPREN & GREEN LLP
                                                    CERTIFIED PUBLIC ACCOUNTANTS



New York, New York
March 24, 1999






















                                                         A - 2


<PAGE>

<TABLE>


                                      HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                                                      SCHEDULE II
                                    VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                                    (in thousands)





                                         Additions/
                                         Deductions
                            Balance at   Charged to   Charged to                   Balance
                            Beginning    Costs and    Other                        at End
                            of Period    Expenses     Accounts     Deductions(a)   of Period
                            ---------    --------     --------     -------------   ---------
Year ended
 December 31, 1998:

<S>     <C>    <C>    <C>    <C>    <C>    <C>
  Allowance for doubtful
   accounts                    $273         $100       $100 (b)     ($20)            $453
                               ====         ====       ====          ===             ====

Year ended 
 December 31, 1997:

  Allowance for doubtful
   accounts                    $577        ($285)      $ -          ($19)            $273
                               ----         ====       ====          ===             ====

Year ended
 December 31, 1996:

   Allowance for doubtful
   accounts                    $596         $ 64       $ -          ($83)            $577
                               ====         ====       ====          ===             ====

</TABLE>


(a)  Write-off of accounts receivable.
(b)  Amount  acquired  as part of the HMG  Schutz  acquisition  pursuant  to the
     Purchase Agreement effective August 1, 1998.
















                                                          A-3


<PAGE>