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, 2000
                                       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,  2000  were
$9,629,233.

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 20, 2001 is
$1,326,936  based upon $0.75  multiplied by the 1,769,248 Shares of Registrant's
Common Stock held by non-affiliates1.

The number of shares  outstanding of each of the registrant's  classes of common
stock (which excludes 62,067 treasury shares), as of March 20, 2001 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 2001 Annual  Meeting of  Stockholders  (to be filed with the  Commission not
later than April 30, 2001).

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, 2000

                                Table of Contents

PART I                                                                   Page

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

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

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

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

Part II

Item 5.      Market for Common

               Equity and Related Stockholder Matters.......................6

Item 6.      Management's Discussion and Analysis of

               Financial Condition and Results of Operations................8

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

Item 8.      Changes in and Disagreements with
               Accountants on Accounting and

               Financial Disclosures.......................................12

Part III

Item 9.      Directors, Executive Officers, Promoters
               and Control Persons; Compliance with

               Section 16(a) of the Exchange Act...........................13

Item 10. Executive Compensation............................................13

Item 11. Security Ownership of Certain Beneficial

               Owners and Management.......................................13

Item 12. Certain Relationships and Related

               Transactions................................................13

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

Signatures.................................................................15

Supplemental Information...................................................16

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
21 retail copy jewelry stores,  two fine jewelry stores,  two fine art galleries
and one reproduction 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 and
o        Orlando

Hawaii
o        Maui

Indiana
o        Michigan City

Louisiana
o        New Orleans

Michigan
o        Birch Run

Missouri
o        Branson

Nevada
o        Laughlin

Texas
o        Grapevine

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

Utah
o        Salt Lake City


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

         One of the fine art  galleries  is located in New Orleans  (Bourbon St.
Gallery) and the other is located in Vail, Colorado (Gore Creek Gallery).

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

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

                                     - 1 -
<PAGE>

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

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

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

         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 and had planned to let the lease expire;
however,  the Company  currently is negotiating to relocate the store within the
same shopping mall.

         In  addition,  the Company  relocated  two  locations,  one in Branson,
Missouri and one in San  Francisco,  California,  to locations  that  management
believes  will  generate  more  traffic.  During the period from June 1, 2000 to
December  31,  2000,   sales  at  these   locations  are  up  22.0%  and  23.0%,
respectively.

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

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

         Original  works of both of these  artists are featured at the Company's
New Orleans and Vail Galleries.

                                     - 2 -
<PAGE>

         The Company plans to license its Elegant Illusions trade name to permit
others to open signature stores featuring  Elegant Illusions brand copy jewelry.
The  Company is  structuring  these  transactions  in a manner  that  management
believes will not require registration under current franchising laws.

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

Types of Stores

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

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

         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.

         In June 2001, the Company anticipates,  but cannot assure, that it will
make the following changes at its Steinbeck Jewelers location:

         o        upgrade its jewelry selection to higher ticket items,
         o        eliminate the handcrafted and gift items,
         o        remodel the premises and
         o        convert a portion of the space  (approximately 500 sq. ft.) to
                  an art gallery  featuring  original  works of the same artists
                  carried in the Bourbon Street and Gore Creek Galleries.

         The fine art galleries,  Bourbon Street Gallery and Gore Creek Gallery,
sell predominantly original oil paintings by contemporary Italian artists.

                                     - 3 -
<PAGE>

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 and Gore Creek Gallery directly from the artists. Less than 5% of
Bourbon  Street   Gallery's   revenues  are  generated  from  sales  of  Art  on
consignment.  None of the Gore Creek Gallery's revenues are generated from sales
of Art on consignment.

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 up approximately  27% for the
year ending December 31, 2000 as compared to the same period in 1999. Similarly,
a copy jewelry  concept store opened up in the same Mall in Miromar,  Florida as
one of the Company's  stores.  Revenues at that  location were up  approximately
7.13% for the year  ending  December  31, 2000 as compared to the same period 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.

Employees

         At March 14,  2000,  the Company had  approximately  124  employees,  a
decrease  of 24  employees  since  March  2000.  Current  employees  include the
Company's three officers,  three regional managers,  one national sales manager,
13 store managers,  nine assistant  managers,  two training  managers,  78 sales
personnel,  one retail  computer  systems  manager,  one office  manager  and 13
clerical personnel.

                                     - 4 -
<PAGE>

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, excluding the warehouse space which is located on another
floor in the building,  is leased from an  unaffiliated  party pursuant to a one
year lease that expires on February 28,  2002.  Included in the  agreement is an
option to extend the lease for an additional year.

         The  Company has leased the  warehouse  portion of the  premises  for a
period of six months, beginning March 1, 2001.

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

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

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

                                     - 5 -
<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  has reduced
operating costs and allowed for a stable management staff.

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

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

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

         No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 2000.

                                     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 the period prior to January 15, 1999 do not
take into account the  one-for-three  reverse split of the Common Stock effected
on January 1999.



                                     - 6 -
<PAGE>


                                                        Bid Prices
                                                 ---------------------
                                                 High             Low
                                                 ----             ---
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, 2000         1.1875            0.6875

Period - Fiscal Year  2000

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

(b) Holders -- There were  approximately  88 holders of record of the  Company's
Common  Stock as of March 20, 2001  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.

         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.



                                     - 7 -
<PAGE>


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, 2000 Compared to Fiscal Year Ended
December 31, 1999
-----------------------------------------------------------------

         Sales  for the  year  ended  December  31,2000  decreased  $997,011  or
approximately 9.4% when compared to the year ended December 31,1999.

         Management  believes  that the  decrease in sales was due to closing of
six  locations in 2000 (one of which was opened in 2000),  offset by the opening
of the Branson and Vail Galleries and the relocations of the Branson and one San
Francisco  location.  As of December  31, 1999,  the Company  operated 29 retail
locations  and, as of December 31, 2000,  it operated 26 retail  locations.  See
"Part I. Item 1. Description of Business; General."

         Costs of goods as a percentage of revenues decreased from approximately
31.0%  during 1999 to  approximately  29.4% during  2000.  This  decrease is the
result of  management's  ongoing  efforts to improve  quality while reducing the
cost of purchases. Management expects costs of goods as a percentage of revenues
to continue to improve in the year 2001.

         During  the  year  ended  December  31,  2000,  selling,   general  and
administrative  expenses  decreased when compared to the year ended December 31,
1999 by  $497,774  (approximately  7.5%).  However,  as a  percentage  of sales,
selling,  general and administrative expenses increased from approximately 62.8%
during the year ended December 31, 1999 to  approximately  64.1% during the year
ended December 31, 2000.  Management  believes that this increase  primarily was
the result of the following non-recurring charges:



                                     - 8 -
<PAGE>



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

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

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

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

         o        Residual  legal fees  resulting  from the Company's  cancelled
                  plan to take the Company private of $3,000.

         o        Back taxes (from 1996),  penalties  and interest in the amount
                  of $24,618.

         The total of all non-recurring charges is $541,177.

         Excluding these non-recurring expenses,  during the year ended December
31, 2000, selling,  general and administrative  expenses decreased when compared
to the year ended December 31, 1999 by $1,038,951  (approximately  15.6%).  As a
percentage of sales, selling, general and administrative expenses decreased from
approximately  62.8%  during the year ended  December  31,1999 to  approximately
58.5% during the year ended December 31,2000.

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

         As of December 31, 1999,  the Company  operated 24 locations  that were
also in operation at December 31, 2000 and open for a full 12 months:


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

Florida
o        Miromar and
o        Orlando

Hawaii
o        Maui

Indiana
o        Michigan City

Louisiana
o        New Orleans (two stores)

Michigan
o        Birch Run

Missouri
o        Branson

Nevada
o        Laughlin

Texas
o        Grapevine

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

Utah
o        Salt Lake City


                                     - 9 -
<PAGE>

         Revenues  from same store  locations  for the year ended  December  31,
2000, increased slightly (approximately 0.93%) from the same period in 1999.

         Net Income
         ----------

         During the year ended  December  31, 2000,  the Company  realized a net
loss of $6,684  compared to net income of $137,109  for the year ended  December
31,1999.  Excluding the non-recurring cumulative charge to net income of $96,045
resulting  from Staff  Accounting  Bulletin 101  discussed  above,  the Company,
during the year ended December 31, 2000, realized net income of $89,361.

         The Company,  during the year ended December 31, 2000, realized pre-tax
income of  $112,961  compared to pretax  income of  $223,109  for the year ended
December 31, 1999.  Excluding the  non-recurring  expenses  discussed above, the
Company,  during the year ended  December 31, 2000,  realized  pre-tax income of
$654,138.

         Inventory Turnover Ratios
         -------------------------

         During the year ended  December 31,  2000,  the Company  maintained  an
inventory  that  provided  a  turnover  ratio of 1.04 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 1.04
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 31,1999 was 1.26 to 1.

         Recently Issued Accounting Standards
         ------------------------------------

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


                                     - 10 -
<PAGE>


Liquidity and Capital Resources
-------------------------------

         As of December 31, 2000,  the Company had  $1,899,722  in cash and cash
equivalents (compared to $1,760,254 on December 31, 1999) and its current assets
exceeded its current liabilities by $5,066,798.

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

         In this regard  management has expanded the Art Gallery concept and has
added Art  Reproductions  to already existing  stores.  Management  continues to
actively seek an internet alliance to sell its jewelry and art reproductions.

         Our primary  anticipated  capital  expenditures  during the year ending
December 31, 2001 include:

         o        the  possible  opening of one to three or more fine art and/or
                  copy jewelry stores;
         o        remodeling Steinbeck Jewelers location;
         o        relocating   the  second  of  the   Company's   San  Francisco
                  locations;
         o        the possible acquisition of real estate to house new stores;
         o        the acquisition of a building to house the Company's Corporate
                  facilities; and
         o        the possible increasing of inventory to accommodate  supplying
                  licensees  (see  "Part I.  Item 1.  Description  of  Business;
                  General").

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

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

         A significant  amount of the Company's business comes from tourists who
visit certain of the Company's stores but do not have an Elegant Illusions store
near their home. Management  anticipates that these tourists and others who will
learn about the Company's e-commerce site at its existing locations will shop on
its e-commerce site. For a discussion of this change in focus, see "Part I, Item
1. Business."

                                     - 11 -
<PAGE>

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

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

                             ELEGANT ILLUSIONS, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED December 31, 2000

                                      INDEX

                                                                        Page No.
                                                                        --------

    Report of Independent Auditor                                          F-1

    Consolidated Balance Sheets - December 31, 1999 and 2000               F-2

    Consolidated Statements of Operations for the

    Years Ended December 31, 1999 and 2000                                 F-3

    Consolidated Statement of Stockholders'
    Equity for the Years
    Ended December 31, 1999 and 2000                                       F-4

    Consolidated Statements of Cash Flows for the

    Years Ended December 31, 1999 and 2000                                 F-5

    Notes to Consolidated Financial Statements                             F-6


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

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


                                     - 12 -
<PAGE>


                                    PART III

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

         The  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  2001  Annual  meeting  of  Stockholders  (the  "Proxy  Statement"),  and is
incorporated herein by this reference.

         In March 2001,  Keith  Brandon,  one of the  Company's  Directors and a
member of the Audit  Committee,  passed away.  The Company's  Board of Directors
appointed Barbara Z. Bokanovich to the Board and the Audit Committee to serve in
such capacities until the Annual Meeting of Stockholders.

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)

                                     - 13 -
<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
-------------------

         None.


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


                                     - 14 -
<PAGE>


                                   SIGNATURES

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

                                                      ELEGANT ILLUSIONS, INC.

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

                                                      /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 29, 2001
------------------
 James Cardinal


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


/s/ Tamara Gear                         Director                  March 29, 2001
---------------
 Tamara Gear


                                        Director                  March 29, 2001
---------------------------
 Janet Heinze


                                       Director                  March __, 2001
---------------------------
 Barbara Z. Bokanovich



                                     - 15 -
<PAGE>

                            SUPPLEMENTAL INFORMATION

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

                                 Not Applicable.

<PAGE>





                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 2000


<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 2000

Report of Independent Auditor                                         F-1

Consolidated Balance Sheets at December 31, 1999 and 2000             F-2

Consolidated Statements of Operations -                               F-3
    Years Ended December 31, 1999 and 2000

Consolidated Statement of Stockholders' Equity -                      F-4
    Years Ended December 31, 1999 and 2000

Consolidated Statements of Cash Flows -                               F-5
    Years Ended December 31, 1999 and 2000

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, 1999 and 2000,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  for  the  years  then  ended.   These   financial   statements   are  the
responsibility of the Company's  management.  My responsibility is to express an
opinion on these financial statements based on my audits.

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

In my opinion,  the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elegant
Illusions,  Inc.  and  Subsidiaries  as of  December  31,  1999 and 2000 and the
consolidated results of operations,  stockholders' equity and cash flows for the
years then ended, in conformity with generally accepted accounting principles of
the United States of America.

                                                Jeffrey S. Gilbert, CPA

Los Angeles, California
March 26, 2001

                                       F-1


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

<TABLE>
<CAPTION>
                                                                   December 31,  December 31,
                                                                      1999          2000
                                    ASSETS

<S>                                                                 <C>            <C>
CURRENT ASSETS
         Cash and cash equivalents                                  $ 1,760,254    $ 1,899,722
         Accounts receivable (net of allowance for
                    doubtful accounts of $16,000 in 1999)               415,353        227,245
         Income Taxes receivable                                         88,130          5,380
         Inventory                                                    2,597,635      2,867,755
         Prepaid expenses                                               299,227        279,232
                                                                    -----------    -----------

                  TOTAL CURRENT ASSETS                                5,160,599      5,279,334
                                                                    -----------    -----------


PROPERTY AND EQUIPMENT, NET                                           1,892,119      2,196,339
                                                                    -----------    -----------

OTHER ASSETS

         Deposits                                                        65,105         68,264
         Patents and trademarks, net of accumulated amortization          2,430          1,290
          of $3,527 and $4,664 in 1999 and 2000
         Excess cost over net assets acquired, net of accumulated
          amortization of $22,656 and $26,706 in 1999 and 2000           18,191         14,141
                                                                    -----------    -----------
                                                                         85,726         83,695
                                                                    -----------    -----------
                                                                    $ 7,138,444    $ 7,559,368
                                                                    ===========    ===========
                  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
         Current portion of mortgage payable                                  0    $    10,118
         Accounts payable and accrued expenses                          240,357        202,418
                                                                    -----------    -----------
                                                                        240,357        212,536
                                                                    -----------    -----------

MORTGAGE PAYABLE                                                        463,430
DEFERRED INCOME TAXES                                                   213,871        205,871
                                                                    -----------    -----------
                                                                        213,871        669,301
                                                                    -----------    -----------

                  TOTAL LIABILITIES                                     454,228        881,837
                                                                    -----------    -----------

STOCKHOLDER EQUITY
         Common stock-authorized 30,000,000 shares,
            $.001 par value, issued and outstanding
            6,146,446 shares in 2000 and 1999                             6,147          6,147
         Additional paid in capital                                   3,914,509      3,914,509
         Retained earnings                                            2,847,568      2,840,883
Less treasury stock at cost (62,067 shares in 2000 and 1999)            (84,008)       (84,008)
                                                                    -----------    -----------
                                                                      6,684,216      6,677,531
                                                                    -----------    -----------
                                                                    $ 7,138,444    $ 7,559,368
                                                                    ===========    ===========
</TABLE>

                  See Accompanying Notes to Consolidated Financial Statements

                                       F-2
<PAGE>

                    ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                 FOR THE YEAR ENDED DECEMBER 31, 1999 AND 2000

                                                         1999           2000
                                                         ----           ----

REVENUES                                              $10,626,244   $ 9,629,233

COST OF GOODS SOLD                                      3,298,529     2,829,556
                                                      -----------   -----------

GROSS PROFITS                                           7,327,715     6,799,677
                                                      -----------   -----------

EXPENSES

                  SELLING, GENERAL AND ADMINISTRATION   6,669,850     6,172,077
                  DEPRECIATION AND AMORTIZATION           434,358       469,914
                  INTEREST EXPENSE                            398        44,726
                                                        -----------  -----------

                                                        7,104,606     6,686,717
                                                       -----------   ----------
INCOME BEFORE INCOME TAXES                                223,109       112,960

PROVISION FOR INCOME TAXES                                 86,000        23,600
                                                      -----------    ----------

NET INCOME BEFORE ACCOUNTING CHANGE                       137,109        89,361

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                       0        96,045
                                                      -----------   -----------

NET INCOME (LOSS)                                     $   137,109   ($    6,685)
                                                      ===========   ===========



WEIGHTED AVERAGE SHARES OUTSTANDING                     6,146,446     6,146,446
                                                      ===========   ===========

BASIC AND DILUTED INCOME(LOSS) PER SHARE
                  BEFORE ACCOUNTING CHANGE            $      0.02   $      0.01
                                                      ===========   ===========

                  AFTER ACCOUNTING CHANGE             $      0.02   ($     0.00)
                                                      ===========   ===========







                  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, 1999 AND 2000

<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, 1998               6,146,553     $       6,147    $    3,914,509    $   2,710,459     $     (84,008)   $   6,547,107

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

BALANCE
  December 31, 1999               6,146,553             6,147         3,914,509        2,847,568           (84,008)       6,684,216

  Net loss
    for the year                                                                         (6,685)                            (6,685)
                              --------------    --------------   ---------------   --------------    --------------   --------------

BALANCE
  December 31, 2000               6,146,553     $       6,147    $    3,914,509    $   2,840,883     $     (84,008)   $   6,677.531
                              ==============    ==============   ===============   ==============    ==============   ==============
</TABLE>









           See accompanying Notes to Consolidated Financial Statements

                                       F-4


<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000

<TABLE>
<CAPTION>
                                                                           1999           2000
                                                                           ----           ----
<S>                                                                    <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
         Net income (Loss)                                             $   137,109    ($    6,685)
         Adjustments to reconcile net income to net cash provided by
         (used in) operating activities:
         Loss on dispersion of property and equipment                       80,969
         Depreciation and amortization                                     434,358        469,915
         Changes in operating assets and liabilities:
                  (Increase) Decrease in:
                  Accounts Receivable                                         (212)       188,109
                  Inventory                                                 38,235       (270,120)
                  Prepaid expense                                          (28,540)        19,994
                  Income tax receivable                                     54,670         82,750
                  (Increase) Decrease in:
                  Accounts payable and accrued expenses                     78,113        (37,940)
                  Income taxes payable                                      61,000         (8,000)
                                                                       -----------    -----------

NET CASH PROVIDED BY OPERATIONS                                            774,733        518,992
                                                                       -----------    -----------


CASH FLOW FROM INVESTING ACTIVITIES
                  Purchase of property and equipment                      (676,580)      (866,750)
                  Proceeds from sale of property and equipment              16,455
                  Other assets                                             101,698         (2,777)
                                                                       -----------    -----------

NET CASH USED IN INVESTING ACTIVITIES                                     (574,882)      (853,072)
                                                                       -----------    -----------
CASH FLOW FROM FINANCING ACTIVITIES
                  Mortgage payable                                               0        480,000
                  Principal Repayments                                           0         (6,642)
                                                                       -----------    -----------


NET CASH FROM FINANCING ACTIVITIES                                               0        473,548
                                                                       -----------    -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                  199,851        139,468

CASH AND CASH EQUIVALENT BALANCE
                  Beginning of period                                    1,560,403      1,760,254
                                                                       -----------    -----------

CASH AND CASH EQUIVALENT BALANCE
                  End of period                                        $ 1,760,254    $ 1,899,722
                                                                       ===========    ===========

SUPPLEMENTAL CASH FLOW DISCLOSURE
                  Interest paid                                        $       398    $    44,726
                  Income tax paid                                      $         0         19,600

</TABLE>




           See Accompanying Notes to Consolidated Financial Statements

                                       F-5
<PAGE>

                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 2000

    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, Missouri,  Louisiana,  Hawaii,
         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 two stores in New  Orleans and Vail and  reproductions  in
         one store in Missouri.

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

         Cash and Cash Equivalents - Cash  equivalents are purchased  short-term
         highly liquid  investments  readily  convertible  to cash with original
         maturities  of no more than three  months.  There are cash  balances in
         certain Federal insured banks that exceed the maximum insured  amounts.
         However, management of the Company does not consider this a significant
         risk.  As of December 31,  2000,  the Company has deposits in excess of
         the FDIC limit in the amount of approximately $1,600,000.

         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  at 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 1999 and
         2000.

         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
         $314,850 and  $174,627 for the years ended  December 31, 1999 and 2000,
         respectively.

    2.   PROPERTY AND EQUIPMENT

         Property and equipment  consisted of the following at December 31, 1999
         and 2000:

<TABLE>
<CAPTION>
                                                                                               1999                 2000
                                                                                        ------------------   ------------------

               <S>                                                                      <C>                  <C>
               Real Estate                                                              $         221,246    $          759,940
               Office furniture, fixtures & equipment                                   $         194,264    $          224,607
               Store furniture, fixtures & equipment                                            2,438,499             2,436,651
               Vehicles                                                                            19,500                19,500
               Leasehold improvements                                                             707,038               844,439
                                                                                        ------------------   ------------------
                                                                                                3,580,547             4,285,137

                  Less: accumulated depreciation and amortization                               1,688,428             2,088,798
                                                                                        ------------------   ------------------
                                                                                        $       1,892,119    $        2,196,339
                                                                                        ==================   ==================
</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,
1999 and 2000 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
                                                                   ==================   ==================   ==================

             2000:
                Current                                            $          22,600    $           1,000    $          23,600
                                                                   ------------------   ------------------   ------------------
                Deferred
                                                                   ------------------   ------------------   ------------------
                                                                   $          22,600    $           1,000    $          26,600
                                                                   ==================   ==================   ==================
</TABLE>

         The  component of deferred tax liability was as follows at December 31,
2000:

             Deferred tax liability:
                Depreciation                             $         205,871
                                                         ==================

         Income tax  expense  amounted  to  $86,000 in 1999 and  $23,600 in 2000
         (effective  tax rates of 38% and 20.9%,  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>
                                                                                               1999                 2000
                                                                                        ------------------   ------------------

             <S>                                                                        <C>                  <C>
             Expected statutory tax                                                     $          75,857    $           37,276
             State income tax, net of federal tax benefit                                           9,866                 5,000
             Settlement for prior years dispute                                                                          19,600
             Impast from initial lower Federal Tax rates                                                               (11,750)
             Other                                                                                    277              (21,126)
                                                                                        ------------------   ------------------
                  Actual tax                                                            $          86,000    $           23,600
                                                                                        ==================   ==================
</TABLE>


   4.    OPERATING LEASES

         The Company  leases its office and retail store  facilities and certain
         equipment under  operating  leases with terms ranging from three to ten
         years.  Certain of the leases include  percentage rates of 3% to 12% of
         revenues as defined.  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, 2000
         are as follows:

               Year Ended
               December 31,
              --------------
                  2001                        $          877,459
                  2002                                   720,583
                  2003                                   533,791
                  2004                                   315,795
                  2005                                   159,582
                  Thereafter                              17,895
                                              ------------------
                                              $        2,625,105
                                              ==================



                                       F-8
<PAGE>

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

         Rent expense for the fiscal years ended December 31, 1999 and 2000 were
         $1,781,583 and $1,843,130.

   5.    Accounting change

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

   6.    Long term debt

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

         2001    $10,118

         2002    $11,062

         2003    $12,095

         2004    $13,225

         2005    $14,459

                                       F-9