SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2001
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
Commission File No.0-28128
-------

                             ELEGANT ILLUSIONS, INC.
------------------------------------------------------------------------------
(Name of small business issuer in its charter)

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

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

Issuer's telephone number  (408) 649-1814
                           --------------
Securities registered pursuant to Section 12(b) of the Act:     None
                                                            ---------------
Securities registered pursuant to Section 12(g) of the Act:  Common Stock
                                                            ---------------

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act, 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  _____
                                                              ------

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[X ]

The Issuer's revenues for its fiscal year ended December 31, 2001 were
$9,258,476.

The aggregate market value of the voting stock held by non-affiliates (1) of the
registrant based on the average of the closing bid ($.41) and asked ($.64)
prices of such stock, as of March 19, 2002 is $928,855 based upon $0.525
multiplied by the 1,769,248 Shares of Registrant's Common Stock held by
non-affiliates1.

The number of shares outstanding of each of the registrant's classes of common
stock (which excludes 62,067 treasury shares), as of March 19, 2002 is 6,084,379
shares, all of one class of $.001 par value Common Stock..



Transitional Small Business Disclosure Format (check one):  Yes         No   X
                                                                ------    ------

--------
     1 Affiliates for purposes of this item refers to those persons who, during
the preceding 3 months, were officers, directors and/or owners of 5% or more of
the Company's outstanding stock.

<PAGE>




                                               ELEGANT ILLUSIONS, INC.
                                                     Form 10-KSB
                                            Year Ended December 31, 2001

                                                  Table of Contents
<TABLE>
<CAPTION>

PART I                                                                                                         Page

<S>  <C>                                                                                                         <C>
Item 1.      Description of Business..............................................................................1

Item 2.      Description of Properties............................................................................5

Item 3.      Legal Proceedings....................................................................................6

Item 4.      Submission of Matters to a Vote of
               Security Holders...................................................................................6

Part II

Item 5.      Market for Common
               Equity and Related Stockholder Matters.............................................................6

Item 6.      Management's Discussion and Analysis of
               Financial Condition and Results of Operations......................................................7

Item 7.      Financial Statements................................................................................12

Item 8.      Changes in and Disagreements with
               Accountants on Accounting and
               Financial Disclosures.............................................................................12

Part III

Item 9.      Directors, Executive Officers, Promoters
               and Control Persons; Compliance with
               Section 16(a) of the Exchange Act.................................................................13

Item 10. Executive Compensation..................................................................................14

Item 11. Security Ownership of Certain Beneficial

               Owners and Management.............................................................................15

Item 12. Certain Relationships and Related

               Transactions......................................................................................16

Item 13. Exhibits and Reports on Form 8-K........................................................................16

Signatures.......................................................................................................18

Supplemental Information.........................................................................................19

Financial Statements............................................................................................F-1
</TABLE>


<PAGE>


                                     PART I

Item 1.      Description of Business.
             -----------------------

General

         Elegant  Illusions,  Inc.  (the  "Company"),  through its  wholly-owned
subsidiary, Elegant Illusions, Inc, a California corporation (the "Subsidiary"),
is primarily in the retail copy jewelry business and currently owns and operates
19 retail copy jewelry stores, two fine jewelry stores, three fine art galleries
and one reproduction art gallery.

    The retail copy jewelry stores are located in:



<PAGE>


California                           Indiana
o        Gilroy,                     o        Michigan City
o        Monterey (two stores),
o        Palm Springs,               Louisiana
o        Sacramento,                 o        New Orleans
o        Santa Barbara,
o        San Diego and               Michigan
o        San Francisco (two stores)  o        Birch Run

Florida                              Missouri
o        Miromar and                 o        Branson
o        Orlando
                                     Nevada
Hawaii                               o        Laughlin

o        Maui

U.S. Virgin Islands
o        St. Croix and
o        St. Thomas


         One of the fine jewelry  stores (which  includes a fine art Gallery) is
located in Monterey and the other is located in St. Croix.

         The fine art  galleries  are located in New Orleans,  Louisiana,  Vail,
Colorado  and  Sarasota,  Florida.  Each now  operates  under the name  Cardinal
Gallery.

         The reproduction  art gallery (Branson  Gallery) is located in Branson,
Missouri.

         In 1997, the Company  announced a store expansion plan. In this regard,
it opened four  locations in 1997,  seven in 1998 and two in 1999.  However,  in
1998,  management  elected  to shift its focus from  opening  new  locations  to
bolstering  revenues from existing stores and exploring other sales mediums that
potentially could generate greater returns to cash and less capital exposure.

                                       1
<PAGE>

         The Company has identified and closed the following stores that it
deemed to be non performing:

o Portland, Oregon on January 3, 1999;
o Ontario, California on April 28, 1999;
o Kenosha, Wisconsin on August 3, 1999;
o Oahu, Hawaii on January 3, 2000;
o Tulare, California on February 27, 2000;
o Royal Dane Mall, St. Thomas on July 1, 2000;
o Seaport Jewelers on October 23, 2000;
o San Francisco reproduction art gallery on November 30, 2000;
o Utah on July 30, 2001: and
o Grapevine on August 13, 2001.

         The Company also closed its Mall of America location in June 2000
because it was unable to negotiate a lease renewal satisfactory to management.

         In addition, the Company relocated two locations, one in Branson,
Missouri and one in San Francisco, California.

         For more information on the performance of the Company's existing
locations, see "Part II, Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

         In January 2000, the Company purchased a retail site in Vail, Colorado
and, on November 5, 2000, opened a Fine Art Gallery at this location (see "Part
I, Item 2. Description of Property"). In October, 2001 the Company opened a fine
art Gallery ( Cardinal Gallery) in Sarasota, Florida. In addition, the Company
has licenses to reproduce the works of Norberto Martini and Andrea Stella. The
Company sells these reproductions in certain of its current copy jewelry and
fine jewelry stores and it's Gallery located in Branson Missouri.

         Original works of both of these artists are featured at the Company's
New Orleans, Vail and Sarasota Galleries. During the year 2001, the Company
changed the names of Bourbon St. Gallery (New Orleans) and Gore Creek Gallery
(Vail) to Cardinal Gallery.

         The Company plans to license its Elegant Illusions trade name to permit
others to open stores featuring Elegant Illusions brand copy jewelry. The
Company is structuring these transactions in a manner that management believes
will not require registration under current franchising laws. In this regard,
the Company signed a license agreement with its first licensee whose store will
operate under its own trade name in Pennsylvania.

         The Company also plans to license the right to sell its Elegant
Illusions brand copy jewelry to existing retail jewelry stores or jewelry/gift
galleries operating under their own trade name. These stores would devote a
department or area to Elegant Illusions brand copy jewelry.

                                       2
<PAGE>

Types of Stores

         The copy jewelry  stores sell copies of fine jewelry  including  rings,
pendants,  earrings,  necklaces,  bracelets,  pearl  enhancers  and  ear  charms
manufactured in 14 carat gold,  sterling  silver  vermeil,  gold bonded brass or
gold bonded white metal.  By using  synthetic and laboratory  grown stones,  the
Company offers copy jewelry at a fraction of the cost of real fine jewelry.

         The fine jewelry stores,  Steinbeck Jewelers (Monterey) and Kings Alley
Jeweler (St.  Croix),  sell fine jewelry  including rings,  pendants,  earrings,
necklaces,  bracelets,  manufactured in 10 carat, 12 carat and 14 carat gold and
other  precious  metals set with precious and  semi-precious  stones and certain
gift ware items.

         In June 2001,  the Company made the following  changes at its Steinbeck
Jewelers location:

o        upgraded its jewelry selection to higher ticket items,
o        eliminated the handcrafted and gift items,
o        remodeled the premises and
o        converted a portion of the space  (approximately 500 sq. ft.) to an art
         gallery  featuring  original  works of the same artists  carried in the
         three Cardinal Gallery locations.

         The fine art galleries, Cardinal Gallery, New Orleans, Cardinal
Gallery, Vail and Cardinal Gallery, Sarasota, sell predominantly original oil
paintings by contemporary Italian artists.

Purchase of Inventory

         The Company  purchases  its copy jewelry  merchandise  directly  from a
number of  manufacturers  located in and outside the United States;  it does not
purchase from  distributors.  Products purchased include stock items and jewelry
designed  by the  Company.  The  jewelry  sold in the fine  jewelry  stores  are
primarily  purchased directly from  manufacturers and, to a lesser extent,  from
distributors.  The Company  purchases  its Art for the three fine art  galleries
directly  from the artists.  Less than 5% of Cardinal  Gallery's  (New  Orleans)
revenues are generated  from sales of Art on  consignment.  None of the Cardinal
Gallery's  (Vail  or  Sarasota)  revenues  are  generated  from  sales of Art on
consignment.

                                       3
<PAGE>

Marketing

         The Company's primary source of business results from "walk by" traffic
and word of mouth.  The Company also  advertises in magazines and newspapers and
on radio.  Management  believes  that its choice of  strategic  location  is its
primary  marketing  tool.  The Company's  stores are located in high  trafficked
locations  including  malls and tourist  areas.  The strategic  locations of the
stores also helps mitigate  seasonal  factors;  the tourist  locations do higher
volume  during the summer and vacation  times while the mall and heavy  shopping
locations  do  higher  volume  around  the  traditional   holiday  times  (e.g.,
Christmas, Valentines Day and Mothers Day).

Competition


         At this time,  management  believes  that the Company has little direct
competition.  The Company  knows of two copy  jewelry  retail  store chains that
could  compete with the Company if they were located  within close  proximity of
the Company's stores - Impostors and Landau Hyman.  Management believes that the
Company  would be able to  compete  even if  stores  were  opened  within  close
proximity of the  Company's  stores.  The  Company's  copy  jewelry  stores also
compete indirectly with fine jewelry and costume jewelry retail stores; however,
due to the type of merchandise  sold and the difference in product price ranges,
such competition has minimal if any affect on the Company's business.


Employees

         At March 20, 2002, the Company had approximately 124 employees. Current
employees  include the Company's  three  officers,  two regional  managers,  one
national  sales  manager,  21 store  managers,  two  assistant  managers,  three
training managers, 75 sales personnel,  one retail computer systems manager, one
office manager and 15 clerical personnel.


Item 2.      Description of Properties.
             -------------------------

         The Company's  executive  offices are located at 542  Lighthouse  Ave.,
Suite 5, Pacific Grove, California 93950. The facility consists of approximately
10,100 square feet utilized approximately as follows:

                                                Square
Usage                                           Footage
-----                                           -------
Executive office space                               700
Administrative space                               1,100
New facility assembly                              1,700
Manager training                                     800
Warehouse space                                    5,000
Computer and file space                              900
                                                 -------
                                                  10,100

                                       4
<PAGE>

         The facility, excluding the warehouse space which is located on another
floor in the building,  is leased from an  unaffiliated  party pursuant to a one
year lease that expires on February 28, 2003.

         The  Company has leased the  warehouse  portion of the  premises  for a
period of six months, beginning March 1, 2002.

         Management   believes  that  the  current   executive   facilities  are
sufficient  for the  Company's  needs  through  the term of its  lease;  however
management actively is looking to purchase a building.

         As  noted  below,  Cardinal  Gallery,  Vail  is  located  in  a  retail
condominium owned by the Company and the Cardinal Gallery,  Sarasota location is
leased from James Cardinal,  Gavin Gear and Tamara Gear, the Company's executive
officers, directors and principal stockholders. The rest of the Company's stores
are leased from  unaffiliated  parties on various  terms.  Certain of the leases
provide the  landlord  with a percentage  of revenues  generated at and from the
specific  leased  location (see Note 4 to the Company's  Consolidated  Financial
Statements).  In addition,  certain of the leases contain termination clauses in
the event a location does not meet specific revenue projections.

         On January  31,  2000,  the  Company  purchased  a retail  site in Vail
Colorado located at160 Gore Creek Drive, The Lodge Apartment Condominium,  Vail,
Colorado 81657,  where it opened a Fine Art Gallery.  The site is  approximately
504 square feet.  The Company  leased these  premises back to the seller through
April 30, 2000. The Company retook  possession of the premises on May 1, 2000 at
which time it began to prepare the premises  for use as a Fine Art Gallery.  The
Fine Art Gallery was opened on November 5, 2000.

         In September  2001, the Company entered into a triple net lease for its
Cardinal  Gallery in Sarasota,  Florida.  The store is located at John  Ringling
Blvd, Sarasota,  Florida.  The store is owned by James Cardinal,  Gavin Gear and
Tamara Gear,  executive  officers,  directors and principal  stockholders of the
Company.  The specific  lease terms  require 60 monthly base payments of $7,200.
Management  believes that the lease terms for this store are comparable to those
the Company would have obtained from an unaffiliated landlord.

         On October 14, 1999, the Company purchased a condominium in New Orleans
to house staff coming from other locations to train.  Previous to this purchase,
staff were  housed in hotels.  Management  believes  this  purchase  has reduced
operating costs and allowed for a stable management staff.


                                       5
<PAGE>



Item 3.      Legal Proceedings.
             -----------------

         The Company is not presently a party to any material litigation not in
the regular course of its business, nor to the Company's knowledge is such
litigation threatened.

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

         No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 2001.


                                     PART II

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

         (a) Marketing  Information  -- The principal  U.S.  market in which the
Company's  Common Stock ($.001 par value,  all of which are one class) is traded
is in the over-the-counter market (OTCBB Symbol: "EILL.OB").

         The following tables set forth the range of high and low closing bid
prices for the Company's Common Stock on a quarterly basis for the past two
fiscal years. information for the year ended December 31, 2000 was obtained from
NASDAQ and information for the year ended December 31, 2001 was obtained from
the Pink Sheets, LLC. The bid prices reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions. The Company's Common Stock was delisted from NASDAQ on August 23,
2001. It is now quoted on the OTC Bulletin Board.

                                                          Bid Prices
                                                   High              Low

Period - Fiscal Year  2000
--------------------------
First Quarter ending March 31, 2000             1.844             0.813
Second Quarter ending June 30, 2000             1.719             0.938
Third Quarter ending September 30, 2000         1.50              1.00
Fourth Quarter ending December 31, 2000         1.50              0.516

Period - Fiscal Year  2001
--------------------------
First Quarter ending March 31, 2001             1.09375            .625
Second Quarter ending June 30, 2001             0.80              0.50
July 2, 2001 through August 23, 2001            0.52              0.40
August 24, 2001 through September 28, 2001      0.32              0.15
Fourth Quarter ending December 31, 2001         0.40              0.24


                                       6
<PAGE>


         (b)  Holders  -- There were  approximately  83 holders of record of the
Company's  Common Stock as of March 19, 2002 inclusive of those  brokerage firms
and/or  clearing  houses holding the Company's  securities  for their  clientele
(with each such brokerage  house and/or  clearing house being  considered as one
holder).


         (c)  Dividends  -- The Company has not paid or declared  any  dividends
upon its  Common  Stock  since its  inception  and,  by  reason  of its  present
financial  status  and  its  contemplated  financial   requirements,   does  not
contemplate  or  anticipate  paying any  dividends  upon its Common Stock in the
foreseeable future.


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

Cautionary Statement on Forward-Looking Statements

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

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


Results of Operations

Fiscal Year ended December 31, 2001 Compared to Fiscal Year Ended
December 31, 2000
-----------------------------------------------------------------
         Sales for the year ended December 31, 2001 decreased $370,757 or
approximately 3.9% when compared to the year ended December 31, 2000.

         Management believes that the decrease in sales was due to closing of
two locations in 2001, offset by the opening of the Sarasota Gallery. As of
December 31, 2000, the Company operated 26 retail locations and, as of December
31, 2001, it operated 25 retail locations. See "Part I. Item 1. Description of
Business; General."


                                       7
<PAGE>


         Costs of goods as a percentage of revenues remained essentially
unchanged from approximately 29.4% during 2000 to approximately 29.7% during
2001. Management expects costs of goods as a percentage of revenues to improve
in the year 2002.

         During  the  year  ended  December  31,  2001,  selling,   general  and
administrative  expenses  decreased when compared to the year ended December 31,
2000 by  $231,866  (approximately  3.8%).  However,  as a  percentage  of sales,
selling, general and administrative expenses remained essentially unchanged from
approximately  64.1% during the year ended  December  31, 2000 to  approximately
64.2%  during the year ended  December 31, 2001.  Management  believes  that the
decrease in expenses  from 2000 to 2001 and the  increase in such  expenses as a
percentage of sales from 2000 to 2001  primarily was the result of the following
non-recurring  charges  in 2000  offset  primarily  by a  $256,000  increase  in
executive compensation in 2001:

o        The costs associated with closing six locations in 2000 of $64,514.

o        The costs associated with Staff Accounting  Bulletin 101 resulting in a
         cumulative  charge to net  income of  $96,045  (see the  discussion  in
         "Recently Issued Accounting Standards" below).

o        The cost associated  with the Company's  attempt to purchase a building
         resulting in the loss of the deposit of $250,000.

o        Settlement  of a lawsuit  for  $70,000  and  associated  legal  fees of
         approximately $33,000.

o        Residual legal fees resulting from the Company's cancelled plan to take
         the Company  private of $3,000.  Penalties  and interest on back income
         taxes from 1996, in the amount of $5,018.

         The total of all non-recurring charges is $521,577.

         Excluding these non-recurring expenses,  during the year ended December
31, 2001, selling,  general and administrative  expenses increased when compared
to the year ended  December  31, 2000 by  $289,711  (approximately  5.1%).  As a
percentage of sales, selling, general and administrative expenses increased from
approximately  58.5% during the year ended  December  31, 2000 to  approximately
64.2% during the year ended December 31, 2001.



                                       8
<PAGE>


         Revenues Same Store Locations.
         -----------------------------

         As of December 31, 2000, the Company operated 22 locations that were
also in operation at December 31, 2001 and open for a full 12 months:



<PAGE>
<TABLE>
<CAPTION>


California                             Hawaii                                  Missouri
<S>     <C>                              <C>                                      <C>
o        Gilroy,                       o        Maui                           o        Branson
o        Monterey (three stores),
o        Palm Springs,                 Indiana                                 Nevada
o        Sacramento,                   o        Michigan City                  o        Laughlin
o        Santa Barbara,
o        San Diego and                 Louisiana                               U.S. Virgin Islands
o        San Francisco (two stores)    o        New Orleans (two stores)       o        St. Croix (two stores) and
                                                                               o        St. Thomas
Florida                                Michigan
o        Miromar and                   o        Birch Run
o        Orlando

</TABLE>

         Revenues  from same store  locations  for the year ended  December  31,
2001,  decreased  approximately  1.9% from the same  period in 2000.  Management
attributes this decrease to the events of September 11, 2000.

         Net Income

         During the year ended  December  31,  2001,  the Company  realized  net
income of $43,059  compared to a net loss of $6,685 for the year ended  December
31, 2000. Excluding the non-recurring cumulative charge to net income of $96,045
resulting  from Staff  Accounting  Bulletin 101  discussed  above,  the Company,
during the year ended December 31, 2000, realized net income of $89,361.

         The Company,  during the year ended December 31, 2000, realized pre-tax
income of  $112,960  compared to pretax  income of  $223,109  for the year ended
December 31, 1999.  Excluding the  non-recurring  expenses  discussed above, the
Company,  during the year ended  December 31, 2000,  realized  pre-tax income of
$654,137.

         Inventory Turnover Ratios

         During the year ended  December 31,  2001,  the Company  maintained  an
inventory  that  provided  a  turnover  ratio of 0.88 to1.  Management  does not
believe  that the  current  inventory  turnover  is  indicative  of  impaired or
slow-moving inventory.

                                       9
<PAGE>

         Management  believes that the current inventory  turnover ratio of 0.88
to 1 is appropriate for the Company's plan of operation,  including  maintaining
its strategy of replacing  inventory sold at its retail  locations  within a 2-3
day time  frame.  Management  reviews  items on hand,  on a  regular  basis,  to
determine slow moving items,  then discount the price of those items so they are
sold at prices  that still  generate  a positive  gross  margin.  The  inventory
turnover ratio for the year ended December 31, 2000 was 1.04 to 1.

         Recently Issued Accounting Standards

         The  Securities  and  Exchange  Commission  (the  "SEC")  issued  Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, in
December 1999.  The SAB summarizes  certain of the SEC staff's views in applying
generally  accepted  accounting  principles to revenue  recognition in financial
statements.   In  June  2000,  the  SEC  issued  SAB  101B,   which  delays  the
implementation  date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years  beginning  after  December 15, 1999. In  accordance  with SAB 101,
during  the  quarter  ending  September  30,  2000,  the  Company  adopted a new
accounting  method  pursuant to which it recognizes  layaway sales as sales upon
delivery  of the  merchandise  to the  customer.  The impact of this  accounting
change  was a  cumulative  charge to net  income  of  $96,045  effective  at the
beginning of the period. The pro forma effect of retroactive application of this
accounting change to prior operating periods is immaterial.

Liquidity and Capital Resources

         As of December 31, 2001,  the Company had  $1,609,236  in cash and cash
equivalents (compared to $1,899,722 on December 31, 2000) and its current assets
exceeded its current liabilities by $5,237,547.

         In 1997, the Company  announced a store expansion.  In this regard,  it
opened  four  locations  in  1997,  seven  in  1998  and two in  1999.  However,
management  elected to shift its focus from opening new  locations to bolstering
revenues  from existing  stores and  exploring  other sales mediums and products
that  potentially  could  generate  greater  returns  to cash with less  capital
exposure.

         In this regard management has expanded the Art Gallery concept and has
added Art Reproductions to already existing stores.

         Our primary anticipated capital expenditures during the year ending
December 31, 2002 include:

         o        the  possible  opening of one to three or more fine art and/or
                  copy jewelry stores;
         o        the possible  acquisition  of real estate to house new stores;
                  and
         o        the acquisition of a building to house the Company's Corporate
                  facilities.

                                       10
<PAGE>

         In this  regard,  we have  signed  a lease  for a store  in the town of
Wailes on the island of Maui in Hawaii.  We anticipate that this store will sell
copy jewelry,  fine jewelry and fine art and will open within the next 90 to 120
days.

         We believe  that we have  sufficient  capital  reserves  for all of the
foregoing activities, except, possibly, for the purchase of real estate. We most
likely will mortgage some or all of the real estate that we acquire.

         In  September   1999,  the  Company   established  an  e-commerce  site
(www.elegantillusions.com) to sell its products over the internet. However, to
date internet sales have not made a material  contribution to revenues.  In June
2000, we entered into an internet alliance with Vcommerce Corporation to provide
for the sale of certain of our jewelry  over the  internet.  We had  anticipated
that our  products  would  be  available  on the  internet  as a result  of this
alliance in late August or September 2000. Our products became available through
Vcommerce  commencing in November 2000; however,  revenues from this source have
not been material to date.

         A significant amount of the Company's business comes from tourists who
visit certain of the Company's stores but do not have an Elegant Illusions store
near their home. Management anticipates that these tourists and others who will
learn about the Company's e-commerce site at its existing locations will shop on
its e-commerce site.




                                       11
<PAGE>




Item 7.      Financial Statements.
             --------------------

         The following  consolidated  financial statements have been prepared in
accordance  with the  requirements  of Item  310(a)  of  Regulation  S-B and are
located at the end of this Annual Report on Form 10-KSB.

                             ELEGANT ILLUSIONS, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED December 31, 2001

                                      INDEX
                                                                        Page No.

    Report of Independent Auditor                                          F-1

    Consolidated Balance Sheets - December 31, 2000 and 2001               F-2

    Consolidated Statements of Operations for the
    Years Ended December 31, 2000 and 2001                                 F-3

    Consolidated Statement of Stockholders'
    Equity for the Years
    Ended December 31, 2000 and 2001                                       F-4

    Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2000 and 2001                                 F-5

    Notes to Consolidated Financial Statements                             F-6

Item 8.      Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosures.
             ------------------------------------------------

         There have been no changes in, or disagreements with the Company's
independent accountants with respect to accounting and/or financial disclosure,
during the past two fiscal years.


                                       12
<PAGE>



                                    PART III

Item 9.      Directors, Executive Officers, Promoters and Control Persons;
             compliance with Section 16(a) of the Exchange
             Act.

         The following table sets forth certain information concerning the
directors and executive officers of the Company:

                                        First
                                        Became
Name                            Age     Director    Position

James Cardinal                   55        1993    Chief Executive Officer
                                                   & Director

Gavin Gear                       50        1993    President & Director

Tamara Gear                      43        1993    Secretary-Treasurer
                                                   & Director


Janet Heinze                     53        1998    Director




         Directors are elected at the meeting of stockholders called for that
purpose and hold office until the next stockholders meeting called for that
purpose or until their resignation or death. Officers of the corporation are
elected by the directors at meetings called by the directors for its purpose.

         JAMES CARDINAL has been the Company's Chief Executive Officer since May
1994 and a director  of the  Company  since May 1993.  He was  President  of the
Company  from May 1993 to May  1994.  He has been a  director  of the  Company's
wholly-owned  California Subsidiary,  Elegant Illusions,  Inc.(the "Subsidiary")
since  1992 and a  business  consultant  for  Subsidiary  since  1989.  He was a
director  of Bay Area Grand  Illusions,  Inc.  ("Bay")  from June 1992 until its
merger in to the Subsidiary.  Prior thereto,  he was self-employed as a business
consultant and capital organizer to start-up companies.

         GAVIN  GEAR has  been  the  Company's  President  since  May 1994 and a
director of the Company  since May 1993.  He was Vice  President  of the Company
from May 1993 to May 1994.  He was a founder and has been the  President,  Chief
Financial  Officer and a director  of the  Subsidiary  since 1989.  Mr. Gear was
President,  Chief Financial Officer and a director of Copy Jewels,  Inc. ("CJI")
from 1989 until its merger into the  Subsidiary  and President and a director of
Bay from 1988 until its merger in to the  Subsidiary.  Since  1979,  he also has
been the  President,  Chief  Financial  Officer  and a director  of Cannery  Row
Enterprises, Inc. ("CRE"). CRE was acquired by the Company in July 1994.

                                       13
<PAGE>


         TAMARA  GEAR has been the  Secretary-Treasurer  and a  director  of the
Company since May 1993.  She was a founder and has been the  Secretary-Treasurer
and a director of the Subsidiary since 1989. She was the Secretary-Treasurer and
a director of CJI (from  1989) and of Bay (from  1988) until their  merger in to
the  Subsidiary.  Since 1985,  she also has been an officer and director of CRE.
From 1984 to 1985,  Ms. Gear was a  gemologist  for Sun Studies in Carmel.  From
1980 to 1984, she was the retail manager for Cannery Row Enterprises.

         JANET HEINZE currently is the  Superintendent at the American School in
Guadalajara,  Mexico.  Prior thereto,  she taught  elementary school at the Park
School in Hayward,  California  since  September  1997. Ms. Heinze taught at the
American School in  Guadalajara,  Mexico from September 1991 to August 1996. Ms.
Heinze  graduated from the University of  California,  Berkeley  ("UCB") in 1969
with a degree in Sociology, received her teaching credentials at UCB in 1970 and
her Masters degree from Framingham State University,  Framingham,  Massachusetts
in 1996.

         In March 2001,  Keith  Brandon,  one of the  Company's  Directors and a
member of the Audit  Committee,  passed away.  The Company's  Board of Directors
appointed Barbara Z. Bokanovich to the Board and the Audit Committee. In October
2001, Ms. Bokanovich  resigned as a director and the Company disbanded its Audit
Committee.


Item 10.     Executive Compensation.
             ----------------------

         The following table sets forth a summary of the compensation of the
three Officers of the Company for the fiscal years ended December 31, 2001, 2000
and 1999. Total compensation paid to all three executive officers as a group
during 2001 was $715,000.


<TABLE>
<CAPTION>

                                                          SUMMARY COMPENSATION TABLE

                                                                                           Long-Term Compensation
                                          Annual Compensation                           Awards              Payouts

                                                                 Other          Restrict-                            All Other
                                                                 Annual         ed Stock               LTIP          Compensa
Name and Principal                                    Bonus    Compen-           Award        Options Payouts          -tion
 Position                            Year   Salary    ($)      sation($)           ($)         SARs      ($)            ($)
--------------------                ------  -------  -------  ---------         ---------    -------- ---------      --------


<S>                                <C>      <C>      <C>              <C>               <C>         <C>       <C>           <C>
James Cardinal                     2001     $275,000 $75,000          0                 0           0         0             0
CEO                                2000     $225,000       0          0                 0           0         0             0
                                   1999     $146,418       0          0                 0           0         0             0

Gavin Gear                         2001     $145,000 $37,500          0                 0           0         0             0
President                          2000     $112,500       0          0                 0           0         0             0
                                   1999     $ 90,000       0          0                 0           0         0             0


Tamara Gear                        2001     $145,000 $37,500          0                 0           0         0             0
Secretary-Treasurer                2000     $121,500       0          0                 0           0         0             0
                                   1999     $ 99,000       0          0                 0           0         0             0

</TABLE>

                                       14
<PAGE>



         In respect of the year ended December 31, 2001, both of the
non-employee directors were paid an annual director's fee of $2,000. One of the
non-employee directors resigned during 2001. None of the other directors
received compensation for their services as directors of the Company. The
Company also reimburses its directors for travel, lodging and related expenses
they may incur attending Board of Directors and committee meetings.

Item 11.     Security Ownership of Certain Beneficial Owners and Management.
             --------------------------------------------------------------

         The  following  table  sets  forth  information  with  respect  to  the
beneficial  ownership of the Company's Common Stock as of March 19, 2002 by: (i)
each of the Company's directors and executive officers;  (ii) each person who is
known by the Company to be the  beneficial  owner of five percent or more of the
outstanding shares of Common Stock; and (iii) all of the Company's directors and
executive officers as a group:
<TABLE>
<CAPTION>

Name and Address                      Amount of Record
of Beneficial                          and Beneficial                      Percent of
    Owner                                 Ownership                        Class
----------------                       ------------------                  ----------

<S>                                         <C>                               <C>
James C. Cardinal                           2,115,673                      34.8%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA  93950

Gavin M. Gear                               1,091,146(1)                   17.9%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA  93950

Tamara Gear                                 1,108,312(1)                   18.2%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA  93950

Janet Heinze                                        0                         0%
CircunVaiacion Nte 80
Las Fuentes 45070
GuadalaJara, Jai
Mexico

Barbara Z. Bokanovich(2)                            0                         0%
984 Lupin Drive
Suite 5
Salinas, CA 93906

All Officers and
Directors as a Group
  (5 Persons)                               4,315,131                      70.9%
</TABLE>


                                       15
<PAGE>

(1) Gavin and Tamara Gear are husband and wife. Although each is deemed to be
    the beneficial owner of the shares held by the other, the shares listed for
    Gavin Gear do not include the shares owned by Tamara Gear and the shares
    listed for Tamara Gear do not include the shares owned by Gavin Gear.

(2) Ms. Bokanovich resigned as a Director of the Company in October 2001.


Item 12.     Certain Relationships and Related Transactions.
             ----------------------------------------------

         During the fiscal years ended December 31, 2001 and 2000, there were no
transactions to which the Company was a party, in which any executive officer,
director, principal stockholder or immediate family member of any of the
foregoing persons had a direct or indirect material interest, except as follows:

         In September 2001, the Company entered into a triple net lease for its
Cardinal Gallery in Sarasota, Florida. The store is located at John Ringling
Blvd, Sarasota, Florida. The store is owned by James Cardinal, Gavin Gear and
Tamara Gear, executive officers, directors and principal stockholders of the
Company. For information on the terms of this lease, see "Part I, Item 2.
Description of Properties." Management believes that the lease terms for this
store are comparable to those the Company would have obtained from an
unaffiliated landlord.

         In January and February 2000, James Cardinal obtained 15-year license
agreements with two artists, Norberto Martini and Andrea Stella, to produce,
market and sell reproductions of their art work. Mr. Cardinal has assigned these
license agreements to the Company.

Item 13.     Exhibits and Reports on Form 8-K.
             --------------------------------

Exhibits

         3.a      Certificate of Incorporation of the Company (1)
         3.b      Amendment to the Certificate of  Incorporation  of the Company
                  (1)
         3.c      Amendment to the Certificate of  Incorporation  of the Company
                  (3)
         3.d      By-Laws of the Company (1)
         3.e      Amendment to the Certificate of  Incorporation  of the Company
                  concerning the reverse stock split (4)
         10.a     May 12, 1993  Agreements  between the Company,  Subsidiary and
                  the Subsidiary's Stockholders(2)
         10.b     Agreement of purchase of the two franchise stores(2)

(1)      Previously  filed as an Exhibit to the  Registration  Statement on Form
         S-18,  file No.  33-42851-D  filed  with the  Commission  at its Denver
         Regional  Office and declared  effective by the  Commission on February
         14, 1992.

                                       16
<PAGE>

(2)      Previously  filed as an Exhibit to the Company's Form 8-K dated June 1,
         1993,  as filed with the  Commission  on or about August 26, 1993,  and
         incorporated herein by reference.

(3)      Previously  filed as Appendix A to the Company's  Annual Report on Form
         10-KSB  for the  year  ended  December  31,  1995,  as  filed  with the
         Commission  on or about  March 22,  1996,  and  incorporated  herein by
         reference.

(4)     Previously filed as an Exhibit to the Company's Annual Report on
        Form 10-KSB for the year ended December 31, 1998, as filed with the
        Commission on or about March 24, 1999, and incorporated herein by
        reference.


Reports of Form 8-K

         None.

         Statements contained in this 10-KSB as to the contents of any agreement
or other document referred to are not complete, and where such agreement or
other document is an exhibit to the Company's Registration Statement or is
included in the forms indicated above, each such statement is deemed to be
qualified and amplified in all respects by such provisions.

                                       17
<PAGE>




                                   SIGNATURES

          Pursuant to the requirements of 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.

                                                      ELEGANT ILLUSIONS, INC.


 Dated:  March 29, 2001                 By:  /s/James Cardinal
                                             -----------------------------------

                                              James Cardinal,
                                              Chief Executive Officer,


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

 SIGNATURES                                  TITLE                   DATE
 ----------                                  -----                   ----


 /s/James Cardinal                   Chief Executive Officer      March 29, 2001
 -----------------                   and Director
 James Cardinal

/s/Gavin Gear                        President and Director       March 29, 2001
-------------------------
 Gavin Gear

/s/Tamara Gear
 -----------------                   Secretary-Treasurer
Tamara Gear                         (Chief Financial Officer and
                                     Chief Accounting Officer)
                                     and Director                 March 29, 2001

                                     Director                     March __, 2001
---------------------------
 Janet Heinze



                                       18
<PAGE>




                            SUPPLEMENTAL INFORMATION

         Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.

                                 Not Applicable.

























<PAGE>

                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001


Report of Independent Auditor                                      F-1

Consolidated Balance Sheets at December 31, 2000 and 2001          F-2

Consolidated Statements of Operations -                            F-3
    Years Ended December 31, 2000 and 2001

Consolidated Statement of Stockholders' Equity -                   F-4
    Years Ended December 31, 2000 and 2001

Consolidated Statements of Cash Flows -                            F-5
    Years Ended December 31, 2000 and 2001

Notes to Consolidated Financial Statements                         F-6




<PAGE>
                         REPORT OF INDEPENDENT AUDITOR

To the Board of Directors and Stockholders
Elegant Illusions, Inc.

I  have  audited  the  accompanying   consolidated  balance  sheets  of  Elegant
Illusions,  Inc.  and  Subsidiaries  as of December  31, 2000 and 2001,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  for  the  years  then  ended.   These   financial   statements   are  the
responsibility of the Company's  management.  My responsibility is to express an
opinion on these financial statements based on my audits.

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

In my opinion,  the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elegant
Illusions,  Inc.  and  Subsidiaries  as of  December  31,  2000 and 2001 and the
consolidated results of operations,  stockholders' equity and cash flows for the
years then ended, in conformity with generally accepted accounting principles of
the United States of America.




                                                       Jeffrey S. Gilbert, CPA

Los Angeles, California
March 21 2002










                                       F-1




<PAGE>
                     ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>


                                                                                         December 31,   December 31,
                                                                                            2000             2001
                                    ASSETS

CURRENT ASSETS
<S>                                                                                   <C>             <C>
         Cash and cash equivalents                                                    $1,899,722      $1,609,236
         Accounts receivable                                                             227,245         237,546
         Income taxes receivable                                                           5,380
         Inventory                                                                     2,867,755       3,356,578
         Prepaid expenses                                                                279,232         306,869
                                                                                       ---------       ---------
                  TOTAL CURRENT ASSETS                                                 5,279,334       5,510,229
                                                                                       ---------       ---------

PROPERTY AND EQUIPMENT, NET                                                            2,196,339       2,021,952

OTHER ASSETS
         Deposits                                                                         68,264          79,392
         Patents and trademarks, net of accumulated amortization of
          $4,666 in 2000 and $5,424 in 2001                                                1,291             533
         Excess cost over net assets acquired, net of accumulated
           amortization of $26,706 in 2000                                                14,141               0
                                                                                       ---------       ---------
                                                                                          83,696          79,925
                                                                                       ---------       ---------
                                                                                      $7,559,368      $7,612,106
                                                                                       =========      ==========

                  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
         Current portion of long term debt                                               $10,118         $11,062
         Accounts payable and accrued expenses                                           202,418         213,860
         Income taxes payable                                                                  0          47,760
                                                                                        ---------       ---------
TOTAL CURRENT LIABILITIES                                                                212,536         272,682
                                                                                        =========       =========

LONG TERM DEBT
         Mortgages payable                                                               463,430         452,963
         Deferred income taxes                                                           205,871         165,871
                                                                                        ---------       ---------
                                                                                         669,301         618,834
                                                                                        ---------       ---------
                  TOTAL LIABILITIES                                                      881,837         891,516
                                                                                        =========       =========
STOCKHOLDER'S EQUITY
         Common stock-authorized 30,000,000 shares,
            $.001 par value, issued and outstanding
            6,146,446 shares in 2000 and 2001                                              6,147           6,147
         Additional paid in capital                                                    3,914,509       3,914,509
         Retained earnings                                                             2,840,884       2,883,942
         Less treasury stock at cost (62,067 shares in
         1999 and 1998)                                                                  (84,008)        (84,008)
                                                                                       ---------       ---------
                                                                                       6,677,532       6,720,590
                                                                                       ---------       ---------
                                                                                      $7,559,369      $7,612,106
                                                                                      ==========      ==========

</TABLE>



                  See Accompanying Notes to Consolidated Financial Statements
<PAGE>


                                                     F-2



ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND 2001
<TABLE>
<CAPTION>


                                                                                         2000             2001

<S>                                                                                   <C>             <C>
REVENUES                                                                              $9,629,233      $9,258,476

COST OF GOODS SOLD                                                                     2,829,556       2,745,965
                                                                                       ---------       ---------
GROSS PROFITS                                                                          6,799,677       6,512,511

EXPENSES
                  SELLING, GENERAL AND ADMINISTRATION                                  6,172,077       5,940,212
                  DEPRECIATION AND AMORTIZATION                                          469,914         472,613
                  INTEREST EXPENSE                                                        44,726          42,628
                                                                                          ------          ------
                                                                                       6,686,717       6,455,453
                                                                                       ---------       ---------
INCOME BEFORE INCOME TAXES                                                               112,960          57,058

PROVISION FOR INCOME TAXES                                                                23,600          14,000
                                                                                          ------          ------
NET INCOME BEFORE ACCOUNTING CHANGE                                                       89,360          43,058

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                                                 96,045
                                                                                          ------          ------

NET INCOME                                                                               ($6,685)        $43,058
                                                                                          ------          ------


WEIGHTED AVERAGE SHARES OUTSTANDING                                                    6,146,446       6,146,446
                                                                                       ---------       ---------
BASIC AND DILUTED INCOME(LOSS) PER SHARE
                  BEFORE ACCOUNTING CHANGE                                                 $0.01           $0.01

                  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING                                (0.01)           0.00
                  PRINCIPLE                                                                -----            ----

                  AFTER ACCOUNTING CHANGE                                                 ($0.00)          $0.01
                                                                                          ======           =====


</TABLE>








                  See Accompanying Notes to Consolidated Financial Statements


                                                     F-3
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001

<TABLE>
<CAPTION>

                                        Common Stock               Additional
                                  Shares                             Paid-in          Retained          Treasury
                                Outstanding         Amount           Capital          Earnings            Stock            Total

BALANCE,
<S>        <C> <C>                <C>           <C>              <C>               <C>               <C>              <C>
  December 31, 1999               6,146,553     $       6,147    $    3,914,509    $   2,847,568     $     (84,008)   $   6,684,216
  Net loss
    for the year                                                                          (6,685)                            (6,685)
                                 ----------     -------------    --------------    -------------     -------------    --------------
BALANCE
  December 31, 2000               6,146,553             6,147         3,914,509        2,840,884           (84,008)       6,677,532
  Net income
    for the year                                                                          43,058                             43,058
                                 ----------     -------------    --------------    -------------     -------------    --------------
BALANCE
  December 31, 2001               6,146,553     $       6,147    $    3,914,509    $   2,883,942     $     (84,008)   $   6,720.509

                                ===========     =============    ==============    =============     =============    ==============
</TABLE>















           See accompanying Notes to Consolidated Financial Statements
                                       F-4

<PAGE>


ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND 2001
<TABLE>
<CAPTION>


                                                                                            2000             2001
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                      <C>                   <C>
         Net income                                                                      ($6,685)              $43,058
         Adjustments to reconcile net income to
          net cash provided by (used in)
          operating activities:
         Depreciation and amortization                                                    469,915              472,613
         Loss on disposition of property and equipment                                     80,969               18,574
         Changes in operating assets and liabilities:
                  (Increase) Decrease in:
                  Accounts Receivable                                                    188,109               (10,301)
                  Inventory                                                             (270,120)             (488,823)
                  Prepaid expense                                                         19,994               (27,637)
                  Income tax receivable                                                   82,750                 5,380
                  Increase (Decrease in):
                  Accounts payable and accrued expenses                                  (37,940)               11,442
                  Income taxes payable                                                    (8,000)                7,760
                                                                                         -------                ------
NET CASH PROVIDED BY OPERATIONS                                                          518,992                32,066
                                                                                         -------                ------

CASH FLOW FROM INVESTING ACTIVITIES
                  Purchase of property and equipment                                    (866,750)             (316,800)
                  Proceeds from sale of property and equipment                            16,455
                  Other assets                                                            (2,777)                3,772
                                                                                           -----                 -----
NET CASH USED IN INVESTING ACTIVITIES                                                   (852,882)             (313,028)
                                                                                        --------               -------
CASH FLOW FROM FINANCING ACTIVITIES
                  Mortgages payable                                                      480,000
                  Principal Repayments                                                    (6,642)               (9,524)
                                                                                        --------               -------
NET CASH FROM FINANCING ACTIVITIES                                                       473,358                (9,524)
                                                                                        --------               -------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                139,468              (290,486)

CASH AND CASH EQUIVALENT BALANCE
                  Beginning of period                                                  1,760,254             1,899,722
                                                                                       ---------             ---------
CASH AND CASH EQUIVALENT BALANCE,
                  End of period                                                       $1,899,722            $1,609,236
                                                                                      ----------            ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
                  Interest paid                                                          $44,726               $42,628
                  Income tax paid                                                        $19,600


</TABLE>



                  See Accompanying Notes to Consolidated Financial Statements


                                       F-5






<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization  and  Description  of  Business  -  Elegant  Illusions,   Inc.  was
incorporated  in Delaware  in March  1988.  The Company is engaged in the retail
sale of  fine  jewelry  in two  locations  and  copy  jewelry  at  locations  in
California, Nevada, Missouri, Louisiana, Hawaii, Michigan, Indiana, Florida, and
U.S.  Virgin  Islands.  Copy jewelry  items are  replications  of fine  jewelry,
manufactured with synthetic stones set in 14 carat gold, sterling silver vermeil
or plated  brass.  In  addition,  the  Company  sells  original  oil  paintings,
lithographs and other art in three stores in New Orleans,  Vail and Sarasota and
reproductions in one store in Missouri.

Principles of Consolidation - The financial  statements  include the accounts of
the Company and its  wholly-owned  subsidiaries.  All  significant  intercompany
transactions and balances have been eliminated.

Cash and Cash  Equivalents - Cash  equivalents are purchased  short-term  highly
liquid investments  readily  convertible to cash with original  maturities of no
more than three months. There are cash balances in certain Federal insured banks
that exceed the maximum insured amounts. However, management of the Company does
not consider this a significant  risk. As of December 31, 2001,  the Company has
deposits in excess of the FDIC limit in the amount of approximately $1,2000,000

Inventories - Inventories  are stated at the lower of cost or market  determined
on a first-in, first-out (FIFO) basis.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and  assumptions   that  affect  certain   reported   amounts  and  disclosures.
Accordingly, actual results could differ from those estimates.

Fair  Value of  Financial  Instruments  - The  Company's  financial  instruments
consists of cash equivalents,  receivables,  accounts payable, accrued expenses,
notes  payable  and due to related  parties.  The fair  values of the  Company's
financial instruments approximates the carrying value of the instruments.

Impairment  of  Long-Lived  Assets  -  The  Company  periodically  assesses  the
recoverability  of  the  carrying  amounts  of  long-lived   assets,   including
intangible assets. A loss is recognized when expected  undiscounted  future cash
flows are less than the carrying amount of the asset. The impairment loss is the
difference  by which the carrying  amount of the assets  exceeds its fair value.
The Company does not expect to have any  significant  losses  resulting from its
review of impairment of long-lived  assets.  The loss on disposition of property
and equipment relates to stores closed.

Stock-Based  Compensation  - The  Company  has chosen to continue to account for
stock-based  compensation  using the  intrinsic  value method as  prescribed  in
Accounting  Principles Board ("APB") opinion No.25,  Accounting for Stock Issued
to Employees  and related  interpretations,  under which no  compensations  cost
related to stock  options  has been  recognized  at the  exercise  price of each
option at the date of grant was equal to the fair value of the underlying common
stock.  The  Company  has no stock  option  plan  nor has it  issued  stock  for
compensation.

Property and Equipment - Property and equipment is stated at cost.  Depreciation
is computed on the straight-line  method based upon the estimated useful life of
the asset. Useful lives are generally as follows:

               Office furniture, fixtures & equipment    5-7 years
               Store furniture, fixtures & equipment     5-7 years
               Leasehold improvements                    5-7 years

Patents and Trademarks - The costs of patents and trademarks are being amortized
on the straight line method over a 17 year life.








                                       F-6



<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


Excess cost over net assets acquired - The excess of cost over fair value of net
assets  acquired  related to the  acquisition  of the Company's  two  franchised
stores in 1994 and was being  amortized  over 10 years on a straight line basis.
During the year ended December 31, 2001, the management of the Company concluded
that this excess of cost over fair value had limited value and as such wrote off
the remaining unamortized portion of $10,091.

Income Taxes - The Company  utilizes the asset and  liability  method for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax  consequences  attributable to differences  between the financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases and operating loss and tax credit  carryforwards.  Deferred
tax assets and  liabilities  are measured  using  enacted tax rates  expected to
apply to taxable income in the years in which those  temporary  differences  are
expected  to be  recovered  or settled.  The effect on  deferred  tax assets and
liabilities  of a change in tax rates is recognized in income in the period that
includes the enactment date.

Basic and Diluted Loss per Share - Basic earnings per common share is based upon
the net  earnings  divided  by the  weighted  average  number of  common  shares
outstanding  during the period.  Diluted loss per common  share  adjusts for the
effect of  convertible  securities,  stock options and warrants,  if applicable,
only in the periods  presented  in which  effect  would have been  diluted.  The
Company did not grant options and warrants during 2000 and 2001 and there are no
outstanding convertible securities, options and warrants as of December 31, 2000
and 2001.

Start-up Costs - Costs of start-up activities,  including organization costs, is
expensed as incurred.

Revenue - Revenues  related to the sale of jewelry and art are recognized at the
time the items are delivered to the customer.

Advertising - Advertising costs are expensed the first time the advertisement is
run. Total advertising and promotion expenses were $174,627 and $219,136 for the
years ended December 31, 2000 and 2001, respectively.


    2.   PROPERTY AND EQUIPMENT

         Property and equipment consisted of the following at December 31, 2000
and 2001:
<TABLE>
<CAPTION>

                                                                   2000                 2001

<S>                                                   <C>                  <C>
Real Estate                                           $          759,940   $          759,940
Office furniture, fixtures & equipment                           224,607              253,757
Store furniture, fixtures & equipment                          2,436,651            2,459,436
Vehicles                                                          19,500               62,000
Leasehold improvements                                           844,439              961,673

                                                               4,285,137            4,496,806

   Less: accumulated depreciation and amortization             2,088,798            2,474,854
                                                     $         2,196,339   $        2,021,952
                                                               =========            =========
</TABLE>



                                       F-7

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

         3.       INCOME TAXES

         The components of income tax expense for the years ended December 31,
2000 and 2001 follow:
<TABLE>
<CAPTION>

                                          Federal               State                Total

             2000
<S>                                 <C>                  <C>                  <C>
                Current             $           22,000   $           1,000    $          23,600
                Deferred
                                    $           22,000   $           1,000    $          23,600
                                    ------------------   -----------------    -----------------
             2001:
                Current             $           10,000   $           4,000    $          14,000
                Deferred
                                    $           10,000   $           4,000    $          14,000
                                    ------------------   -----------------    -----------------
</TABLE>

The component of deferred tax liability was as follows at December 31, :

             Deferred tax liability:
                                              2000                         2001

                Depreciation               205,871                   $   165,871

         Income tax expense amounted to $23,600 in 2000 and $14,000 in 2001
         (effective tax rates of 20.9% and 24.5 %, respectively). The actual tax
         expense differs from the expected tax expense (computed by applying the
         Federal corporate tax rate of 34% to earnings before income taxes) as
         follows:

                                                        2000            2001
                                                        ----            ----
Expected statutory tax                            $      37,276   $    18,829
State income tax, net of federal tax benefit              5,000         2,680
Settlement for prior years dispute                       19,600
Impact from initial lower Federal Tax rates             (11,750)       (7,509)
Other                                                   (21,126)
                                                        --------       --------
     Actual tax                                   $      23,600   $     14,000
                                                        --------       --------

4.       OPERATING LEASES

The Company leases its office and retail store facilities and certain  equipment
under  operating  leases with terms ranging from three to ten years.  Certain of
the leases  include  percentage  rates of 3% to 12% of revenues as defined.  The
Company has placed with  various  lessors  approximately  $70,000 in deposits as
required by the leases as of December 31, 2001.

Future minimum lease payments by year and in the aggregate,  under noncancelable
operating leases with initial or remaining lease terms in excess of one year, as
of December 31, 2001 are as follows:

 Year Ended
 December 31,

    2002                                     $        1,094,000
    2003                                                828,000
    2004                                                512,000
    2005                                                277,000
    2006                                                 79,000
    Thereafter                               ------------------

                                             $        2,790,000
                                             ==================





                                       F-8

<PAGE>



                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

Rent  expense  for the  fiscal  years  ended  December  31,  2000 and 2001  were
$1,843,130 and $1,372,498.

During 2001, the Company entered into a lease  arrangement  with its three major
shareholders to lease a store location in Sarasota,  Florida.  In the opinion of
Management  the lease is at market Value for that  location.  The specific lease
terms require 60 monthly base payments of $7,200.

5.       Accounting change

In accordance  with Staff  Accounting  Bulletin 101,  during the quarter  ending
September 30, 2000,  the Company  adopted a revised  accounting  method  whereas
layaway sales would only be recognized as sales upon delivery of the merchandise
to the customer.  Prior to this change,  layaway sales were  recognized when the
customer  made  the  required  minimum  initial  payment.  The  impact  of  this
accounting  change was a cumulative charge to net income of $96,045 effective at
the  beginning  of  the  fiscal  year.  The  pro  forma  effect  of  retroactive
application of this accounting change to prior operating periods is immaterial.


6.       Long term debt

During the year ended December 31, 2000,  the Company  acquired a sales location
in Vail, Colorado. It purchased the property for approximately $595,000 of which
$480,000 of the  purchased  price was funded by a mortgage  note  secured by the
property at 8.96% per annum.  The mortgage is stated at fair value.  The Company
is required to make  monthly  payments of  $4,346.33  for 234 months.  Principal
repayments over the next five years are as follows:



2002  $11,062

2003  $12,095

2004  $13,225

2005  $14,459

2006  $15,810



7.    Savings plan - 401(k)

The Company,  effective  June 1, 2001  established a 401(k) profit sharing plan.
For  eligible  employees,  the Company  savings and  investment  plan will allow
eligible  employees to allocate up to 10% of salary through payroll  deductions.
The Company  matches 50% of the  employee's  pre-tax  contributions,  up to plan
limits. In 2001, the costs of this plan was approximately $6,000.












                                       F-9