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, 1999
                                       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,  1999  were
$10,626,244.

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 27, 2000 is
$1,868,139 based upon $1.0625 multiplied by the 1,758,248 Shares of Registrant's
Common Stock held by non-affiliates(1).

The number of shares  outstanding of each of the registrant's  classes of common
stock (which excludes 62,067 treasury shares), as of March 27, 2000 is 6,084,379
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 2000 Annual  Meeting of  Stockholders  (to be filed with the  Commission not
later than April 30, 2000).

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, 1999

                                Table of Contents

PART I                                                                     Page

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

Item 2.      Description of Properties......................................4

Item 3.      Legal Proceedings..............................................5


Item 4.      Submission of Matters to a Vote of
               Security Holders.............................................5


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..........................................10


Item 8.      Changes in and Disagreements with
               Accountants on Accounting and
               Financial Disclosures.......................................11


Part III

Item 9.      Directors, Executive Officers, Promoters
               and Control Persons; Compliance with
               Section 16(a) of the Exchange Act...........................11

Item 10. Executive Compensation............................................11


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


Item 12. Certain Relationships and Related
               Transactions................................................11

Item 13. Exhibits and Reports on Form 8-K..................................11

Signatures.................................................................12

Supplemental Information...................................................13

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
23 retail  copy  jewelry  stores,  three  fine  jewelry  stores and one fine art
gallery.

    The retail copy jewelry stores are located in:

California
----------
o        Gilroy,
o        Monterey (two stores),
o        Palm Springs,
o        Sacramento,
o        Santa Barbara,
o        San Diego and
o        San Francisco (two stores)

Florida
-------
o        Miromar
o        Orlando

Hawaii
------
o        Maui

Indiana
-------
o        Michigan City

Louisiana
---------
o        New Orleans

Michigan
--------
o        Birch Run

Minnesota
---------
o        Minneapolis

Missouri
--------
o        Branson

Nevada
------
o        Laughlin

Texas
-----
o        Grapevine

U.S. Virgin Islands
-------------------
o        St. Croix and
o        St. Thomas (two stores)

Utah
----
o        Salt Lake City


         One of the fine jewelry stores (which includes a handcraft, jewelry and
gift store) is located in Monterey, the other fine jewelry stores are located in
St. Croix and St. Thomas.

         The fine art gallery is located in New Orleans.

         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>

         Management  slowed the Company's  store  expansion plans because it was
not effective in containing costs at already  established  locations and certain
locations  opened in 1998 did not  perform  to  expectations.  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; and
        o Tulare, California on February 27, 2000.

         The Company's Grapevine,  Texas and Anchorage,  San Francisco locations
are performing  below  expectations.  The Company has reduced staffing costs and
store  hours  at its  Anchorage  location  until  the  lease  expires  or it can
negotiate an early termination of the lease.

         In addition, the Company is in the process of relocating two locations,
one in Branson, Missouri and one in San Francisco, California, to locations that
management believes will generate more traffic.

         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 plans to open a Fine Art  Gallery  at this  location  (see  "Part I, Item 2.
Description of Property").  In addition,  the Company has a license to reproduce
the works of Norberto Martini,  one of the artists featured at the Company's New
Orleans Gallery. The Company plans to sell these reproductions

          o    in certain of its current copy  jewelry and fine jewelry  stores,
               including the relocated Branson, Missouri store and the Company's
               existing  Ghirardelli location in San Francisco (the copy jewelry
               store at that location is moving to the main retail level of that
               mall on June 1, 2000); and

          o    over the Internet  (the Company is exploring the  feasibility  of
               selling art  reproductions  and copy jewelry  through an alliance
               with an existing internet sales portal).


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.

                                      -2-
<PAGE>

         The fine jewelry stores,  Steinbeck  Jewelers  (Monterey),  Kings Alley
Jeweler  (St.  Croix) and  Seaport  Jewelers  (St.  Thomas),  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.

         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.


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 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  currently
is negotiating with a publisher to produce its art reproductions.


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.  In this regard,  two copy jewelry  concept
stores  (neither  one part of a chain)  opened up within  two blocks of our Palm
Springs location.  Revenues at that location were down  approximately 9% for the
year ending  December 31, 1999 as compared to the same period in 1998.  However,
revenues  for  January  and  February of 2000 are up 21% over the same months in
1999.  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.


                                      -3-
<PAGE>

Employees

         At March 24,  2000,  the Company had  approximately  149  employees,  a
decrease of 23 employees since March 1999. These employees include the Company's
three officers,  three regional managers,  one national sales manager,  14 store
managers,  four training  managers,  107 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
                                                 ======

         The  facility is leased from an  unaffiliated  party  pursuant to a two
year lease that expires on February  28, 2001.  Pursuant to the lease the entire
base rent for the 24 month term of $109,000  was paid in March 1999.  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 4 to the Company's
Consolidated Financial Statements).


         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  plans  to  open a Fine  Art  Gallery.  The  site is
approximately 504 square feet. The Company has leased these premises back to the
seller through April 30, 2000.  The Company takes  possession of the premises on
May 1, 2000 at which  time it will begin to prepare  the  premises  for use as a
Fine Art Gallery.

                                      -4-
<PAGE>


         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  will reduce
operating costs.


Item 3.      Legal Proceedings.

         Except as set forth below,  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.

         See  footnote  4  to  the  Company's   Consolidated  Audited  Financial
Statements for the year ended December 31, 1999 included elsewhere herein.



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, 1999.  However,  on November 19,
1999, the Company's three  executive  officers and principal  stockholders  (who
hold, in the  aggregate,  over 71% of the issued and  outstanding  shares of the
Company's  Common  Stock)  adopted a  resolution  to go private by amending  the
Company's Certificate of Incorporation to reverse split the Company's issued and
outstanding shares of Common Stock at a ratio that would have cashed out all but
the three principal stockholders (the "Reverse Split"). The Board (including the
three  principal  stockholders)  cancelled its plans to proceed with the Reverse
Split  because,  after  considering  all the  available  information,  the Board
decided  that it was in the best  interest  of all the  stockholders  to  remain
public at that time.



                                      -5-
<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  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 as reported by NASDAQ (which reflect inter-dealer  prices,  without
retail  mark-up,  mark-down,  or commission  and may not  necessarily  represent
actual  transactions).  The prices for periods  prior to January 15, 1999 do not
take into account the  one-for-three  reverse split of the Common Stock effected
in January 1999.

                                                      Bid Prices
                                                 ---------------------
                                                 High              Low
                                                 ----              ---
Period - Fiscal Year  1998
--------------------------
First Quarter ending March 31, 1998             0.59375           0.21875
Second Quarter ending June 30, 1998             1.46875           0.50
Third Quarter ending September 30, 1998         0.9375            0.5625
Fourth Quarter ending December 31, 1998         0.875             0.50

Period - Fiscal Year  1999
--------------------------
January 1, 1999 through January 14, 1999        0.65625           0.50
January 15, 1999 through March 31, 1999         2.00              1.00
Second Quarter ending June 30, 1999             3.00              0.8125
Third Quarter ending September 30, 1999         1.28125           0.75
Fourth Quarter ending December 31, 1999         1.1875            0.6875

(b) Holders -- There were  approximately  93 holders of record of the  Company's
Common  Stock as of March 27, 2000  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.

                                      -6-
<PAGE>

         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.  To maintain the listing of the Company's
Common Stock on NASDAQ,  the Company  effected a one-for-three  reverse split of
its outstanding share which resulted in an increase in the bid for the Company's
Common Stock to over $1.00 per share.  All  references in this report to numbers
of shares  have been  adjusted to reflect  the  reverse  split,  unless the text
specifically  indicates  otherwise.  By  letter  dated  March 12,  1999,  NASDAQ
determined to continue the listing of the Company's Common Stock, subject to its
right to change its determination  should conditions  dictate.  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.

         During  1998,  in  accordance  with Rule  10b-18  under the  Securities
Exchange Act of 1934,  the Company  repurchased an aggregate of 31,083 shares of
its Common Stock in the open market.

         In May 1998,  the  Company  raised  $720,000  from the sale of  266,667
shares in a private  placement  to one  investor.  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. In addition,  the Company issued 68,334
shares to consultants for public relations  services.  The sales of these shares
was exempt from registration by reason of the exemption provided by Section 4(2)
of the Act.


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, 1999 Compared to
Fiscal Year Ended December 31, 1998

         Sales  for the  year  ended  December  31,1999  increased  $919,428  or
approximately 9.5% when compared to the year ended December 31,1998.

                                      -7-
<PAGE>

         Management  believes that the increase in sales was due to the addition
of two locations in 1999 and full years sales from locations opened in 1998.

         As of December  31,1998,  the Company operated 30 retail locations and,
as of December 31,1999,  it operated 29 retail  locations.  Although the Company
added two stores in 1999, it closed its Portland,  Oregon, Ontario,  California,
and Kenosha,  Wisconsin stores on January 3, 1999, April 28, 1999, and August 3,
1999,  respectively.  The Company closed two additional stores (Oahu and Tulare)
in the first quarter of 2000.

         Costs of goods as a  percentage  of revenues  remained  about the same:
approximately 31.2% during 1998 and approximately 31.0% during 1999.

         During  the  year  ended  December   31,1999,   selling,   general  and
administrative  expenses  increased  when  compared  to the year ended  December
31,1998 by $926,260  (approximately  16.1%). As a percentage of sales,  selling,
general and administrative  expenses  increased from approximately  59.2% during
the year ended  December  31,1998 to  approximately  62.8% during the year ended
December 31,1999.  Management believes that the increase in selling, general and
administrative expenses was the result of the following factors:

          o    The cost of operating  locations opened in 1998 for the full year
               of 1999.

          o    The cost of operating the two locations opened in 1999.

          o    The costs associated with closing three locations in 1999.

          o    Increased costs associated with advertising for staff,  increased
               hiring and training of staff as a result of  increased  turnover,
               and increased travel expenses  associated with training new staff
               and operating the Company's locations.

          o    The costs of the  Company's  "going  private"  transaction"  (see
               "Part I. Item 4.  Submission  of  Matters  to a Vote of  Security
               Holders").

          o    Lower than expected revenues.



                  Revenues Same Store Locations.

         As of December  31,1998,  the Company  operated 21 locations  that were
also in operation at December 31,1999 and open for a full 12 months:  two in New
Orleans,  three in Monterey,  one in Sacramento,  one in San Diego, one in Santa
Barbara,  two in San Francisco,  one in Palm Springs, one in Salt Lake City, one
in Branson, one in Minneapolis,  one in Laughlin,  one in Gilroy, one in Tulare,
two in St Croix, one in St Thomas and one in Oahu.

         Revenues from same store locations for the year ended December 31,1999,
increased (approximately 1.2%) from the same period in 1998.

         As noted in previous reports, the Company had experienced  decreases in
revenues  during 1998 at its Oahu, St Croix and San Francisco  (Anchorage  Mall)
copy jewelry  stores and at its St Croix fine jewelry store (Kings  Alley).  The
Company  closed the Oahu store and the Tulare store during the first  quarter of
2000 and anticipates  closing the Anchorage store when the lease expires, if not
sooner.   Revenues  at  the  Kings  Alley  and  St  Croix  locations   increased
approximately 13.0% and 1%, respectively,  over 1998 revenues and have continued
to increase during the first quarter of 2000.

                                      -8-
<PAGE>

                  Net Income

         During the year ended December 31,1999, the Company realized net income
of  $137,109  compared  to net income of  $318,379  for the year ended  December
31,1998.

         Inventory Turnover Ratios

         During the year ended  December  31,1999,  the  Company  maintained  an
inventory  that  provided  a  turnover  ratio of 1.26 to1.  Management  does not
believe  that the  current  inventory  turnover  is  indicative  of  impaired or
slow-moving inventory.

         Management  believes that the current inventory  turnover ratio of 1.26
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  31,1998 was 1.20 to 1.  Management
believes that this  improved  inventory  turnover  ratio is due to the fact that
during the year ended  December  31,1999  the Company had more stores open for a
full 12 month  period and fewer new stores  that were open only a portion of the
period than during the year ended  December  31,1998 and the  closuring of three
locations in 1999 .

Liquidity and Capital Resources

         As of December 31, 1999,  the Company had  $1,760,254  in cash and cash
equivalents (compared to $1,560,403 on December 31, 1998) and its current assets
exceeded its current liabilities by $4,920,241.

         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  has  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  is  expanding  the Art Gallery  concept and
adding Art  Reproductions to already existing  stores.  Management  continues to
actively seek an internet alliance to sell its jewelry and art reproductions.

         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.  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. For a discussion of this change in focus, see "Part I, Item 1.
Business."

                                      -9-
<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, 1999

                                      INDEX

                                                                        Page No.

    Report of Independent Auditor                                         F-1

    Consolidated Balance Sheets - December 31, 1998 and 1999              F-2

    Consolidated Statements of Operations for the

    Years Ended December 31, 1998 and 1999                                F-3

    Consolidated Statement of Stockholders'
    Equity for the Years
    Ended December 31, 1998 and 1999                                      F-4

    Consolidated Statements of Cash Flows for the

    Years Ended December 31, 1998 and 1999                                F-5

    Notes to Consolidated Financial Statements                            F-6


                                      -10-
<PAGE>

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.

                                    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  2000  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      Amendment to the Certificate of Incorporation of the Company
             concerning the reverse stock split (4)

                                      -11-
<PAGE>

    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 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

         Form 8-K filed November 23, 1999, as amended on November 26, 1999

         Form 8-K filed December 2, 1999.

         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.










                                      -12-
<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 30, 2000                 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 30, 2000
---------------------------
 James Cardinal


 /s/ Gavin Gear                            Director              March 30, 2000
---------------------------
 Gavin Gear


 /s/ Tamara Gear                           Director              March 30, 2000
---------------------------
 Tamara Gear



                                           Director              March __, 2000
---------------------------
 Janet Heinze


                                           Director              March __, 2000
---------------------------
 Keith Brandon




                                      -13-
<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.



























                                      -14-
<PAGE>







                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1999










<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1999

Report of Independent Auditor                                          F-1

Consolidated Balance Sheets at December 31, 1998 and 1999              F-2

Consolidated Statements of Operations -                                F-3
    Years Ended December 31, 1998 and 1999

Consolidated Statement of Stockholders' Equity -                       F-4
    Years Ended December 31, 1998 and 1999

Consolidated Statements of Cash Flows -                                F-5
    Years Ended December 31, 1998 and 1999

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, 1998 and 1999,  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,  1998 and 1999 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

Los Angeles, California
March 22, 2000



                                      F-1
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>

                                                                                               1998                 1999
                                                                                        ------------------   -----------------
                                     ASSETS

<S>                                                                                     <C>                  <C>
CURRENT ASSETS
    Cash and cash equivalents                                                           $       1,560,403    $       1,760,254
    Accounts receivable (net of allowances for
      doubtful accounts of $16,000 in 1998 and 1999)                                              415,141              415,353
    Income taxes receivable                                                                       142,800               88,130
    Inventory                                                                                   2,635,870            2,597,635
    Prepaid expenses                                                                              270,685              299,227
                                                                                        ------------------   ------------------
        TOTAL CURRENT ASSETS                                                                    5,024,899            5,160,599
                                                                                        ------------------   ------------------
PROPERTY AND EQUIPMENT, NET                                                                     1,743,134            1,892,119
                                                                                        ------------------   ------------------

OTHER ASSETS

    Deposits                                                                                       65,090               65,105
    Patents and trademarks, net of accumulated amortization
      of $3,150 and $3,908 in 1998 and 1999, respectively                                           2,807                2,430
    Excess cost over net assets acquired, net of accumulated
      amortization of $18,606 and $22,656 in 1998 and 1999, respectively                           26,291               18,191
                                                                                        ------------------   ------------------
        TOTAL OTHER ASSETS                                                                         94,188               85,726
                                                                                        ------------------   ------------------
                                                                                        $       6,862,221    $       7,138,444
                                                                                        ==================   ==================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable and accrued expenses                                               $         162,244    $         240,358
                                                                                        -----------------    -----------------
        TOTAL CURRENT LIABILITIES                                                                 162,244              240,358

DEFERRED INCOME TAXES                                                                             152,871              213,871
                                                                                        ------------------   ------------------
        TOTAL LIABILITIES                                                                         315,115              454,229
                                                                                        ------------------   ------------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Common stock - authorized 30,000,000 shares, $.001 par value,
      issued and outstanding 6,146,553 in 1998 and 1999                                             6,147                6,147
    Additional paid-in capital                                                                  3,914,508            3,914,508
    Retained earnings                                                                           2,710,459            2,847,568
    Less treasury stock at cost (62,066 shares in 1998 and 1999)                                  (84,008)             (84,008)
                                                                                        ------------------   ------------------
        TOTAL STOCKHOLDERS' EQUITY                                                              6,547,106            6,684,215
                                                                                        ------------------   ------------------
                                                                                        $       6,862,221    $       7,138.444
                                                                                        ==================   ==================
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                      F-2
<PAGE>

                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>

                                                                                               1998                 1999
                                                                                        ------------------   ------------------
<S>                                                                                     <C>                  <C>
REVENUES                                                                                $       9,706,816    $      10,626,244

COST OF GOODS SOLD                                                                              3,030,003            3,298,529
                                                                                        ------------------   ------------------
GROSS PROFIT                                                                                    6,676,813            7,327,715

EXPENSES
    Selling, general and administrative                                                         5,743,590            6,669,850
    Depreciation and amortization                                                                 407,369              434,358
    Interest expense                                                                                  475                  398
                                                                                        ------------------   ------------------
        TOTAL EXPENSES                                                                          6,151,434            7,104,606
                                                                                        ------------------   ------------------
INCOME BEFORE INCOME TAXES                                                                        525,379              223,109

PROVISION FOR INCOME TAXES                                                                        207,000               86,000
                                                                                        ------------------   ------------------
NET INCOME                                                                              $         318,379    $         137,109
                                                                                        ==================   ==================

WEIGHTED AVERAGE SHARES OUTSTANDING                                                             5,988,000             6,084,000
                                                                                        ==================   ==================

BASIC EARNINGS PER COMMON SHARE                                                         $             .05    $             .02
                                                                                        ==================   ==================
</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, 1998 AND 1999

<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, 1997               5,811,553     $        5,812  $      2,989,843    $  2,392,080     $     (46,056)   $   5,341,679

  Treasury Stock
    purchased                                                                                              (37,952)         (37,952)

  Sale of stock                     266,667                267           719,733                                            720,000

  Issuance of stock
    for services                     68,333                 68           204,932                                            205,000

  Net income
    for the year                                                                         318,379                            318,379
                              --------------    --------------   ---------------   --------------    --------------   --------------

BALANCE
  December 31, 1998               6,146,553              6,147         3,914,508       2,710,459           (84,008)       6,547,106

  Net income
    for the year                                                                         137,109                            137,109
                              --------------    --------------   ---------------   --------------    --------------   --------------

BALANCE
  December 31, 1999               6,146,553     $       6,1467   $    3,914,5098   $   2,847,568     $     (84,008)   $   6,684,215
                              ==============    ==============   ===============   ==============    ==============   =============
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                                               1998                 1999
                                                                                        ------------------   ------------------
<S>                                                                                     <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                          $         318,379    $         137,109
    Adjustments to reconcile net income to
      net cash provided by operating activities:
        Depreciation and amortization                                                             407,369              434,358
        Expenses related to stock issued for consulting services                                  205,000
        Changes in operating assets and liabilities:
        (Increase) decrease in:
         Accounts receivable                                                                      (58,017)                (212)
         Inventory                                                                               (211,115)              38,235
         Prepaid expenses                                                                        (180,258)             (28,540)
         Income tax receivable                                                                    (60,608)              54,670
        Increase (decrease) in:
         Accounts payable and accrued expenses                                                     48,493               78,113
        Income taxes payable and deferred income taxes                                             25,000               61,000
                                                                                          ----------------   ------------------

        NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 494,243              774,733
                                                                                        ------------------   ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of property and equipment                                                           (947,491)            (676,580)
    Deposits and other assets                                                                       10,155             101,698
                                                                                        ------------------   ------------------
        NET CASH USED IN INVESTING ACTIVITIES                                                    (937,336)            (574,882)
                                                                                        ------------------   ------------------

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

        NET CASH PROVIDED BY FINANCING ACTIVITIES                                                  682,048
                                                                                        ------------------   ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                          238,955              199,851

CASH AND CASH EQUIVALENTS BALANCE, Beginning of period                                           1,321,448            1,560,403
                                                                                         -----------------   ------------------
CASH AND CASH EQUIVALENTS BALANCE, End of period                                         $       1,560,403   $        1,760,254
                                                                                         =================   ==================

SUPPLEMENTAL CASH FLOW DISCLOSURE:
    Interest paid                                                                       $             475    $              398
    Income taxes paid                                                                   $         242,528    $           19,657

NON-CASH FINANCING ACTIVITY:
    Issuance of shares of common stock in exchange for services                         $           205,000  $

</TABLE>



          See accompanying Notes to Consolidated Financial Statements.

                                      F-5
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1999

    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 three  locations  and copy  jewelry at
         locations in California,  Nevada, Utah,  Minnesota,  Missouri,  Oregon,
         Louisiana, Hawaii Wisconsin, Michigan, Indiana, Florida, Texas 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 a 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.  As of December 31,  1999,  the Company has deposits in excess of
         the FDIC limit in the amount of approximately $1,200,000.

         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.

         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  as the  exercise  price of each option at the date of grant
         was equal to the fair value of the underlying common stock.

         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  acquisition of the Company's
         two  franchised  stores is being  amortized over 10 years on a straight
         line basis.

         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 applicable to common shares after preferred
         dividend  requirements  and upon 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 only in the periods  presented in which effect would have been
         diluted. The Company did not grant options and warrants during 1998 and
         1999.

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

         Advertising  -  Advertising  costs  are  expensed  the  first  time the
         advertisement  is run. Total  advertising  and promotion  expenses were
         $255,088 and  $314,850 for the years ended  December 31, 1998 and 1999,
         respectively.

    2.   PROPERTY AND EQUIPMENT

         Property and equipment  consisted of the following at December 31, 1998
and 1999:

<TABLE>
<CAPTION>

                                                                                               1998                 1999
                                                                                        ------------------   ------------------
               <S>                                                                      <C>                  <C>
               Real Estate                                                              $               0    $          221,246
               Office furniture, fixtures & equipment                                             161,804               194,264
               Store furniture, fixtures & equipment                                            2,156,526             2,438,499
               Vehicles                                                                            19,500                19,500
               Leasehold improvements                                                             756,037               707,038
                                                                                        ------------------   ------------------
                                                                                                3,093,867             3,580,547

                  Less: accumulated depreciation and amortization                               1,350,733             1,688,428
                                                                                        ------------------   ------------------
                                                                                        $       1,743,134    $        1,892,119
                                                                                        ==================   ==================
</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,
1998 and 1999 follow:
<TABLE>
<CAPTION>
                                          Federal               State                Total
                                    -----------------    -----------------    ------------------
             <S>                    <C>                  <C>                  <C>
             1999:
                Current             $          12,000    $          13,000    $          25,000
                Deferred                       59,000                2,000               61,000
                                    ------------------   ------------------   ------------------
                                    $          71,000    $          15,000    $          86,000
                                    ==================   ==================   ==================

             1998:
                Current             $         151,000    $          31,000    $         182,000
                                    ------------------   ------------------   ------------------
                Deferred                       24,000                1,000               25,000
                                    ------------------   ------------------   ------------------
                                    $         175,000    $          32,000    $         207,000
                                    ==================   ==================   ==================
</TABLE>

         The  component of deferred tax liability was as follows at December 31,
1999:

             Deferred tax liability:
                Depreciation                             $         213,871
                                                         =================

         Income tax  expense  amounted  to  $207,000 in 1998 and $86,000 in 1999
         (effective  tax rates of 38% and 38.5%,  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:
<TABLE>
<CAPTION>
                                                                      1998                 1999
                                                               ------------------   ------------------
             <S>                                               <C>                  <C>
             Expected statutory tax                            $         178,629    $          75,857
             State income tax, net of federal tax benefit                 21,120                9,866
             Other                                                         7,251                  277
                                                               ------------------   ------------------
                  Actual tax                                   $         207,000    $          86,000
                                                               ==================   ==================
</TABLE>


    4.   COMMITMENTS AND CONTINGENCIES

         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, 1999
         are as follows:

               Year Ended
               December 31,
               ------------
                  2000                       $  1,075,000
                  2001                            687,000
                  2002                            485,000
                  2003                            340,000
                  2004                            154,000
                  Thereafter                       46,000
                                             -------------
                                             $  2,787,000

         Rent expense for the fiscal years ended December 31, 1998 and 1999 were
         $1,477,595 and $1,781,583, respectively.

                                      F-8
<PAGE>

          LITIGATION:

          The  Company  has been  named as a  defendnat  by a former  manager  /
          employee in a lawsuit  claiming  among  other  things that the Company
          misclassified  him and certain  other store  managers in the Company's
          California   locations  as  managers  excluding  them  from  receiving
          overtime pay. The Company  intends to vigorously  defend  against this
          action  and  the  Company's  management  is of the  opinion  that  any
          liability is immaterial.

    5.   STOCKHOLDERS' EQUITY

         During 1998 the Company sold 266,667  common shares for  $720,000,  net
         and  also,  issued  68,333  common  shares,   valued  at  approximately
         $205,000, in connection with services performed by consultants.  During
         1998 the  Company  acquired  31,083  shares of its common  stock for an
         aggregate price of $37,952.

    6.   COMMON STOCK REVERSE SPLIT

         On  January 2, 1999,  the Board of  Directors  approved a one for three
         reverse  stock  split.  The number of  authorized  shares and par value
         remained  the same.  The  effect of the  reverse  stock  split has been
         retroactively  reflected  as of  December  31,  1997  in the  financial
         statements. All references to the number of common shares and per share
         amounts elsewhere in the consolidated  financial statements and related
         footnotes  have been restated as  appropriate  to reflect the effect of
         the reverse stock split for all periods presented.
















                                      F-9
<PAGE>