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, 1997
                                      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,  1997  were
$8,385,707.

The aggregate market value of the voting stock held by non-affiliates (1) of the
registrant based on the closing bid price of such stock, as of March 10, 1997 is
$1,644,742  based upon $.375  multiplied by the 4,385,978 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, as of December 31, 1997 and March 10, 1997 is 17,434,338  shares,  all of
one class of $.001 par value Common Stock.

The information required by Items 9, 10, 11 and 12 under Part III of this report
is  incorporated by reference from the issuer=s  definitive  proxy statement for
its 1998 Annual  Meeting of  Stockholders  (to be filed with the  Commission not
later than April 30, 1998.

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, 1997

                                Table of Contents
PART I                                                                     Page
------                                                                     ----

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

Item 2.  Description of Properties...........................................3

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

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

Part II
-------

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

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

Item 7.  Financial Statements................................................9

Item 8.  Changes in and Disagreements with
           Accountants on Accounting and
             Financial Disclosures...........................................9

Part III
--------

Item 9.  Directors, Executive Officers, Promoters
           and Control Persons; Compliance with
             Section 16(a) of the Exchange Act..............................10

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

Item 11. Security Ownership of Certain Beneficial
           Owners and Management............................................10

Item 12. Certain Relationships and Related
           Transactions.....................................................10

Item 13. Exhibits and Reports on Form 8-K...................................10

Signatures..................................................................11

Supplemental Information....................................................11

Financial Statements.......................................................F-1

<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 20
retail copy jewelry  stores,  two fine jewelry  stores and one fine art gallery.
The retail copy jewelry  stores are located in Monterey,  San  Francisco,  Santa
Barbara, San Diego,  Sacramento,  Palm Springs,  Gilroy and Tulare,  California;
Salt  Lake  City,  Utah;  Minneapolis,  Minnesota;  Portland,  Oregon;  Branson,
Missouri;  New Orleans,  Louisiana;  Laughlin,  Nevada;  Oahu, Hawaii;  Kenosha,
Wisconsin;  and St. Croix and St. Thomas,  U.S. Virgin Islands.  One of the fine
jewelry stores (which  includes a handcraft,  jewelry and gift store) is located
in Monterey,  the second fine jewelry store is located in St. Croix and the fine
art gallery is located in New Orleans.

   In  October  1997,  subsequent  to the  opening  of a new  store  in  Gilroy,
California,  the Company  announced plans for a 50 store  expansion.  In January
1998, the Company  increased its planned  expansion to  approximately  81 stores
over an  anticipated  three year period.  Pursuant to this plan, the Company has
opened three stores (Tulare, California, Kenosha, Wisconsin and St. Thomas, U.S.
Virgin Islands) and anticipates opening approximately six new stores in 1998. At
this time,  management  believes,  but cannot assure,  that four of these stores
will be located at Universal Studios in Orlando, Florida (anticipated to open in
October 1998);  Michigan City,  Indiana (April 1998);  Birchrun,  Michigan;  and
Milpitas,  California.  The  Company  plans to fund the opening of these six new
locations from current cash reserves and revenues.  It is  anticipated  that the
opening of  additional  new stores will be funded from current cash reserves and
revenues  and, to the extent  required,  from bank and/or equity  financing.  No
assurance  can be given that the Company will be able to secure such bank and/or
equity  financing.  Completion  of the Company's  planned 81 store  expansion is
dependant on the Company's  ability to obtain  adequate  financing on acceptable
terms.

   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.

   During 1997, the Company consolidated its handcraft,  jewelry and gift store,
Steinbeck Lady, into Steinbeck Jewelers. Steinbeck Lady primarily sells jewelry,
including rings,  pendants,  earrings,  necklaces and bracelets  manufactured in
Sterling  silver,  other  metals  and other  materials;  gift  items of a marine
nature; and some pottery.

   The fine art gallery,  Bourbon Street Gallery,  sells predominantly  original
oil paintings by contemporary Italian artists.

                                       1

<PAGE>


   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 and the handcraft,
jewelry and gifts sold in the Steinbeck  Lady section of the Steinbeck  Jewelers
store are  primarily  purchased  directly  from  manufacturers  and, to a lesser
extent,  from  distributors.  The Company  purchases its Art for Bourbon  Street
Gallery  directly from the artists.  Less than 5% of the art gallery's  revenues
are generated from sales of Art on consignment.

   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).

   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.

   At March 8, 1998, the Company had approximately 123 employees,  including its
three  officers,  three regional  managers,  13 store  managers,  three training
managers,  86 sales  personnel,  one distribution  manager,  one retail computer
systems manager, one art department manager and 12 clerical personnel.


History

   The Subsidiary was founded on May 1, 1989 for the purpose of selling  jewelry
and jewelry  store  franchises.  Its founders  incorporated  Copy  Jewels,  Inc.
("CJI") in July 1989 for the purpose of supplying  jewelry to the Subsidiary and
its franchise stores.

   The first  franchise  store  opened in San  Diego in  September  1989 and the
second  franchise store opened in Santa Barbara in July 1990.  These stores were
acquired by the Company in May 21, 1993.

   The first Subsidiary-owned store opened in Sacramento in March 1991, followed
by a second in  Monterey in May 1991 and a third in Salt Lake City in July 1992.
With the exception of the  Subsidiary-owned  store in Monterey,  which closed in
January 1993, all of these stores are open and operating.

   Bay Area  Grand  Illusions,  Inc.  ("Bay"),  a  company  then  owned by the
Company's  current  management,  opened  a  Subsidiary  jewelry  store  in San
Francisco in May 1988. The San Francisco  store  relocated  within  Ghiradelli
Square in April 1994.

                                       2

<PAGE>


   Prior to the Company's acquisition of the Subsidiary, CJI and Bay merged with
and into the Subsidiary.

   During 1993 and 1994,  the Company  opened three new copy jewelry  stores per
year. In addition,  in 1994,  the Company,  through a newly formed  wholly-owned
subsidiary,  Bourbon Street,  Inc.,  entered into a partnership to sell original
oil paintings and other art in a storefront that opened on Bourbon Street in New
Orleans on September 15, 1994.  The art gallery  operates under the name Bourbon
Street  Gallery.  The Company funded the renting and build out of the storefront
location and the inventory of art. The  Company's  two  partners,  a husband and
wife team who are unaffiliated with the Company,  run the day-to-day  operations
of the store.  Material managerial  decisions are determined by the Company. The
Company and its partners split store profits on a 50-50 basis. Since the Company
funded the  partnership,  the Company will be entitled to receive all  remaining
inventory of the partnership after payment of partnership expenses.

   Effective  July  1,  1994,  the  Company  acquired  all  of  the  issued  and
outstanding shares of common stock of Cannery Row Enterprises, Inc. ("CRE") from
Gavin Gear and Tamara  Gear,  two officers  and  directors  of the  Company,  in
exchange for 150,000 shares of the Company's Common Stock. CRE owns three stores
- a copy jewelry  store,  a fine jewelry store and a gift store,  all located in
Monterey.

   During  1995,  the  Company  opened one new copy  jewelry  store and one fine
jewelry store and during 1996, the Company opened three new copy jewelry stores.

   On  January  30,  1997,  the  Company  closed its store at the  Pavilions  in
Sacramento,  California,  because  that  location was not  performing  up to the
Company's expectations.

   During 1997, the Company opened four new copy jewelry stores.


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  5,700
square feet, including  approximately 700 square feet of executive office space,
approximately  1,600 square feet of administrative  space,  approximately  2,500
square feet of warehouse space and approximately 900 square feet of computer and
file space.  The  facility is leased from an  unaffiliated  party  pursuant to a
three  year  lease.  Initial  base rent is $3,300  per  month,  plus  utilities.
Management believes that the current executive facilities are sufficient for its
needs over the next few years.

   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 5 to the Company's
Consolidated Financial Statements).

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.

                                       3

<PAGE>


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

   During the last quarter of the Company's fiscal year ended December 31, 1997,
the Company's Executive Officers, who collectively hold approximately 75% of the
Company's issued and outstanding Common Stock,  approved and adopted, by written
consent  in  lieu  of a  meeting  of  stockholders,  a  proposal  (the  "Charter
Amendment") to amend the Company's Certificate of Incorporation to reverse split
the outstanding  shares of the Company's  Common Stock.  Pursuant to the Charter
Amendment, the Board of Directors retained the right to: (i)set the ratio of the
reverse  split  as low as  one-for-two  or as high as  one-for-six;  or (ii) not
proceed with any reverse split. If and when the Board of Directors determines to
effect a reverse split of the Company's issued and outstanding  Common Stock, at
least 10 days prior to the anticipated  effective date of the reverse split, the
Company will file a Current Report on Form 8-K and issue a press release stating
the ratio and the anticipated effective date of the reverse split.

   The Stockholders  approved the Charter Amendment to increase the market price
per share. The Company=s Common Stock is listed on the NASDAQ SmallCap Market. A
minimum bid price of $1.00 per share is required to assure continued  listing of
the  Company's  Common  Stock on the  NASDAQ  SmallCap  Market.  During the last
quarter  of 1997 and the first  quarter  of 1998,  the bid price for the  Common
Stock has remained below. Management believes but cannot assure that, by reverse
splitting the outstanding  shares of Common Stock at a sufficient ratio, the bid
price for the Common  Stock will exceed  $1.00 per share.  See "Part II. Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters."

                                       4

<PAGE>


                                    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 (NASDAQ SmallCap Symbol:  "EILL"). The Company's Common
Stock was listed for trading on the NASDAQ  Smallcap  Market on August 16, 1996.
Prior thereto, it traded in the over-the-counter  market (Bulletin Board Symbol:
"EILL").  On  February  27,  1998,  the  Company  received a letter  from NASDAQ
informing  the Company that Company was not in compliance  with  NASDAQ's  $1.00
minimum bid  maintenance  requirement.  Pursuant to the letter,  the Company has
until May 28, 1998 to comply with this  requirement.  The minimum bid price must
remain at or above $1.00 for 10 consecutive  business days in order to return to
compliance with the minimum bid  requirement.  If the Company's  Common Stock is
delisted  from NASDAQ,  stockholders'  ability to resell their shares of Company
stock  and/or the price at which such shares  could be resold could be adversely
affected.

   The  following  tables set forth the range of high and low bid prices for the
Company's  Common  Stock on a quarterly  basis for the past two fiscal  years as
reported by the National  Quotation Bureau (which reflect  inter-dealer  prices,
without  retail  mark-up,  mark-down,  or  commission  and may  not  necessarily
represent actual transactions).

                                               Bid Prices
                                             ---------------
                                             High        Low
                                             ----        ---

Period - Fiscal Year 1996

First Quarter ending March 31, 1996          3           2
Second Quarter ending June 30, 1996          3.125       3
July 1, 1996 - August 15, 1996               3.125       2.75
August 16, 1996 - September 30, 1996         3.1875      3
Fourth Quarter ending December 31, 1996      3.25        1.625

Period - Fiscal Year 1997

First Quarter ending March 31, 1997          2.875       1.25
Second Quarter ending June 30, 1997          1.6875      0.6875
Third Quarter ending September 30, 1997      1.1875      0.6525
Fourth Quarter ending December 31, 1997      0.90625     0.40625

   (b) Holders -- There were approximately 78 holders of record of the Company's
Common  Stock as of March 10, 1998  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.

                                       5

<PAGE>


   In March  1996,  the Company  sold  606,061  shares of its Common  Stock to a
foreign  investor for gross  proceeds of  $1,000,000  and paid a  commission  of
$50,000  on  the  transaction.  The  sales  of  these  shares  was  exempt  from
registration  by reason of the  exemption  provided by  Regulation S promulgated
under the Securities Act of 1933 (the "Act").

   In April  1996,  the Company  sold  100,000  shares of its Common  Stock to a
supplier in exchange for inventory valued at $200,000. The sales of these shares
was exempt from registration by reason of the exemption  provided by Rule 506 of
Regulation D promulgated under the Act.

   During 1997, in accordance with Rule 10b-18 under the Securities Exchange Act
of 1934,  the Company  repurchased  an aggregate of 93,100  shares of its Common
Stock in the open market and, from January 1, 1998 through  March 10, 1998,  the
Company  repurchased an additional 92,900 shares of its Common Stock in the open
market.  The Board of  Directors  is in the  process of  returning  all of these
shares to the status of authorized but unissued  shares of the Company=s  Common
Stock.


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, 1997 Compared to Fiscal Year Ended  December 31,
1995

   Sales for the year ended December 31, 1997 increased $1,066,448 or 14.6% when
compared to the year ended December 31, 1996.

                                       6

<PAGE>


   Management  believes  that the  increase in sales was due to the  addition of
four  locations  (Gilroy,  Kenosha,  Tulare and St.  Thomas)  and a full year of
operations  at the three  stores  opened in 1996 (San  Francisco,  Monterey  and
Laughlin), net of the closing of one location (Pavilions).

   As of December 31, 1996, the Company  operated 21 retail  locations and as of
December  31,  1997,  the Company  operated 23 retail  locations.  Although  the
Company added four stores in 1997, it closed its Pavilions store in January 1997
and consolidated Steinbeck Lady into Steinbeck Jewelers.

   The Costs of goods as a percentage of revenues  decreased slightly from 30.5%
in fiscal 1996 to 29.2% in fiscal 1997.

   During fiscal 1997,  selling,  general and administrative  expenses increased
when compared to fiscal 1996 by $938,436  (approximately 25.1%). As a percentage
of  sales,   selling,   general  and  administrative   expenses  increased  from
approximately 51.1% during 1996 to approximately  55.8% during 1997.  Management
believes  that this  increase was the result of a number of factors.  One factor
was the cost of  opening  and  operating  the four new  stores  opened  in 1997,
including an  extraordinary  expense of  approximately  $40,000  incurred in the
setting up and commencement of operations of the St. Thomas store,  which opened
at the very end of 1997 (December 19, 1997). Expenses incurred in setting up and
commencing  operations at new locations are non-recurring and are fully expensed
when  incurred.  Another  factor was the costs  related to  operating  the three
stores  opened in 1996 for a full 12 months.  In  addition,  labor costs rose by
approximately  17%.  Management  raised labor costs to stabilize  the  Company's
workforce in light of the strong  economic  conditions in the United States over
the past  year.  Management  believes  that  increased  salaries  will lead to a
decrease in job  turnover  and added  revenues in 1998.  The Company  also spent
approximately  $80,000 in  advertising  costs designed to increase the long-term
visibility  and name  recognition of the Company and  approximately  $50,000 for
financial   public   relations.   Finally,   the  Company  incurred  a  loss  of
approximately $50,000 at its Kenosha store. The Company is currently negotiating
to move the Kenosha  store to a new  location  within the same mall.  Management
believes,  but cannot  assure,  that  changing  the  location and a full year of
operations at the Kenosha store should yield operating  profits at that location
in 1998.

Revenues same store locations.

   As of December 31, 1996, the Company  operated 20 locations  (which  includes
Steinbeck  Lady) that were also in operation  at December  31, 1997:  two in New
Orleans,  four in Monterey,  one in Sacramento,  one in San Diego,  one in Santa
Barbara,  two in San Francisco,  one in Palm Springs, one in Salt Lake City, one
in Portland,  one in Branson,  one in  Minneapolis,  one in Laughlin,  two in St
Croix and one in Oahu. The Company's  Pavilions  store in Sacramento,  which was
operating on December 31, 1996, closed in January 1997.  Revenues from the above
mentioned  20  locations  for  the  year  ended  December  31,  1997,  increased
approximately  8% from the same period in 1996.  Management  believes  that this
increase in same store revenues was due primarily to the fact that 1997 revenues
include a full 12 months of operations  for the stores opened in 1996.  Revenues
for the stores that  operated for a full 12 months  during  fiscal 1996 and 1997
were down slightly (1%).

                                       7

<PAGE>


   In 1996, the Company  adjusted some of its software in light of the year 2000
problem.  Management  does not believe  that the year 2000 problem will have any
material adverse affect on the Company's operations or revenues.

Liquidity and Capital Resources

   As of  December  31,  1997,  the  Company  had  $1,321,448  in cash  and cash
equivalents  and  its  current  assets  exceeded  its  current   liabilities  by
$4,162,195.

   In  October  1997,  subsequent  to the  opening  of a new  store  in  Gilroy,
California,  the Company  announced plans for a 50 store  expansion.  In January
1998, the Company  increased its planned  expansion to  approximately  81 stores
over an  anticipated  three year period.  Pursuant to this plan, the Company has
opened three stores (Tulare, California, Kenosha, Wisconsin and St. Thomas, U.S.
Virgin Islands) and anticipates opening approximately six new stores in 1998. At
this time,  management  believes,  but cannot assure,  that four of these stores
will be located at Universal Studios in Orlando, Florida (anticipated to open in
October 1998);  Michigan City,  Indiana (April 1998);  Birchrun,  Michigan;  and
Milpitas,  California.  During  1998,  the Company also  anticipates  moving its
Kenosha  store from one  location to a new  location  within the same mall.  The
Company plans to fund the opening of these six new locations and the  relocation
of the Kenosha store from current cash reserves and revenues.  It is anticipated
that the  opening of  additional  new stores will be funded  from  current  cash
reserves  and  revenues  and, to the extent  required,  from bank and/or  equity
financing.  No  assurance  can be given that the Company  will be able to secure
such bank and/or equity financing.  Completion of the Company's planned 81 store
expansion is dependant on the Company's ability to obtain adequate  financing on
acceptable terms. In addition, no assurance can be given as to the actual number
or location of stores that the Company will open in the future.

   The Company is in the process of changing its $1,000,000  line of credit from
Comerica  Bank with two new lines from that bank.  The Company has a  commitment
from  Comerica  Bank for a specific  advance line of credit up to  $1,500,000 to
open new stores.  The commitment  also provides the  Subsidiary  with a $200,000
revolving  line of credit for working  capital  purposes.  These lines of credit
will be  collateralized  by the  Company's  assets and the Company  also will be
required to maintain certain  financial  ratios and covenants.  These new credit
lines and the actual terms and conditions thereof are subject to the preparation
and execution of a definitive loan agreement and other documentation  acceptable
to the Bank.  As of  December  31, 1997 and the date  hereof,  no funds had been
advanced on the existing $1,000,000 line of credit.

                                       8

<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, 1997

                                     INDEX
                                     -----

                                                                Page No.
                                                                --------

   Report of Independent Auditor                                  F-1

   Consolidated Balance Sheets - December 31, 1996 and 1997       F-2

   Consolidated Statements of Operations for the
   Years Ended December 31, 1996 and 1997                         F-4

   Consolidated Statement of Stockholders'
   Equity for the Years Ended December 31, 1996 and 1997          F-5

   Consolidated Statements of Cash Flows for the
   Years Ended December 31, 1996 and 1997                         F-6

   Notes to Consolidated Financial Statements                     F-8


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. However,  Jeffrey S. Gilbert, CPA, who audited
the consolidated  financial  statements  included herein,  is a successor to the
auditing  firm of  Hollander,  Gilbert & Co.  Hollander,  Gilbert & Co.  was the
accounting  firm  that  audited  the  Company's  1996   consolidated   financial
statements.

                                       9

<PAGE>


                                   PART III
                                   --------

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

   The   information  required  by   this  Item 9 is set  forth  in the  section
entitled "Election of Directors in the Company's  definitive proxy statement for
its 1998  Annual  meeting  of  Stockholders"  (the  "Proxy  Statement"),  and is
incorporated herein by this reference.

Item 10. Executive Compensation.

   The information required by this Item 10 is set forth in the section entitled
"Executive  Compensation" in the Company's Proxy Statement,  and is incorporated
herein by this reference.

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

   The information required by this Item 11 is set forth in the section entitled
"Security  Ownership  of  Certain  Beneficial  Owners  and  Management"  in  the
Company's Proxy Statement, and is incorporated herein by this reference.

Item 12. Certain Relationships and Related Transactions.

   The information required by this Item 11 is set forth in the section entitled
"Certain   Relationships  and  Related  Transactions"  in  the  Company's  Proxy
Statement, and is incorporated herein by this reference.

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  Form of  Certificate of  Amendment to the  Certificate of  Incorporation
        of the Company concerning the possible 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.

(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  Information  Statement
pursuant to Section 14(c) of the Securities  Exchange Act of 1934, as filed with
the  Commission  on or about  December  31,  1997,  and  incorporated  herein by
reference.

Reports of Form 8-K

      No reports on Form 8-K were  filed  during the last  quarter of the fiscal
year covered by this report.

      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.

                                       10

<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 11, 1998             By: /s/ James Cardinal
                                           ------------------------
                                           James Cardinal,
                                           Chief Executive Officer,

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


     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                 Director                March 13, 1998
   ------------------------
   James Cardinal


/s/Gavin Gear                     Director                March 11, 1998
   ------------------------
   Gavin Gear


/s/Tamara Gear                    Director                March 11, 1998
   ------------------------
   Tamara Gear


                            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.

                                       11

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1997

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1997


     Report of Independent Auditor                       F-1
     
     Consolidated Balance Sheets at
       December 31, 1996 and 1997                        F-2
     
     Consolidated Statements of Operations -             F-4
       Years Ended December 31, 1996 and 1997
     
     Consolidated Statement of Stockholders' Equity -    F-5
       Years Ended December 31, 1996 and 1997
     
     Consolidated Statements of Cash Flows -             F-6
       Years Ended December 31, 1996 and 1997
     
     Notes to Consolidated Financial Statements          F-8
     

<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, 1996 and 1997,  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.
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,  1996 and 1997 and the
consolidated results of operations,  stockholders' equity and cash flows for the
years then ended, in conformity with generally accepted accounting principles.


                                                    Jeffrey S. Gilbert, CPA
                                                    (Jeffrey S. Gilbert, CPA is
                                                    a successor to the audit
                                                    firm of Hollander, Gilbert
                                                    & Co., which performed the
                                                    1996 audit.)
Los Angeles, California
March 10, 1998

                                       F-1

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1997

                                                  1996           1997
                                              ------------   ------------

                                     ASSETS

CURRENT ASSETS
  Cash and cash equivalents                   $ 1,886,297    $ 1,321,448
  Accounts receivable                             190,270        357,124
  Income taxes receivable                                         82,192
  Inventory                                     1,990,174      2,424,755
  Prepaid expenses                                 45,643         90,427
                                              ------------   ------------

    TOTAL CURRENT ASSETS                        4,112,384      4,275,946
                                              ------------   ------------

PROPERTY AND EQUIPMENT, NET (Note 2)              884,707      1,216,353
                                              ------------   ------------

OTHER ASSETS
  Deposits                                         55,764         65,196
  Patents and trademarks, net of
   accumulated amortization
   of $928 and $1,161 in 1996
   and 1997, respectively                           3,798          3,563
  Excess cost over net assets acquired,
   net of accumulated amortization
   of $14,556 and $18,606 in 1996
   and 1997, respectively                          26,291         22,241
                                              ------------   ------------

    TOTAL OTHER ASSETS                             85,853         91,002
                                              ------------   ------------

                                              $ 5,082,944    $ 5,583,301
                                              ============   ============


          See accompanying Notes to Consolidated Financial Statements.

                                       F-2

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS, continued
                           DECEMBER 31, 1996 AND 1997

                                                  1996           1997
                                              ------------   ------------


                   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Note payable - bank (Note 3)                $              $
  Accounts payable and accrued expenses            92,827        113,751
  Income taxes payable (Note 4)                    71,915
                                              ------------   ------------

    TOTAL CURRENT LIABILITIES                     164,742        113,751

NOTE PAYABLE (Note 3)                              20,000

DEFERRED INCOME TAXES (Note 4)                     95,871        127,871
                                              ------------   ------------

    TOTAL LIABILITIES                             280,613        241,622
                                              ------------   ------------

COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY (Note 6)
  Common stock - authorized 30,000,000
   shares, $.001 par value,
   issued and outstanding 17,434,338
   in 1996 and 1997                                17,434         17,434
  Additional paid-in capital                    2,978,221      2,978,221
  Retained earnings                             1,806,676      2,392,080
  Less treasury stock at cost
   (93,100 shares in 1997)                                       (46,056)
                                              ------------   ------------

    TOTAL STOCKHOLDERS' EQUITY                  4,802,331      5,341,679
                                              ------------   ------------

                                              $ 5,082,944    $ 5,583,301
                                              ============   ============

          See accompanying Notes to Consolidated Financial Statements.

                                       F-3

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

                                                  1996           1997
                                              ------------   ------------

REVENUES                                      $ 7,319,259    $ 8,385,707

COST OF GOODS SOLD                              2,234,297      2,452,396
                                              ------------   ------------

GROSS PROFIT                                    5,084,962      5,933,311

EXPENSES
  Selling, general and administrative           3,738,999      4,677,435
  Depreciation and amortization                   225,416        311,125
  Interest expense                                  9,445            347
                                              ------------   ------------

    TOTAL EXPENSES                              3,973,860      4,988,907
                                              ------------   ------------

INCOME BEFORE INCOME TAXES                      1,111,102        944,404

PROVISION FOR INCOME TAXES (Note 4)               441,600        359,000
                                              ------------   ------------

NET INCOME                                    $   669,502    $   585,404
                                              ============   ============

WEIGHTED AVERAGE SHARES OUTSTANDING            17,292,000     17,430,000
                                              ============   ============

BASIC EARNINGS PER COMMON SHARE               $       .04    $       .03
                                              ============   ============

       See accompanying Notes to Consolidated Financial Statements.

                                       F-4

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>

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

<S>                  <C>          <C>         <C>         <C>         <C>         <C>
BALANCE,
 December 31, 1995    16,728,277  $   16,728  $1,828,927  $1,137,174  $           $2,982,829 

 Sale of stock           606,061         606     949,294                             950,000 

 Issuance of stock
  for inventory          100,000         100     199,900                             200,000 

 Net income
  for the year                                               669,502                 669,502
                     -----------  ----------  ----------  ----------  ----------  ----------

BALANCE,
 December 31, 1996    17,434,338      17,434   2,978,221   1,806,676               4,802,331 

 Treasury Stock
  purchased                                                              (46,056)    (46,056)

 Net income
  for the year                                               585,404                 585,404
                     -----------  ----------  ----------  ----------  ----------  ----------

BALANCE
 December 31, 1997    17,434,338  $   17,434  $2,978,221  $2,392,080  $  (46,056) $5,341,679
                     ===========  ==========  ==========  ==========  ==========  ==========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       F-5

<PAGE>


                 ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

                                                  1996           1997
                                              ------------   ------------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                  $   669,502    $   585,404
  Adjustments to reconcile net
   income to net cash provided by
   operating activities:
    Depreciation and amortization                 225,416        311,125
    Changes in operating assets
     and liabilities:
    (Increase) decrease in:
     Accounts receivable                          (86,394)      (166,854)
     Inventory                                   (420,826)      (434,581)
     Prepaid expenses                             (27,729)       (44,784)
     Income tax receivable                                       (82,192)
    Increase (decrease) in:
     Accounts payable and accrued expenses        (27,155)        20,924
     Income taxes payable and deferred
      income taxes                                 98,008        (39,915)
                                              ------------   ------------

    NET CASH PROVIDED BY OPERATING
     ACTIVITIES                                   430,822        149,127
                                              ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment             (354,611)      (637,688)
  Deposits and other assets                        (9,024)       (10,232)
                                              ------------   ------------

    NET CASH USED IN INVESTING ACTIVITIES        (363,635)      (647,920)
                                              ------------   ------------


       See accompanying Notes to Consolidated Financial Statements.

                                       F-6

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

                                                  1996           1997
                                              ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds (payments) from bank
   credit line, net                              (750,000)
  Principal reduction of note payable             (80,000)       (20,000)
  Payments to stockholders/officers                         
  Sale of common stock                            950,000
  Purchase of treasury stock                                     (46,056)
                                              ------------   ------------

    NET CASH PROVIDED BY FINANCING ACTIVITIES     120,000        (66,056)
                                              ------------   ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS         187,187       (564,849)

CASH AND CASH EQUIVALENTS BALANCE,
 Beginning of period                            1,699,110      1,886,297
                                              ------------   ------------

CASH AND CASH EQUIVALENTS BALANCE,
 End of period                                $ 1,886,297    $ 1,321,448
                                              ============   ============

SUPPLEMENTAL CASH FLOW DISCLOSURE:
  Interest paid                               $    12,312    $       347
  Income taxes paid                           $   362,881    $   480,398

NON-CASH FINANCING ACTIVITY:
  Issuance of shares of common stock
   in exchange for inventory                  $   200,000

       See accompanying Notes to Consolidated Financial Statements.

                                       F-7

<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1997

 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, Utah, Minnesota, Missouri, Oregon, Louisiana, Hawaii
     Wisconsin,  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 its store in New
     Orleans.

     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.

     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 accouting  principles  requires  management to make
     estimates  and  assumptions   that  affect  certain  reported  amounts  and
     disclosures. Accordingly, actual results could differ from those estimates.

     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.

     Stock-Based  Compensation  - The Company plans to account for stock options
     under SFAS No. 123, which retains the original accounting prescribed by APB
     Opinion No. 25. As a result,  options granted at fair value will not result
     in charges to earnings.  Disclosures will be made, however, of compensation
     costs determined under SFAS No. 123's fair value methodology.

     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

                                       F-8

<PAGE>


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

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

     Excess  cost over net assets  acquired - The excess of cost over fair value
     of  net  assets  acquired  related  to  acquisition  of the  Company's  two
     franchised  stores  is being  amortized  over 10 years on a  straight  line
     basis.

     Income  Taxes  - The  Company  uses  the  asset  and  liability  method  of
     accounting  for income  taxes.  The  objective  of the asset and  liability
     method  is to  establish  deferred  tax  assets  and  liabilities  for  the
     temporary  differences  between the financial  reporting  basis and the tax
     basis of the Company's assets and liabilities at enacted tax rates expected
     to be in effect when such amounts are realized or settled.

 2.  PROPERTY AND EQUIPMENT

     Property and equipment  consisted of the following at December 31, 1996 and
     1997:

                                                  1996           1997
                                              ------------   ------------

       Office furniture, fixtures &
        equipment                             $   100,845    $    93,360
       Store furniture, fixtures & equipment    1,032,269      1,550,423
       Vehicles                                    19,500         19,500
       Leasehold improvements                     374,491        483,096
                                              ------------   ------------

                                                1,527,105      2,146,379
         Less: accumulated depreciation
          and amortization                        642,398        930,026
                                              ------------   ------------

                                              $   884,707    $ 1,216,353
                                              ============   ============

 3.  NOTES PAYABLE

     The Company had entered into a loan agreement with an individual who loaned
     $100,000  in March  1990  without  a due date  requiring  monthly  interest
     payments  of $850 (10% per  annum).  The amount was deemed long term as the
     creditor in the past has not requested  payoff.  The Company repaid $80,000
     of the loan during 1996 and the remainder during 1997.

     The Company has a $1,000,000 line of credit with a bank effective  December
     1996 due on demand.  Interest  is at annual base rate as  announced  by the
     bank  (initial  base  rate was  8.25%)  plus  1.75%.  The line of credit is
     collateralized  by  the  Company's  accounts   receivable,   inventory  and
     equipment.  The Company shall also maintain  certain  financial  ratios and
     covenants. As of December 31, 1997, no amount was due on the creditline.

                                       F-9

<PAGE>


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

 4.  INCOME TAXES

     The  components of income tax expense for the years ended December 31, 1996
     and 1997 follow:

                                  Federal        State           Total
                               ------------   ------------   ------------

      1996:
       Current                 $   338,000    $    74,000    $   412,000
       Deferred                     23,600          6,000         29,600
                               ------------   ------------   ------------

                               $   361,600    $    80,000    $   441,600
                               ============   ============   ============

      1997:
       Current                 $   279,000    $    48,000    $   327,000
       Deferred                     28,000          4,000         32,000
                               ------------   ------------   ------------

                               $   307,000    $    52,000    $   359,000
                               ============   ============   ============

     The  component  of deferred  tax  liability  was as follows at December 31,
     1997:

      Deferred tax liability:
       Depreciation                           $   127,871
                                              ============

     Income tax  expense  amounted  to  $441,600  in 1996 and  $359,000  in 1997
     (effective tax rates of 41% and 38%, 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:

                                                  1996           1997
                                              ------------   ------------

      Expected statutory tax                  $   377,775    $   321,097
      State income tax, net of federal
       tax benefit                                 68,200         34,282
      Other                                        (4,375)         3,621
                                              ------------   ------------

        Actual tax                            $   441,600    $   359,000
                                              ============   ============

 5.  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.  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, 1997 are as follows:

                                      F-10

<PAGE>


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

       Year Ended
       December 31,

        1998                                  $   978,000
        1999                                      836,000
        2000                                      574,000
        2001                                      310,000
        2002                                      162,000
        Thereafter                                158,000
                                              ------------

                                              $ 3,018,000
                                              ============

     Rent  expense for the fiscal  years ended  December  31, 1996 and 1997 were
     $1,014,489 and $1,197,460, respectively.

 6.  STOCKHOLDERS' EQUITY

     During 1996 the Company sold 606,061  common shares for  $950,000,  net and
     also, issued 100,000 common shares,  valued at approximately  $200,000,  in
     connection  with its  acquisition  of  inventory.  During  1997 the Company
     acquired  93,100  shares  of its  common  stock for an  aggregate  price of
     $46,056.

                                      F-11