SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 Form 10-KSB/A-1


            [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:

<TABLE>
<CAPTION>

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


         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.


         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.

                                      -2-
<PAGE>

         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.

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.

                                      -3-
<PAGE>

Marketing

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

Competition

         At this time,  management  believes  that the Company has little direct
competition.  The Company  knows of two copy  jewelry  retail  store chains that
could  compete with the Company if they were located  within close  proximity of
the Company's stores - Impostors and Landau Hyman.  Management believes that the
Company  would be able to  compete  even if  stores  were  opened  within  close
proximity of the  Company's  stores.  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
in January 1999.  The Company's  Common Stock was delisted from NASDAQ on August
23______ __, 2001. It is now quoted on the OTC Bulletin Board.




                                      -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  $497,773  (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 $1,038,950  (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:



<PAGE>
<TABLE>
<CAPTION>


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



                                      -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 $6,685 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 $112,960 compared to pretax income of $223,109 for the year ended
December 31, 1999. Excluding the non-recurring expenses discussed above, the
Company, during the year ended December 31, 2000, realized pre-tax income of
$654,137.


         Inventory Turnover Ratios

         During the year ended December 31, 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 8, 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
 ----------                                  -----                 ----



                                             Director         March 8, 2002
---------------------------
 James Cardinal


                                             Director         March 8, 2002
-------------------------
 Gavin Gear


                                             Director         March 8, 2002
---------------------------
 Tamara Gear


                                             Director         March __, 2002
---------------------------
 Janet Heinze




                                      -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.




                                      -16-
<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
<PAGE>

                     ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                  December 31,   December 31,
                                                                                    1999                2000
                                    ASSETS

CURRENT ASSETS
<S>                                                                                <C>             <C>
         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

         Store lease deposits and other                                                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

<TABLE>
<CAPTION>

                                                                                    1999              2000
                                                                                    ----              ----

<S>                                                                               <C>              <C>
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)
                                                                                       ======         =======

</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, 1999 AND 2000

<TABLE>
<CAPTION>

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

BALANCE,
<S>                               <C>           <C>              <C>               <C>               <C>                <C>
  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 YEAR ENDED DECEMBER 31, 1999 AND 2000
<TABLE>
<CAPTION>


                                                                                       1999             2000
                                                                                       ----             ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                  <C>              <C>
         Net income (Loss)                                                           $137,109         ($6,685)
         Adjustments to reconcile net income to net cash provided by
         (used in) operating activities:

         Loss on disposition 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.  The loss on disposition of property
and equipment relates to stores closed.

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

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

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


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




                                       F-6


                    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  divided  by the  weighted  average  number of  common  shares
outstanding  during the period.  Diluted loss per common  share  adjusts for the
effect of  convertible  securities,  stock options and warrants,  if applicable,
only in the periods  presented  in which  effect  would have been  diluted.  The
Company did not grant options and warrants during 1999 and 2000 and there are no
outstanding convertible securities, options and warrants as of December 31, 1999
and 2000.


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


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


Advertising - Advertising costs are expensed the first time the advertisement is
run. Total advertising and promotion expenses were $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



                    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:

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

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
                  ==================   ==================   ==================

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


                Deferred tax liability:        1999                         2000
                                               ----                         ----


                Depreciation         $         213,871               $   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
Impact 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.  The
Company has placed with various  Lessors  $65,000 in deposits as required by the
leases as of December 31, 2000.



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.  Prior to this change,  layaway sales were  recognized when the
customer  made  the  required  minimum  initial  payment.  The  impact  of  this
accounting  change was a cumulative charge to net income of $96,045 effective at
the  beginning  of  the  fiscal  year.  The  pro  forma  effect  of  retroactive
application of this accounting change to prior operating periods is immaterial.


   6.    Long term debt


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




2001  $10,118

2002  $11,062

2003  $12,095

2004  $13,225

2005  $14,459








                                       F-9