U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                                   (Mark One)

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

             For the transition period from __________ to __________

                         Commission File Number O-28690

                           HOLLYWOOD PRODUCTIONS, INC.
                 (Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>

<S>                                                                                            <C>       
           Delaware                                                                            11-3871821
         (State or Other Jurisdiction of Incorporation or Organization)               (I.R.S. Employer Identification No.)
</TABLE>

            14 East 60th Street, Suite 402, New York, New York 10022
                    (Address of Principal Executive Offices)

                                 (212) 688-9223
                (Issuer's Telephone Number, Including Area Code)

             Securities registered pursuant to Section 12(b) of the
                                 Exchange Act:

        Title of Each Class and Name of Each Exchange on Which Registered
                                      NONE

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          Common Stock, $.001 par value
                                (Title of Class)


     Check whether the Issuer (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such  shorter  period that  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 no  disclosure  of  delinquent  filers in  response to Item 405 of
Regulation S-B is contained in this form,  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 Registrant's revenues for its fiscal year
ended December 31, 1998 were $5,276,459.

     The  aggregate  market  value  of  the  voting  stock  on  March  29,  1999
(consisting of Common Stock,  par value $.001 per share) held by  non-affiliates
was  approximately  $5,161,105.60,  based upon the closing price for such Common
Stock on said date ($1.31),  as reported by a market maker. On such date,  there
were 5,372,971 shares of Registrant's Common Stock outstanding.



<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

History

     Hollywood  Productions,  Inc. (the "Company") was founded in December 1995,
in the  State of  Delaware,  for the  purpose  of  acquiring  screen  plays  and
producing  independent  motion pictures using named talent.  While the Company's
intention is to engage in the film business  utilizing  budgets  deemed small by
motion picture  standards,  i.e.,  typically  ranging  between $1 million and $3
million,  it has pursued and may continue to pursue and produce motion  pictures
with  budgets  outside of this range.  To date,  the Company  has  produced  two
independent motion pictures.

     In  addition  to its  motion  picture  business,  with its  September  1996
acquisition of Breaking Waves, Inc.  ("Breaking Waves"), a New York corporation,
which  acquisition  was contingent on and  consummated  simultaneously  with the
Company's  initial  public  offering,   the  Company  entered  the  business  of
designing,  manufacturing, and distributing (throughout the United States) young
girls' swimwear and coordinating  beach cover-ups and accessories.  In 1998, the
Company  expanded  its  swimsuit  business  to  include  sales of boys and men's
swimwear, wet suits, cover-ups,  and jackets, under its newly licensed "Jet Ski"
line. The men's "Jet Ski" swimwear line was  discontinued in October 1998, prior
to   production   of  the  line,   after   management's   reevaluation   of  and
dissatisfaction with the potential profitability of same.

Motion Picture Business

General

     The Company,  in general,  seeks to acquire  screenplays and produce motion
pictures  which have  budgets in the range of between $1 million and $3 million,
though it has  produced  and may  produce  and pursue the  production  of motion
pictures  with budgets  either  above or below this range.  The Company may also
invest in the production of motion pictures  though it may not receive  absolute
ownership of either the  screenplay,  the motion picture,  or certain  ancillary
rights (i.e., stage performances or novel adaptations) thereto.

Production

     Since its inception, the Company has been actively soliciting and reviewing
screenplays for the production of motion pictures.  The Company shall attempt to
acquire the rights to screenplays for the production of motion pictures which it
anticipates either producing or co-producing.  Once a screenplay is acquired (i)
a budget will be prepared,  (ii) revisions to the screenplay will be made, (iii)
the talent,  production  crews, and all ancillary items required for the filming
of the  motion  picture  will be  obtained,  and  (iv) a film  schedule  will be
established.  Once  filming  is  complete,  the film will be  edited,  sound and
special  effects  will be  added,  and a final  print  will  be  produced.  Upon
completion  of the  foregoing  processes,  the Company  will arrange for private
showings  of the film as well as other  arrangements  for the purpose of finding
both foreign and domestic distributors for the film.

     The Company  estimates  that  production of each motion picture will entail
five to eight weeks of filming and an additional  fourteen  weeks of editing and
adding sound and special  effects.  Thereafter,  the Company  expects to require
eight to twelve weeks to obtain a distributor  for the film, if one is obtained.
If one is not obtained,  the Company will attempt to distribute the film itself.
Once the  foregoing  process  is  complete,  the film  will be  released  to the
theaters or other distribution  channels.  This generally occurs within eight to
twenty-four weeks. See "--Distribution, Billing and Revenues."

Distribution, Billing and Revenues

     Distribution of a film may be undertaken either by a motion picture studio,
an  independent  distributor,  or by the Company  itself  through an agent.  The
distributor  or agent,  in the event the  Company  self-distributes  its  films,
enters  agreements  with the theaters to provide the theaters with films to show
the public.  Most theaters have multiple screens and can show multiple movies at
the same time. There is a continuous demand for new films. In negotiating with a
distributor to sign on to a project,  the Company and the distributor  determine
who will incur what  portion of the costs of  marketing a film,  at which time a
budget is prepared and the extent of the release of the film is determined.  For
most high  budget,  top-name  talent  pictures,  the film is widely  released to
between  1,500  and  2,500  theaters  nationwide.  For  films  that the  Company
anticipates producing, the release may be done in platforming stages whereby the
film initially will be released at several theaters in one or two major markets,
where  advertising  and marketing  will be done. A screening  will be held,  and
critics  will be invited to the film in  anticipation  of a review.  If the film
receives a favorable  response from either the critics and/or the audience,  the
film's distribution will expand gradually into additional markets and theaters.

     The Company  anticipates that the films it produces will be distributed and
shown at movie theaters. Once a film has been distributed throughout theaters in
the United States,  it may be distributed  in markets  throughout the world.  In
addition, the film may be further distributed through cable television including
pay-per-view,  premium and standard channels, public television, and through the
sale and/or rental of videotapes. There are many avenues for the distribution of
a film and the  exploitation of all ancillary  rights  thereto.  The Company may
enter into agreements with different  distributors for different markets or sell
all the rights to one  distributor.  Revenues  generated are  distributed to all
parties involved including the distributor,  the producers,  the owners, and the
talent pursuant to extensive formulas previously agreed upon.
<PAGE>
     Distribution  rights to motion pictures are granted legal  protection under
the copyright laws of the United States and most foreign countries which provide
substantial  civil and  criminal  sanctions  for  unauthorized  duplication  and
exhibition of motion  pictures.  The Company plans to take all  appropriate  and
reasonable measures to secure,  protect,  and maintain or obtain agreements from
licenses to secure,  protect,  and maintain copyright  protection for all of the
motion  pictures  distributed  by the Company  under the laws of all  applicable
jurisdictions.

     The Company  estimates that between 36 and 58 weeks will elapse between the
commencement  of expenditures by the Company in the acquisition of a screenplay,
the production of a motion picture,  and the release of same. It does not expect
to receive revenues from the exploitation of the film until  approximately 24 to
36 weeks after its release. Billing in the industry is done quarterly:  theaters
pay  distributors  on a quarterly  basis,  and the Company is paid the following
quarter.  However,  in the event a distributor  desires to distribute one of the
Company's films, such distributor may either (i) offer an initial payment to the
Company  against,  or in addition to, future royalties or (ii) purchase the film
outright.

Production of "Dirty Laundry"

     In March 1995, the Company  entered into a property  acquisition  agreement
(the  "Purchase  Agreement")  and a  co-production  agreement  (the  "Production
Agreement") with Rogue Features,  Inc.  ("Rogue"),  an unaffiliated  entity,  to
acquire the rights to and co-produce a motion picture of the screenplay entitled
"Dirty  Laundry."  In  addition,  the Company and Rogue  entered into a right of
first  refusal  agreement  with respect to the next two products of Rogue and/or
its principals.

     In  April  1996,  the  Company  formed  D.L.   Productions,   Inc.   ("D.L.
Productions"),  a New York corporation,  as a wholly owned  subsidiary,  for the
purpose of holding  title to and  producing the Dirty Laundry film and receiving
revenues from the  distribution  thereof.  The Purchase  Agreement  conveyed all
rights to the  screenplay and the film itself to the Company.  In return,  Rogue
directed  Dirty  Laundry  and has the  right  to 25% of the  profits  of same as
described in the Production Agreement.  Rogue also retained the right to produce
a live comedy or musical  upon the  earlier of five years after Dirty  Laundry's
release or the Company's approval. In addition,  Michael Normand, a principal of
Rogue,  retained the right to adapt the screenplay of Dirty Laundry into a novel
on the Company's  approval of the compensation it is to receive  therefrom.  The
Production  Agreement  provided for the principals of Rogue to direct and retain
creative  control of the production of the film while the Company  retains final
approval.

     Pursuant to the terms of the Purchase  Agreement and Production  Agreement,
the Company financed all but $100,000 (which was invested by the co-producer) of
the production  costs of Dirty Laundry.  Pursuant to these agreements as well as
the terms of the  participation  agreements  entered  into with the two stars of
Dirty  Laundry,  each of Jay  Thomas  and Tess  Harper  had the right to receive
$50,000 against a 5% participation  fee from the first revenues  received by the
Company.  To date,  Mr. Thomas and Ms. Harper each have been paid  approximately
$49,000 from funds which were  received by the Company  from the  licensing - by
the Company's foreign sales agent (Trident Releasing,  Inc., "Trident") - of the
film in several territories in the overseas marketplace.  In April 1997, Trident
entered  into one such  license  agreement  with  TaurusFilm  GmbH & Co.  ("TF")
whereby  TF agreed to  distribute  a version  of the film in Germany in either a
dubbed and/or subtitled  fashion.  Gross receipts  generated from this agreement
were $150,000.

     After the  above-named  talent  has been paid his  entire  $50,000  and the
investments  of each of the  co-producers  have  been  recouped,  the  remaining
proceeds shall be  distributed as follows:  (i) 5% of revenues shall be remitted
to each of Mr. Thomas and Ms. Harper, up to a maximum of $250,000, at which time
each individual's distribution decreases to 2% thereafter,  (ii) the Company and
the co-producer each shall receive 25% and 35%, respectively,  of its respective
investment  from  revenues  generated,  representing  payment  of an  investment
premium  for each  producer's  financing  of the film,  and  (iii) all  revenues
generated  beyond  (i) and (ii)  shall  first be used to repay any  distribution
costs incurred,  then 2% shall be distributed to each of the two stars,  and the
remainder  shall be remitted to the Company and the  co-producer  at the rate of
75% and 25%, respectively.

     The filming of Dirty Laundry commenced in April 1996 and took approximately
five weeks to complete.  After completion of filming,  the Company undertook the
process of editing and adding sound,  special effects,  and music, which took an
additional twenty weeks. Upon completion of this process,  the Company conducted
private  showings  of  the  film  in  order  to  obtain  both  a  foreign  sales
representative  (Trident)  to enter  into  foreign  licensing  agreements  and a
domestic distributor. To this end, the Company met with numerous local and cable
television   companies  and  offered   screenings  of  the  film  to  major  and
"mini-major" studios and specialty distributors.  Notwithstanding such attempts,
which  occurred  over a six to eight  month  process,  the Company was unable to
engage a theatrical (i.e. movie theater) distributor. Accordingly, the Company's
next  step was to meet  with  pay  cable,  network  television,  and  syndicated
television  entities including,  among others,  HBO, Showtime,  and Lifetime for
Women,  in an attempt to have the film premier on one or more of such  stations.
After  approximately  nine months without  success,  commencing in approximately
November  1997,  the Company  spent an  additional  seven months  attempting  to
distribute the film to ancillary markets such as home video and pay-per-view.


<PAGE>
     Finally,  in June 1998, the Company entered into an agreement with Artistic
License Films ("ALF") whereupon ALF agreed to use its best efforts to distribute
(i.e., release) the film in at least three New York theaters and two Los Angeles
theaters. In exchange for its efforts, ALF received a $20,000 retainer fee which
constitutes  an  advance  against  ALF's  distributor's  fee of 25% of the gross
receipts  from  the  theatrical  distribution  of  the  film.  Pursuant  to  the
agreement,  such receipts  shall be paid as follows:  (i) the first 75% shall be
paid to the  Company  to  reimburse  it for all  direct  expenses  it  incurs in
connection with the distribution of the film, (ii) then 25% shall be paid to the
Company to reimburse same for its advance  payment of the retainer to ALF, (iii)
next,  the  distributor  shall be paid its 25% of the receipts its advance,  and
(iv) finally, the remaining gross receipts shall be remitted to the Company.

     The film  eventually  was  released  to five New York and three Los Angeles
theaters  whereupon  it had a limited  run during the fall of 1998 and  received
marginal  reviews.  The Company is now presenting  Dirty Laundry to distributors
for  video,  syndicated,   network,  and  cable  television,   and  pay-per-view
distribution.

     Dirty Laundry is a romantic comedy which was shot in the New York tri-state
area and stars Jay Thomas as Joey Green,  a dry cleaner going through a mid-life
crisis,  and Tess  Harper as his wife,  Beth,  of 15 years,  who is a sex advice
columnist for a woman's magazine. Mr. Thomas has most recently co-starred in the
motion  picture "Mr.  Holland's  Opus" and is known for his  television  work in
"Love & War," "Cheers,"  "Murphy Brown," and "Mork & Mindy." Ms. Harper earned a
Golden Globe  nomination for her performance in the film "Tender Mercies" and an
Oscar  nomination  for her role in the film "Crimes of the Heart." In the movie,
Joey owns a dry cleaning business which is doing poorly and is convinced that he
is aging  prematurely.  Due to their lack of  intimacy,  Beth tells Joey to seek
counseling,  which he does unbeknownst to Beth, who herself has become attracted
to her  chiropractor.  Throughout  the film, a variety of bizarre  mishaps occur
which result in the couple's rekindling of their lost romance. In November 1997,
with production of the movie complete,  the Company  effected the dissolution of
D.L.  Productions.  Its assets were transferred to the Company,  and the Company
took over the marketing of Dirty Laundry.

Production of "Machiavelli Rises"

     In April 1998,  the Company  entered into a  co-production  agreement  with
Norfolk  Films,  Inc.   ("Norfolk")  for  the  production  of  a  film  entitled
"Machiavelli Rises." The Company and Norfolk formed a limited liability company,
Battle Studies  Productions,  LLC ("Battle Studies"),  to finance,  produce, and
distribute  the  film  which  commenced  production  in  April  1998.  Principal
photography   was   completed   in  May  1998  at  a  total  cost  of  $265,000.
Post-production  work on the film was completed in November  1998.  The film was
written,  directed,  and co-produced by Efraim Horowitz and can be characterized
as a contemporary ghost story about power,  greed, love, and Leonardo Da Vinci's
lost notebook.  Total  production  costs to date have  aggregated  approximately
$400,000 of which the Company  has funded 50%. In  accordance  with the terms of
the  co-production  agreement,  the proceeds of the film will be  distributed as
follows:  first,  both  parties  shall  be  entitled  to  recoup  their  initial
investment in the film, at 135% thereof; then, after repayment to the respective
parties of additional  costs incurred by same,  any remaining  proceeds shall be
distributed  50% to  Norfolk  and 50% to the  Company.  The film  had a  private
showing in New York on January 12,  1999 and at the  Brussels  Film  Festival in
Brussels,  Belgium on January 26, 1999. At present, the Company has not executed
a distribution  agreement for the exploitation of the film; however, the Company
plans  to  submit  the film for  critical  review  in  upcoming  film  festivals
including the Avignon Film Festival in New York on April 28, 1999.

Regulations

     The Code and Ratings  Administration  of the Motion Picture  Association of
America,   an  industry  trade   association,   assigns  ratings  for  age-group
suitability  for viewing of motion  pictures.  While the Company will follow the
practice of submitting most of its motion pictures for such ratings, the Company
may review this policy from time to time.

     United  States  television  stations  and  networks,  as  well  as  foreign
governments,  impose  regulations  on the content of motion  pictures  which may
restrict,  in whole or in part,  exhibition  on  television  or in a  particular
territory.  There can be no assurance  that current and future  restrictions  on
motion  pictures  released by the Company will not limit or affect the Company's
ability to exhibit such motion pictures.

Competition in the Film Industry

     The Company competes, and will continue to compete, with other institutions
which produce,  distribute,  and exploit and finance  films,  some of which have
substantial  financial and personnel resources which are more extensive than the
Company's. These institutions include the major film studios - including Disney,
Universal, MGM, and Sony - as well as the television networks.  Industry members
compete substantially for the hire or purchase of a limited number of producers,
directors,  actors, and screenplays which are able to attract major distribution
in all media and all markets throughout the world.

     The motion picture business is highly competitive and has an extremely high
profile in terms of name recognition,  with relatively insignificant barriers to
entry,  and  numerous  entities  compete  for  the  same  directors,  producers,
actors/actresses,  distributors,  theaters,  etc.  There is intense  competition
within  the film  industry  for  exhibition  times at  theaters,  as well as for
distribution in other media, and for the attention of the movie-going public and
other  viewing  audiences.  Competition  for  distribution  in other media is as
intense as the  competition for theatrical  distribution,  and not all films are
licensed in other media. Each year,  numerous  production  companies are formed,
and numerous  motion  pictures are produced,  all of which motion  pictures seek
full distribution and exploitation. Despite the increase in the number of films,
a small number of films,  those which receive  widespread  consumer  acceptance,
account for a large percentage of total box office receipts.
<PAGE>
Swimwear Business

General

     Breaking  Waves is a  designer,  manufacturer,  and  distributor  of girl's
swimwear which is sold  throughout  the United States.  In addition to swimwear,
Breaking Waves also  manufactures  beach cover-ups and accessories to coordinate
with  its  swimwear.  Swimwear  is made in  children's  sizes  from  2-16 and in
pre-teen sizes.

     Pursuant  to  its  license   agreement  with  Kawasaki   Motors  Corp.  USA
("Kawasaki"),  commencing  in the latter  half of  calendar  1998,  the  Company
expanded its market by selling boy's swimwear, wet suits, cover-ups, and jackets
under the "Jet Ski" trade name. The planned expansion of the "Jet Ski" line into
the  men's  market  was   discontinued  in  October  1998,   upon   management's
reevaluation of and dissatisfaction with the potential profitability of same.

     Breaking  Waves  markets  swimwear  under  private  brand labels  including
"Breaking  Waves," "All Waves," and "Making  Waves."  Under a license  agreement
with Beach Patrol, Inc. ("Beach"),  Breaking Waves also markets and manufactures
a line of  children's  swimwear  under the name  "Daffy  Waterwear"  and has the
exclusive  right to use the "All Waves,"  "Breaking  Waves," "Making Waves," and
other marks in connection  with its manufacture and sale of girls swim and beach
wear

Products, Design, Supplies and Inventory

     Breaking Waves designs, manufactures, and sells both private label and name
brand girl's  swimwear and  accessories  as well as boy's  swimwear,  wet suits,
cover-ups,  and  jackets.  It has an  office  in  Homestead,  Florida  where its
designer  designs all styles for its swimwear  lines and accessory  items.  Each
season,  approximately  20-25 prints and fabrics are developed for the "Breaking
Waves"  line,  and 15-18  prints and fabrics are  developed  for the "All Waves"
line, which lines comprised  approximately 33% and 25% of Breaking Waves' volume
for the year ended December 31, 1998.

     In designing its children's swimwear,  Breaking Waves adapts certain of the
prints  and  styles it is  provided  by Beach  which  Breaking  Waves  feels are
appropriate  for  children's  wear.  Approximately  12-16  prints and styles are
typically  marketed by Breaking Waves under the "Daffy Waterwear" label. Of each
fabric or print  chosen,  the Company  usually  manufactures  two  swimsuits:  a
one-piece model and a two-piece model.

     Once  Breaking  Waves  has  chosen  the  prints it  desires  to use for its
children's  swimwear,  it sends  the  fabric  designs  to its agent in Korea who
disseminates same to one or more clothing  manufacturers thereat for prototyping
and the knitting or weaving and printing of fabrics.  The  manufacturer  returns
the fabrics to Breaking Waves,  and upon Breaking Waves' approval  thereof,  the
fabrics  are  sent,  with  the  desired  design,  to any one or more of  several
Indonesian  companies where the fabric is cut and sewn into a completed product.
Finished goods are shipped from the Indonesian  company to a public warehouse in
the City of Industry, California.  Breaking Waves has found that this process is
the most cost-effective means of operating its business.  It expects to continue
its  operations  in  this  manner  in  the  future,  though  it  may  use  other
manufacturers and suppliers in different countries.

     Breaking Waves' swimwear typically is produced in two blended fabrics:  one
is a blend  of nylon  and  lycra  spandex  ("NL"),  and the  other is a blend of
cotton,  polyester,  and lycra spandex ("CPL"). Each product line uses different
designs and emphasizes different fabric blends.

     For each of the years ended December 31, 1998 and 1997,  approximately 50%,
40%, and 10% of Breaking  Waves'  finished  products were  purchased  from three
manufacturers: two in Indonesia, and one in the Philippines. Although management
of  Breaking   Waves  is  of  the  opinion  that  the  fabrics  and   non-fabric
sub-materials  it uses  are  readily  available  and  that  there  are  numerous
manufacturers for such piece goods who offer similar terms and prices, there can
be no assurance that management is correct in such belief. The unavailability of
fabrics  or  the  absence  of  clothiers,  or  the  availability  of  either  at
unreasonable  cost, could adversely affect the operations of Breaking Waves and,
hence, the Company.

     Since Breaking Waves purchases finished garments from overseas contractors,
it  does  not  buy or  maintain  an  inventory  of  sub-materials.  It  has  not
experienced difficulty in satisfying finished garment requirements and considers
its sources of supply  adequate.  Breaking  Waves'  inventory of garments varies
depending upon its backlog of purchase orders and its financial position.

Financing Arrangements

     In August 1997, the Company  terminated its accounts  receivable  financing
agreement with NationsBanc and entered into a Factoring and Revolving  Inventory
Loan and Security Agreement (the "Heller Agreement") with Heller Financial, Inc.
("Heller")  pursuant  to which  Heller  agreed to (i)  purchase  all of Breaking
Waves'  accounts  receivables,  (ii)  provide  advances  against  such  accounts
receivables,  (iii)  provide a revolving  loan,  and (iv)  guarantee  letters of
credit in excess of $1.5 million as well as provide certain other services.  The
Company is a guarantor of Breaking  Waves'  obligations  to Heller.  The Company
maintains a letter of credit with a financial institution in support of and as a
condition to its factoring  agreement.  The financial  institution  requires the
Company to maintain  $1.15 million on deposit as  collateral  for such letter of
credit.  Breaking  Waves may take advances of up to 85% of the purchase price of
its eligible accounts receivable.
<PAGE>
     Initially,  the Heller Agreement provided that at the time Heller purchased
each  receivable,  it would charge Breaking Waves a factoring  commission of 1%,
but in no event less than $3.00 per  invoice.  In addition to  advances,  Heller
would make revolving loans to Breaking Waves, on Breaking Waves' request,  of up
to 50% of eligible inventory. Moreover, Breaking Waves would pay Heller interest
on the daily balance of  outstanding  advances and  revolving  loans at the Base
Rate.  "Base  Rate"  means a variable  rate of  interest  per annum equal to the
higher of (a) the rate of interest  from time to time as  published by the Board
of  Governors  of the  Federal  Reserve  System as the "Bank Prime Loan" rate in
Federal  Reserve  Statistical  Release H.15 (519)  entitled  "Selected  Interest
Rates" or any successor  publication of the Federal Reserve System reporting the
Bank Prime Loan rate or its equivalent, or (b) the Federal Funds effective rate.

     In December 1998, Breaking Waves and Heller amended the Heller Agreement to
provide  (i)  factoring  commissions  of (a)  0.85% on the first $5  million  in
accounts  sold and  assigned  to  Heller  during  each year and (b) 0.65% on all
accounts in excess of $5 million sold and  assigned to Heller  during each year,
but in no event less than $3 per  invoice;  and (ii) on accounts  bearing  terms
greater  than 90 days,  an increase in  commission  by 0.25% for each 30 days or
part thereof that the terms exceed 60 days. The interest  expense paid to Heller
under the Heller  Agreement  totaled  approximately  $224,603 for the year ended
December 31, 1998.

Marketing and Sales

     The "Daffy Waterwear" label is sold to department and specialty stores. The
"Breaking  Waves"  label  is also  distributed  through  better  department  and
specialty  stores.  The "All Waves" label is sold to mass  merchants and also as
promotional goods in department  stores.  Private label programs are supplied to
several major chains and  department  store groups.  For the year ended December
31, 1998, the "Breaking Waves" label accounted for approximately 33% of Breaking
Waves' volume,  the "All Waves" label accounted for  approximately  25% of same,
and the "Daffy Waterwear" and "Jet Ski" labels " accounted for approximately 33%
and 9%, respectively.

     Breaking Waves sells its swimwear and accessory  items through its showroom
sales staff and through independent sales representatives. Its customers include
the Dillard and Federated  department  store groups as well as Kids R Us, Sears,
Wal-Mart, T.J. Maxx, Kohl's Department Store, and Marshalls. Pursuant to a sales
agreement  entered into with Play Co. Toys & Entertainment  Corp.  ("Play Co."),
Breaking Waves also sells its swimwear in certain of Play Co.'s toy stores. (See
"--Acquisition of Minority Interest in Play Co. Toys & Entertainment Corp.") For
the years ended  December  31, 1998 and 1997,  Breaking  Waves had three and two
major customers,  respectively,  comprising 13%, 13%, and 11% and 36% and 12% of
net sales, respectively.

     Breaking Waves  merchandise is shipped  pursuant to purchase orders sent by
its  customers  and is sent f.o.b.  (freight on board) which means that Breaking
Waves is not  responsible  for the goods  during  shipment  or for the  delivery
charge.  Payment  is due 30  days  after  shipment.  No  goods  are  shipped  on
consignment;  therefore,  except for  non-conforming or damaged goods, all goods
shipped are considered sold.


     In addition to its  in-house  sales and showroom  personnel,  approximately
twenty  independent  sales  representatives  throughout  the United  States sell
Breaking Waves merchandise.  These representatives service department stores and
smaller  specialty  retailers.  Separate  independent  representatives  sell the
"Daffy  Waterwear"  line. None of these  representatives  is under contract with
Breaking Waves; nor does any receive a salary from same. Rather,  each is paid a
commission  based  upon his  sales.  In  addition  to  showroom  sales and sales
representatives  calling on customers,  Breaking  Waves exhibits its products at
major  trade  shows.  End of  season  and  discontinued  merchandise  is sold to
off-price stores.

Internet Sales

     In March  1999,  Breaking  Waves  launched an online  wholesale  children's
swimwear website at www.BreakingWaves.com. The website is designed to complement
the company's  wholesale  distribution  efforts by providing  retailers  instant
access to more than 200 styles of Breaking  Waves  swimwear.  The entire line of
Breaking Waves swimwear, including products marketed under the "Breaking Waves,"
"All Waves," "Daffy  Waterwear,"  and "Jet Ski" brands,  is available for online
purchase by retailers.  The Breaking Waves website is being hosted by Mindspring
and incorporates e-commerce features from Cybercash and Mercantec, Inc.

     Management  believes  that the website  will fill the needs of existing and
potential  customers.  Through the Internet,  retailers can purchase merchandise
online in a matter of minutes,  at their own  convenience,  instead of having to
wait for a printed wholesale  catalog.  Management  believes that the advantages
and efficiencies created by the website will assist Breaking Waves in increasing
brand  awareness as well as market  share.  Marketing  strategies  for "driving"
retailers to the site include co-op trade  advertisements,  tradeshow  exposure,
direct mail,  and inclusion of the website  address on all corporate  collateral
and product labels.

Work in Progress

     Breaking Waves  manufactures its swimwear lines from June to December based
on its knowledge of the market and past sales.  Customer orders  generally start
arriving in June and July. Goods are reordered by customers on a continual basis
through the following June. The quantity of open purchase orders at any date may
be affected by, among other things, the timing and recording of orders. Breaking
Waves does not sell on consignment  and does not accept return of products other
than imperfect goods or goods shipped in error.
<PAGE>
     The  major  design  work  takes  place  from  January  to  May.  Goods  are
manufactured,  printed,  and  sewn  overseas  from  June to  December.  Finished
garments are shipped  from the factory to a public  warehouse in Los Angeles for
shipments to  retailers.  The  majority of shipments to retailers  are made from
November to May, with January through March being the peak shipping time.

Trademarks and Licensing; New Product Line

     Breaking  Waves  relies on common law  trademarks  for usage of its private
label swimwear lines. In addition,  in October 1995, it entered into a licensing
agreement  with Beach to use the trademark  "Daffy  Waterwear."  Beach  supplies
prints and designs used under this agreement for the Daffy line. Pursuant to the
licensing agreement, Breaking Waves was given the right to use those designs for
a children's line under the "Daffy Waterwear" label from January 1, 1996 to June
30, 1998. Thereafter,  the agreement provided for a three year extension, at the
option of Breaking  Waves,  through and until June 30, 2001.  Breaking Waves has
exercised this option, thereby so extending the agreement.  For its right to use
the trademark, Breaking Waves agreed to pay Beach, subject to certain variables,
the greater of 5% of net sales or as  follows:  (i) during the first six months,
an aggregate  of $75,000,  (ii) during the next twelve  months,  an aggregate of
$85,000,  (iii) during the final twelve  months,  an aggregate of $100,000,  and
(iv)  during each of the final three years of the  agreement,  an  aggregate  of
$150,000, $175,000, and $200,000, respectively.

     Breaking Waves also entered into a licensing agreement with Kawasaki to use
the  trademark  "Jet Ski" for a line of girl's,  boy's,  and men's  swimwear and
accessories.  In  October  1998,  the  men's  line of  "Jet  Ski"  swimwear  and
accessories  was  discontinued.  "Jet Ski" is the brand name used throughout the
world for all of Kawasaki's personal watercraft. The license agreement commenced
July 1, 1997 and continues  through May 31, 1999. It may be renewed for one year
at Breaking  Waves'  option.  Pursuant to the terms of the  agreement,  Breaking
Waves shall pay to Kawasaki 5% of net sales of the goods sold under this line.

     In addition to the foregoing,  Breaking Waves has registered trademarks for
"Breaking Waves" and "All Waves." There can be no assurance that such trademarks
or the marks licensed by Breaking  Waves  adequately  will be protected  against
infringement.  In addition,  there can be no assurance  that Breaking Waves will
not be found to be  infringing  on  another  company's  trademark.  In the event
Breaking Waves finds another party to be infringing  upon one of its trademarks,
if  registered,  or is found by  another  company  to be  infringing  upon  such
company's trademark, there can be no assurance that Breaking Waves will have the
financial means to litigate such matters.

     On October  31,1996,  Breaking Waves entered into a license  agreement with
North-South  Books,  Inc.  ("NSB") for the exclusive use of certain art work and
text in the making of swimsuits and accessories in the United States and Canada.
The agreement expired on March 1, 1999. Breaking Waves recorded $4,852 and $0 in
royalties  under this  agreement  during the years ended  December  31, 1998 and
1997, respectively.

Competition

     There is intense  competition in the swimwear  apparel  industry.  Breaking
Waves competes with many other manufacturers in these markets, many of which are
larger  and have  greater  resources  than it  does.  Major  competitors  in the
swimwear industry include "Ocean Pacific,"  "Gottex," and "Speedo." In addition,
department  stores and retailers have their own private label programs which are
the major competition in the mass merchant business.

     Breaking   Waves'   business   is  highly   competitive   with   relatively
insignificant  barriers to entry and with numerous firms  competing for the same
customers.  Breaking Waves is in direct  competition with local,  regional,  and
national clothing  manufacturers,  many of which have greater resources and more
extensive  distribution  and marketing  capabilities  than it does. In addition,
many large  retailers have recently  commenced  sales of "store brand"  garments
which  compete  with those sold by  Breaking  Waves.  Management  believes  that
Breaking Waves' market share is not significant in its product lines.

     Breaking Waves' recent expansion into the boy's swimwear industry,  through
its "Jet Ski" line,  represents an entry into a sector of the swimwear  industry
in which it has not previously  entered.  Breaking Waves believes that the boy's
swimwear industry is similar to the girl's industries in many respects; however,
there may be  significant  differences  of which  Breaking  Waves is not  aware.
Although Breaking Waves plans to hire sales personnel with experience in selling
boy's  swimwear  and  products  which  relate to water  sports,  there can be no
assurance  that it will be  successful  in  entering  this new  product  sector.
Additionally, Breaking Waves' use of a nationally recognized tradename like "Jet
Ski"  represents an entry into a new type of marketing with which Breaking Waves
has no experience and which may produce  unforeseen risks.  There are many major
brands  that  now sell  products  that  relate  to water  sports,  i.e.  "Nike,"
"Quicksilver,"  "Addidas,"  "Body  Glove,"  and  "Polo  Sport."  Most  of  these
manufacturers  have established  relationships with the retailers Breaking Waves
targets (such as sporting good stores,  surf shops,  and outlets which sell "Jet
Ski" watercraft) for its "Jet Ski" line.

     Many of the national  clothing  manufacturers  have  extensive  advertising
campaigns which develop and reinforce brand  recognition.  In addition,  many of
such  manufacturers  have agreements with department  stores and national retail
clothing chains to jointly  advertise and market their products.  Since Breaking
Waves does little  advertising and has no agreement with any department store or
national  retail  chain to  advertise  any of its  products,  it  competes  with
companies  that have brand  names that are well known to the  public.  All other
factors being equal,  it can be expected that a retail shopper will buy a "brand
name" garment before he buys an "unknown" brand.
<PAGE>
Seasonality

     Breaking  Waves'  business is seasonal with a large portion of its revenues
and profits  derived  between  November and March.  Each year from April through
October, Breaking Waves designs and manufactures the following season's swimwear
lines.  There can be no assurance  that revenues  received from December to June
will support Breaking Waves' operations for the rest of the year.

Employees

     The Company has two executive officers who oversee its operations and those
of  Breaking  Waves  and  one  administrative   assistant.  Most  screenwriters,
performers,  directors,  and technical  personnel who are or will be involved in
the Company's  films are members of guilds or unions which bargain  collectively
with producers on an  industry-wide  basis from time to time. Any work stoppages
or other labor difficulties could delay the production of the films resulting in
increased production costs and delayed return of investments. Breaking Waves has
three  executive  officers,  including two vice  presidents in charge of design,
merchandising,  marketing, and sales and one administrative assistant.  Breaking
Waves has approximately  twenty independent road sales people and accounting and
clerical staff.

Business Risks

     The Company  anticipates  that the motion  pictures  it produces  will cost
between $1 million and $3 million,  depending on the film. The likelihood of the
success of each film and the Company's ability to stay on budget and on schedule
for  each  film  must  be  considered  in  light  of  the  problems,   expenses,
difficulties,  complications,  and delays  frequently  encountered in connection
with the production of a motion picture.  Due to unforeseen  problems and delays
including  illness,   weather,   technical  difficulty,   and  human  error,  by
completion,  most films are considerably over budget.  In addition,  the lack of
experience of management in this  industry,  the limited  operating  history and
capital of the Company,  and the  competitive  environment  in which the Company
operates  may  cause  increased  expenses  due to  mistakes  and  delays  in the
production of the films.


     The success of a film in theatrical distribution,  television,  home video,
and  other   ancillary   markets  is  dependent   upon  public  taste  which  is
unpredictable  and  susceptible  to change.  The number and  popularity of other
films being distributed may also significantly  affect the theatrical success of
a film.  Accordingly,  it is  impossible  for anyone to predict  accurately  the
success of any film at the time it enters production. The production of a motion
picture  requires the  expenditure  of funds based  largely on a  pre-production
evaluation of the commercial potential of the proposed project.

     The apparel  industry is a cyclical  industry,  with consumer  purchases of
swimwear,   accessory  items,  and  related  goods  tending  to  decline  during
recessionary  periods when disposable  income is low.  Accordingly,  a prolonged
recession  would in all  likelihood  have an adverse effect on the operations of
Breaking  Waves and,  hence,  the Company.  Breaking  Waves operates in only one
segment  of the  apparel  industry,  specifically  swimwear,  and  is  therefore
dependent  on the demand for such goods.  Decreases  in the demand for  swimwear
products  would have a material  adverse  effect on the Company's  business as a
whole.

     Breaking Waves believes that its success in the swimwear  industry  depends
in substantial part on its ability to anticipate, gauge, and respond to changing
consumer demands and fashion trends in a timely manner.  It designs its swimwear
lines from  January to May each year for delivery of products  between  November
and May of the following  year.  Breaking Waves attempts to anticipate  consumer
preferences.  There can be no assurance,  however, that it will be successful in
this regard,  and if it misjudges the market for any of its products,  it may be
faced with unsold finished goods,  inventory,  and work in process,  which could
have an adverse effect on the Company's operations as a whole.

Common Stock Dividend

     On January 14,  1999,  the  Company's  Board of  Directors  authorized  the
issuance of a stock  dividend to all holders of shares of the  Company's  common
stock, par value $0.001 per share (the "Common  Stock"),  as of January 29, 1999
(the "Record  Date").  Pursuant to the  dividend,  each share held on the Record
Date  generated  the  issuance  of one  additional  share of Common  Stock.  The
dividend was paid on February 5, 1999. Accordingly,  unless otherwise noted, all
share  and per  share  information  contained  in this  annual  report  reflects
retroactive application of this dividend.


Acquisition of Minority Interest in Play Co. Toys & Entertainment Corp.

     On November 24, 1998, pursuant to a sales agreement (the "Sales Agreement")
entered into in September 1998 by and between Breaking Waves and Play Co. (a toy
retailer and publicly  traded  company whose board  chairman is the President of
both the Company and  Breaking  Waves),  Breaking  Waves  purchased  1.4 million
unregistered  shares of Play Co.'s common stock in a private  transaction.  As a
result of this stock purchase,  Breaking Waves acquired  approximately  25.4% of
the  total  issued  and  outstanding   shares  of  Play  Co.  common  stock.  As
consideration for the stock, Breaking Waves remitted $504,000, which represented
an  approximate  price of $0.36 per share:  $300,000  of the  consideration  was
remitted  in  cash,  and the  remaining  $204,000  was  provided  in the form of
merchandise, primarily girls' swimsuits.


<PAGE>
     Breaking Waves had previously  sold (during its last two seasons) a limited
number of pieces of its swimwear to Play Co. in order to engage in a market test
of the sale of same from certain of Play Co.'s toy stores. Since the test proved
successful,  Breaking Waves entered into the Sales Agreement,  pursuant to which
Breaking  Waves  agreed  to sell to Play Co. on a  wholesale  basis and Play Co.
agreed to purchase from Breaking Waves, during each season during which swimwear
is  purchased,  an agreed  upon number of pieces of  merchandise  for its retail
locations.   Play  Co.  further  agreed  to  provide  advertising,   promotional
materials,  and ads of the merchandise in all of its brochures,  advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods, in all mediums utilized by same. The sales agreement is for a
term of one year and  automatically  extends  for one year terms  unless  either
Breaking Waves or Play Co. terminates same.

Loans to Play Co. Toys & Entertainment Corp.

     On February 1, 1999, the Company  loaned  $100,000 to Play Co. and received
in exchange  therefor an unsecured  promissory  note bearing  interest at 9% per
annum. The note is payable by Play Co. in four monthly  installments  commencing
March 15, 1999 and ending June 15, 1999.

     On July 15, 1998,  Breaking Waves loaned  $300,000 to Play Co. and received
in exchange  therefor an unsecured  promissory  note bearing  interest at 9% per
annum.  The note called for five monthly  installments of principal and interest
commencing  on August 15, 1998 and ending  December 30, 1998 and has been repaid
in full.

     On March 1, 1998 Breaking Waves loaned $250,000 to Play Co. and received in
exchange therefor an unsecured  promissory note bearing interest at 15% interest
per annum.  The note  called  for ten  monthly  installments  of  principal  and
interest  commencing  on March 31, 1998 and ending on December  31, 1998 and has
been repaid in full.

Private Offerings of Common Stock and Registration Thereof

     In February  1998,  pursuant  to private  transactions,  the  Company  sold
600,000 shares of Common Stock for approximately $195,000. In May 1998, pursuant
to private transactions, the Company sold an additional 700,000 shares of Common
Stock for an aggregate $560,000.  The proceeds from these private offerings were
utilized by the Company for general  working  capital and to fund the  Company's
interest in Battle Studies.

         In May 1998,  the Company  filed a Form S-3  registration  statement to
register the 600,000 shares issued in the February 1998 private placement and an
additional  1,960,700 shares of Common Stock held by the Company's then majority
shareholder,  European Ventures Corp.  ("EVC"), a company whose sole officer and
director is related to the  Company's  president.  The  registration  was deemed
effective  by the  Securities  and Exchange  Commission  (the "SEC") on July 30,
1998.

Warrant Distribution

     On April  15,  1998,  the  Company's  Board  of  Directors  authorized  the
distribution of Warrants (the "Distribution  Warrants") to all holders of shares
of the  Company's  Common Stock as of May 8, 1998 (the "Warrant  Record  Date").
Pursuant to the  distribution,  each share held on the Warrant Record Date shall
generate  the  issuance of one  Distribution  Warrant to  purchase  one share of
Common Stock at an exercise price of $4.00 per share. The Distribution Warrants,
which are  exercisable  for a period of three  years  commencing  one year after
issuance,  shall  be  issued  and  distributed  once  the  Company  has  filed a
registration statement for same and same has been declared effective by the SEC.
The Company intends to file the registration statement in May 1999.

One for Three Reverse Split

     In February 1998, the Company effected a one for three reverse split of its
Common  Stock.  Accordingly,  unless  otherwise  noted,  all share and per share
information contained in this annual report reflects retroactive  application of
this reverse split.

Initial Public Offering and Acquisition of Breaking Waves, Inc.

     In September  1996,  the Company  consummated a public  offering of 533,333
shares of its Common Stock and 1,600,000  warrants (the "Warrants") at $5.00 per
share and $0.25 per Warrant,  respectively,  through  Euro-Atlantic  Securities,
Inc. ("Euro-Atlantic"). The Company received net proceeds of $3,813,294 from the
offering.  Also  included in the  offering  were  933,333  shares and  2,000,000
Warrants  registered  for resale by EVC, the then  majority  shareholder  of the
Company.

     Pursuant to a stock purchase  agreement,  dated May 31, 1996,  entered into
between the Company and the  shareholders of Breaking Waves, the shareholders of
Breaking Waves  exchanged all of the issued and  outstanding  shares of Breaking
Waves  common  stock for  100,000  shares of the  Company's  Common  Stock.  The
transaction  (the  "Acquisition")  was  consummated  contemporaneously  with the
closing of the Company's initial public offering.

     Pursuant  to  the  terms  of the  agreement,  on the  closing  date  of the
Acquisition, Breaking Waves performed a recapitalization and exchanged of all of
its  common  stock for new  common  stock and for a series  of  preferred  stock
designated  the  "Series A Preferred  Stock." For each share of Breaking  Waves'
common stock exchanged, the holder received one share of new common stock and 28
shares of Series A Preferred  Stock.  In connection  therewith,  Breaking  Waves
amended its certificate of  incorporation to authorize 5,600 shares of preferred
stock,  designated  as the Series A  Preferred  Stock.  One-half of the Series A
Preferred Stock was redeemable by Breaking Waves at $100 per share on January 1,
1997, and the remaining  one-half was redeemable at $100 per share on January 1,
1998. All Series A Preferred Stock, which had no dividend, conversion, or voting
rights (but had a preference  on  liquidation  equal to $100 per share) has been
redeemed.
<PAGE>
     Also  pursuant  to the terms of the  agreement,  the Company  replaced  the
personal   guarantees  the  prior  shareholders  of  Breaking  Waves  issued  to
NationsBanc Commercial Corp.  ("NationsBanc"),  in accordance with the Company's
then line of credit.  The Company replaced the guarantees with letters of credit
secured by bank deposits.  The Company  contributed  $100,000 of the proceeds to
the capital of  Breaking  Waves and  simultaneously  therewith,  Breaking  Waves
repaid  loans made by Daniel  Stone and Susan Stone in the  aggregate  amount of
$100,000.  Immediately  preceding the consummation of the Acquisition,  Breaking
Waves  distributed to its  shareholders an amount equal to 45% of the net income
before  taxes of  Breaking  Waves for the  period  from  January  1, 1996 to the
closing  date.  This was done in order to pay taxes  owed by such  shareholders,
since Breaking Waves was a subchapter S corporation.

ITEM 2.           DESCRIPTION OF PROPERTY

     The Company's  executive offices are located at 14 East 60th Street,  Suite
402, New York, New York 10022, (212) 688-9223,  and comprise approximately 1,800
square feet.  The Company  leased its office space  (approximating  2,600 square
feet) in November 1996 for a term of five years,  at an approximate  base annual
rental of $70,000.  Anytime after  November  1999, the Company has the option to
terminate the lease.

     Breaking  Waves  maintains its  executive  offices and showroom at 112 West
34th  Street,  New York,  New York 10120.  Until  January  1998,  this space was
approximately  1,000 square feet and  comprised  only office  space.  In January
1998,  Breaking  Waves amended its lease and rented an  additional  1,000 square
feet which  comprises  its showroom  for the "Jet Ski" line.  The lease is for a
term of seven years,  expiring  December  2004,  and carries an annual rental of
$71,600.  Breaking  Waves also  maintains  a Florida  office,  which it moved in
January 1999 from Miami to 19865  Southwest  328th  Street,  Homestead,  Florida
33030.  This office,  comprising  approximately 780 square feet, houses Breaking
Waves' design operation and is rented month to month for approximately $900.

ITEM 3.           LEGAL PROCEEDINGS

     The Company is not a party to any material  litigation  and is not aware of
any  threatened  litigation  that would have a  material  adverse  effect on its
business. Neither the Company's officers,  directors,  affiliates, nor owners of
record or  beneficially  of more than five percent of any class of the Company's
Common Stock is a party to any material proceeding adverse to the Company or has
a material interest in any such proceeding adverse to the Company.




ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On November 24, 1998,  the Company held an annual  meeting of  shareholders
whereat the following proposals were put to the shareholders for voting thereon:
(i) to elect four  directors  to the Board of  Directors,  (ii) to  authorize an
offering of up to one million shares of the Company's  Common Stock in a private
placement,  and (iii) to authorize  Breaking Waves to purchase up to one million
four hundred thousand shares of Play Co. common stock pursuant to the terms of a
sales agreement between the companies.

         With respect to item (i) above, votes were cast as follows:
<TABLE>
<CAPTION>

                                                               For                              Abstentions

<S>                                                           <C>                                <C>   
         Harold Rashbaum                                      1,550,834                          24,138
         Robert DiMilia                                       1,538,284                          36,688
         Alain Le Guillou                                     1,538,284                          36,688
         James B. Frakes                                      1,538,350                          36,622
</TABLE>

         With respect to item (ii) above, votes were cast as follows:
<TABLE>
<CAPTION>

                      For                              Against                          Abstentions                 Not Voted

<S>               <C>                                  <C>                                  <C>                       <C>  
                  1,539,516                            26,933                               6,6475                    2,048

</TABLE>
         With respect to item (iii) above, votes were cast as follows:
<TABLE>
<CAPTION>

                  For                         Against                Abstentions                          Not Voted

<S>               <C>                         <C>                        <C>                                <C>  
                  1,542,502                   22,313                     8,109                              2,048

</TABLE>



<PAGE>
                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information

     The Company's  Common Stock is quoted on the SmallCap  Market of the Nasdaq
Stock Market.  The following table sets forth  representative  high and low sale
prices  as  reported  by a market  maker  for the  Company's  Common  Stock  and
Warrants,  during the period from September 23, 1996 through  December 31, 1998.
Sales prices reflect prices between dealers and do not include resale  mark-ups,
mark-downs, or other fees or commissions.
<TABLE>
<CAPTION>

                                                             Common Stock                            Warrants

Calendar Period                                   Low                 High                 Low                High

<S>                                               <C>                  <C>                 <C>                <C>
09/23/96 - 12/31/96                               6                    11 3/8              3 1/4              6 3/4
01/01/97 - 03/31/97                               3 1/4                 8 1/8              1                  5 1/2
04/01/97 - 06/30/97                               1 1/16                5                    1/8              1 1/2
07/01/97 - 09/30/97                               1                     1 7/8                3/8              1 1/16
10/01/97 - 12/31/97                                 5/16                1 7/8                1/8                5/8
01/01/98 - 02/04/98 (1)                             7/32                  5/16               1/32               1/8
02/05/98 - 03/31/98                               2 3/4                 3 3/16               1/32               7/32
04/01/98 - 06/30/98                               2 1/16                4 13/16              1/16               1/4
07/01/98 - 09/30/98                                 7/16                  3/32               1/32               1/8
10/01/98 - 12/31/98                                 5/16                1 1/4                1/32               1/16
01/01/99 - 03/31/99 (2)                             1/2                 2 25/32              1/32               5/16
</TABLE>


     The above  prices  reflect  the  price per  pre-reverse  split  shares  and
Warrants  through  February 5, 1998.  The  Company's one for three reverse stock
split and corresponding Warrant adjustment became effective on February 5, 1998;
accordingly,  for dates  thereafter,  the  above  table  reflects  the price for
post-split  shares and  post-adjustment  Warrants  commencing on that date.  The
table reflects the price for post-dividend  shares and post-adjustment  Warrants
since February 5, 1999.

     As of March 30,  1999,  there were 64  holders  of record of the  Company's
Common Stock,  although the Company  believes that there are  approximately  900
additional  beneficial  owners of shares of Common Stock held in street name. As
of March 29, 1999,  the number of  outstanding  shares of the  Company's  Common
Stock was 5,372,971.  (This number is subject to change, nominally, as the 2,751
pre-reverse  split and pre-dividend  shares which have not been exchanged as yet
are offered for such exchange by the Company's shareholders.)

     Initially,  each Warrant entitled the holders thereof to purchase one share
of the  Company's  Common Stock at an exercise  price of $6.50 per share,  until
September 9, 2001. On June 23, 1997, the Board of Directors approved a reduction
in the exercise price of the Warrants from $6.50 to $3.00.  On February 5, 1998,
the  Company  effected a one for three  reverse  split of the  Company's  Common
Stock.  Accordingly,  the Company  adjusted the terms of the Warrants to reflect
the reverse split such that exercise of three  Warrants would entitle the holder
to purchase one share of Common Stock at an exercise price of $9.00. Pursuant to
the Company's  Common Stock dividend  issued on February 5, 1999,  however,  the
terms of the Warrants were adjusted again.  Pursuant to the existing terms,  the
exercise of three  Warrants at $9.00 entitles the holder thereof to purchase two
shares of Common Stock.


<PAGE>
     Euro-Atlantic,  the underwriter of the Company's  initial public  offering,
was a  dominant  influence  in the  market for the  Company's  securities  until
February  1997. In February  1997,  Euro-Atlantic's  clearing  firm, WS Clearing
Corp.,  ceased operations,  which resulted in a freeze of all of the accounts of
Euro-Atlantic,  including  its  clients'  accounts  and  firm  trading  account.
Euro-Atlantic  ceased  operations  immediately  thereafter.  The  market for the
Company's  securities  has been  significantly  affected  and may continue to be
affected by the loss of Euro-Atlantic's participation in the market. The loss of
Euro-Atlantic's  market making activities of the Company's  securities decreased
significantly the liquidity of an investment in such securities.

     On April 15, 1998, the Company's Board of Directors authorized the issuance
of Distribution  Warrants to all holders of shares of the Company's Common Stock
as of the May 8, 1998 Warrant Record Date.  Pursuant to the  distribution,  each
share  held on the  Warrant  Record  Date shall  generate  the  issuance  of one
Distribution  Warrant to purchase one share of Common Stock at an exercise price
of $4.00 per share.  The  Distribution  Warrants,  which are  exercisable  for a
period of three years,  commencing one year after issuance,  shall be issued and
distributed  once the Company has filed a  registration  statement  for same and
same has been  declared  effective by the SEC.  The Company  intends to file the
registration statement in May 1999.

     The Company has paid no cash  dividends  and has no present plan to pay any
cash dividends. Payment of future dividends will be determined from time to time
by its board of directors,  based upon its future  earnings,  if any,  financial
condition, capital requirements, and other factors. The Company is not presently
subject to any  contractual  or  similar  restriction  on its  present or future
ability to pay such dividends.

Recent Sales of Unregistered Securities

     Except where  otherwise  indicated,  the sales of securities of the Company
described below were exempt from registration  under the Securities Act of 1933,
as amended (the "Act"), in reliance upon the exemption  afforded by Section 4(2)
of the Act for transactions  not involving a public  offering.  All certificates
evidencing such sales bear an appropriate restrictive legend.

     In December 1995,  EVC acquired  3,333,334  shares of the Company's  Common
Stock and 2,000,000 Warrants in exchange for an initial capital  contribution of
$1,100,000. Of these shares, 933,334 were registered for resale in the Company's
initial public  offering,  and 1,960,700 were registered with the Company's Form
S-3  filed in May 1998.  Also  registered  in the  offering  were the  2,000,000
Warrants.  Between  September  1996 and January  1999,  EVC sold an aggregate of
1,893,334 shares of Common Stock and 1,997,600 Warrants.

     In  September  1996,  simultaneously  with  the  Company's  initial  public
offering and pursuant to a stock purchase agreement, dated May 31, 1996, entered
into between the Company and the  shareholders  of Breaking  Waves,  the Company
issued 100,000 shares of Common Stock to the  shareholders  of Breaking Waves in
exchange for all of said shareholders' issued and outstanding shares of Breaking
Waves common stock

     On February 9, 1998,  in private  transactions,  the Company  sold  600,000
shares of Common  Stock to three  entities  at a price of $0.65 per share for an
aggregate  price of  $195,000.  These  shares were  purchased  by the  following
accredited investors:  Full Moon Development,  Inc., Volcano Trading,  Inc., and
American Telecom Corp. (whose president, secretary, and a director is related to
the Company's  President).  The private  offering was conducted in reliance upon
Rule 506 of the General Rules and Regulations  under the Securities Act of 1933.
The  proceeds  from these sales were used by the  Company  for  general  working
capital and to fund the Company's interest in Battle Studies. No underwriter was
used in connection with this offering.

         On May 4, 1998,  in private  transactions,  the  Company  sold  700,000
shares of Common  Stock to three  entities  at a price of $1.60 per share for an
aggregate  price of  $560,000.  These  shares were  purchased  by the  following
accredited  investors:  Amir Overseas  Capital,  Ltd., HDS Capital Corp.  (whose
secretary is related to the Company's  President),  and Galit Capital,  Ltd. The
private  offering was  conducted in reliance  upon Rule 506 of the General Rules
and Regulations  under the Securities Act of 1933. The proceeds from these sales
were used by the Company for general  working  capital and to fund the Company's
interest in Battle  Studies.  No  underwriter  was used in connection  with this
offering.




<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

               CAUTIONARY STATEMENTS ON FORWARD-LOOKING STATEMENTS

     Statements  contained in this report which are not historical  facts may be
considered forward looking  information with respect to plans,  projections,  or
future  performance  of the  Company as  defined  under the  Private  Securities
Litigation Reform Act of 1995. These  forward-looking  statements are subject to
risks and  uncertainties  which could cause actual results to differ  materially
from those projected.  The words "anticipate,"  "believe," "estimate," "expect,"
"objective,"  and "think" or similar  expressions  used  herein are  intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's  current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic  conditions,  including housing starts and changes in consumer
disposable  income,  and foreign economic  conditions,  including  currency rate
fluctuations. Some or all of the facts are beyond the Company's control.

General

     Hollywood  Productions,  Inc. (the "Company") was incorporated in the State
of  Delaware  on  December  1, 1995.  The  Company was formed for the purpose of
acquiring screen plays and producing motion pictures.  During September 1996, in
connection  with the  completion of its Initial  Public  Offering  ("IPO"),  the
Company  acquired  all the capital  stock of  Breaking  Waves,  Inc.  ("Breaking
Waves"). Breaking Waves designs, manufactures, and distributes private and brand
name label children's swimwear.

     The consolidated financial statements at December 31, 1998 and 1997 include
the  accounts of the Company and its wholly  owned  subsidiary,  Breaking  Waves
(herein  referred to as the  "Companies")  after  elimination of all significant
intercompany transactions and accounts

     The following  discussion and analysis  should be read in conjunction  with
the  consolidated  financial  statements  and related  footnotes  which  provide
additional   information  concerning  the  Company's  financial  activities  and
condition.  Since the Company and its  subsidiary,  Breaking  Waves,  operate in
different  industries,  the  discussion  and analysis is presented by segment in
order to be more meaningful.

     Year ended  December  31, 1998 as compared to the year ended  December  31,
1997

Breaking Waves

     For the year ended December 31, 1998 and 1997, Breaking Waves generated net
sales of $5,156,247  (inclusive  of $204,000 of sales made to an affiliate)  and
$5,262,240  respectively  with a cost  of  sales  amounting  to  $3,221,238  and
$3,222,478  respectively.  The gross profit for the year ended December 31, 1998
amounted to $1,935,009,  or 38%, as compared to the year ended December 31, 1997
during which it amounted to $2,039,762, or 39%.

     Selling,  general,  and  administrative  expenses  during  the years  ended
December 31, 1998 and 1997 amounted to $1,665,524 and $1,460,284,  respectively.
The  increase,  amounting  to  $205,240,  is  primarily  attributable  to  costs
associated in establishing a new product line ("Jet Ski") which was subsequently
cancelled.

     The  major  components  of  the  Breaking  Waves  selling,   general,   and
administrative  expenses during the year ended December 31, 1998 are as follows:
$554,402 of officers,  office staff, and designer salaries and related benefits,
$123,016 of  commission  expense,  $213,471 of  warehousing  costs,  $140,989 of
royalty  fees,  $85,917  of rent  expense,  $56,545 of factor  commissions,  and
$491,184 representing other miscellaneous general corporate overhead expenses.

     The major components of selling,  general, and administrative  expenses for
the year ended  December 31, 1997 are as follows:  $522,387 of officers,  office
staff, and design salaries and related benefits, $141,339 of commission expense,
$188,460  of  warehousing  costs,  $111,355  of  royalty  fees,  $78,719 of rent
expense,   $50,807  of  factor  commission  and  $367,217   representing   other
miscellaneous general corporate overhead expenses.

     Breaking Waves  acquired a 25.4% interest in Play Co. Toys &  Entertainment
Corp.  ("Play  Co.") by paying  $300,000  in cash and by  shipping  $204,000  in
merchandise.   In  connection   with  the  $504,000   investment  in  Play  Co.,
representing a 25.4% ownership percentage, Breaking Waves recognized $473,270 of
equity  earnings in Play Co.'s  earnings  from November 24, 1998 to December 31,
1998.

     Play Co.'s operations are highly seasonal with approximately  30-40% of its
net sales  historically  falling  within the last three  months of the  calendar
year.  Accordingly,  the equity  earnings in Play Co. are not  indicative of the
results to be  expected if the  investment  in Play Co. was  consummated  at the
beginning of the year.

     The  following  unaudited  pro forma  information  presents  the results of
operations of Breaking  Waves for the years ended  December 31, 1998 and 1997 as
if the investment in Play Co. was consummated at the beginning of each year:

<PAGE>
<TABLE>
<CAPTION>

                                                  Year Ended December 31,
                                                   1998           1997
                                                   -----          ----
                                                 (Unaudited)

<S>                                            <C>            <C>        
Net Sales ..................................   $ 5,156,247    $ 5,262,240
Cost of Sales ..............................     3,221,238      3,222,478
Selling, general and administrative expenses     1,665,524      1,460,284
Other Income (Expenses) ....................      (315,091)      (753,861)
Net Loss ...................................       (81,912)      (207,069)
</TABLE>

     These  unaudited  pro forma  results of  operations  have been prepared for
comparative  purposes only and do not purport to be indicative of the results of
operations  which would have actually  resulted had the acquisition  occurred on
the date indicated, or of future results of operations.

     Interest  expense in connection  with its factoring  agreement  amounted to
$224,192  and  $224,397  for  the  years  ended   December  31,  1998  and  1997
respectively.

     Breaking Waves generated net income of $436,420 and $322,453, respectively,
for the years ended  December 31, 1998 and 1997 after an income tax provision of
$36,306 and  $32,686,  respectively,  for the years ended  December 31, 1998 and
1997.

Hollywood Productions, Inc.

     For the years ended December 31, 1998 and 1997, the Company generated sales
from its motion  picture  "Dirty  Laundry"  amounting  to $120,211  and $44,875,
respectively.  Although  sales have been  minimal  since the  completion  of the
motion  picture,  the  Company  expects  increases  in  sales  during  1999  and
thereafter as a result of a new release of the picture during 1998.

     The Company's  selling,  general,  and  administrative  expense amounted to
$683,986  and  $719,157  for  the  years  ended  December  31,  1998  and  1997,
respectively. This represents a decrease of $35,171, or approximately 5%.

     The major components of the Company's expenses are as follows for the years
ended December 31:
<TABLE>
<CAPTION>

                                                                1998       1997
Salaries  (officer and office staff) and stock compensation
<S>                                                           <C>        <C>     
and related benefits ......................................   $242,313   $345,455
Legal and Professional fees ...............................     94,767     83,495
Rent ......................................................     72,257     72,960
Consulting fees ...........................................     52,000     58,950
Other general corporate and administrative expenses .......    222,649    158,297
</TABLE>

     The company generated a net loss of $334,476 after an income tax benefit of
$229,658  for the year ended  December  31,  1998.  The income tax  benefit  was
primarily a result of the Company utilizing its net operating losses for federal
tax purposes as of December 31, 1998. The Company has a net operating loss carry
forward of approximately  $865,000 for federal tax purposes which is expected to
be  utilized  in the future as a result of filing  consolidated  federal  income
taxes with its subsidiary, Breaking Waves. For the year ended December 31, 1997,
the Company had a net loss of $674,967 with no income tax benefit.

Liquidity and Capital Resources

     At December 31, 1998,  the Companies have a  consolidated  working  capital
amounting to $1,413,717.  The Companies  anticipate that their current available
cash will be sufficient  for the next twelve  months and they do not  anticipate
any cash shortfalls.

     The Company  considers  highly liquid  investments with maturities of three
months or less at the time of purchase to be cash equivalents.  Included in cash
are certificates of deposit of approximately  $1,166,234.  The Company maintains
cash  deposits  in  accounts  which are in excess of Federal  Deposit  Insurance
Corporation limits by approximately  $1,100,000.  The Company believes that such
risk is  minimal.  The  Company  maintains  a letter of credit  with a financial
institution as a condition of its factoring agreement. The financial institution
requires the Company to maintain  $1,150,000  on deposit as  collateral  for the
letter of credit. Accordingly, such cash is designated as restricted.

     For the year ended December 31, 1998, the Companies reported a consolidated
net income of $30,994  after an income tax benefit of  $192,383  whereas for the
year ended December 31, 1997, the Companies  reported a consolidated net loss of
$423,467 after a provision of income taxes amounting to $27,865.

Investment in Joint Venture

     Pursuant to a  co-production  agreement  dated April 17, 1998,  the Company
invested  $200,000 for a 50% interest in a newly formed  entity,  Battle Studies
Productions, LLC ("Battle Studies"), a limited liability company. Norfolk Films,
Inc.  ("NFF") an unrelated party,  also invested  $200,000 for the remaining 50%
interest in Battle Studies. Battle Studies will be treated as a joint venture in
order to co-produce  motion  pictures and to finance the costs of production and
distribution  of such motion  pictures.  The joint venture retains all rights to
the motion pictures, the screenplays, and all ancillary rights attached thereto.
As of December 31, 1998,  Battle Studies had completed  filming its first motion
picture and was in post production.
<PAGE>
     The Company  accounts for the  investment  in Battle  Studies on the equity
method.  Accordingly, as of December 31, 1998, the Company has only recorded its
initial  $200,000  investment in the joint venture since no operations  have yet
commenced.

Factoring Arrangements

         (a)      NationsBanc

     On April 4,  1991,  Breaking  Waves  entered  into an  accounts  receivable
financing  agreement with NationsBanc  Commercial Corp.  ("Nations") to sell its
interest  in all  present  and future  receivables  without  recourse.  Interest
expense in connection with such financing  arrangement  amounted to $156,785 for
the year ended  December 31, 1997.  Effective on or about August 20, 1997,  such
financing  agreement  was  cancelled and replaced with a factoring and revolving
inventory loan and security agreement with Heller Financial, Inc. ("Heller").

         (b)      Heller

     On August 20, 1997,  Breaking  Waves entered into a factoring and revolving
inventory  loan and  security  agreement  (which  was  subsequently  amended  in
December  1998) with Heller  pursuant to which Heller agreed to (i) purchase all
of Breaking  Waves' accounts  receivables,  (ii) provide  advances  against such
accounts receivables, (iii) provide a revolving loan, and (iv) guarantee letters
of credit in excess of $1,500,000 as well as provide certain other services. The
Company is a guarantor of Breaking  Waves'  obligations  to Heller.  The Company
maintains a letter of credit with a financial institution in support of and as a
condition to its factoring  agreement.  The financial  institution  requires the
Company to  maintain  $1,150,000  on deposit as  collateral  for such  letter of
credit.  Breaking  Waves may take advances of up to 85% of the purchase price of
its eligible accounts receivable.

     The factoring agreement provides (i) factoring  commissions of (a) 0.85% on
the first $5 million in accounts  sold and  assigned to Heller  during each year
and (b) 0.65% on all  accounts  in excess of $5  million  sold and  assigned  to
Heller during each year,  but in no event less than $3 per invoice;  and (ii) on
accounts  bearing terms greater than 90 days, an increase in commission by 0.25%
for each 30 days or part thereof that the terms exceed 60 days. Interest expense
related to this agreement  totaled $224,603 and $67,611,  respectively,  for the
years ended  December  31, 1998 and 1997.  Heller has a  continuing  interest in
Breaking  Wave's  inventory as collateral  for the advances.  As of December 31,
1998, the net advances to Breaking Waves from the factor amounted to $2,063,554.

Capital Lease Obligations

     During  1998,  the Company  acquired  computer  equipment  and  proprietary
software for its subsidiary, Breaking Waves, pursuant to the following terms and
conditions:

     On August 13,  1998,  the Company  acquired  various  computer  and related
components for $28,583 by entering into a capital lease obligation with interest
at approximately 9.2% per annum,  requiring 48 monthly payments of principal and
interest of $713. The lease is secured by the related computer equipment.

     On  September  13,  1998,  the Company  acquired  proprietary  software for
$32,923  by  entering  into  a  capital  lease   obligation   with  interest  at
approximately  10.9% per annum,  requiring 48 monthly  payments of principal and
interest of $850. The lease is secured by the related software.

Lease Commitments

     The Company and its  subsidiary  have  entered  into lease  agreements  for
administrative offices. The Company leases its administrative office pursuant to
a 5  year  lease  expiring  November  30,  2001  at  annual  rent  amounting  to
approximately  $70,000,   before  annual  escalations.   Breaking  Waves  leased
administrative  offices through  approximately  January 1998 pursuant to a lease
requiring annual payments of approximately $64,000.  Breaking Waves amended such
lease and  rented  additional  space at an annual  rental  of  $71,600  expiring
December  2004.  Breaking  Waves also  leases an  offsite  office for one of its
designers on a month to month basis with annual payments approximating $11,000.

     Rent  expense for the years ended  December  31, 1998 and 1997  amounted to
approximately $158,174 and $147,180, respectively.

License Agreements

     On October 16, 1995,  Breaking Waves entered into a license  agreement with
Beach Patrol,  Inc.  ("Beach").  Pursuant to the licensing  agreement,  Breaking
Waves was given the right to use those  designs for a children's  line under the
"Daffy Waterwear" label from January 1, 1996 to June 30, 1998.  Thereafter,  the
agreement provided for a three year extension,  at the option of Breaking Waves,
through and until June 30,  2001.  Breaking  Waves has  exercised  this  option,
thereby so extending the agreement. For its right to use the trademark, Breaking
Waves agreed to pay Beach,  subject to certain  variables,  the greater of 5% of
net sales or as  follows:  (i)  during the first six  months,  an  aggregate  of
$75,000,  (ii) during the next twelve  months,  an aggregate  of $85,000,  (iii)
during the final twelve months,  an aggregate of $100,000,  and (iv) during each
of the final three years of the agreement,  an aggregate of $150,000,  $175,000,
and $200,000, respectively. The Company recorded royalties and advertising under
this agreement  totaling  $135,000 and $111,000  during the years ended December
31, 1998 and 1997, respectively.

     On October 31, 1996,  Breaking Waves entered into a license  agreement with
North-South  Books,  Inc.  ("N-S") for the exclusive use of certain art work and
text in the making of swimsuits and accessories in the United States and Canada.
The  agreement  expired on March 1, 1999.  The  Company  recorded  $4,852 and $0
royalties  under this  agreement  during the years ended  December  31, 1998 and
1997, respectively.


<PAGE>
     On October 17, 1997,  Breaking Waves entered into a license  agreement with
Kawasaki Motors Corp., U.S.A. ("KMC") with an effective date of July 1, 1997 for
the exclusive use of certain  trademarks in the making of swimwear in the United
States. The fee for the exclusive use of certain trademarks is five percent (5%)
of net sales.  The agreement  expires May 31, 1999. No royalties were paid under
the agreement during the years ended December 31, 1998 and 1997, respectively.

Internet Sales

     In March  1999,  Breaking  Waves  launched an online  wholesale  children's
swimwear website at www.BreakingWaves.com. The website is designed to complement
the company's  wholesale  distribution  efforts by providing  retailers  instant
access to more than 200 styles of Breaking  Waves  swimwear.  The entire line of
Breaking Waves swimwear, including products marketed under the "Breaking Waves,"
"All Waves," "Daffy  Waterwear,"  and "Jet Ski" brands,  is available for online
purchase by retailers.  The Breaking Waves website is being hosted by Mindspring
and incorporates e-commerce features from Cybercash and Mercantec, Inc.

     Management  believes  that the website  will fill the needs of existing and
potential  customers.  Through the Internet,  retailers can purchase merchandise
online in a matter of minutes,  at their own  convenience,  instead of having to
wait for a printed wholesale  catalog.  Management  believes that the advantages
and efficiencies created by the website will assist Breaking Waves in increasing
brand  awareness as well as market  share.  Marketing  strategies  for "driving"
retailers to the site include co-op trade  advertisements,  tradeshow  exposure,
direct mail,  and  including the site address on all  corporate  collateral  and
product labels.

Year 2000

     The  Companies  have  addressed  and will continue to address the year 2000
issue to ensure the reliability of their operational systems. The Companies have
made and will continue to make certain  investment in their software systems and
applications to ensure that it is Year 2000 compliant. These expenditures, which
are expensed as incurred,  are not expected to be material . The  Companies  are
also working with their suppliers and customers to ensure their  compliance with
Year 2000 issues in order to avoid any interruptions in its business.

Private Placements

     During   February  and  May  1998,   pursuant  to  two   separate   private
transactions,  the Company sold  600,000 and 700,000  shares of Common Stock for
approximately  $195,000 and $560,000,  respectively to certain  entities.  These
funds were used by the Company  primarily  for  working  capital and to fund the
Company's  interest in Battle  Studies.  An officer of two of the  entities  who
invested in the Company in the private  placements  is related to the  Company's
President.

     On July 30, 1998, the Securities and Exchange Commission declared effective
a Form S-3  Registration  Statement which registered the 600,000 shares from the
February  1998  private  transaction  along with  1,960,700  shares  held by the
Company's then majority shareholder, European Ventures Corp. ("EVC"). EVC's sole
officer and director is an affiliate of the Company's President.

Loans to Play Co.

     On March 1, 1998,  Breaking Waves loaned funds to Play Co. in return for an
unsecured promissory note in the amount of $250,000.  Such note required monthly
payments beginning March 31, 1998 of $25,000 plus interest at 15% per annum. The
note was repaid in full as of December 31, 1998.

     On July 15, 1998,  Breaking  Waves loaned  additional  funds to Play Co. in
return for an unsecured  promissory  note in the amount of  $300,000.  Such note
required monthly payments  beginning August 15, 1998 of $50,000 plus interest at
9% per annum through  November 15, 1998 and a lump-sum  payment of $100,000 plus
interest on  December  15,1998.  The note was repaid in full as of December  31,
1998.

     Pursuant  to an  unsecured  promissory  note dated  February  1, 1999,  the
Company loaned $100,000 to Play Co. bearing  interest at 9% per annum.  Play Co.
agreed to repay such note by June 15, 1999 with monthly installments.

     Breaking  Waves  generated  approximately  $26,000 of interest  income from
loans to Play Co.

Common Stock Dividend

     On January 14, 1999,  the Company  declared a 100% Common Stock dividend to
all  shareholders  of record as of January 29,  1999.  The  dividend was paid on
February 5, 1999, whereby the Company issued 2,686,027 shares of Common Stock.

ITEM 7. FINANCIAL STATEMENTS

     See attached Financial Statements.

ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 
        AND FINANCIAL DISCLOSURE

     Not Applicable.




<PAGE>
                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Officers and Directors

         The  following  table  sets forth the  names,  ages,  and titles of all
directors and officers of the Company:
<TABLE>
<CAPTION>

Name                                Age                     Position

<S>                                 <C>                     <C>
Harold Rashbaum                     72                      President, CEO, and Director

Robert DiMilia                      53                      Vice President, Secretary, and                                Director

Alain Le Guillou, M.D.              42                      Director

James B. Frakes                     42                      Director
</TABLE>



     All  directors   are  elected  at  an  annual   meeting  of  the  Company's
shareholders  and hold  office for a period of one year or until the next annual
meeting  of  shareholders  or  until  their  successors  are  duly  elected  and
qualified.  Vacancies on the Board of Directors  may be filled by the  remaining
directors.  Officers are appointed  annually by, and serve at the discretion of,
the Board of Directors.  There are no family relationships  between or among any
officers or directors of the Company,  except Mr. Rashbaum is the  father-in-law
of Dr. Alain Le Guillou.  Dr. Le Guillou receives a director's fee of $1,000 per
month for his  participation  as  director.  The  Company  does not have key man
insurance on the lives of any of its officers or directors.

     As permitted  under the Delaware  General  Corporation  Law, the  Company's
Certificate of Incorporation  eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision,  shareholders may be
unable to  recover  damages  against  directors  for  actions  which  constitute
negligence or gross  negligence or are in violation of their  fiduciary  duties.
This  provision in the Company's  Certificate  of  Incorporation  may reduce the
likelihood  of  derivative  and other types of  shareholder  litigation  against
directors.

     Harold  Rashbaum has been the President,  Chief  Executive  Officer,  and a
Director of the Company since January 1997.  Since  September  1996, he has also
been the President,  Secretary,  and sole Director of Breaking  Waves.  From May
1996 to January  1997,  Mr.  Rashbaum  served as Secretary  and Treasurer of the
Company.  Mr.  Rashbaum  has been the Chairman of the Board of Directors of Play
Co. since September 10, 1996. Mr.  Rashbaum was a management  consultant to Play
Co.  from July 1995 to  September  10,  1996.  In May 1998,  he was elected as a
Director of Toys International,  Inc. ("Toys," a wholly-owned subsidiary of Play
Co.).  Since  February  1996,  Mr.  Rashbaum has also been the  President  and a
Director of H.B.R. Consultant Sales Corp. ("HBR"), of which his wife is the sole
shareholder.  Prior thereto from February 1992 to June 1995, Mr.  Rashbaum was a
consultant to 47th Street Photo,  Inc., an electronics  retailer.  Mr.  Rashbaum
held this  position at the request of the  bankruptcy  court during the time 47t
Street Photo,  Inc. was in Chapter 11. From January 1991 to February  1992,  Mr.
Rashbaum was a  consultant  for National  Wholesale  Liquidators,  Inc., a major
retailer of household goods and housewares.

     Robert DiMilia, has been a Director,  Vice President,  and Secretary of the
Company since January 10, 1997. Prior thereto he was a consultant to the Company
with respect to the production of Dirty Laundry.  From 1991 to 1994, Mr. DiMilia
was a Vice  President  for The  Bon Bon  Group,  a  national  payroll/accounting
entertainment  service  company.  From March 1995 to May 1996, Mr. DiMilia was a
media and  marketing  consultant  in the film  industry  working on a variety of
projects.

     Alain Le Guillou,  M.D. has been a Director of the Company  since May 1996.
Since July 1995,  Dr. Le Guillou has been a doctor of  pediatrics  at Montefiore
Medical  Group.  From July 1992 to June  1995,  Dr. Le Guillou  was a  pediatric
resident at the University of Minnesota, Gillette Hospital, St. Paul, Minnesota.
Dr. Le Guillou is the son-in-law of Harold Rashbaum.

     James  Frakes was  elected  Director of the  Company in January  1998.  Mr.
Frakes was appointed Chief  Financial  Officer and Secretary of Play Co. in July
1997.  In August 1997, he was elected as a Director of Play Co. In January 1998,
Mr. Frakes was appointed  Secretary and Chief Financial  Officer of Toys. He was
elected as a Director  thereof in May 1998.  From June 1990 to March  1997,  Mr.
Frakes was Chief Financial  Officer of Urethane  Technologies,  Inc. ("UTI") and
two of its subsidiaries,  Polymer Development Laboratories, Inc. ("PDL") and BMC
Acquisition,  Inc. These were specialty chemical companies, which focused on the
polyurethane  segment  of the  plastics  industry.  Mr.  Frakes  was  also  Vice
President  and a Director  of UTI  during  this  period.  In March  1997,  three
unsecured  creditors of PDL filed a petition for the  involuntary  bankruptcy of
PDL. This matter is pending before the United States Bankruptcy  Court,  Central
District of California. From 1985 to 1990, Mr. Frakes was a manager for Berkeley
International  Capital  Corporation,  an investment banking firm specializing in
later stage venture  capital and leveraged  buyout  transactions.  In 1980,  Mr.
Frakes obtained a Masters in Business Administration from University of Southern
California.  He obtained his  Bachelor of Arts degree in history  from  Stanford
University, from which he graduated with honors in 1978.


<PAGE>
Significant Employees

     Malcolm Becker,  63, has been the Vice President of Design,  Merchandising,
and Production of Breaking Waves since its inception in 1991.

     Michael  Friedland,  61, has been the Vice President of Design,  Marketing,
and Sales of Breaking Waves since its inception in 1991.

     The Company has agreed to indemnify its officers and directors with respect
to certain  liabilities  including  liabilities  which may arise  under the Act.
Insofar  as  indemnification  for  liabilities  arising  under  the  Act  may be
permitted  to  directors,  officers,  and  controlling  persons  of the  Company
pursuant to any charter, provision, by-law, contract,  arrangement,  statute, or
otherwise,  the Company has been  advised  that in the opinion of the SEC,  such
indemnification  is  against  public  policy  as  expressed  in the  Act and is,
therefore,  unenforceable. In the event that a claim for indemnification against
such liabilities  (other than the payment by the Company of expenses incurred or
paid by a  director,  officer,  or  controlling  person  of the  Company  in the
successful defense of any such action,  suit, or proceeding) is asserted by such
director,  officer,  or controlling person of the Company in connection with the
securities  being  registered,  the Company  will,  unless in the opinion of its
counsel the matter has been settled by controlling precedent,  submit to a court
of appropriate  jurisdiction the question whether such  indemnification by it is
against  public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 10.          EXECUTIVE COMPENSATION

Summary of Cash and Certain Other Compensation

     The following table provides  certain  information  concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, or paid to the named  executive  officer during the periods ended
December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>

====================================================================================================================================
                                                      SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                             Annual Compensation                          Long-Term Compensation

Name and Principal Position

                       
                                                                       Awards                        Payouts
 
                                                                             Securities                 
                                                Other       Restricted       Underlying                       All
                                                Annual       Stock            Option/                        Other
                        Year   Salary  Bonus   Compens-      Awards            SAR            LTIP        Compensation   
                                 ($)     ($)    ation         ($)               (#)         Payouts ($)       ($)
<S>                     <C>    <C>       <C>     <C>        <C>                 <C>            <C>            <C>
Harold Rashbaum ..      1998   156,000   --      --           --                --             --             --
  President,  CEO,
  And Director
                        1997   147,000   --      --           --                66,666(3)      --             --
                        1996(1) 26,000   --      --        100,000(2)           --             --             --
 
</TABLE>
     (1)  Commenced  employment  in May 1996.  At the  closing of the  Company's
initial public offering,  HBR, a company controlled by Mr. Rashbaum and owned by
his wife, received 5,000 shares of Common Stock and a consulting fee of $40,000.

     (2) Includes  33,333  shares issued under the Senior  Management  Incentive
Plan in June  1996,  subject to a two year  vesting  schedule.  The shares  were
valued on issuance at $100,000 and were sold in May 1998. See "Senior Management
Incentive Plan."

     (3) Includes options to purchase 100,000 pre-reverse split and pre-dividend
shares  of  Common  Stock  issued  in March  1997  under  the  Company's  Senior
Management  Incentive  Plan.  In March 1998,  the Board of Directors  approved a
revision of the terms of the options  granted to Harold  Rashbaum in  accordance
with the 1 for 3 reverse split of the Company's  Common Stock. The revised terms
reduced the number of shares underlying the option from 100,000 to 33,333 shares
and decreased the exercise  price from $5.125 to $2.93.  In February  1999,  the
Board of  Directors  approved a revision of the terms of the options  granted to
Harold  Rashbaum in  accordance  with the  Company's  issuance of a Common Stock
dividend. The revised terms increased the number of shares underlying the option
from 33,333 to 66,666 and decreased the exercise price from $2.93 to $1.46.  See
"Senior Management Incentive Plan."

Stock Options

     The following table provides  information  with respect to (i) the exercise
of stock  options by the named  executive  officer  during the fiscal year ended
December 31, 1998 and (ii) the fiscal year end value of all unexercised options:

<PAGE>
<TABLE>
<CAPTION>


=====================================================================================================================
                 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEARS AND FY-END OPTION/SAR VALUES

=====================================================================================================================
                                                                                 Number of                 
                                                                             Securities Underlying          Value of Unexercised   
                                                                             Unexercisable                    In-The-Money
                            Shares Acquired on Exercise                         Options/SAR's                 Options/SAR's
                                    (#)                                          FY-End (#)                   at FY-End ($)
          Name                                             Value                Exercisable/                  Exercisable/
                                                          Realized              Unexercisable                 Unexercisable
                                                            ($)
---------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                     <C>                 <C>    <C>                   <C> <C>
     Harold Rashbaum                 0                       0                   66,666/0 (1)                 0/0 (2)
=====================================================================================================================
</TABLE>

     (1) In March 1998, the Board of Directors  approved a revision of the terms
of the options granted to Harold Rashbaum in accordance with the 1 for 3 reverse
split of the  Company's  Common  Stock.  The revised terms reduced the number of
shares  underlying  the option from 100,000 to 33,333  shares and  decreased the
exercise  price from $5.125 to $2.93.  In February  1999, the Board of Directors
approved a revision  of the terms of the options  granted to Harold  Rashbaum in
accordance with the Company's  issuance of a Common Stock dividend.  The revised
terms increased the number of shares underlying the option from 33,333 to 66,666
and decreased the exercise price from $2.93 to $1.46.

     (2) The  closing  sales  price on  December  31,  1998 was $1.13 per share;
therefore the options had no value.

---------------------------

Employment and Consulting Agreements

Hollywood Productions, Inc.

     Before he became an officer and  director of the Company,  Harold  Rashbaum
provided  consulting  services to the Company through HBR, a company of which he
is an officer and  director and of which his wife is the sole  shareholder.  HBR
entered  into an oral  consulting  agreement  with the  Company  whereby it will
receive 5% of the net profits  received by the Company from the  distribution of
"Dirty  Laundry".  In  addition,  HBR  received  $40,000 and 5,000 shares of the
Company's Common Stock at the closing of the Company's  initial public offering.
From October 1996 through March 1997, Mr. Rashbaum received a salary of $104,000
per annum for being an officer and director of the Company.  In March 1997,  Mr.
Rashbaum's salary was increased to $156,000 per annum. In addition, Mr. Rashbaum
received  33,333  shares of Common Stock under the Company's  Senior  Management
Incentive  Plan,  one half of which shares  vested in each of June 1997 and June
1998.   These  shares  were  sold.  See  "Certain   Relationships   and  Related
Transactions."



<PAGE>
Breaking Waves, Inc.

     In January  1996,  Dan Stone entered into a two year  consulting  agreement
with  Breaking  Waves  pursuant  to which he was to  oversee  the  operation  of
Breaking  Waves in return for a yearly  consulting  fee of  $100,000.  Mr. Stone
received $50,000 from the proceeds of the Company's initial public offering,  as
payment in advance of one half of the 1997  consulting fee, the balance of which
was paid in weekly  installments.  On January 1, 1998, the consulting  agreement
expired, and Mr. Stone's relationship with Breaking Waves was terminated.

     In  November  1996,  Breaking  Waves  entered  into three  year  employment
agreements  with each of Malcolm  Becker and Michael  Friedland.  The agreements
initially  provided that Messrs.  Becker and Friedland each would be compensated
at a salary of $110,000 per annum during the term of his agreement and that each
would be  issued  restricted  shares  of  Common  Stock,  subject  to a  vesting
schedule,  annually  during the term of his  agreement.  The number of shares of
Common  Stock to be issued  is  calculated  on the  basis of a market  value (as
hereinafter  defined)  of  $25,000  on the  date  of  issuance,  subject  to the
following  vesting  schedule:  (i) 1/2 of the shares issued on November 27, 1996
vested 90 days from  issuance,  and the balance vested 270 days from the date of
issuance and (ii) for each subsequent  annual issuance  commencing  November 27,
1997, 1/2 of the shares vested six months from issuance,  and the balance vested
on the following anniversary. "Market Value" shall mean (i) $5.00 per share with
respect  to the  shares  issued in  November  1996 and (ii) the  average  of the
closing bid and asked prices for a share of Common Stock for a period of 30 days
ending five days prior to the date of issuance,  as  officially  reported by the
principal  securities  exchange  on  which  the  Common  Stock  is  quoted.  The
agreements include non-disclosure and non-compete clauses.

     In November 1996, 3,334 shares of the Company's Common Stock were issued to
each of Messrs. Becker and Friedland, subject to the aforesaid vesting schedule.
In November  1997,  14,444 shares of the  Company's  Common Stock were issued to
each of Messrs. Becker and Friedland, subject to the aforesaid vesting schedule.
In April 1999,  the Company shall issue Mr. Becker 69,158 shares and shall issue
Mr.  Friedland  126,792  shares.  In January 1998,  Mr.  Friedland's  employment
agreement  was amended to provide  for an  increase  in salary to  $130,000  per
annum.  Also in January 1998, Mr. Becker's  employment  agreement was amended to
reflect a reduction in the amount of time Mr. Becker would be required to devote
to the business of Breaking Waves, a concomitant  reduction in salary to $60,000
per annum,  and a reduction in the number of shares of Common Stock to be issued
(the number to equal a market value of $13,636).  In January 1999, Mr.  Becker's
employment agreement was further amended to reflect an increase in the amount of
time Mr.  Becker would be required to devote to the  business of Breaking  Waves
and a concomitant increase in salary to $70,000 per annum.

Senior Management Incentive Plan

General

     In May 1996, the Board of Directors adopted the Senior Management Incentive
Plan (the  "Management  Plan")  which was adopted by  shareholder  consent.  The
Management  Plan provides for the issuance of an aggregate of 116,666  shares of
Common Stock  (adjusted  for the February  1998 reverse  split and February 1999
Common Stock  dividend)  in  connection  with the issuance of stock  options and
other  stock  purchase  rights  to  executive  officers,   key  employees,   and
consultants.

     The  Management  Plan was  adopted to provide the Board of  Directors  with
sufficient  flexibility regarding the forms of incentive  compensation which the
Company will have at its disposal for rewarding executive  officers,  employees,
and  consultants  (of either the  Company  or a  subsidiary  of same) who render
significant services to the Company or its subsidiary with equity in the Company
through the grant of stock options and other  rights.  The  Management  Plan was
adopted to enable the Company to attract and retain qualified  personnel without
unnecessarily  depleting the Company's  cash reserves (by offering those persons
who provide significant services a personal interest in the Company's growth and
success) and to augment the Company's existing compensation programs.

     The Management Plan is intended also to help the Company attract and retain
key  executive  management  personnel  whose  performance  is expected to have a
substantial  impact on the Company's  long-term  profit and growth  potential by
encouraging and assisting those persons to acquire equity in the Company.  It is
contemplated that only persons who perform services of special importance to the
Company will be eligible to participate  under the  Management  Plan. A total of
shares of Common  Stock have been  reserved for  issuance  under the  Management
Plan.  It is  anticipated  that  awards made under the  Management  Plan will be
subject to three-year vesting periods,  although the vesting periods are subject
to the discretion of the Administrator (as defined below).

     The Management  Plan is to be  administered  by the Board of Directors or a
committee of the Board if one is  appointed  for this purpose (the Board or such
committee,  as the case may be, will be referred to in the following description
as the "Administrator").  Members of the Board of Directors who are eligible for
awards or have been  granted  awards may not vote on any matters  affecting  the
administration  of the  Management  Plan or the grant of any  award  thereunder.
Subject to the specific  provisions of the Management  Plan,  the  Administrator
will have the discretion to determine the  recipients of the awards,  the nature
of the awards to be granted,  the dates such  awards will be granted,  the terms
and conditions of awards,  and the interpretation of the Management Plan, except
that any award  granted to any employee of the Company who is also a director of
the Company will also be subject - in the event the  Administrator  of such plan
at the  time  such  award  is  proposed  to be  granted  does  not  satisfy  the
requirements regarding the participation of "disinterested persons" set forth in

<PAGE>
Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934,
as amended (the  "Exchange  Act") - to the  approval of an  auxiliary  committee
consisting  of  not  less  than  three  individuals  (all  of  whom  qualify  as
"disinterested  persons" as defined under Rule 16b-3.  In the event the Board of
Directors deems the formation of an auxiliary committee  impractical,  the Board
is  authorized  to approve any award under the  Management  Plan. As of the date
hereof,  the Company  has not yet  determined  who will serve on such  auxiliary
committee,  if one is required.  The  Management  Plan  generally  provides that
unless the  Administrator  determines  otherwise,  each option or right  granted
under the plan will become  exercisable in full upon certain "change of control"
events as described therein.

     If any  change  is made in  respect  of the  Common  Stock  subject  to the
Management  Plan or subject to any right or option  granted under the Management
Plan (through merger,  consolidation,  reorganization,  recapitalization,  stock
dividend,  or dividend in property  other than cash,  stock  split,  liquidating
dividend,  combination  of  shares,  exchange  of  shares,  change in  corporate
structure, or otherwise), the Administrator will make appropriate adjustments to
the Management Plan and the number of shares and price per share of Common Stock
subject to outstanding rights or options.  Generally, the Management Plan may be
amended by action of the Board of  Directors  except  that any  amendment  which
would  change the class of  securities  subject to the plan,  increase the total
number of shares  subject  to such  plan,  extend  the  duration  of such  plan,
materially  increase the benefits  accruing to participants  under such plan, or
change the  category of persons who can be eligible  for awards  under such plan
must be  approved  by the  affirmative  vote of the owners of a majority  of the
Common Stock  entitled to vote.  The  Management  Plan permits awards to be made
thereunder until November 2004.

     Directors  who  are not  otherwise  employed  by the  Company  will  not be
eligible for  participation in the Management Plan. The Management Plan provides
for  four  types  of  awards:  stock  options,  incentive  stock  rights,  stock
appreciation   rights  (including  limited  stock  appreciation   rights),   and
restricted shares.

Incentive Stock Options ("ISOs" and "non-ISOs")

     The Management Plan may be either  incentive stock options which qualify as
such under the Internal  Revenue Code  ("ISOs") or options  which do not qualify
under the Internal Revenue Code as ISOs ("non-ISOs").  ISOs may be granted at an
option  price of not less than 100% of the fair market value of the Common Stock
on the date of grant  except  that an ISO  granted to any person who owns Common
Stock  representing  more than 10% of the  total  combined  voting  power of all
classes of Common Stock of the Company ("10% Shareholder") must be granted at an
exercise  price of at least 110% of the fair market value of the Common Stock on
the date of the grant.  The exercise  price of non-ISOs may not be less than 85%
of the  fair  market  value  of the  Common  Stock  on the  date of  grant.  The
Administrator  will determine the exercise  period of the options  granted which
shall  be no less  than  one  year  from  the  date of  grant.  Non-ISOs  may be
exercisable for a period of up to 13 years from the date of grant.  ISOs granted
to persons other than 10%  Shareholders may be exercisable for a period of up to
10  years  from the date of  grant;  ISOs  granted  to 10%  Shareholders  may be
exercisable  for a  period  of up to five  years  from the  date of  grant.  The
aggregate fair market value (determined at the time an ISO is granted) of shares
of Common Stock that are subject to ISOs held by a plan  participant that may be
exercisable  for the  first  time  during  each  calendar  year  may not  exceed
$100,000.

     Payment for shares of Common Stock purchased  pursuant to exercise of stock
options may be remitted in cash or by certified  check or at the  discretion  of
the  Administrator  (i) by promissory  note,  (ii) promissory note combined with
cash,  (iii) by shares of Common  Stock  having a fair market value equal to the
total exercise  price, or (iv) by a combination of items  (i)-(iii)  above.  The
provision  that permits the delivery of already owned shares of stock as payment
for the exercise of an option may permit  "pyramiding."  In general,  pyramiding
enables a holder to use  shares  of Common  Stock  owned in order to pay for the
exercise of the stock option.  This is done by  transferring  such shares to the
Company as payment of the exercise  price for the shares  purchased  pursuant to
the exercise of the Option.  The value of such shares shall be determined by the
market  value of the  shares at the time of  transfer.  Thereafter,  the  shares
received  upon the  exercise  of the  option  could then be used to do the same.
Thereby,  the holder  may start with as little as one share of Common  Stock and
use the shares of Common Stock acquired in successive, simultaneous exercises of
the option to exercise  the entire  option,  regardless  of the number of shares
covered  thereby,  with no additional cash or investment other than the original
share of Common Stock used to exercise the option.

     Upon  termination of  employment,  an optionee will be entitled to exercise
the vested  portion of an option  for a period of up to three  months  after the
date of termination  except that if the reason for  termination  was a discharge
for  cause,  the  option  shall  expire  immediately,  and  if  the  reason  for
termination  was death or  permanent  disability  of the  optionee,  the  vested
portion  of the  option  shall  remain  exercisable  for a period  of 12  months
thereafter.

     In March 1997, the Company  granted to each of Mr. Rashbaum and Mr. DiMilia
an option to purchase  100,000  and 50,000  pre-reverse  split and  pre-dividend
shares, respectively,  of Common Stock at an exercise price of $5.125 per share,
pursuant  to the  Management  Plan.  The terms of each  option  were  revised in
accordance  with the February 1998 reverse  split of the Company's  Common Stock
and the February 1999 Common Stock  dividend and now provide for the purchase of
66,666  and  33,332  shares,  respectively,  at $1.46 per  share.  See  "Certain
Relationships and Related Transactions."
<PAGE>
Incentive Stock Rights

     Incentive  stock rights  consist of incentive  stock units each of which is
equivalent to one share of Common Stock and may be awarded in consideration  for
services performed for the Company or any subsidiary.  Each incentive stock unit
shall entitle the holder thereof to receive, without payment of cash or property
to the  Company,  one  share of  Common  Stock  in  consideration  for  services
performed  for the Company or any  subsidiary  by the  employee,  subject to the
lapse of the incentive  periods,  at which time the Company will issue one share
of Common  Stock for each unit  awarded upon the  completion  of each  specified
period.  If the employment with the Company of the holder of the incentive stock
units  terminates prior to the end of the incentive period relating to the units
awarded,  the rights will thereupon be null and void, except that if termination
is caused by death or permanent disability, the holder or his heirs, as the case
may be, will be entitled to receive a pro rata portion of the shares represented
by the units,  based upon that portion of the incentive period which has elapsed
prior to the death or disability.

Stock Appreciation Rights (SARs)

     SARs may be granted to recipients  of stock  options  under the  Management
Plan.  In  the  discretion  of the  Board  of  Directors,  SARs  may be  granted
simultaneously  with, or subsequent  to, the grant of a related stock option and
may be exercised to the extent that the related  option is  exercisable,  except
that no general SAR (as hereinafter defined) may be exercised within a period of
six months of the date of grant of such SAR,  and no SAR granted with respect to
an ISO may be exercised  unless the fair market value of the Common Stock on the
date of exercise  exceeds the exercise price of the ISO. An option holder may be
granted general SARs ("general  SARs"),  limited SARs ("limited SARs"), or both.
General SARs permit the holder  thereof to receive - without  payment of cash or
property to the Company - cash, shares of Common Stock, or a combination of both
in an amount  determined  by dividing  (i) that  portion,  elected by the option
holder,  of the total  number of shares which the holder is eligible to purchase
multiplied  by the amount,  if any, by which the fair market value of a share of
Common Stock (on the exercise  date)  exceeds the option  exercise  price of the
related  option by (ii) the fair market  value of a share of Common Stock on the
exercise date.  Limited SARs are similar to general SARs except that, unless the
Administrator determines otherwise,  limited SARs may be exercised only during a
prescribed  period  following  the  occurrence  of one or more of the  following
"change of control" transactions: (i) the approval of the Board of Directors and
shareholders of the Company of a consolidation or merger in which the Company is
not the  surviving  corporation,  the  sale of all or  substantially  all of the
assets of the Company,  or the  liquidation or dissolution of the Company,  (ii)
the  commencement  of a tender or exchange offer for the Company's  Common Stock
(or securities  convertible  into Common Stock) without the prior consent of the
Board,  (iii) the  acquisition  of  beneficial  ownership by any person or other
entity  (other than the Company or any employee  benefit  plan  sponsored by the
Company) of  securities  of the Company  representing  25% or more of the voting
power of the Company's outstanding securities,  or (iv) in the event, during any
period of two  consecutive  years or less,  individuals  who at the beginning of
such period  constitute  the entire Board cease to  constitute a majority of the
Board, unless the election, or the nomination for election, of each new director
is approved by at least a majority of the directors then still in office.

     An SAR holder may exercise his SAR rights by giving  written notice of such
exercise to the Company,  which  specifies  the number of shares of Common Stock
involved.  The exercise of any portion of either the related stock option or the
tandem  SARs  will  cause a  corresponding  reduction  in the  number  of shares
remaining  subject to the option or the tandem SARs, thus  maintaining a balance
between outstanding options and SARs. SARs have the same termination  provisions
as the underlying  stock options (as described above) in the event an SAR holder
ceases to be an employee of the Company.

Restricted Stock Purchase Agreements

     Restricted share agreements  provide for the issuance of restricted  shares
of Common Stock to eligible participants under the Management Plan. The Board of
Directors may determine the price to be paid by the  participant  for the shares
or that the  shares  may be issued  for no  monetary  consideration.  The shares
issued shall be subject to restrictions  for a stated  restricted  period during
which the participant must remain in the Company's employ in order to retain the
shares. Payment may be made in cash, by promissory note, or via a combination of
both. In June 1996, the Company issued an aggregate of 41,667  restricted shares
under the  Management  Plan: (i) each of Mr.  Rashbaum and Mr. Melillo  received
33,333  shares and (ii) Charles  Rosen,  a consultant  to the Company,  received
16,667 shares.  All such shares were subject to a vesting  schedule whereby half
of the shares were to vest in each of June 1997 and 1998.  Upon the  termination
of Mr.  Rosen's  consulting  agreement,  his 16,667 shares were cancelled by the
Company;   likewise,  Mr.  Mellilo's  33,333  shares  were  cancelled  upon  his
resignation.

     Restricted  shares awarded under the  Management  Plan will be subject to a
period of time,  designated by the  Administrator  as the  "restricted  period,"
during  which the holder has limited  rights with  respect to such  shares.  The
Administrator  may also impose other  restrictions,  terms,  and conditions that
must be  fulfilled  before the  restricted  shares  may vest.  Upon the grant of
restricted shares,  stock  certificates  registered in the name of the recipient
will be issued, and such shares will constitute issued and outstanding shares of
Common Stock for all corporate purposes.  The holder will have the right to vote
the restricted  shares and to receive all regular cash dividends (and such other
distributions as the Administrator may designate,  other than distributions made
solely with respect to the restricted  shares  ("retained  distributions")),  if
any, which are paid or distributed on the restricted shares and,  generally,  to
exercise  all other rights as a holder of Common Stock except that until the end
of the restricted period: (i) the holder will not be entitled to take possession
of the stock certificates representing the restricted shares or receive retained
distributions,  and (ii) the holder will not be entitled to sell,  transfer,  or
otherwise dispose of the restricted shares. A breach of any restrictions, terms,
or conditions  established by the  Administrator  with respect to any restricted
shares will cause a forfeiture of such restricted shares.


<PAGE>
     Upon expiration of the applicable restricted period(s) and the satisfaction
of any other applicable  conditions,  the restricted shares and any dividends or
other distributions not distributed to the holder (the "retained distributions")
thereon will become vested. Any restricted shares and any retained distributions
thereon  which do not so vest will be forfeited to the Company.  If prior to the
expiration of the  restricted  period a holder's  employ is  terminated  without
cause  or  because  of a  total  disability  (in  each  case as  defined  in the
Management Plan) or the holder dies, unless otherwise provided in the restricted
share  agreement  providing for the award of restricted  shares,  the restricted
period applicable to each award of restricted shares will thereupon be deemed to
have  expired.  Unless the  Administrator  determines  otherwise,  if a holder's
employment  terminates  prior to the  expiration  of the  applicable  restricted
period for any reason other than as set forth above,  all restricted  shares and
any retained  distributions  thereon will be forfeited.  Upon  forfeiture of any
restricted  shares,  the Company will repay to the holder thereof any amount the
holder originally paid for such shares.

     Acceleration of all awards under the Management Plan shall occur,  pursuant
to the provisions of Section 13 the Management  Plan, on the first day following
the occurrence of any of the following:  (a) the approval by the shareholders of
the Company of an "Approved  Transaction,"  (b) a "Control  Purchase,"  or (c) a
"Board Change."

     An "Approved  Transaction" is defined as (i) any consolidation or merger of
the Company in which the Company is not the continuing or surviving  corporation
or  pursuant  to which  shares of Common  Stock  would be  converted  into cash,
securities,  or other  property  other than a merger of the Company in which the
holders  of  Common  Stock  immediately  prior  to  the  merger  have  the  same
proportionate ownership of Common Stock of the surviving corporation immediately
after the merger,  (ii) any sale,  lease,  exchange,  or other  transfer (in one
transaction or a series of related  transactions) of all, or substantially  all,
of the assets of the Company,  or (iii) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.

     A "Control  Purchase" is defined as  circumstances  in which any person (as
such term is defined in Sections  13(d)(3) and  14(d)(2) of the  Exchange  Act),
corporation,  or other entity  (other than the Company or any  employee  benefit
plan  sponsored  by the  Company)  (i) shall  purchase  any Common  Stock of the
Company (or securities  convertible  into the Company's  Common Stock) for cash,
securities,  or any other  consideration  pursuant to a tender offer or exchange
offer,  without the prior consent of the Board of Directors or (ii) shall become
the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange
Act),  directly  or  indirectly,  of  securities  of  the  Company  representing
twenty-five  percent  (25%)  or more of the  combined  voting  power of the then
outstanding securities of the Company ordinarily (and apart from rights accruing
under  special  circumstances)  having  the  right  to vote in the  election  of
directors  (calculated  as provided in  paragraph  (d) of such Rule 13d-3 in the
case of rights to acquire the Company's securities).

     A "Board Change" is defined as circumstances in which, during any period of
two consecutive  years or less,  individuals who at the beginning of such period
constitute  the entire Board shall cease for any reason to constitute a majority
thereof  unless the election,  or the  nomination  for election by the Company's
shareholders, of each new director was approved by a vote of at least a majority
of the directors then still in office.

Non-Executive Director Stock Option Plan

     The Company  terminated  its  Non-Executive  Director  Stock Option Plan on
December 31, 1998, in accordance with the terms thereof.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth certain  information  regarding  beneficial
ownership of the Company's  outstanding Common Stock as of March 29, 1999 by (i)
each beneficial owner of 5% or more of the Company's Common Stock;  (ii) each of
the Company's  executive  officers,  directors and key employees;  and (iii) all
executive  officers,  directors,  and key  employees  as a  group.  All  numbers
reflected herein and in the footnotes hereto have been adjusted to reflect the 1
for 3 reverse split  effected on February 5, 1998 and the Common Stock  dividend
paid on February 5, 1999.





<PAGE>
<TABLE>
<CAPTION>

            Name and Address                          Number of Shares            Percent of Common Stock Beneficially Owned (2)(3)
           of Beneficial Owner                     Beneficially Owned (1)
           -------------------                     ------------------

European Ventures Corp.
<S>      <C>                                            <C>                                          <C>  
P.O. Box 47                                             1,440,700 (4)                                26.8%
Road Town,
Tortola, British Virgin Islands

Harold Rashbaum
c/o Hollywood Productions, Inc.                          -- (5)                                      1.2%
14 East 60th Street, Suite 402
New York, New York 10022

Robert DiMilia
c/o Hollywood Productions, Inc.                          -- (6)                                        *
14 East 60th Street, Suite 402
New York, New York 10022

Alain Le Guillou, M.D.
c/o Hollywood Productions, Inc.                          --                                           --
14 East 60th Street, Suite 402
New York, New York 10022

(table continued from previous page)

James Frakes
c/o Hollywood Productions, Inc.                          --                                           --
14 East 60th Street, Suite 402
New York, New York 10022

All Officers and Directors as a Group (four persons)
                                                         -- (5)(6)                                   1.8%
</TABLE>
* Less than 1%

     (1) Unless otherwise noted, all of the shares shown are held by individuals
or entities  possessing  sole voting and  investment  power with respect to such
shares.  Shares not outstanding but deemed  beneficially  owned by virtue of the
right of an individual or entity to acquire them within 60 days,  whether by the
exercise of options or  Warrants,  are deemed  outstanding  in  determining  the
number of shares beneficially owned by such person or entity.

     (2) The  "Percent of Common  Stock  Beneficially  Owned" is  calculated  by
dividing the "Number of Shares  Beneficially  Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common  Stock that such  person or entity has the right to acquire  within 60
days,  whether by exercise of options or Warrants.  The "Percent of Common Stock
Beneficially  Owned" does not reflect shares beneficially owned by virtue of the
right of any person,  other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or Warrants.

     (3) Does not give effect to the issuance of (i) 2,560,000  shares of Common
Stock  issuable  upon  exercise of the  3,840,000  outstanding  Warrants,  at an
exercise  price of $9.00  per  share or (ii)  116,666  shares  of  Common  Stock
reserved for issuance under the Company's Senior Management Incentive Plan.

     (4) Does not include  1,600  shares of Common  Stock  underlying  the 2,400
Warrants owned by EVC.

     (5) Does not include  66,666  shares of Common Stock  underlying  an option
granted under the Company's  Senior  Management  Incentive  Plan. See "Executive
Compensation."

     (6) Does not include  33,332  shares of Common Stock  underlying  an option
granted to Robert DiMilia under the Company's Senior Management  Incentive Plan.
See "Executive Compensation."


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On  February  1,  1999,  the  Company  loaned  $100,000  to Play Co. (a toy
retailer and publicly  traded  company whose board  chairman is the President of
both the  Company and  Breaking  Waves) and  received  in  exchange  therefor an
unsecured  promissory note bearing interest at 9% per annum. The note is payable
by Play Co. in four monthly  installments  commencing  March 15, 1999 and ending
June 15, 1999.

     On November  24,  1998,  pursuant to its Sales  Agreement  entered  into in
September  1998 by and  between  Breaking  Waves  and Play Co.,  Breaking  Waves
purchased  1.4  million  unregistered  shares of Play  Co.'s  common  stock in a
private transaction. As a result of this stock purchase, Breaking Waves acquired
approximately  25.4% of the  total  issued  and  outstanding  shares of Play Co.
common stock. As consideration for the stock,  Breaking Waves remitted $504,000,
which  represented  an  approximate  price of $0.36 per share:  $300,000  of the
consideration  was remitted in cash, and the remaining  $204,000 was provided in
the form of merchandise, primarily girls' swimsuits.


<PAGE>
     Breaking Waves had previously  sold (during its last two seasons) a limited
number of pieces of its swimwear to Play Co. in order to engage in a market test
of the sale of same from certain of Play Co.'s toy stores. Since the test proved
successful,  Breaking Waves entered into the Sales Agreement,  pursuant to which
Breaking  Waves  agreed  to sell to Play Co. on a  wholesale  basis and Play Co.
agreed to purchase from Breaking Waves, during each season during which swimwear
is  purchased,  an agreed  upon number of pieces of  merchandise  for its retail
locations.   Play  Co.  further  agreed  to  provide  advertising,   promotional
materials,  and ads of the merchandise in all of its brochures,  advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods, in all mediums utilized by same. The sales agreement is for a
term of one year and  automatically  extends  for one year terms  unless  either
Breaking Waves or Play Co. terminates same.

     On July 15, 1998,  Breaking Waves loaned  $300,000 to Play Co. and received
in exchange  therefor an unsecured  promissory  note bearing  interest at 9% per
annum.  The note called for five monthly  installments of principal and interest
commencing  on August 15, 1998 and ending  December 30, 1998 and has been repaid
in full.

     On March 1, 1998 Breaking Waves loaned $250,000 to Play Co. and received in
exchange therefor an unsecured  promissory note bearing interest at 15% interest
per annum.  The note  called  for ten  monthly  installments  of  principal  and
interest  commencing  on March 31, 1998 and ending on December  31, 1998 and has
been repaid in full.

     In April 1998, the Company  completed a private placement of 700,000 shares
of the Company's  Common Stock at a price of $1.60 per share. HDS Capital Corp.,
a company  whose  secretary  is related to the  Company's  President,  purchased
250,000 such shares thereby.  See "Description of Business-Private  Offerings of
Common Stock and Registration Thereof."

     In February  1998,  the Company  completed a private  placement  of 600,000
shares of the  Company's  Common  Stock at a price of $0.65 per share.  American
Telecom  Corporation,  a company whose president,  secretary,  and a director is
related to the  Company's  President,  purchased  200,000  shares  thereby.  See
"Description  of  Business-Private  Offerings of Common  Stock and  Registration
Thereof."

     During the years ended  December  31, 1998 and 1997,  the Company  remitted
$27,000  and  $69,500,   respectively,  in  financial  consulting  fees  to  DRA
Consulting,  Inc.,  a  company  whose  president  is  related  to the  Company's
President.

     In March 1997,  the Company  granted to each of Harold  Rashbaum and Robert
DiMilia an option to  purchase  100,000  and 50,000  pre-reverse  split  shares,
respectively, of Common Stock at an exercise price of $5.125 per share, pursuant
to the Management Plan. The terms of this option were revised in accordance with
the February 1998 reverse  split of the Company's  Common Stock and the February
1999 Common Stock dividend and now provide for the purchase of 66,666 and 33,332
shares,  respectively,  at $1.46 per share. See "Executive Compensation - Senior
Management Incentive Plan."

     In October 1996, in exchange for two promissory  notes,  the Company loaned
Mr. Rashbaum and Robert Melillo (the former Chief Executive Officer,  President,
and Director of the Company) an aggregate of $87,000 bearing  interest at 6 1/2%
payable over three years.  In January 1997, the balance of Mr.  Melillo's  note,
aggregating  $30,130,  was forgiven as part of a severance  package  provided to
same.

     In June 1996,  the  Company  issued  33,333  shares of Common  Stock to Mr.
Melillo  under the  Management  Plan.  The shares were to vest at the rate of in
each of June 1997 and 1998. On January 10, 1997, Mr. Melillo resigned and agreed
to return 16,667 shares to the Company.  Mr.  Melillo  failed to comply with the
terms of his  resignation;  therefore,  all 33,333  shares were  cancelled.  See
"Executive Compensation - Employment and Consulting Agreements."

     Before he became an Officer  and  Director  of the  Company,  Mr.  Rashbaum
provided  consulting  services to the Company through HBR, a company of which he
is an officer and  director and of which his wife is the sole  shareholder.  HBR
entered  into an oral  consulting  agreement  with the  Company  whereby it will
receive 5% of the net profits  received by the Company from the  distribution of
Dirty  Laundry.  In  addition,  HBR  received  $40,000  and 5,000  shares of the
Company's Common Stock at the closing of the Company's  initial public offering.
From October 1996 through March 1997, Mr. Rashbaum received a salary of $104,000
per annum for being an officer and director of the Company.  In March 1997,  Mr.
Rashbaum's salary was increased to $156,000 per annum. In addition, Mr. Rashbaum
received  33,333 shares of Common Stock under the  Management  Plan, one half of
which  shares  vested  in  each of June  1997  and  June  1998.  See  "Executive
Compensation - Employment and Consulting Agreements."

     In January  1996,  Dan Stone entered into a two year  consulting  agreement
with  Breaking  Waves  pursuant  to which he was to  oversee  the  operation  of
Breaking  Waves in return for a yearly  consulting  fee of  $100,000.  Mr. Stone
received $50,000 from the proceeds of the Company's initial public offering,  as
payment in advance of one half of the 1997  consulting fee, the balance of which
was paid in weekly  installments.  On January 1, 1998, the consulting  agreement
expired,  and Mr. Stone's  relationship with Breaking Waves was terminated.  See
"Executive Compensation - Employment and Consulting Agreements."


<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) The following financial  statements of the Company are included as Part
II,

Item 8:
<TABLE>
<CAPTION>

<S>                                                                             <C>
             Index to Financial Statements ................................   F-0
             Report of Independent Certified Public Accountants ...........   F-1
             Balance Sheets ...............................................   F-2
             Statements of Operations .....................................   F-3
             Statement of Stockholders' Equity ............................   F-4
             Statements of Cash Flows .....................................   F-5 - F-6
             Notes to Financial Statements ................................   F-7 - F-25
</TABLE>


On October 29, 1998,  the Company filed a report on Form 8-K disclosing the
dismissal of Scarano & Tomaro, P.C. as auditors of the Company. The Form 8-K was
amended on November 24, 1998.

     The following  exhibits  which are  designated by an asterisk (*) are filed
herewith,  and those  designated  by (**)  shall be filed by  amendment  hereto.
Exhibits  not so  designated  previously  were  filed  with the  Securities  and
Exchange  Commission  with either (i) the  Registration  Statement on Form SB-2,
file no.  333-5098-NY,  (ii) the  Registration  Statement on Form SB-2, file no.
333-5098-NY, Post-Effective Amendment No. 1, (iii) the Registration Statement on
Form SB-2, file no.  333-5098-NY,  Post-Effective  Amendment No. 2, or (iv) such
other  documents  as the  Company  has filed with the  Securities  and  Exchange
Commission  as designated  below.  Pursuant to 17 C.F.R.  230.411,  each exhibit
filed by the Company is incorporated by reference herein.
<TABLE>
<CAPTION>

<S>                      <C>
  3.1                    Certificate of Incorporation of the Company
  3.2                    Amendment to Certificate of Incorporation of the Company, filed in June 7, 1996
  3.4                    By-Laws of the Company
  3.6                    Certificate of Incorporation of Breaking Waves, Inc.
  3.7                    By-Laws of Breaking Waves, Inc.
  4.1                    Specimen Common Stock Certificate
  4.2                    Specimen Warrant Certificate
  4.4                    Form of Warrant Agreement between the Company, the Underwriter and Continental 
                         Stock Transfer & Trust Company
  4.5                    Form of Restricted Stock Agreement
 10.2                    The Company's Senior Management Incentive Plan
 10.4                    Consulting Agreement between Breaking Waves, Inc. and Dan Stone
 10.5                    Lease for premises at 112 West 34th Street, New York, New York
10.6                     Lease for premises at 8410 N.W. 53rd Terrace, Miami, Florida
10.6(a)                  Amendment to lease at 8410 N.W. 53rd Terrace, Miami, Florida
 10.7                    Stock Purchase Agreement between the Company, European Ventures Corp., Breaking Waves, Inc., and the 
                         shareholders of Breaking Waves, Inc., dated May, 1996
 10.9                    Property Acquisition Agreement between the Company and Rogue Features, Inc., dated March, 1996
 10.10                   Co-production agreement between the Company and Rogue Features, Inc., dated March, 1996 and all amendments 
                         thereto
 10.11                   Right of First Refusal Agreement with principals of Rogue Features, Inc.
 10.13                   Shippers Agency Agreement between Hollywood Productions, Inc., and Third Party Enterprises, Inc.
 10.14                   License Agreement between Breaking Waves, Inc. and Beach Patrol, Inc.
 10.16                   Employment Agreement with Michael Friedland (incorporated by reference to the indicated exhibit in the 
                         Company's 10-KSB for the year ended December 31, 1996)
10.17                    Employment Agreement with Malcolm Becker (incorporated by reference to the indicated exhibit in the 
                         Company's 10-KSB for the year ended December 31, 1996)
 10.18                   Termination of Employment Agreement with Robert Melillo (incorporated by reference to the indicated 
                         exhibit in the Company's 10-KSB for the year ended December 31, 1996)
 10.19                   Trident Releasing, Inc. License Agreement (incorporated by reference to the indicated exhibit in the 
                         Post-Effective Amendment No.1)
 10.20                   Cyclone Option Agreement (incorporated by reference to the indicated exhibit in the Post-Effective 
                         Amendment No.1)
 10.21                   Cyclone Co-Writer Agreement (incorporated by reference to the indicated exhibit in the Post-Effective 
                         Amendment No.1)
 10.22                   Heller Financial Agreement (incorporated by reference to the indicated exhibit in the Post-Effective 
                         Amendment No.2)
 10.23                   Non-Executive Director Stock Option Plan (incorporated by reference to Appendix B in the Proxy Statement 
                         for the Company's June 1997 Annual Meeting)
 10.24                   Kawasaki Motors Corp., USA "Jet Ski" License Agreement (incorporated by reference to the indicated exhibit 
                         in the Company's 10-KSB for the year ended December 31, 1997)
 10.25                   Amendment to lease at 112 West 34th Street, New York, New York (incorporated by reference to the indicated 
                         exhibit in the Company's 10-KSB for the year ended December 31, 1997)
 10.26                   Form of Subscription Agreement used in connection with the Company's February 1998 Private Placement 
                         (incorporated by reference to the indicated exhibit in the Company's 10-KSB for the year ended 
                         December 31, 1997)
10.27*                   Form of Subscription Agreement used in connection with the Company's May 1998 Private Placement
10.28*                   Amendment to Employment Agreement with Michael Friedland dated January 1, 1998
10.29*                   Amendment to Employment Agreement with Malcolm Becker dated January 1, 1998
10.30*                   Second Amendment to Employment Agreement with Malcolm Becker dated January 1, 1999
10.31**                  Lease for premises at 14 East 60th Street, Room 402, New York, New York
16.01                    Letter from Scarano & Tomaro, P.C. regarding dismissal of Scarano & Tomaro, P.C. as the Company's auditors 
                         (incorporated by reference to the indicated exhibit in the Company's Form 8-K/A filed on November 24, 1998)
 27.1*                   Financial Data Schedule

</TABLE>
<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997


<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>




                                                                                              Page
                                                                                             number

<S>                                                                                              <C>
Independent auditors' report                                                                   F-1

Consolidated balance sheet at December 31, 1998                                                F-2

Consolidated statements of operations for the years ended
 December 31, 1998 and 1997                                                                    F-3

Consolidated statement of stockholders' equity for the years ended
 December 31, 1998 and 1997                                                                    F-4

Consolidated statements of cash flows for the years ended
 December 31, 1998 and 1997                                                                 F-5 - F-6

Notes to consolidated financial statements                                                 F-7 - F-25
</TABLE>



<PAGE>
                          INDEPENDENT AUDITORS' REPORT





To the Board of Directors and Stockholders of
Hollywood Productions, Inc



     We have audited the  accompanying  consolidated  balance sheet of Hollywood
Productions,  Inc. and Subsidiary the "Company", as of December 31, 1998 and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  for the years  ended  December  31,  1998 and  1997.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
the  Company  as of  December  31,  1998  and the  consolidated  results  of its
operations  and cash flows for the years  ended  December  31,  1998 and 1997 in
conformity with generally accepted accounting principles.




Massella, Tomaro & Co., LLP
Jericho, New York
February 25, 1999






<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>


                                                      ASSETS

Current assets:
<S>                                                                                                              <C>              
    Cash                                                                                                         $         159,526
    Cash - restricted                                                                                                    1,150,000
    Accounts receivable                                                                                                     53,228
    Prepaid expenses                                                                                                        52,668
    Inventory                                                                                                            2,663,003
    Advances to officer                                                                                                     18,000
    Deferred tax asset                                                                                                      55,000
                                                                                                                 -----------------
         Total current assets                                                                                            4,151,425

Furniture, computer equipment, and leasehold improvements, net                                                              78,875
Film production and distribution costs, net                                                                              1,901,222
Costs in excess of net assets of business acquired                                                                         904,641
Investments in joint venture and affiliate                                                                               1,177,270
Advances to officer - non-current portion                                                                                   22,000
Organizational costs, net                                                                                                   50,000
Deferred tax asset - non current                                                                                           173,658
Other assets                                                                                                                20,635
                                                                                                                 -----------------
         Total assets                                                                                                   $8,479,726


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                                                             $          70,202
    Accrued expenses                                                                                                       540,204
    Due to factor                                                                                                        2,063,554
    Capital lease obligations                                                                                               13,589
    Deferred tax liability                                                                                                  50,159
                                                                                                                 -----------------
         Total current liabilities                                                                                       2,737,708


Capital lease obligations, net of current portion                                                                           43,683
                                                                                                                 -----------------

         Total liabilities                                                                                               2,781,391

Commitments and contingencies (Note 9)                                                                                           -

Stockholders' equity:
    Common stock - $.001 par value, 20,000,000 shares authorized,
     5,373,388 shares issued and outstanding (Notes 1 and 13)                                                                5,374
    Additional paid-in capital                                                                                           6,307,416
    Accumulated deficit                                                                                                    (614,455)
                                                                                                                  ------------------
         Total stockholders' equity                                                                                      5,698,335

Total liabilities and stockholders' equity                                                                       $       8,479,726
                                                                                                                 =================
</TABLE>

           See accompanying notes to consolidated financial statements



<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>

                                                                         1998            1997
                                                                   ---------------  -------------

<S>                                                                   <C>            <C>        
Net sales .........................................................   $ 5,276,459    $ 5,307,115

Cost of sales .....................................................     3,343,364      3,263,744
                                                                      -----------    -----------

Gross profit ......................................................     1,933,095      2,043,371
                                                                      -----------    -----------

Expenses:
    Selling, general, and administrative expenses .................     2,349,510      2,179,441
    Amortization of costs in excess of net assets of business
    acquired ......................................................        70,952         70,952
                                                                      -----------    -----------

Total expenses ....................................................     2,420,462      2,250,393
                                                                      -----------    -----------

Loss before other income (expense)
 and provision for income taxes ...................................      (487,367)      (207,022)
                                                                      -----------    -----------

Other income (expense):
    Equity in earnings of affiliate ...............................       473,270           --
    Rental income .................................................        15,947           --
    Cancellation (issuance) of stock issued in lieu of compensation        62,500        (62,500)
    Public offering costs .........................................       (91,385)          --
    Interest and finance expense ..................................      (224,603)      (224,396)
    Interest income ...............................................        90,249         98,316
                                                                      -----------    -----------
         Total other income (expense) .............................       325,978       (188,580)
                                                                      -----------    -----------

Loss before (benefit) provision for
 income taxes .....................................................      (161,389)      (395,602)

(Benefit) provision for income taxes ..............................      (192,383)        27,865
                                                                      -----------    -----------

Net income (loss) .................................................        30,994       (423,467)

Other items of comprehensive income ...............................          --             --
                                                                      -----------    -----------

Comprehensive net income (loss) ...................................   $    30,994    $  (423,467)
                                                                      -----------    -----------

Basic:
    Net loss ......................................................   $       .01    $      (.10)
                                                                      ===========    ===========

Weighted average number of
 common shares outstanding ........................................     4,990,554      4,064,080
                                                                      ===========    ===========


</TABLE>

           See accompanying notes to consolidated financial statements




<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>

                                                                        Additional                       Total
                                                Common Stock             Paid-in        Accumulated   Stockholders'
                                            Shares*          Amount      Capital          Deficit       Equity

<S>                  <C> <C>               <C>          <C>            <C>            <C>            <C>        
Balances at December 31, 1996 ........     4,078,334    $     4,054    $ 5,653,754    $  (221,982)   $ 5,435,826

Cancellation of common stock in
 connection with senior management
 incentive income plan ...............       (16,666)           (50)       (62,450)          --          (62,500)

Issuance of common stock pursuant to a
 management employment agreement .....        28,888             86         24,914           --           25,000

Net loss for the year ended
 December 31, 1997 ...................          --             --             --         (423,467)      (423,467)
                                         -----------    -----------    -----------    -----------    -----------

Balances at December 31, 1997 ........     4,090,556          4,090      5,616,218       (645,449)     4,974,859

Sale of common stock .................     1,300,000          1,300        753,682           --          754,982

Cancellation of common stock
 in connection with Senior
 Management Plan .....................       (16,668)           (16)       (62,484)          --          (62,500)

Net income for the year ended
 December 31, 1998 ...................          --             --             --           30,994         30,994
                                         -----------    -----------    -----------    -----------    -----------

Balances at December 31, 1998 ........     5,373,888    $     5,374    $ 6,307,416    $  (614,455)   $ 5,698,335
                                         ===========    ===========    ===========    ===========    ===========
</TABLE>

*Notes 1 and 13














           See accompanying notes to consolidated financial statements
<PAGE>

                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>


                                                                     1998            1997
                                                                --------------  ----------

Cash flows from operating activities:
<S>                                                               <C>            <C>         
   Net income (loss) ..........................................   $    30,994    $  (423,467)
   Adjustments to reconcile net income (loss) to net
    cash (used for) operating activities:
       Equity earnings in affiliate ...........................      (473,270)          --
       Amortization and depreciation ..........................       283,584        169,980
       Expensing of deferred offering cost ....................        87,385           --
       Sale of inventory to acquire common stock ..............      (204,000)          --
       Deferred income tax (benefit) expense ..................      (195,660)         4,852
       Forgiveness of note receivable in lieu of compensation .          --           30,130
       Cancellation (issuance) of stock issued for compensation       (62,500)        87,500
       Decrease (increase) in:
          Accounts receivable .................................       (29,911)          (966)
          Prepaid Expenses ....................................        (6,427)        42,319
          Inventory ...........................................      (279,811)      (567,666)
          Film production costs ...............................      (277,378)      (268,597)
          Security deposits ...................................        (1,533)        (9,924)
       Increase (decrease) in:
          Accounts payable ....................................       (64,216)        72,130
          Accrued expenses ....................................       336,743         98,405
          Due to factor .......................................       312,660        316,208
            Income taxes payable ..............................          --          (35,279)
                                                                  -----------    -----------

Net cash used for operating activities ........................      (543,340)      (484,375)
                                                                  -----------    -----------

Cash flows from investing activities:
   Acquisition of furniture, computer equipment, and
     leasehold improvements ...................................       (10,891)       (19,084)
   Investment in common stock of affiliate ....................      (300,000)          --
   Investment in joint venture ................................      (200,000)          --
   Subsidiary's redemption of preferred stock .................      (280,000)      (280,000)
                                                                  -----------    -----------

Net cash used for investing activities ........................      (790,891)      (299,084)
                                                                  -----------    -----------

Cash flows from financing activities:
   Sale of common stock .......................................       754,982
   Repayments from (advances to) related parties ..............        40,028        (13,804)
   Principal payments on capital leases .......................        (4,234)          --
   Offering costs incurred ....................................          --          (67,385)
                                                                  -----------    -----------

Net cash provided by (used for) financing activities ..........       790,776        (81,189)
                                                                  -----------    -----------

Net (decrease) in cash ........................................      (543,455)      (864,648)

Cash, beginning of period .....................................     1,852,981      2,717,629
                                                                  -----------    -----------

Cash, end of period ...........................................   $ 1,309,526    $ 1,852,981
                                                                  ===========    ===========


</TABLE>


          See accompanying notes to consolidated financial statements.




<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31,


<TABLE>
<CAPTION>

                                                                1998             1997
                                                             ------------      --------

Supplemental disclosure of non-cash flow information:  Cash paid during the year
    for:
<S>                                                      <C>                   <C>     
         Interest ....................................   $           224,603   $224,396
                                                         ===================   ========
         Income taxes ................................   $             3,277   $ 57,528
                                                         ===================   ========

Schedule of non-cash operating activities:
    In connection with the recognition of deferred
    compensation, 28,888 shares of common
    stock were issued as consideration for services ..   $              --     $ 25,000
                                                         ===================   ========


    In connection with the (cancellation) issuance of
    compensation, 16,667 shares of common stock
    were (cancelled) issued ..........................   $           (62,500)  $ 62,500
                                                         ===================   ========

Schedule of non-cash investing activities:
    Acquisition of office equipment and software in
    connection with capital lease obligations ........   $            61,506   $   --
                                                         ===================   ========

    Acquisition of an equity interest in Play Co. Toys
    & Entertainment Corp., in exchange for
    merchandise inventory ............................   $           204,000   $   --
                                                         ===================   ========



</TABLE>
          See accompanying notes to consolidated financial statements.





<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997


NOTE 1       -    ORGANIZATION

     Hollywood  Productions,  Inc. (the "Company") was incorporated in the State
of  Delaware  on  December  1, 1995.  The  Company was formed for the purpose of
acquiring  screenplays and producing  motion  pictures.  During  September 1996,
simultaneously  with the completion of its Initial Public Offering ("IPO"),  the
Company  acquired  all the capital  stock of  Breaking  Waves,  Inc.  ("Breaking
Waves"). Breaking Waves designs, manufactures, and distributes private and brand
name labels of children's swimwear nationally.

     The Company,  directly and through  Breaking  Waves,  has  investments in a
joint venture and an affiliate, which are accounted for on the equity method.

     On February 5, 1998, the Company declared a 1 for 3 reverse stock split. On
January  14,  1999,  the  Company  declared  a 100%  stock  dividend  to all its
shareholders  of record as of January 19, 1999.  Such stock dividend was paid on
February 5, 1999. Accordingly,  the financial statements give retroactive effect
to such stock split and dividend to which all record  holders are entitled.  See
Note 13.

NOTE 2       -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a) Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary  Breaking Waves after elimination of
all significant  intercompany  transactions and accounts.  Affiliated  companies
which are 20 to 50 percent owned are accounted for on the equity method.

     b) Cash and cash equivalents

     The Company  considers  highly liquid  investments with maturities of three
months or less at the time of purchase to be cash equivalents. Included in these
amounts are  certificates of deposit of  approximately  $1,166,234.  The Company
maintains  cash  deposits  in  accounts  which are in excess of Federal  Deposit
Insurance Corporation limits by approximately  $1,100,000.  The Company believes
that such risk is  minimal.  The  Company  maintains  a letter of credit  with a
financial  institution as a condition of its factoring agreement.  The financial
institution requires the Company to maintain $1,150,000 on deposit as collateral
for the letter of credit. Accordingly, such cash is designated as restricted.

     c) Inventory

     Inventory amounting to $2,663,003 at December 31, 1998 consists of finished
goods and is valued at the lower of cost (using the first-in,  first-out method)
or market.  All  inventory is pledged as  collateral  for  factored  receivables
pursuant to a factoring agreement with a financial institution.

     d) Film production and distribution costs

     The Company follows industry  standards in capitalizing film production and
distribution  costs.  Film production and  distribution  costs include all costs
associated with the writing, producing, and distribution of the film. Film costs
include the costs of  production,  prints,  pre-release,  and other  advertising
expected to benefit future periods.  These costs, as well as  participation  and
talent  residuals,  are charged against  earnings on an individual film basis in
the ratio that the  current  year's  gross film  revenues  bear to  management's
estimate of total remaining ultimate gross film revenues from all sources.

     Film  costs are  stated at the lower of cost or  estimated  net  realizable
value on an individual  film basis.  Revenue and cost forecasts are  continually
reviewed  by  management  and revised  when  warranted  by changing  conditions.
Estimates of total gross revenues can change  significantly  due to the level of
market acceptance of film products. Accordingly,  revenue estimates are reviewed
periodically  and  amortization  is  adjusted.  Such  adjustments  could  have a
material effect on the results of operations in future  periods.  When estimates
of total  revenue  and  costs  indicate  that a feature  film will  result in an
ultimate loss,  additional  amortization is recognized to the extent required to
produce a zero gross margin over the remaining life of the film.
<PAGE>
     For the year ended December 31, 1998, the Company has amortized $122,126 of
film production and distribution costs.

     e) Income taxes

     The Company  accounts  for income  taxes in  accordance  with  Statement of
Financial  Accounting  Standards ("SFAS") No. 109, "Accounting for Income Taxes"
which requires the use of the "liability method" of accounting for income taxes.
Accordingly,  deferred tax  liabilities  and assets are determined  based on the
difference  between  the  financial  statement  and  tax  bases  of  assets  and
liabilities,  using  enacted  tax  rates in  effect  for the  year in which  the
differences  are  expected to  reverse.  Current  income  taxes are based on the
respective  periods'  taxable  income  for  federal,  state and city  income tax
reporting purposes.

     f) Revenue and cost recognition

     Breaking  Waves' sales are recognized upon the shipment from the warehouse.
Sales returns are recorded upon  acceptance of the goods by the warehouse.  Duty
costs,  which are a component of cost of sales,  are recorded upon the clearance
of such goods through customs.

     Revenues from the theatrical distribution of motion pictures are recognized
when motion  pictures are exhibited.  Revenues from video sales are  recognized,
together  with  related  costs,  on the date that  video  units are made  widely
available for sale by retailers.  Revenues from the licensing of feature  films,
together  with related  costs,  are recorded  when the material is available for
telecasting  by the licensee and when certain  other  conditions  are met.  Film
production and distribution costs are stated at the lower of unamortized cost or
estimated net realizable  value. In accordance with SFAS 53, the individual film
forecast method is used to amortize film costs.

     g) Earnings per share

     During 1997, the Financial  Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 replaced the previously required reporting of
primary and fully diluted earnings per share with basic and diluted earnings per
share, respectively.  Unlike the previously reported primary earnings per share,
basic earnings per share excludes the dilutive effects of stock options. Diluted
earnings per share is similar to the previously  reported fully diluted earnings
per share.  Earnings  per share  amounts  for all  periods  presented  have been
calculated in accordance with the requirements of SFAS No. 128.

     h) Use of estimates

     In preparing  financial  statements in conformity  with generally  accepted
accounting principles,  management is required to make estimates and assumptions
which affect the reported  amounts of assets and  liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. The most significant estimate
with regard to these financial statements is the estimate of projected income of
motion  picture  which is the  basis  used in  amortizing  film  production  and
distribution costs. Actual results could differ from those estimates.

     i) Fair value disclosure at December 31, 1998

     The  carrying  value  of cash,  accounts  receivable,  inventory,  accounts
payable,  accrued  expenses,  and capital  lease  obligations  are a  reasonable
estimate of their fair value.

Reclassifications

     Certain  prior period  accounts  have been  reclassified  to conform to the
current year presentation.

Long-Lived Assets

     During  1997,  the Company  adopted the SFAS No. 121,  "Accounting  for the
impairment  of long lived assets and for long lived  assets to be disposed  of."
The  statement  requires  that  long  lived  assets  and  certain   identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may  not be  recoverable.  There  was no  impact  on the  Company's  results  of
operations or financial condition upon the adoption of SFAS No. 121, nor has the
Company had to adjust the carrying value of its long lived assets.

     l) Deferred compensation

     Deferred   compensation   consists  of  common  stock  issued  in  lieu  of
compensation  pursuant to the 1996 Senior Management  Incentive Plan ("Incentive
Plan") and  management  employment  agreements.  Such costs have been  amortized
using the  straight  line method  over the period of the  vesting  rights of the
respective shares.

     m) Organizational costs

     Organizational  costs consist of common stock issued in lieu of legal costs
incurred in the  establishment  of the Company.  Organizational  costs are being
amortized  on a straight  line basis over their  estimated  useful lives of five
years.

     n) Costs in excess of net assets of business acquired.


<PAGE>
     Costs in excess of net assets of business  acquired in connection  with the
acquisition of Breaking Waves are being  amortized on a straight line basis over
the estimated useful life of the related assets acquired for a period of fifteen
years.

     o) Deferred offering costs

     Deferred  offering costs incurred during 1997 consist of professional  fees
and advances to an underwriter in connection  with a IPO of Breaking Waves which
was terminated during 1998. Accordingly,  all such costs related to the IPO have
been expensed and charged to operations in 1998.

     p) Accounting for stock-based compensation

     The  Company  elected  to  continue  to  measure  compensation  cost  using
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to  Employees,"  as is permitted by SFAS No. 123,  "Accounting  for  Stock-Based
Compensation."  Accordingly,  no  compensation  cost has been recognized for the
options  issued under the Incentive  Plan as the exercise price and market value
at the date of grant  were the same.  For  companies  that  choose  to  continue
applying APB No. 25, SFAS No. 123 requires  certain pro forma  disclosures as if
the fair value method had been utilized. Had compensation cost for the Company's
stock-based  compensation  plan been  determined  based on the fair value at the
grant  dates for awards  under the plan  consistent  with the method of SFAS No.
123,  the  Company's  net income  (loss) and  earnings per share would have been
reduced to the pro forma amounts  indicated  below  utilizing  the  Black-Sholes
option pricing model:
<TABLE>
<CAPTION>

                                                                                 1998                1997
                                                                          ----------------     ----------
                  Net income (loss)-
<S>                                                                       <C>                  <C>                               
                                   as reported                            $         30,994     $      (423,467)                  
                                    pro forma                             $         30,994     $      (533,217)
                                                                          ================     ================                   

                  Basic EPS -   as reported                               $           .01      $       (.10)
                                                                          ===============     =================
                                   pro forma                              $            .01     $       (.13)
                                                                          ================     ================
</TABLE>

     q) Effect of New Accounting Standards

     The Company does not believe that any recently issued accounting standards,
not yet adopted by the  Company,  will have a material  impact on its  financial
position and results of operations when adopted.

     r) Furniture, Computer Equipment, and Leasehold Improvements

     Furniture,  computer equipment,  and leasehold improvements are recorded at
cost less accumulated  depreciation  and  amortization  which is provided on the
straight  line basis over the  estimated  useful lives of the assets which range
between  five and seven  years.  Expenditures  for  maintenance  and repairs are
expensed as incurred.

     s) Equity Method of Accounting

     Investments  in  significantly  (20 to 50  percent)  owned  affiliates  are
accounted  for by the equity  method of  accounting,  whereby the  investment is
carried  at cost  of  acquisition,  plus  the  Company's  equity  percentage  in
undistributed earnings or losses since acquisition.  Reserves are provided where
management  determines  that  the  investment  or  equity  in  earnings  is  not
realizable.


<PAGE>
     t) Accounts Receivables

     The  Company   utilizes   the   allowance   method  for   recognizing   the
collectibility of its accounts receivables.  The allowance method recognizes bad
debt expense based on a review of the individual  accounts  outstanding based on
the  surrounding  facts.  As of  December  31,  1998,  no  allowance  was deemed
necessary by management.

NOTE 3 - FURNITURE, COMPUTER EQUIPMENT & LEASEHOLD IMPROVEMENTS

     Furniture, computer equipment, and leasehold improvements are as follows at
December 31, 1998:

Furniture & fixtures ..........   $ 37,944
Computer equipment and software     66,017
Leasehold improvements ........      4,594
                                  --------

                                   108,555
Less: accumulated  depreciation
         and amortization .....     29,680
                                  --------
                                  $ 78,875
                                  ========

     Computer  equipment  and  software  amounting  to  $61,506  is  pledged  in
connection with capital lease obligations.

     Depreciation and amortization expense for the years ended December 31, 1998
and 1997 amounted to $11,340 and $10,621, respectively.

NOTE 4 - ACQUISITION OF BREAKING WAVES, INC.

     Pursuant  to  a  stock   purchase   agreement   dated  May  31,  1996  (the
"Agreement"), on September 24, 1996, the Company issued 100,000 shares of Common
Stock  in  exchange  for all of the  issued  and  outstanding  capital  stock of
Breaking  Waves.  The transaction was accounted for using the purchase method of
accounting.  As a result of the  transaction,  excess  of cost  over net  assets
acquired totaling $1,064,283 was recorded and is being amortized over the useful
lives of the related assets which is fifteen years. Amortization expense totaled
$70,952 for the years ended December 31, 1998 and 1997, respectively.

     Prior to the  consummation  of the Company's IPO,  during  September  1996,
Breaking Waves performed a  re-capitalization  and exchanged all of its existing
common stock for new common stock, and a series of preferred stock.  Pursuant to
the Agreement, Breaking Waves issued 5,600 shares of its newly authorized Series
A Preferred Stock to its previous stockholders in proportion to their respective
holdings. The holders of the shares of Series A Preferred Stock had the right to
redemption whereby, on each of January 1, 1997 and 1998, Breaking Waves redeemed
one-half  of the  outstanding  shares  of the  Series A  Preferred  Stock,  at a
redemption  price of $100 per share on a pro rata basis.  During of January 1997
and 1998,  2,800 such shares of the Series A Preferred  Stock of Breaking  Waves
were redeemed for a total of $280,000 in each year.

NOTE 5 - INVESTMENT IN JOINT VENTURE AND AFFILIATE

     a) Investment in Joint Venture

     Pursuant to a  co-production  agreement  dated April 17, 1998,  the Company
invested  $200,000 for a 50% interest in a newly formed  entity,  Battle Studies
Productions,  LLC  ("Battle  Studies") a limited  liability  company.  Northfolk
Films,  Inc.  ("NFF"),  an  unrelated  party,  also  invested  $200,000  for the
remaining 50% interest in Battle  Studies.  Battle  Studies will be treated as a
joint venture in order to co-produce motion pictures and to finance the costs of
production and distribution of such motion  pictures.  The joint venture retains
all rights to the motion  pictures,  the  screenplays,  and all ancillary rights
attached thereto.  As of December 31, 1998, Battle Studies had completed filming
its first motion picture and was in post production.

     The Company  accounts for the  investment  in Battle  Studies on the equity
method.  Accordingly, as of December 31, 1998, the Company has only recorded its
initial  $200,000  investment in the joint venture since no operations  have yet
commenced.

     b) Investment in Affiliate

     On November 24, 1998, pursuant to a sales agreement (the "Sales Agreement")
entered into during  September  1998 by and between  Breaking Waves and Play Co.
Toys &  Entertainment  Corp.  ("Play Co," a toy retailer  and a publicly  traded
company  whose  Chairman of the Board is also the  President  of the Company and
Breaking Waves),  Breaking Waves purchased 1,400,000 unregistered shares of Play
Co.'s common stock for a total of $504,000  comprised of $300,000 in cash and by
shipping $204,000 of merchandise to Play Co. After the purchase,  Breaking Waves
owned a 25.4% of the outstanding common stock of Play Co.

     Breaking Waves accounts for its investment under the equity method. For the
year ended  December  31,  1998,  Breaking  Waves  recorded  $473,270  of equity
earnings for its  proportionate  share in Play Co.'s  earnings from November 24,
1988 to December 31, 1998.

     Play Co.'s operations are highly seasonal with approximately  30-40% of its
net sales  historically  falling  within the last three  months of the  calendar
year.  Accordingly,  the equity  earnings in Play Co. are not  indicative of the
results to be  expected if the  investment  in Play Co. was  consummated  at the
beginning of the year.
<PAGE>
     The  following  unaudited  pro forma  information  presents  the results of
operations  of the Company for the years ended  December 31, 1998 and 1997 as if
the investment in Play Co. was consummated at the beginning of its year:
<TABLE>
<CAPTION>

                              Year Ended December 31,
                              1998            1997
                          (Unaudited)

<S>                       <C>            <C>        
Net Sales .............   $ 5,276,459    $ 5,307,115
Cost of Sales .........     3,343,364      3,263,744
Total Expenses ........     2,420,462      2,250,393
Other Income (Expenses)      (192,354)      (718,102)
Net Loss ..............      (487,338)      (952,989)
Net Loss per share ....          (.10)          (.23)

</TABLE>
     These  unaudited  pro forma  results of  operations  have been prepared for
comparat ive purposes only and do not purport to be indicative of the results of
operations  which would have actually  resulted had the acquisition  occurred on
the date indicated, or of future results of operations.

NOTE 6 - DUE TO FACTOR

     NationsBanc

     On April 4,  1991,  Breaking  Waves  entered  into an  accounts  receivable
financing  agreement with NationsBanc  Commercial Corp.  ("Nations") to sell its
interest  in all  present  and future  receivables  without  recourse.  Interest
expense in connection with such financing  arrangement  amounted to $156,785 for
the year ended  December 31, 1997.  Effective on or about August 20, 1997,  such
financing  agreement  was  cancelled and replaced with a factoring and revolving
inventory loan and security agreement with Heller Financial, Inc.


     Heller

     On August 20, 1997,  Breaking  Waves entered into a factoring and revolving
inventory loan and security  agreement (as amended December 9, 1998) with Heller
Financial,  Inc.  ("Heller")  to sell their  interest  in all present and future
receivables without recourse.  Breaking Waves submits all sales offers to Heller
for credit approval prior to shipment, and pays Heller a factoring commission of
 .85% of the first $5,000,000 of receivables sold and .65% of receivables sold in
excess of $5,000,000  for each year.  Heller  retains from the amount payable to
Breaking Waves a reserve for possible  obligations such as customer disputes and
possible  credit  losses  on  unapproved  receivables.  Breaking  Waves may take
advances  of up to 85% of the  receivable,  with  interest at the rate of 1 3/4%
over prime.  In connection with the factoring  agreement,  the Company agreed to
maintain  $1,150,000 of cash in a segregated  account in order to  collateralize
standby letters of credit.

     Interest  expense related to this agreement  totaled  $224,603 and $67,611,
respectively,  for the years  ended  December  31,  1998 and 1997.  Heller has a
continuing interest in Breaking Wave's inventory as collateral for the advances.
As of December  31,  1998,  the net  advances to Breaking  Waves from the factor
amounted to $2,063,554.

NOTE 7 - CAPITAL LEASE OBLIGATIONS

     During  1998,  the Company  acquired  computer  equipment  and  proprietary
software for its subsidiary, Breaking Waves, pursuant to the following terms and
conditions:

     i) On August 13, 1998, the Company  acquired  various  computer and related
components for $28,583 by entering into a capital lease obligation with interest
at approximately 9.2% per annum,  requiring 48 monthly payments of principal and
interest of $713. The lease is secured by the related computer equipment.

     ii) On September 13, 1998, the Company  acquired  proprietary  software for
$32,923  by  entering  into  a  capital  lease   obligation   with  interest  at
approximately  10.9% per annum,  requiring 48 monthly  payments of principal and
interest of $850. The lease is secured by the related software.

     At December 31, 1998,  the  aggregate  future  minimum  lease  payments due
pursuant to the above capital lease obligations are as follows:

<TABLE>
<CAPTION>
                                                                                  
                                                                                        Year
                                                                                       ended
                                                                                     December
                                                                                       31:

                              <S>                                                      <C>                              
                              1999                                         $           18,757
                              2000                                                     18,757                                  
                              2001                                                     18,757
                              2002                                                     13,355
                                                                            -----------------
             Total minimal lease payments                                              69,626

                                 Less: Amounting representing Interest                 12,354

                                 Present value of net minimum
                                 lease payments                             $          57,272
                                                                              ===============
</TABLE>
<PAGE>
     At December 31, 1998 equipment and software under capital leases is carried
at a book value of $59,115.

NOTE 8 - PROVISION (BENEFIT) FOR INCOME TAX

     Provision  (benefit)  for income tax is comprised of the  following for the
years ended December 31:
<TABLE>
<CAPTION>

                                                                                   1998            1997
                  Current:
<S>                                                                             <C>             <C>       
                           Federal                                              $        -      $        -
                           State and local                                           3,277            23,013
                                                                                ----------      ------------
                                                                                     3,277            23,013
                                                                                ----------      ------------
                  Deferred:
                           Federal                                                (145,501)            2,257
                           State and local                                         (50,159)            2,595
                                                                                -----------     ------------
                                                                                  (195,660)            4,852
                                                                                -----------     ------------
Total (benefit) provision for income taxes                               $        (192,383)     $     27,865 
                                                                         ==================  ===============
</TABLE>

     A  reconciliation  of the  provision  for  income  taxes on income  per the
federal  statutory rate to the reported income tax expense is as follows for the
years ended December 31:
<TABLE>
<CAPTION>

                                                   1998          1997

Federal statutory rate applied to
<S>                                             <C>          <C>       
 pretax loss ................................   $ (38,187)   $(129,155)

State and local income taxes, net of federal
 income tax benefit, applied to pretax loss .     (13,478)     (55,992)

Permanent differences .......................       8,447       14,302

(Decrease) Increase in valuation allowance ..     (63,175)     170,845

Current provision for state and local taxes .       3,277       23,013

(Increase) in deferred tax assets ...........    (122,265)        --

(Decrease) increase in deferred tax liability      32,998        4,852
                                                ---------    ---------

      Total provision for income taxes ......   $(192,383)   $  27,865
                                                =========    =========
</TABLE>

     Income taxes are provided for the tax effects of  transactions  reported in
the financial  statements and consist of taxes currently due plus deferred taxes
related to differences  between the financial  statement and tax bases of assets
and  liabilities  for financial  statement  and income tax  reporting  purposes.
Deferred tax assets and liabilities represent the future tax return consequences
of these  temporary  differences,  which will either be taxable or deductible in
the year when the assets or liabilities  are recovered or settled.  Accordingly,
measurement  of the  deferred  tax assets and  liabilities  attributable  to the
book-tax basis differentials are computed at a rate of 34% federal and 12% state
and local pursuant to SFAS No. 109.




<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

     The tax  effect of  significant  items  comprising  the  Company's  current
deferred tax assets are as follows as of December 31, 1998:
<TABLE>
<CAPTION>

<S>                                                                                                <C>           
                  Net operating loss carryforwards                                                 $       47,470
                  Section 263A inventory capitalization                                                     7,530
                  Valuation allowance                                                                           -
                                                                                                   --------------

                  Deferred current tax asset                                                       $       55,000
                                                                                                   =============

                  The tax effect of significant  items  comprising the Company's
net  non-current  deferred tax asset and liability are as follows as of December
31, 1998:

                  Net operating loss carryforwards                                                 $      352,451
                  Valuation allowance                                                                    (128,634)
                                                                                                   ---------------
                  Deferred non-current tax asset                                                          223,817
                                                                                                   --------------

                  Equity in earnings of affiliate                                                  $       56,777
                  Depreciable assets                                                                       (6,618)
                                                                                                   ---------------
                  Deferred non-current tax liability                                                       50,159
                                                                                                   --------------

                  Net non-current deferred tax asset                                               $      173,658
                                                                                                   ==============

</TABLE>
<PAGE>
     The Company and its subsidiary  file a consolidated  tax return for federal
tax purposes.  For state and local purposes, the Company and its subsidiary file
separate  tax  returns.  As such,  each entity  computes its state and local tax
based on its own taxable income or loss.

     At December 31, 1998,  the Company had a net  operating  loss  carryforward
(NOL)  for  federal  and  state  tax  purposes  of  approximately  $865,000  and
$1,100,000, respectively, both of which expire between 2012 and 2013. Management
believes it is more likely than not that the results of future  operations  will
generate sufficient taxable income to realize the deferred tax asset.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

     a) Lease commitments
                                                                               
     The Company and its  subsidiary  have  entered  into lease  agreements  for
administrative offices. The Company leases its administrative office pursuant to
a 5  year  lease  expiring  November  30,  2001  at  annual  rent  amounting  to
approximately  $70,000,   before  annual  escalations.   Breaking  Waves  leased
administrative  offices through  approximately  January 1998 pursuant to a lease
requiring  annual payments of  approximately  $64,000.  Breaking Waves cancelled
such lease and simultaneously entered into a new lease for additional space with
the same landlord  requiring annual payments of $71,600 expiring  December 2004.
Lastly,  Breaking  Waves leases an offsite  office for one of its designers on a
month to month basis with annual payments approximating $11,000.





<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997



     The Company and its subsidiary's  approximate  future minimum rentals under
non-cancelable operating leases in effect on December 31, 1998 are as follows:
<TABLE>
<CAPTION>

<S>                          <C>                                                     <C>           
                             1999                                                    $      141,257
                             2000                                                           141,257
                             2001                                                           135,452
                             2002                                                            71,600
                             2003                                                            71,600
                             Thereafter                                                      71,600
                                                                                     --------------
                                                                                     $      632,766
</TABLE>

     Rent  expense for the years ended  December  31, 1998 and 1997  amounted to
approximately $158,174 and $147,180, respectively.

     b) Significant vendors and customers

     Breaking  Waves  purchases  approximately  90% of its  inventory  from  two
vendors in Indonesia.  For the years ended December 31, 1998 and 1997,  Breaking
Waves had three and two  customers,  respectively,  which comprise 13%, 13%, and
11%, and 36% and 12% of net sales, respectively.

     c) Seasonality

     Breaking Waves' business is considered seasonal with a large portion of its
revenues and profits being derived  between  November and March.  Each year from
April through  October,  Breaking  Waves engages in the process of designing and
manufacturing  the  following  season's  swimwear  lines,  during which time its
incurs the majority of its production costs with limited revenues.

     d) License agreements

     i) On October 16, 1995,  Breaking  Waves  entered into a license  agreement
with Beach Patrol, Inc. ("Beach") for the exclusive use of certain trademarks in
the United States.  The agreement  covered a term of January 1, 1996 to June 30,
1998 and contained a provision for an additional  three year  extension,  at the
option of Breaking  Waves,  through and until June 30, 2001.  Breaking Waves has
exercised this option,  thereby so extending the agreement.  The agreement calls
for  minimum  annual  royalties  of  $75,000  to  $200,000  over the life of the
agreement with options based on sales levels from  $1,000,000 for the first year
to $4,000,000 in the sixth year. The Company recorded  royalties and advertising
under this  agreement  totaling  $135,000  and  $111,000  during the years ended
December 31, 1998 and 1997, respectively.

     ii) On October 31, 1996,  Breaking  Waves entered into a license  agreement
with North-South  Books,  Inc. ("N-S") for the exclusive use of certain art work
and text in the making of swimsuits  and  accessories  in the United  States and
Canada.  The agreement expired March 1, 1999. The Company recorded $4,852 and $0
royalties  under this  agreement  during the years ended  December  31, 1998 and
1997, respectively.


     iii) On October 17, 1997,  Breaking Waves entered into a license  agreement
with Kawasaki  Motors Corp.,  U.S.A.  ("KMC") with an effective  date of July 1,
1997 for the  exclusive  use of certain  trademarks in the making of swimwear in
the United States.  The fee for the exclusive use of certain  trademarks is five
percent (5%) of net sales. The agreement expires May 31, 1999. No royalties were
paid under the  agreement  during the years  ended  December  31, 1998 and 1997,
respectively.

     e) Co-production and property purchase agreements

     Pursuant to co-production and property purchase  agreements dated March 15,
1996, as amended, the Company acquired the rights to co-produce a motion picture
and to finance the costs of production and  distribution  of such motion picture
with the  co-producer  agreeing to finance  $100,000 of the costs of production.
The Company  retains all rights to the motion picture,  the screenplay,  and all
ancillary rights attached  thereto.  The motion picture was completed during the
latter part of 1996 and,  accordingly,  the Company  commenced the marketing and
distribution process.

     As  of  December  31,  1998,  the  Company  invested   $1,964,613  for  the
co-production  and  distribution of such motion picture whereas the co-producers
have invested $100,000.  For the years ended December 31, 1998 and 1997, revenue
associated   with  the  motion   picture   amounted  to  $120,211  and  $44,875,
respectively,  and  amortized  film costs  amounted  to  $122,126  and  $41,266,
respectively.


<PAGE>
Employment agreements

     On November 27, 1996, the Company  entered into two  employment  agreements
(as  amended)  with two key  employees of Breaking  Waves.  Such  employees  are
responsible  for the  designing,  marketing  and sales of  Breaking  Waves.  The
employment  agreements  are for a term of three  years with  annual  salaries of
$60,000 and $130,000 for 1998 (as amended),  respectively, and for $110,000 each
for 1997. One of the employment agreements was further amended effective January
1, 1999 with an annual salary  increase from $60,000 to $70,000.  In addition to
the salaries,  the Company  agreed to issue on each of November 27, 1996,  1997,
and 1998, shares of common stock in the amount equal to the fair market value of
$25,000  (before  amendment)  on the  date of each  issuance,  to each  employee
subject to a vesting  schedule.  In connection  with the decrease in salary from
originally  $110,000 per year to $70,000 per year for one of the key  employees,
the  Company  reduced  the value of shares to be issued  thereof to $13,636  for
1998. During January 1999, the Company and such key employees mutually agreed to
defer the issuance of the common stock  scheduled to be issued November 27, 1998
until the second quarter of 1999.

     g) Year 2000

     The Company has  addressed and will continue to address the year 2000 issue
to ensure the  reliability of its operational  system.  The Company has and will
continue to make certain  investment in its software systems and applications to
ensure that it is Year 2000 compliant. These expenditures, which are expensed as
incurred  are not  expected to be material  The Company is also working with its
suppliers  and  customers  to ensure their  compliance  with Year 2000 issues in
order to avoid any interruptions in its business.





<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997



NOTE 10           -   STOCKHOLDER'S EQUITY

     a) Initial public offerings

     On  September  24, 1996,  the Company  successfully  completed  its initial
public offering.  The Company yielded net proceeds of $3,813,294 after deducting
underwriter selling expenses and non-accountable expense allowance.

     b) Reverse stock split

     Effective  February 5, 1998,  the Company  declared a 1 for 3 reverse stock
split.  Accordingly,  the financial  statements give  retroactive  effect to the
stock split.

     c) Private placement

     During   February  and  May  1998,   pursuant  to  two   separate   private
transactions,  the Company sold  600,000 and 700,000  shares of its common stock
for a total of  approximately  $195,000 and  $560,000,  respectively  to various
entities.  An officer  of two of the  entities  who  invested  in the  Company's
private placement is affiliated to the Company's President.

     On July 30, 1998 the Securities and Exchange  Commission declared effective
a Form S-3  Registration  Statement which registered the 600,000 shares from the
February,  1998 private transaction along with 1,960,700 shares held by the then
Company's  majority  shareholder,  European Ventures Corp.  ("EVC").  EVC's sole
officer and director is an affiliate of the Company's President.

     d) 1996 Senior Management Incentive Plan

     During May 1996,  the Board of Directors  adopted the Incentive  Plan.  The
Incentive Plan provides for the issuance of up to 166,666 shares of Common Stock
in connection with the issuance of stock options and common shares.

     On March 14, 1997, the Company granted 99,998 options to purchase shares of
common stock  pursuant to the  Company's  Incentive  Plan  consisting  of 66,666
options to the Company's  President and 33,332 options to another  officer.  The
exercise price of each option was fixed at $1.46 (as revised) per share and such
options expire March 2002.





<PAGE>
                   HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997



     A summary of the status of the Company's  stock options  outstanding  as of
December 31, 1998 and changes  during the years ended December 31, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>

                                                                         Number of              Exercise
                                                                           Options              Price
<S>                                                                              <C>            <C>  
                      Outstanding at December 31, 1996                              -           $   -
                                                                                -----           -------

                         Granted                                               99,998            1.46
                         Exercised                                                  -               -
                         Cancelled                                                  -               -
                                                                                -----           -----
                      Outstanding at December 31, 1997                         99,998            1.46
                         Granted                                                    -               -
                         Exercised                                                  -               -
                         Cancelled                                                  -               -
                                                                                   --          ------
                      Outstanding at December 31, 1998                        99,998            $1.46
                                                                            ==============      =====
</TABLE>

     e) Non-Executive Director Stock Option Plan

     During April 1997, the Company adopted the Company's Non-Executive Director
Stock  option Plan (the  "Director's  Plan"),  which was adopted by  shareholder
consent.  The Director's Plan provides that each eligible  director  receives an
option  to  purchase  up to  5,000  shares  of  Common  Stock  immediately  upon
appointment  and on  January  1 of each year in which  the  Director  has been a
member of the Board for a continuous 12 month period.  Options granted under the
Director's  Plan may be exercised at any time and before the  expiration of five
years from the date of their grant.  Effective  December  31, 1998,  the Company
cancelled the Director's Plan pursuant to the terms thereof.

     f) Cancellation of shares

     Effective  January  10,  1997,  upon the  resignation  of an officer  and a
consultant  of the Company,  16,667 of the  remaining  33,333  common shares not
vested which were  originally  issued to such officer and  consultant  under the
Incentive  Plan were caused to be  immediately  vested and the remaining  16,667
common shares were cancelled.

     During 1998, the 16,667 shares of common stock previously issued and vested
to a  former  officer  of the  Company  and  recorded  as  compensation  expense
amounting to $62,500 during 1997 were cancelled by the Company.

     g) Employment agreement

     Pursuant to the employment  agreements,  28,888 shares of common stock were
issued  during the year ended  December  31,  1997.  Such  shares were valued at
$25,000 with a 50% discount due to the restricted nature of the stock, resulting
in $25,000 being recorded as deferred compensation which has been amortized over
the vesting period of the stock issued.

     h) Distribution Warrants

     On April  15,  1998,  the  Company's  Board  of  Directors  authorized  the
distribution of Warrants (the "Distribution  Warrants") to all holders of shares
of the  Company's  Common Stock as of May 8, 1998 (the "Warrant  Record  Date").
Pursuant to the  distribution,  each  shareholder  of record  shall  receive one
Warrant to purchase one share of Common Stock at an exercise  price of $4.00 per
share.  The  Warrants,  which  are  exercisable  for a period  of  three  years,
commencing one year after  issuance,  shall be issued and  distributed  once the
Company has filed a  registration  statement for same and same has been declared
effective by the Securities and Exchange Commission. The Company intends to file
the registration statement in May 1999.


<PAGE>
NOTE 11 - RELATED PARTIES TRANSACTIONS

     During June 1996,  the Company issued 33,333 shares to each of two officers
of the Company as consideration  for services  rendered.  Vesting of such shares
will be 50% from one year from date of issuance and 50% from two years from date
of issuance.  Such shares were valued at 50% of the IPO price or $2.50.  For the
years ended December 31, 1998 and 1997 the Company recorded compensation expense
amounting to $31,250 and $93,750, respectively.

              For the  years  ended  December  31,  1998 and 1997,  $27,000  and
$69,500,  respectively of financial consulting fees were paid to an affiliate of
the Company's President.

     For the year ended December 31, 1998,  included in net sales is $204,000 of
sales made to Play Co. in lieu of partial  payment for the  acquisition of 25.4%
of Play Co.'s common stock. The Company's  President is also the Chairman of the
Board of Play Co.

     d) During  October  1996,  pursuant to two  promissory  notes,  the Company
loaned  two of its  officers  a total of  $87,000  bearing  interest  at six and
one-half  percent (6 1/2%) payable over three years.  During  January 1997,  the
balance of one of the notes  amounting  to  $30,130  was  forgiven  as part of a
severance package for a previous officer. As of December 31, 1998, the remaining
note amounted to $37,000,  of which  $15,000 has been  classified as current and
$22,000 classified as non-current.

     As of December 31, 1998,  the Company's  President was advanced  additional
funds totaling $3,000 which are  non-interest  bearing and due on demand and are
classified as current.

     e) On March 1, 1998,  Breaking Waves loaned funds to Play Co. in return for
an  unsecured  promissory  note in the amount of  $250,000.  Such note  required
monthly  payments  beginning  March 31, 1998 of $25,000 plus interest at 15% per
annum. The note was repaid in full as of December 31, 1998.

     f) On July 15, 1998,  Breaking Waves loaned additional funds to Play Co. in
return for an unsecured  promissory  note in the amount of  $300,000.  Such note
required monthly payments  beginning August 15, 1998 of $50,000 plus interest at
9% per annum through  November 15, 1998 and a lump-sum  payment of $100,000 plus
interest on  December  15,1998.  The note was repaid in full as of December  31,
1998.

     g) Private placement

     During   February  and  May  1998,   pursuant  to  two   separate   private
transactions,  the Company sold  600,000 and 700,000  shares of its common stock
for a total of  approximately  $195,000 and  $560,000,  respectively  to various
entities.  An officer  of two of the  entities  who  invested  in the  Company's
private placement is affiliated to the Company's President.

     On July 30, 1998 the Securities and Exchange  Commission declared effective
a Form S-3  Registration  Statement which registered the 600,000 shares from the
February,  1998 private transaction along with 1,960,700 shares held by the then
Company's  majority  shareholder,  European Ventures Corp.  ("EVC").  EVC's sole
officer and director is and affiliate of the Company's President.



<PAGE>
NOTE 12 - INDUSTRY SEGMENTS

     The Company's  operations have been classified into two segments:  swimwear
sales and film  productions.  Information  about the two  segments for the years
ended December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>

                                                         1998                         1997
                                                    ------------------             ---------------
                                                         Segment       Consolidated       Segment      Consolidated
                  Sales:
<S>                                                 <C>               <C>            <C>            <C>
                    Swimwear sales                  $   5,156,248                    $   5,262,240
                    Film production                       120,211                           44,875
                                                    -------------                    -------------
                  Total Sales                                         $   5,276,459                 $    5,307,115
                                                                      =============                 ==============

                  Operating profit:
                    Swimwear sales                  $     568,560                    $     638,851
                    Film production                        (1,915)                           3,609
                                                    --------------                   -------------
                                                                      $     566,645                 $     642,460
                  Corporate:
                    General and administrative
                      expense                                            (1,074,445)                    (841,030)
                    Equity in earnings of affiliate                         473,270                         -
                    Amortization expense                                    (70,952)                     (70,952)
                    Interest income                                          90,249                       98,316
                    Interest and finance expense                           (224,603)                    (224,396)
                    Other                                                    78,447                         -
                                                                      ---------------             ----------------
                  Loss from operations before (benefit)
                  provision for income tax                                 (161,389)                      (395,602)

                  (Benefit) provision for income tax                       (192,383)                        27,865
                                                                      --------------                --------------

                  Net (loss) income                                   $      30,994                 $     (423,467)
                                                                      =============                 ==============

                  Identifiable assets:
                    Swimwear sales                  $   2,849,354                    $   2,525,716
                    Film productions                    1,901,221                        1,745,970
                    Corporate                           3,729,151                        3,088,607
                                                    -------------                    -------------

                      Total assets                                    $   8,479,726                 $     7,360,293
                                                                      =============                 ===============
</TABLE>

     Operating profit is total revenue less cost of sales and operating expenses
and excludes general corporate  expenses,  interest  expense,  and income taxes.
Identifiable assets are those used by each segment of the Company's  operations.
Corporate assets are primarily cash and investments.

NOTE 13 - SUBSEQUENT EVENTS

     Stock Dividend

     On January  14,  1999,  the Company  declared a 100% stock  dividend to all
shareholders  of record as of January 29,  1999,  total  shares of common  stock
amounting  to  2,686,944.  Such stock  dividend  was issued on February 5, 1999.
Accordingly,  as a result of such stock dividend,  the Company issued  2,686,027
shares of its  common  stock.  An  additional  917 shares  are  entitled  to the
dividend,  and such  shares  shall be issued to the holders  thereof  once these
holders have exchanged their old shares of common stock (i.e., pre-February 1998
reverse split) into post-reverse  split shares of common stock. These additional
shares are included in the total issued and outstanding common stock at December
31, 1998.

     Advances to Play Co.

     Pursuant  to an  unsecured  promissory  note dated  February  1, 1999,  the
Company loaned $100,000 to Play Co. bearing  interest at 9% per annum.  Play Co.
agreed to repay such note by June 15, 1999 with monthly installments.







<PAGE>
                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the
Undersigned hereunto duly authorized on the 8th day of April, 1999.



                                                     HOLLYWOOD PRODUCTIONS, INC.



                                                         By: /s/ Harold Rashbaum
                                                                 Harold Rashbaum
                                                         Chief Executive Officer


     Pursuant to the requirements of the Securities Act of 1933 as amended, this
Registration  Statement  has been signed below by the  following  persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>



<S>                                                  <C>                                                  <C>
/s/ Harold Rashbaum                                  Chief Executive Officer,                             04/08/99
Harold Rashbaum                                      President, and Director                              Date



/s/ Robert DiMilia                                   Vice President, Secretary,                           04/08/99
Robert DiMilia                                       and Director                                         Date



/s/ Alain Guillou, M.D.                              Director                                             04/08/99
Alain Le Guillou, M.D.                                                                                    Date



/s/ James B. Frakes                                  Director                                             04/08/99
James B. Frakes                                                                                           Date


</TABLE>