SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

|X|   Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the fiscal year ended December 31, 1998

|_|   Transition  Report under Section 13 or 15(d) of the Securities  Exchange
      Act of 1934 for the transition period from ____________ to ____________

Commission file number:  0-24798

                           COLECCIONES DE RAQUEL, INC.
                 (Name of small business issuer in its charter)

          Nevada                                        93-1123005
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

9873 S. Santa Monica Boulevard
Beverly Hills, CA                                         90212
(Address of principal executive offices)                (Zip Code)

Issuer's telephone number: (310) 203-9240

Securities to be registered pursuant to Section 12(b) of the Act: None

Securities to be registered pursuant to Section 12(g) of the Act:

                         Common Stock, $.0001 Par Value
                                (Title of Class)

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X|  No |_|

      Check if 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. |_|

      The issuer's revenues for the fiscal year ended December 31, 1998 were
$5,882.

      The aggregate market value of the voting stock held by non-affiliates of
the registrant is incalculable inasmuch as the co,mon stock hasn't traded within
the past 60 days.

      The number of shares of the registrant's Common Stock, $.0001 par value,
outstanding as of March 31, 1999 was 27,300,000.

      Documents incorporated by reference: None.

      Transitional Small Business Issuer Format (check one):
      Yes |_| No |X|


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<PAGE>

                                     PART I

Item 1.  Description of Business.

Business Development.

      COLECCIONES DE RAQUEL, INC. (the "Company") was organized under the laws
of the State of Nevada on August 6, 1993. As of December 31, 1993, the Company
issued 20,000,000 shares of its common stock, $.0001 par value, to Ms. Raquel
Zepeda in exchange for the business known as Colecciones De Raquel ("CDR") which
had been operated by Ms. Zepeda as a sole proprietorship since December 1, 1987.
See "Item 12. Certain Relationships and Related Transactions". Unless the
context indicates otherwise, the term "Company" includes COLECCIONES DE RAQUEL,
INC. and CDR.

      Historical Development. Ms. Zepeda decided to develop the Company's
products primarily because, as a first generation Mexican American, she was
dissatisfied with the types of cosmetics available specifically for Hispanics.
In developing the Company's product line, Ms. Zepeda selected those colors that
she believed would complement the skin tones of the targeted market. In
selecting these colors, Ms. Zepeda recognized that the persons to whom these
products would be marketed may be categorized as having light, medium or dark
skin tones. As a result, the shades of colors included in each collection have
been geared to each particular group. See "Products" below.

      From December 1, 1987 until the closing of the Company's initial public
offering, Ms. Zepeda, on a part-time basis, developed the Company's present
product line and conducted minimal marketing activities for these products. Due
to her limited financial resources, Ms. Zepeda was unable to conduct extensive
marketing of these products. From December 1, 1987 to September 30, 1994, total
sales of products aggregated $4,438 and net losses aggregated $70,805.

      During this period, both Ms. Zepeda and her products received publicity in
both English and Spanish media including Avisa magazine, the Hispanic Fashion
Designer's Showcase and Spanish publications Mundo Artistico, Negocios Y
Finanzas, and Noticias Del Mundo. Ms. Zepeda has also been interviewed on both
English and Spanish television stations. This publicity has featured both Ms.
Zepeda and the Company's products. Since the public offering and opening of the
boutique, the Company has received recognition in publications such as Latina
Magazine, Beauty Fashion Magazine, Beverly Hills (213), Mundo Artistico, Nuestro
Tiempo, and Hispanic Business. The Company's products were described as being
designed for people with "golden" complexions and designed for the Hispanic and
similar markets. Although the Company believes that this publicity will assist
it in its future marketing efforts, there is no assurance that it will have any
benefit.

      With proceeds of the Company's public offering it has produced its
proprietary fragrance, "Sabor A Mi," a complete line of colors cosmetics and
skin care and opened two boutiques in Beverly Hills and Los Angeles. All
products are being sold and marketed through these boutiques. Additionally, the
Company has produced a music compact disc which it plans to cross-market with
the sale of the fragrance. "Sabor A Mi" is also the name of a very popular
Spanish love song. The compact disc contains information on the Company's line
of cosmetics along with a sample fragrance strip and product ordering
information. On March 6, 1998 the Company entered into a distribution agreement
with R Town Entertainment for the distribution of both the compact disc and
fragrance. R Town Entertainment has distribution in approximately 1,500 stores
that specialize in Latin artists. The compact disc is either sold separately or
given away as a complimentary gift with the purchase of the fragrance.


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<PAGE>

      Public Offering. As part of an initial public offering in August 1994, the
Company issued 1,000,000 Units of securities for an aggregate offering price of
$100,000. The Company realized net proceeds of $91,090 from the sale of the
Units. Each Unit consisted of one share of common stock and one A Warrant. Each
A Warrant entitled was exercisable at an exercise price of $.25 per A Warrant
for one share of common stock and two B Warrants. Each B Warrant was exercisable
at an exercise price of $.50 per B Warrant for one share of common stock and one
C Warrant. Each C Warrant was to be exercisable at $1.00 per C Warrant for one
share of common stock.

      Utilizing the net proceeds from its initial public offering, the Company
ordered product and packaging and placed print and radio advertisements. The
Company's print advertising, which ran for a single month in the Spanish
language editions of Cosmopolitan, Elle and Marie Claire, resulted in little
customer response. The Company's radio advertisements ran over a three month
period and resulted in numerous requests for product samples from potential
customers but only limited mail order sales.

      The Company utilized substantially all of the net proceeds from the public
offering during the year ended December 31, 1994. The Company's business
operations during the year ended December 31, 1994 resulted in only minimal
revenues and, at year end, the Company had only a small amount of cash available
to finance continuing operations on an extremely limited basis.

      From September 1995 through February 1996, the Company received $1,250,000
in payment for the exercise of the A and B warrants. As a result, the Company
was able to expand its operations.

      Recent Operations. In October 1995, as a part of a test marketing campaign
for the fragrance, "Sabor A Mi, Melody of Eternal Passion", the Company licensed
the right to use a cart in the Montebello Town Center in Montebello, California
on a month to month basis. The Company selected the Montebello Town Center for
its cart location based on the heavy Hispanic traffic in the mall. Base rent for
the cart was $1,500 per month for October 1995 and $3,500 per month for November
and December 1995. The cart license required the Company to pay percentage rent
of fifteen percent (15%) of its net sales in excess of $10,000 per month for
October 1995 and $23,333 per month for November and December 1995. The Company
continued licensing the cart through February 29, 1996 at a rate of $1,500 per
month. Although sales were insufficient to cover the rental and staffing cost of
the cart, the Company considered the test marketing fulfilled and terminated the
cart operation in order to expand to a boutique to sell and market its entire
collection of cosmetics, fragrance and lingerie.

      In September, 1995, the Company entered into a two (2) year lease for a
700 square foot store front in Beverly Hills, California on little Santa Monica
Boulevard across from the Peninsula Hotel. Monthly rent for the space which the
Company is utilizing for both showroom and offices is $1,100 per month. The
grand opening of the showroom boutique was May 3, 1996.

      At the showroom boutique location, the Company offers its cosmetics line
which includes foundation, concealer, face powder and blush products, eye
shadow, eye liners, mascara, lip liners and lipstick; its Sabor A Mi fragrance
in both perfume and spray cologne; and its skin care products for dry, normal
and oily skin types. The Company also offers a small number of lingerie pieces
at its showroom location.

      In May 1996, the Company entered into a three (3) year lease for a second
boutique location in the financial district of downtown Los Angeles. Monthly
rent for the 900 square foot storefront is $1,451. The Company offers the same
full line of its cosmetics, fragrance, skincare, and lingerie at its downtown
location.


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<PAGE>

      In early 1997 the Company completed its registration of the trademarks for
the Company's logo and "Peligro!". On December 10, 1997 the lease for the
Beverly Hills location was extended for an additional two years, with no changes
in the terms of agreement. The compact disc (see Principal Markets and Marketing
Strategy.) was completed in March 1998.

      In May 31, 1998, the Company entered into a sales agreement with Con
Estilo Latino. Con Estilo Latino is a seasonal catalogue that sells and promotes
various products to Hispanics/Latinos in the United States.

      In June, 1998 the Company entered into agreements with consultants A. R.
Hardy& Associates and John W. Vanover for investor relations services and
promotion of the Company's stock. These agreements facilitated payment to the
consultants via common stock in the Company. Consequently, the Company filed an
S-8 and issued 3.3 million shares for payment of these services. However, both
contracts were terminated some months thereafter for non-performance. Per the
terms of the contract, the Company is seeking the return of all common stock
from John W. Vanover, along with $10,000 cash through the American Arbitration
Association. A settlement was signed between the Company and A. R. Hardy &
Associates on April 1, 1999 in which the Company will pay $4,000 for services in
stead of the 700,000 shares. All 3.3 million shares issued through the S-8
filing are stopped and pending cancellation.

      In mid-September, the Company laid off two employees, Elizabeth A. Tovar
and Josephina Vettorazzi, in an effort to decrease the Company's losses. These
cut-backs reduced the Company's costs by $4,300 monthly, or 21%. As of October,
1998, the Company has used contract employees to manage sales at the Downtown
boutique.

      The Company warehouses its inventory at a public warehouse facility in Los
Angeles, California which offers security 24 hours a day.

Business of the Issuer.

      Principal Products.

      The Company has developed a line of cosmetics that it believes will have
appeal to the Hispanic and Asian markets. These markets also include certain
Mediterranean, European and Pacific Islanders. Persons in these markets are
sometimes referred to as having "golden" skin tones. The Company's cosmetic line
is intended to appeal to these markets by complementing their "golden" skin
tones.

      During the course of developing the Company's cosmetic line, Ms. Zepeda
also designed other products intended to complement its cosmetic line, including
a skin care line. Additionally, Ms. Zepeda is working on the design of
"iPeligro!", a man's fragrance which the Company plans to launch in early 1999.
Ms. Zepeda previously designed the fragrance which the Company is marketing
under the trademarked name, "Sabor A Mi, Melody of Eternal Passion". As a
complement to its cosmetics, skin care and fragrance products, the Company is
also offering a small selection of lingerie at its showroom boutique location.

      The Company's products are intended for use by individuals. As such, there
is a possibility that claims for product liability may be made against the
Company. Although the producers of the Company's products have advised the
Company that they maintain product liability insurance, there is no assurance
that such insurance is adequate or will be applicable if claims are made against
the Company. The Company does not presently plan to obtain product liability
insurance. Accordingly, any claims relating to product liability may have a
negative effect on the Company.


                                       4
<PAGE>

      Principal Markets and Marketing Strategy.

      The Company believes that the principal market for its cosmetic and
fragrance products is among Hispanic women in the U.S. and Latin America. During
the near term, the Company intends to concentrate on marketing its products in
the Los Angeles, California area which contains a large and growing number of
Hispanics. Eventually, the Company plans to extend its distribution nationally
and internationally. Approximately 3.8 million Hispanics reside in the Los
Angeles, California area and comprise approximately 19% of the entire United
States Hispanic population. Simmons Hispanic II Study projected that by the year
2005 the U.S. Hispanic market will comprise the largest minority group in the
United States. According to McGraw-Hill's 1995 Hispanic Consumer Market Report,
Hispanics buying power for 1997 was estimated at $357 billion in the U.S. This
report also estimated that Hispanics spent $6 billion on Personal Care Products
and Services. (This market segment includes cosmetics, fragrance and skin care.)
Latin America's cosmetic market was $5.9 billion and expected to increase to
$7.6 billion by 1998, according to Euromonitor International.

      Companies such as Avon, Estee Lauder, Mabelline, Pavion Ltd., Proctor &
Gamble, and Revlon have made directional changes in advertising content and
product orientation in an effort to more effectively reach the non-Anglo market.
Estee Lauder introduced it "Prescriptives" line targeting ethnic women in 1991.
According to NPD Beauty Trends, Prescriptives was one of the top selling
prestige lines in 1996; and in fiscal 1997 Estee Lauder reported sales of $124.7
million in "other Americas." In 1994, Avon printed a bilingual brochure targeted
to Hispanic women in a small test-market study. Avon has identified the Hispanic
market as promising because professional appearance is very important to
Hispanics and because Hispanic children are introduced to makeup and jewelry at
an early age. Avon research reflects that its average order for Hispanics is
about $9 higher than for non-Hispanics. Market studies have confirmed that
Hispanics generally spend more on consumer goods per capita than do other market
segments.

      The Company's marketing efforts promote the use of the Company's products
to the "golden" skin tones of Hispanic women. Marketing efforts will also
emphasize that the Company's products have been developed by Ms. Zepeda who, as
a first generation Mexican-American, is familiar with the cosmetic needs of
Hispanic women. The Company's marketing efforts will also take into account the
high levels of service which Hispanic shoppers expect. The Company believes that
Ms. Zepeda's understanding of the Hispanic customer will be a valuable resource
in developing a marketing strategy and directing the Company's marketing
efforts.

      Following the initial public offering, the Company advertised its products
on a limited basis through print advertising in selected Spanish language
magazines and through radio advertising which featured its Sabor A Mi, Melody of
Eternal Passion fragrance. The Company has discontinued all magazine
advertisements, except for advertisements in Latina Magazine and Hispanic
Business. The Company is principally pursuing some radio advertising on Spanish
language stations which has yielded a more positive customer response.
Additionally, a web-site has been established on the Internet to promote both
the product line and stock (www.deRaquel). All advertisements include the
Company's toll-free number and web-site address. Also, product samples are
available to potential customers as a part of its promotional efforts.

      The fragrance was named after a world-famous Latin love song, "Sabor A
Mi". Ms. Zepeda has recorded a jazz-style version of the song which is currently
a give-away with the purchase of the cologne or perfume. The Company has also
produced a music CD containing five (5) songs sung by Ms. Zepeda, including
"Sabor A Mi". Additionally, the CD contains a fragrance strip of "Sabor A Mi,
Melody of Eternal Passion", an ad for the complete line of products and
boutiques, along with purchasing information. The CD will be a give-away with
purchase of the fragrance and will also be available for purchase in select
music stores.


                                       5
<PAGE>

      The Company intends to market its products utilizing the services of Ms.
Zepeda and employees, and does not plan to utilize the services of any other
individual or firm spokesperson for these marketing efforts. The Company's
ability to maintain or expand its marketing efforts is directly dependent on the
level of sales and profitability achieved from its marketing of its products.

      Distribution.

      On May 30, 1998, the Company entered into a sales agreement with Con
Estilo Latino. Con Estilo Latino produces seasonal catalogues that sell and
promote various products to Hispanics/Latinos in the United States.
Additionally, the Company continues to sell its products through its two
locations in Beverly Hills and downtown Los Angeles.

      Further, as of March, 1999, the Company has been certified as a minority
vendor by the Southern California Regional Purchasing Councils, Inc. This
association assists minority companies in obtaining distribution with many large
companies such as large department store chains. The Company continues to
approach local boutiques for sales and distribution of its products. As of March
1999, the Company has received minimal orders.

      Competition.

      There are numerous other companies that produce and sell cosmetics.
Substantially all of these companies are significantly larger, better financed
and more established than the Company. These companies have established
customers and are continually seeking to obtain additional customers. The
Company's competitors are in a better position to effectively market their
products and offer various incentives to their customers. The Company will be
directly competing with these companies in marketing its products.

      The Company faces competition from other cosmetic product companies. Major
companies with which the Company competes include Revlon, Estee Lauder,
Maybelline, Mary Kay and Avon. Many of the Company's competitors have extensive
consumer loyalty and awareness which is supplemented by ongoing advertising and
other promotions. The Company's limited financial resources will not enable it
to conduct similar advertising and promotions and will place the Company at an
extreme competitive disadvantage.

      Due to the high level of competition and the Company's limited resources,
the Company will face continuing intense competition in all aspects of its
business.

      Raw Materials.

      The Company's products are produced by independent third parties who also
obtain the materials used to produce these products. The Company believes that
these materials are available from various sources at competitive prices. The
Company has made arrangements with Your Name Cosmetics, an independent
manufacturer of cosmetic and other related products to be its initial source of
supply for its products. This company produced the limited amount of products
used by the Company in its previous activities. Although the Company has not
entered into any agreement with this company, the Company has been informed that
this supplier will be able to fulfill the Company's expected limited need for
products on a timely basis. The Company anticipates that it will be required to
prepay a portion of the price for the products purchased from this supplier upon
placing an order and the balance payable upon delivery of the products.
Accordingly, the Company does not expect to receive credit terms from this
supplier. The Company also anticipates that, in the future, it may be able to
obtain thirty day credit terms from this supplier if the level of its purchases
increases. No discussions have been held regarding any 


                                       6
<PAGE>

such credit terms and there is no assurance that the Company will be able to
purchase products without paying for them in advance. The Company has not
experienced any difficulties in obtaining required products from these
producers. However, the Company's experience in obtaining these products may not
be indicative of its ability to obtain products in the future due to its minimal
operations to date.

      The Company has not entered into any contracts for either the materials
used in producing its products or the production of these products. Accordingly,
there can be no assurance that the Company will be able to obtain products in
quantities, at prices, and at required times to meet its needs. These needs
include fulfilling future sales commitments.

      The Company does not plan to carry significant amounts of either materials
or finished products in its inventory. Therefore, it will be relying on third
parties to supply it with products on a continuing basis. The failure of the
Company to obtain products sufficient for its needs would have a substantial
negative effect on its operations.

      Patents and Trademarks.

      The Company has obtained the trademarks for the following: "iPeligro!"
(extension filed on February of 1998, for future use), its fragrance for men,
"Sabor A Mi, Melody of Eternal Passion," and the Company logo. Additionally,
copyrights are held for the following: Color Me Golden, a beauty guide for
golden skin tones; Sound Recording for "Sabor A Mi," the Company's logo, the
Compact Disc and its product brochure.

      The formulas for the fragrances "Sabor A Mi" and "iPeligro!" were
developed by Ms. Zepeda for the Company and are the proprietary formulas of the
Company. There are no other proprietary rights or information, including
formulas, held by the Company for any of its products.

      Government Regulation.

      The Company does not believe that its products are subject to government
regulations, including those imposed by the United States Food and Drug
Administration. However, the Company has not requested nor has it received any
notification that its products are not subject to such regulations. If the
Company's products are subject to any government regulation, noncompliance with
such regulations, either presently in effect or subsequently enacted, would
adversely effect its ability to market its products and have a substantial
negative effect on its operations.

      Employees.

      As of December 31, 1998, the Company employed one (1) person full time.
The Company may hire additional part-time secretarial and retail sales employees
depending on its level of operations.

      The Company may engage consultants to assist it in various aspects of its
business. See "Item 9. Directors, Executive Officers, Promoters and Control
Persons".

Item 2. Description of Property.

      The Company maintains its principal offices in a 700 square foot store
front located at 9873 S. Santa Monica Blvd., Beverly Hills, California. The
space is a combined office and showroom which the Company leased for two years
commencing in September 1995 at a monthly rent of $1,100 per month. This lease
was renewed for two additional years until October 9, 1999.


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<PAGE>

      In May 1996 the Company entered into a three-year lease for a second
boutique location in the financial district of downtown Los Angeles. Monthly
rent for the 900 square-foot storefront is $1,451.

Item 3. Legal Proceedings.

      In September of 1998, the Company filed a complaint and Demand for
Arbitration before the American Arbitration Association against John W. Vanover.
The Demand for Arbitration is for the return of $10,000 in cash and stock
certificates for 2.6 million Company common shares. The basis of the dispute is
for non-performance, bad faith, and willful malfeasance. Other than this item,
there are no material pending legal proceedings to which the Company or the
property of the Company are subject. In addition, no proceedings are known to be
contemplated by a governmental authority against the Company or any officer or
director of the Company.

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

      Not applicable


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                                     PART II

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

      Prior to the completion of the Company's initial public offering, there
was no trading activity in the Company's common stock. The Company believes that
certain market makers began quoting prices for the shares of the Company's
common stock following the Company's initial public offering which closed in
August 1994. The Company's common stock may be traded in the over-the-counter
market and quoted in what are commonly referred to as the National Quotation
Bureau's "pink sheets" or the OTC "Electronic Bulletin Board", which reports
quotations by brokers or dealers in particular securities. Because of the lack
of readily available quotations and the limited trading volume frequently
associated with these securities, there is a greater risk of market volatility
of such securities than for securities traded on national exchanges. Trading in
the Company's stock is reported under the symbol CRQL.

      The following table sets forth the quarterly high and low bid prices (to
the nearest $1/8) of the common stock for the last 3 years. Included for
December 1998 are the high and low ask prices due to no bid prices.

      In December, 1998, Olsen Payne & Company filed a 15c2-11 on behalf of the
Company to restore trading of the Company stock on the OTC. The stock is
expected to commence trading shortly after the filing of this 1998 10-KSB with
the Securities and Exchange Commission.

Year Ended December 31, 1995              High              Low
                                          ----              ---

      First Quarter                       3                 1/2

      Second Quarter                      3-7/8             3

      Third Quarter                       3-3/4             1-3/4

      Fourth Quarter                      2-7/8             2-1/4

Year Ended December 31, 1996

      First Quarter                       2-1/4             1-3/4

      Second Quarter                      1-3/4             3/4

      Third Quarter                       No Bid            No Bid

      Fourth Quarter                      No Bid            No Bid

Year Ended December 31, 1997        Closing Bid             Closing Ask

                                          High        Low         High  Low
                                          ----        ---         ----  ---

      First Quarter                       No Bid      No Bid       2     2

      Second Quarter                      No Bid      No Bid       2     2

      Third Quarter                       No Bid      No Bid       2     2


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<PAGE>


      Fourth Quarter                      No Bid      No Bid       2     2

Year Ended December 31, 1998        Closing Bid             Closing Ask

                                          High        Low         High  Low
                                          ----        ---         ----  ---

      First Quarter                       No Bid      No Bid      None  None

      Second Quarter                      No Bid      No Bid      None  None

      Third Quarter                       No Bid      No Bid      None  None

      Fourth Quarter                      No Bid      No Bid      None  None

      These quotations represent inter-dealer quotations without adjustment for
retail markups, markdowns or commissions and do not necessarily represent actual
transactions.

      As of December 31, 1998, there were 1,015 record holders of the Company's
common stock.

      Common Stock. The authorized capital stock of the Company includes
50,000,000 shares of common stock which has a par value of $.0001 per share. The
holders of common stock (a) have equal rateable rights to dividends from funds
legally available therefor, when and if declared by the Board of Directors of
the Company; (b) are entitled to share rateably in all of the assets of the
Company available for distribution to holders of common stock upon liquidation,
dissolution or winding up of the affairs of the Company; (c) does not have
preemptive, subscription or conversion rights and there are no redemption or
sinking fund provisions applicable thereto; and (d) are entitled to one
noncumulative vote per share on all matters on which shareholders may vote at
all meetings.

      Preferred Stock. The authorized capital stock of the Company also includes
10,000,000 shares of preferred stock, par value $.001 per share. The Board of
Directors of the Company has the right to determine the characteristics of any
preferred stock. Such characteristics include voting rights, dividend
requirements, redemption provisions and/or liquidation preferences.

      The Board of Directors of the Company has designated 100,000 shares of
preferred stock as Series A Preferred Stock (the "Preferred Stock").
Concurrently with the completion of the Company's initial public offering, Ms.
Zepeda exchanged the 20,000,000 shares of common stock that she owned for
100,000 shares of Preferred Stock. The rights of the holder of the Preferred
Stock (the entire issue of 100,000 shares being held by the President, Raquel
Zepeda) have been amended by the Board of Directors to allow the conversion of
Preferred stock into common stock at the rate of one share of Series A Preferred
stock for 200 shares of Common stock at any time. In 1996, the Board of
Directors directed the Corporation to issue 20,000,000 shares of common stock to
the President, Raquel Zepeda, in exchange for the 100,000 shares of Preferred
stock held by her, and to retire the Preferred Stock. This brought the total of
issued and outstanding common stock of the Corporation to 24,000,000 shares.
This action was anticipated to have a material dilutive effect on the holders of
the Corporation's outstanding common stock. Further, in June of 1998, the
Company issued 3.3 million shares of common stock through an S-8 filing for
payment of services to two consultants. As of September, 1998 a stop trade order
was placed on the shares issued through the S-8, due to non-performance. A
settlement has been reached with one consultant for return of 700,000 shares. A
settlement for the additional 2.6 million shares are pending a hearing before
the American Arbitration Association.


                                       10
<PAGE>

      As of December 31, 1998, there were 27,300,000 shares of common stock
outstanding, with each share entitled to one vote. As the holder of 19,888,000
shares, Ms. Zepeda will continue to be able to elect all of the Company's
directors and continue to control the Company. See "Item 11. Security Ownership
of Certain Beneficial Owner and Management".

      The Company has not paid any cash dividends since its inception and does
not contemplate paying dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for the operation of the Company's
business.

Item 6. Management's Discussion and Analysis or Plan of Operation.

Material Changes in Financial Condition

      The Company had cash and cash equivalents of $249,653 at December 31,
1998.

      The Company's available cash position at December 31, 1998 is expected to
be sufficient to cover the Company's operating expenses through calendar year
1999, and possibly for some period thereafter.

      Through December 31, 1998, revenues from operations continued to be
insufficient to support the selling, general and administrative expenses of the
Company. At such time as the settlement agreement proceeds are exhausted, the
Company's continued existence will be dependent on its ability to generate
significant product sales and ultimately achieve profitable operations.

Material Changes in Results of Operations

      The Company's selling, general and administrative expenses decreased 26%
by $82,229 during the year ended December 31, 1998 below the level of selling,
general and administrative expenses incurred during the preceding year. The
decrease was attributable primarily to employee lay-offs and the reduction of
advertising, legal and accounting fees.

      The Company's business operations during the year ended December 31, 1998
resulted in only minimal revenues. Revenues were down 19.6% largely due to the
temporary closing of the Downtown boutique and decrease in advertisements.
Interest income also decreased, as the Company's cash decreases. Management does
not believe that historical revenues, operating margins or expenses for the
period ended December 31, 1998 were indicative of future operating results.

      The Company is unable to predict when, if ever, the Company will generate
sufficient revenues from operations in excess of its cost of goods sold and
selling, general and administrative expenses.

      Regarding current concerns over the Year 2000 Issue, the Company is
conducting a comprehensive review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the Issue. The Issue is whether computer systems
will properly recognize the date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.Based on the review of the
computer systems, management does not believe the cost of implementation will be
material to the Company's financial position and results of operations.


                                       11
<PAGE>

Item 7. Financial Statements.


                           COLECCIONES DE RAQUEL, INC.
                          (A Development Stage Company)
                          INDEX TO FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants...........................13

Balance Sheets as of December 31, 1998.......................................14

Statements of Operations for the years ended December 31, 1998
and 1996 and for the period from December 1, 1987 (Inception)
through December 31, 1998 ...................................................15

Statements of Stockholders' Equity for the period from December 1, 1987
(Inception) to December 31, 1998 ............................................16

Statements of Cash Flows for the years ended December 31, 1998
and 1996 and for the period from December 1, 1987 (Inception)
through December 31, 1998 ...................................................18

Notes to Financial Statements ...............................................20


                                       12
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Colecciones de Raquel, Inc.

We have audited the accompanying balance sheet of Colecciones de Raquel, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1998, and the period from December 1, 1987
(inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
statements of operations, stockholders' equity, and cash flows for the period
from inception to December 31, 1995.

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

In our opinion, based on our audits and the audit report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Colecciones de Raquel, Inc. as of December
31, 1998, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998, and the period from December 1,
1987 (inception) to December 31, 1998 in conformity with generally accepted
accounting principles.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 25, 1999


                                       13
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                                   BALANCE SHEET
                                                               December 31, 1998

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

                                     ASSETS
Current assets
    Cash and cash equivalents                                       $   249,653
    Merchandise inventory                                                68,591
    Prepaid expenses and other assets                                     4,788
                                                                    -----------

        Total current assets                                            323,032

Equipment, net of accumulated depreciation of $27,884                    19,837
Deposits                                                                  2,200
                                                                    -----------

               Total assets                                         $   345,069
                                                                    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
    Accounts payable and accrued liabilities                        $     4,403
                                                                    -----------
        Total current liabilities                                         4,403
                                                                    -----------

Commitments and contingencies

Stockholders' equity
    Preferred stock, $.001 par value
        10,000,000 shares authorized
        0 shares issued and outstanding
    Common stock, $.0001 par value
        50,000,000 shares authorized
        27,300,000 shares issued and outstanding                          2,730
    Additional paid-in capital                                        1,375,444
    Deficit accumulated during the development stage                 (1,037,508)
                                                                    -----------

           Total stockholders' equity                                   340,666
                                                                    -----------
               Total liabilities and stockholders' equity           $   345,069
                                                                    ===========

   The accompanying notes are an integral part of these financial statements.


                                       14
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                        STATEMENTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                 Period From
                                                                                 December 1,
                                                     For the Year Ended             1987
                                                        December 31,           (Inception) to
                                                ----------------------------     December 31,
                                                     1998            1997            1998
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>         
Sales                                           $      5,882    $      7,322    $     32,381

Cost of goods sold                                     2,899           4,546          14,053
                                                ------------    ------------    ------------

Gross profit                                           2,983           2,776          18,328

Selling, general, and administrative expenses        239,819         322,048       1,156,433
                                                ------------    ------------    ------------

Loss from operations                                (236,836)       (319,272)     (1,138,105)
                                                ------------    ------------    ------------

Other income
    Interest income                                   17,092          29,493          81,635
    Litigation settlement                                 --              --          20,000
    Miscellaneous                                      2,962              --           2,962
                                                ------------    ------------    ------------

        Total other income                            20,054          29,493         104,597
                                                ------------    ------------    ------------

Loss before provision for income taxes              (216,782)       (289,779)     (1,033,508)

Provision for income taxes                               800             800           4,000
                                                ------------    ------------    ------------

Net loss                                        $   (217,582)   $   (290,579)   $ (1,037,508)
                                                ============    ============    ============

Basic loss per share                            $      (0.01)   $      (0.01)               
                                                ============    ============

Diluted loss per share                          $      (0.01)   $      (0.01)               
                                                ============    ============

Weighted-average common shares outstanding        25,747,123      24,000,000                
                                                ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                        15
<PAGE>
                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                              STATEMENTS OF STOCKHOLDERS' EQUITY
                                                For the Years Ended December 31,
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                          
                                                                                                                          
                                       Preferred Stock             Common Stock              Additional         MMI       
                                    ---------------------    -------------------------        Paid-in        Settlement
                                     Shares       Amount       Shares         Amount          Capital         Agreement   
                                    --------     --------    ------------   ----------       ----------      -----------  
<S>                                  <C>           <C>       <C>              <C>             <C>             <C>
Net loss from inception through
  December 31, 1992                       --         --      $         --     $     --        $      --       $       --
Net loss                                                                                                       
                                     --------      ----        ----------        -----           ------       ----------
                                 
Balance, December 31, 1993                                                                                     
Common stock issued in
  reorganization                                               20,000,000        2,000           34,754        
Common stock issued in initial
  public offering                                               1,000,000          100           90,990        
Common stock exchanged for
  preferred stock in connection
  with initial public offering        100,000       100       (20,000,000)      (2,000)           1,900        
Exercise of A Warrants                                          1,000,000          100          249,900        
MMI settlement Agreement                                                                                        (250,000)
Net loss                                                                                                       
                                     --------      ----        ----------        -----           ------       ----------
Balance, December 31, 1994            100,000       100         2,000,000          200          377,544         (250,000)
Exercise of B Warrants                                          2,000,000          200          999,800        
MMI settlement Agreement                                                                                      (1,000,000)
Cash received from MMI                                                                                           849,875
Net loss                                                                                                       
                                     --------      ----        ----------        -----           ------       ----------
Balance, December 31, 1995            100,000       100         4,000,000          400        1,377,344         (400,125)
Cash received from MMI                                                                                           400,125
Preferred stock exchanged for
  common stock                       (100,000)     (100)       20,000,000        2,000           (1,900)       
Net loss                                                                                                       
                                     --------      ----        ----------        -----           ------       ----------
Balance, December 31, 1996                 --        --        24,000,000        2,400        1,375,444               -- 
Net loss                                                                                                       
                                     --------      ----        ----------        -----           ------       ----------
Balance, December 31, 1997                 --        --        24,000,000        2,400        1,375,444               -- 

<CAPTION>
                                     Deficit
                                    During the
                                    Development
                                       Stage            Total
                                     ---------       -----------
<S>                                  <C>             <C> 
Net loss from inception through
  December 31, 1992                  $ (29,178)      $   (29,178)
Net loss                                (7,462)           (7,462)
                                     ---------        ----------
Balance, December 31, 1993             (36,640)          (36,640)
Common stock issued in
  reorganization                                          36,754
Common stock issued in initial
  public offering                                         91,090
Common stock exchanged for
  preferred stock in connection
  with initial public offering                                --
Exercise of A Warrants                                   250,000
MMI settlement Agreement                                (250,000)
Net loss                               (58,052)          (58,052)
                                     ---------        ----------
Balance, December 31, 1994             (94,692)           33,152
Exercise of B Warrants                                 1,000,000
MMI settlement Agreement                              (1,000,000)
Cash received from MMI                                   849,875
Net loss                              (126,518)         (126,518)
                                     ---------        ----------
Balance, December 31, 1995            (221,210)          756,509
Cash received from MMI                                   400,125
Preferred stock exchanged for
  common stock                                                  

Net loss                              (308,137)         (308,137)
                                     ---------        ----------
Balance, December 31, 1996            (529,347)          848,497
Net loss                              (290,579)         (290,579)
                                     ---------        ----------
Balance, December 31, 1997            (819,926)          557,918
</TABLE>


                                       16
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                  STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
                                                For the Years Ended December 31,

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

<TABLE>
<CAPTION>
                                                                                                                          
                                                                                                                          
                                       Preferred Stock             Common Stock              Additional         MMI       
                                    ---------------------    -------------------------        Paid-in        Settlement
                                     Shares       Amount       Shares         Amount          Capital         Agreement   
                                    --------     --------    ------------   ----------       ----------      -----------  
<S>                                  <C>           <C>       <C>              <C>             <C>             <C>
Common stock issued for
  consulting services                              $            3,300,000     $  330       $                  $ 
Net loss                                                                                                        
                                     --------      ----        ----------     ------       ------------       ----------
Balance, December 31, 1998                 --      $ --        27,300,000     $2,730       $  1,375,444       $       --
                                     ========      ====        ==========     ======       ============       ==========

<CAPTION>
                                     Deficit
                                    During the
                                    Development
                                       Stage            Total
                                     ---------       -----------
<S>                                  <C>             <C> 
Common stock issued for
  consulting services                $               $     330
Net loss                                (217,582)     (217,582)
                                     -----------     ---------
Balance, December 31, 1998           $(1,037,508)    $ 340,666
                                     ===========     =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                        17

<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                        STATEMENTS OF CASH FLOWS

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

<TABLE>
<CAPTION>
                                                                             Period From 
                                                                              December 1,
                                                      For the Year Ended         1987    
                                                          December 31,      (Inception) to
                                                   ----------------------    December 31,
                                                      1998         1997          1998
                                                   ---------    ---------    -----------
<S>                                                <C>          <C>          <C>         
Cash flows from operating activities
    Net loss                                       $(217,582)   $(290,579)   $(1,037,508)
    Adjustments to reconcile net loss to
        net cash used in operating activities
           Depreciation                                9,063        8,636         27,884
           Common stock issued for consulting
               services                                  330           --             --
    (Increase) decrease in
        Inventory                                      4,469        2,615        (68,591)
        Prepaid expenses and other assets              1,982        2,789         (4,788)
        Deposits                                         (70)       1,521         (2,200)
    Increase (decrease) in
        Accounts payable and accrued liabilities      (6,265)      (2,601)         4,403
                                                   ---------    ---------    -----------

Net cash used in operating activities               (208,073)    (277,619)    (1,080,800)
                                                   ---------    ---------    -----------

Cash flows from investing activities
    Purchase of equipment                             (3,213)      (5,507)       (47,721)
                                                   ---------    ---------    -----------

Net cash used in investing activities                 (3,213)      (5,507)       (47,721)
                                                   ---------    ---------    -----------

Cash flows from financing activities
    Proceeds from MMI settlement Agreement                --           --      1,250,000
    Proceeds on sale of common stock                      --           --         91,420
    Loans and paid-in capital from
        preferred stockholder                             --           --         36,754
                                                   ---------    ---------    -----------

Net cash provided by financing activities                 --           --      1,378,174
                                                   ---------    ---------    -----------

Net increase (decrease) in cash and cash
    equivalents                                     (211,286)    (283,126)       249,653

Cash and cash equivalents, beginning of
    period                                           460,939      744,065             --
                                                   ---------    ---------    -----------

Cash and cash equivalents, end of period           $ 249,653    $ 460,939    $   249,653
                                                   =========    =========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                        18

<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                            STATEMENTS OF CASH FLOWS (Continued)

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

Supplemental disclosures of cash flow information
                                                                               
                                                                   Period From
                                                                    December 1,
                                        For the Year Ended             1987
                                           December 31,           (Inception) to
                                      -----------------------      December 31,
                                       1998            1997            1998
                                      -------         -------         -------

    Interest received                 $17,092         $29,493         $81,635
                                      =======         =======         =======

    Income taxes paid                 $   800         $   800         $ 4,000
                                      =======         =======         =======

   The accompanying notes are an integral part of these financial statements.


                                        19

<PAGE>
                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Organization and Line of Business

      Colecciones de Raquel, Inc. (the "Company") was organized under the laws
      of the State of Nevada on August 6, 1993. As of March 31, 1994, the
      Company issued 20,000,000 shares of its common stock for the business
      known as Colecciones de Raquel in a reorganization of entities under
      common control accounted for at historic cost in a manner similar to
      pooling of interest accounting as the Company's sole stockholder was the
      sole proprietor of the predecessor business. Accordingly, the accompanying
      financial statements and notes include the accounts of Colecciones de
      Raquel since its inception on December 1, 1987.

      The Company intends to market and sell a line of cosmetics, skin care, and
      fragrance products which it believes will have appeal to sallow to
      olive-skinned women. Through December 31, 1998, the Company was primarily
      involved in preliminary marketing efforts and had not achieved significant
      sales of its products. Therefore, in accordance with Statement of
      Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
      Development Stage Enterprises," the Company is accounted for as a
      development stage company.

      Recently Issued Accounting Pronouncements

      SFAS No. 133, "Accounting for Derivative Instruments and Hedging
      Activities," is effective for financial statements with fiscal years
      beginning after June 15, 1999. SFAS No. 133 establishes accounting and
      reporting standards for derivative instruments, including certain
      derivative instruments embedded in other contracts, and for hedging
      activities. The Company does not expect adoption of SFAS No. 133 to have a
      material effect, if any, on its financial position or results of
      operations.

      SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
      the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
      Enterprise," is effective for financial statements with the first fiscal
      quarter beginning after December 15, 1998. The Company does not expect
      adoption of SFAS No. 134 to have a material effect, if any, on its
      financial position or results of operations.

      SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
      Corrections," is effective for financial statements with fiscal years
      beginning February 1999. This statement is not applicable to the Company.

      Cash and Cash Equivalents

      For purpose of the statements of cash flows, cash equivalents include
      amounts invested in a money market account with a high-quality financial
      institution.


                                       20
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Merchandise Inventory

      Merchandise inventory, which is principally merchandise held for sale, is
      stated at the lower of cost or market. Cost is determined by using the
      first-in, first-out method.

      Equipment

      Equipment is carried at cost and depreciated using the straight-line
      method over the estimated useful lives, which are generally five years.
      Maintenance and minor replacements are charged to expense as incurred.
      Gains and losses on disposals are included in the statements of
      operations.

      Advertising Costs

      Advertising costs are charged to operations when incurred. Advertising
      costs were $3,247 and $24,211 for the years ended December 31, 1998 and
      1997, respectively.

      Income Taxes

      The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
      requires the recognition of deferred tax liabilities and assets for the
      expected future tax consequences of events that have been included in the
      financial statements or tax returns. Under this method, deferred income
      taxes are recognized for the tax consequences in future years of
      differences between the tax bases of assets and liabilities and their
      financial reporting amounts at each year end based on enacted tax laws and
      statutory tax rates applicable to the periods in which the differences are
      expected to affect taxable income. Valuation allowances are established,
      when necessary, to reduce deferred tax assets to the amount expected to be
      realized. The provision for income taxes represents the tax payable for
      the period and the change during the period in deferred tax assets and
      liabilities.

      Net Loss Per Share

      For the year ended December 31, 1998, the Company adopted SFAS No. 128,
      "Earnings per Share." Basic earnings per share is computed by dividing
      income available to common stockholders by the weighted-average number of
      common shares available. Diluted earnings per share is computed similar to
      basic earnings per share except that the denominator is increased to
      include the number of additional common shares that would have been
      outstanding if the potential common shares had been issued and if the
      additional common shares were dilutive. Since the Company does not have
      any stock options, warrants, or other common stock equivalents
      outstanding, basic earnings per share and diluted earnings per share are
      the same.


                                       21
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Comprehensive Income

      For the year ended December 31, 1998, the Company adopted SFAS No. 130,
      "Reporting Comprehensive Income." This statement establishes standards for
      reporting comprehensive income and its components in a financial
      statement. Comprehensive income as defined includes all changes in equity
      (net assets) during a period from non-owner sources. Examples of items to
      be included in comprehensive income, which are excluded from net income,
      include foreign currency translation adjustments and unrealized gains and
      losses on available-for-sale securities. Comprehensive income is not
      presented in the Company's financials statements since the Company did not
      have any of the items of comprehensive income in any period presented.

      Fair Value of Financial Instruments

      The Company measures its financial assets and liabilities in accordance
      with generally accepted accounting principles. For certain of the
      Company's financial instruments, including cash and cash equivalents and
      accounts payable and accrued liabilities, the carrying amounts approximate
      fair value due to their short maturities.

      Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      the disclosures of contingent assets and liabilities at the date of
      financial statements, as well as the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from
      those estimates.

NOTE 2 - CASH AND CASH EQUIVALENTS

      The Company maintains cash deposits in banks and in financial institutions
      located in southern California. Deposits in banks are insured up to
      $100,000 by the Federal Deposit Insurance Corporation ("FDIC"). Deposits
      in a money market account with a financial institution are insured by the
      Securities Investor Protection Corporation ("SIPC"). The Company has not
      experienced any losses in such accounts and believes it is not exposed to
      any significant credit risk on cash deposits.


                                       22
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 3 - COMMON AND PREFERRED STOCK TRANSACTIONS

      Warrants and Related Settlement Agreement

      As part of an initial public offering in August 1994, the Company issued
      1,000,000 Units of securities for an aggregate offering price of $100,000.
      Each Unit consisted of one share of common stock and one A Warrant. Each A
      Warrant entitles the holder one share of common stock and two B Warrants.
      Each B Warrant entitles the holder one share of common stock and one C
      Warrant.

      In November 1994, all of the A Warrants were exercised in a transaction
      which the Company claims was fraudulent. Although the Company received no
      portion of the $250,000 exercise price, Units consisting of one share of
      common stock and two B Warrants were issued by the Company's transfer
      agent without the knowledge of the Company's officers or directors to
      persons purportedly exercising the A Warrants.

      In February 1995, all of the B Warrants were exercised in a transaction
      which the Company claims was fraudulent. Although the Company received no
      portion of the $1,000,000 exercise price, Units consisting of one share of
      common stock and one C Warrant were issued by the Company's transfer agent
      without the knowledge of the Company's officers or directors to persons
      purportedly exercising the B Warrants.

      The shares of common stock issued in the Company's initial public offering
      and upon exercise of the A Warrants and B Warrants (collectively the
      "Shares") have been publicly traded. The C Warrants were not exercised and
      were canceled by the Company.

      In September 1995, the Company entered into an Agreement with Moore
      McKenzie, Inc., a Philippine corporation ("MMI"), which purchased and
      resold the shares following their exercise by third-party entities. MMI
      has expressly denied any involvement in the exercise of the A Warrants and
      B Warrants. Solely for the purpose of protecting and preserving its
      investment in the Shares and its reputation and goodwill, MMI agreed to
      pay the Company the exercise price of the A Warrants ($250,000) and B
      Warrants ($1,000,000).

      The Company has agreed within one year of the Agreement to sell MMI an
      additional 1,000,000 shares of common stock at a price of $1.00 per share
      in place of the shares which could have been purchased upon exercise of
      the C Warrants which were issued upon exercise of the B Warrants and
      subsequently canceled by the Company. As part of the Agreement with MMI,
      the Company has consented to MMI commencing legal proceedings in the name
      of MMI against third parties to recover MMI's damages suffered as a result
      of or in connection with MMI's purchase of the Shares and has agreed to
      assist and cooperate with MMI in any such action. The Agreement has
      expired and MMI has not purchased an additional 1,000,000 shares of common
      stock.


                                       23
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 3 - COMMON AND PREFERRED STOCK TRANSACTIONS (Continued)

      Series A Convertible Preferred Stock

      The preferred stock has a redemption price and liquidating value of $.001
      per share (aggregate $1,000) and is not entitled to dividends. Under
      limited circumstances the Company may elect to redeem the preferred stock.
      If such an election is made, all outstanding shares of preferred stock
      must be redeemed. Upon liquidation, dissolution, or winding up of the
      affairs of the Company, each share of preferred stock is entitled to
      receive its par value of $.001 before any distributions are made to
      holders of common stock.

      In June 1996, the Company retired 100,000 shares of Series A convertible
      preferred stock which was exchanged for 20,000,000 shares of common stock.

      Issuance of Common Stock

      In June 1998, the Company issued 2,600,000 shares of common stock in
      exchange for consulting services to be performed. In addition, upon
      signing of the agreement, the Company paid out-of-pocket expenses of
      $15,000 for the first three months. In July 1998, the Company placed a
      stop trade order on the above shares. The Company is currently undergoing
      arbitration proceedings with the above individual who allegedly failed to
      deliver performance according to the contractual agreement.

      In June 1998, the Company issued 700,000 shares of common stock in
      exchange for consulting services to be performed. In addition, the
      consultant was granted 1,000,000 stock options at exercise prices ranging
      from $0.75 to $3.00 per share. In July 1998, the Company placed a stop
      trade order on the above shares and is in the process of settling the
      above matter (see Note 7).

      Incentive Stock Option Plan

      The Company has adopted an Incentive Stock Option Plan (the "Plan"). The
      Plan authorizes the granting of options to employees of the Company to
      purchase an aggregate of 500,000 shares of common stock at no less than
      the fair market value of the common stock at the date the option is
      granted. For owners of 10% or more of the voting power of the Company's
      stock, the option price must be at least 10% or more of the fair market
      value of the common stock at the date the option is granted. No option may
      be granted after August 6, 2003. No options have been granted under the
      Plan to date.


                                       24
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 4 - INCOME TAXES

        The Company has no material temporary differences that would result in
        deferred taxes. The Company does, however, have loss carryforwards which
        may result in deferred tax assets in the future. At December 31, 1998,
        the Company has approximately $992,000 and $989,000 of federal and state
        net operating loss carryforwards, respectively, that begin to expire in
        2018 and 2003, respectively. For the years ended December 31, 1998 and
        1997, the provision for income taxes represents the minimum state
        franchise tax.

        The Company's deferred tax assets, which have been offset entirely by
        valuation allowances, comprise the following at December 31, 1998:

               Loss carryforwards                              $     395,000
               Valuation allowance                                   395,000
                                                               -------------

                  Deferred tax assets                          $          --
                                                               =============

      The valuation allowance has been increased by approximately $86,000 during
      the year ended December 31, 1998.

NOTE 5 - COMMITMENTS AND CONTINGENCIES

        Leases

        The Company leases its office and retail facilities under operating
        leases which expire through October 1999. Minimum annual rental
        commitments under the lease are as follows:

                Year Ending
               December 31,
               ------------

                  1999                                         $      18,600
                                                               =============

      Rent expense for the years ended December 31, 1998 and 1997 was $30,614
      and $30,614, respectively.

      Employment Agreement

      The Company has entered into an employment agreement with an officer
      expiring August 1999 with an aggregate annual salary of $65,000,
      increasing at the beginning of each subsequent calendar year by the
      Consumer Price Index. In addition, the employee is entitled to incentive
      compensation each year to be determined by the Company's Board of
      Directors.


                                       25
<PAGE>

                                                     COLECCIONES DE RAQUEL, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                   NOTES TO FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 6 - YEAR 2000 ISSUE

      The Company is conducting a comprehensive review of its computer systems
      to identify the systems that could be affected by the Year 2000 Issue and
      is developing an implementation plan to resolve the Issue.

      The Issue is whether computer systems will properly recognize
      date-sensitive information when the year changes to 2000. Systems that do
      not properly recognize such information could generate erroneous data or
      cause a system to fail. The Company is dependent on computer processing in
      the conduct of its business activities.

      Based on the review of the computer systems, management does not believe
      the cost of implementation will be material to the Company's financial
      position and results of operations.

NOTE 7 - SUBSEQUENT EVENT

      In April 1999, the consultant agreed to return the 700,000 shares of
      common stock issued in exchange for consulting services for $4,000 in
      cash.


                                       26


<PAGE>

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

Not applicable.


                                       27
<PAGE>

PART III

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

      The directors and executive officers of the Company are as follows:

      Name                    Age               Position
      ----                    ---               --------

      Raquel Zepeda           47                President and Director

      Directors serve until the next annual meeting of shareholders and until
their successors have been elected and have been qualified. Officers serve until
the meeting of the Board of Directors following the next annual meeting of
shareholders and until their successors have been elected and have been
qualified.

      RAQUEL ZEPEDA, has served as President and as a director of the Company
since its inception on August 6, 1993 and as the Treasurer of the Company since
August 1995. Ms. Zepeda established CDR as a sole proprietorship in 1987. See
"Business". From July 1993 to July 1994, Ms. Zepeda was employed as a legal
secretary by the law firm of Rosky, Landau, Stall & Sheehy. From July 1992 to
July 1993 she was employed in a similar capacity by the law firm of Turner,
Gerstenfeld, Wilk, Tigerman & Young. From April 1988 to July 1992, Ms. Zepeda
was employed as a temporary legal secretary by various law firms in the Los
Angeles, California area. None of the law firms that employed Ms. Zepeda has any
relation to the Company.

      ELIZABETH A. TOVAR, (a.k.a. Elizabeth A. Camacho) has served as Secretary
of the Company since August, 1995. Mrs. Tovar is employed by the Company as its
Administrator. From May 1994 through September 1995, Mrs. Tovar was the vault
manager for a large food services company where she was responsible for all cash
transactions and vault audit procedures. Mrs. Tovar also served as a financial
administrator for the company maintaining accounts receivable and account
payable ledgers. Prior thereto, from July 1991 through April 1994, Mrs. Tovar
was a security officer for the U.S. Department of Justice. Mrs. Tovar attended
El Paso Community College where she majored in business management.

Compliance with Section 16(a) of the Exchange Act

      Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require the Company's officers and directors and persons who own more
than 10% of the Company's common stock to file reports of ownership and changes
in ownership with the Securities and Exchange Commission and to furnish the
Company with copies. During each of the fiscal years ended December 31, 1998,
and 1996, each of the directors and officers filed the required Form 3.

Item 10. Executive Compensation.

      Compensation of Officers. No executive officer of the Company was paid
cash or non-cash compensation in excess of $100,000 during calendar year 1998,
1997, or 1996 and the Company had and has no compensation plans in place and no
officer has received non-cash compensation, other than employee benefits made
available to all employees of the Company. The following table sets forth the
cash compensation paid by the Company to its chief executive officer for
services rendered during calendar years 1998, 1997, 1996, and 1995.


                                       28
<PAGE>

                                                 Annual Compensation(1)
                                                 ----------------------
Name and                                                            Other Annual
Principal Position            Year        Salary ($)    Bonus ($)   Compensation
------------------            ----        ----------    ---------   ------------

Raquel Zepeda, President      1998        65,000            --             --
                              1997        65,000            --             --
                              1996        60,000            --             --
                              1995        50,000*           --             --
----------
*$15,149 of Ms. Zepeda's 1995 salary was accrued.

      Incentive Stock Option Plan. The Company has adopted an Incentive Stock
Option Plan (the "Plan"). The purpose of the Plan is to secure and retain key
employees of the Company. The Plan authorizes the granting of options to key
employees of the Company to purchase an aggregate of 500,000 shares of commons
stock, subject to adjustment for various forms of reorganizations that may
occur. No options may be granted after August 6, 2003 and the fair value of an
option to each optionee cannot exceed $100,000 per year. An employee must have
six months of continuous employment with the Company before he or she may
exercise an option granted under the Plan. The option exercise price may not be
less than 100% of the fair market value of the shares at the time of the
granting of such option. In the event an option is granted to a stockholder who
owns 10% or more of the Company's shares at the time of the grant of the option,
the option price must not be less than 110% of the fair market value of the
shares at the time of such grant. Options granted under the Plan are
nonassignable and terminate three months after employment by the optionee
ceases, except if employment terminates due to the disability of the optionee,
in which event the option will expire twelve months from the date employment
ceases. The Plan is administered by the Company's Board of Directors. No options
have been granted under the Plan. It may be expected that any options granted
will be exercised only if it is advantageous to the option holder and when the
market price of the company's common stock exceeds the option price. In the
event that the Company grants options pursuant to the Plan, the existence of
such options may have a negative effect on the market price of the Company's
common stock.

      Compensation of Directors. Directors receive no compensation for their
services as such.

      Employment Agreement.. In January, 1996, the Company and Ms. Zepeda
entered into an Amendment No. 1 to the original Employment Agreement which
provides for her full time employment by the Company. The Amendment provides a
base salary effective January 1, 1995 of $50,000 per annum, increasing to
$60,000 per annum effective January 1, 1996 and thereafter increasing only for
cost of living adjustments. The Amendment provides for incentive compensation as
determined by the Board of Directors of the Company considering as a factor in
such incentive compensation the profitability of the Company. In 1997, Ms.
Zepeda received an 8.33% increase to $65,000 per year.


                                       29
<PAGE>

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

      Security Ownership of Certain Beneficial Owners. The following table sets
forth information for each person who is known to the Company to be the
beneficial owner of more than five percent of any class of the Company's voting
stock as of December 31, 1998:

                                       Amount and                     Percent of
                 Name and Address of   Nature of          Percent of  all Voting
Title of Class   Beneficial Owner      Beneficial Owner   Class       Classes
--------------   ----------------      ----------------   -----       -------

Common Stock     Raquel Zepeda         19,888,000 shares  83%         83%
                    9873 S. Santa      owned directly
                    Monica Blvd.
                    Beverly Hills, CA

      As of December 31, 1998, there were 24,000,000 shares of common stock
outstanding, with each share entitled to one vote. Therefore, the Company has
securities outstanding with an aggregate of 24,000,000 votes.

      Security Ownership of Management. The following table sets forth as to
each class of equity securities of the Company beneficially owned by all of the
Company's directors and nominees, each of the named executive officers and by
all of the Company's directors and executive officers as a group:

                                          Amount and
                  Name and Address of     Nature of                   Percent of
Title of Class    Beneficial Owner        Beneficial Owner            Class
--------------    ----------------        ----------------            -----

Common Stock      Raquel Zepeda            19,888,000 shares             83%

                    9873 S. Santa          owned directly
                    Monica Blvd.
                    Beverly Hills, CA

Common Stock      Elizabeth A. Tovar       10,000 shares               .004%

                    9873 S. Santa
                    Monica Blvd.
                    Beverly Hills, CA

Common Stock      All executive officers   19,898,000 shares            83%
                    and directors as a 
                    group (2 persons)

      Changes in Control. Other than the Employment Agreement with Ms. Zepeda,
there are no agreements, arrangements, or pledges of securities of the Company,
the operation of which may at a subsequent date result in a change of control of
the Company.


                                       30
<PAGE>

Item 12. Certain Relationships and Related Transactions.

      Not applicable.


                                       31
<PAGE>

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

      (a) Exhibits and Index of Exhibits.

      Exh.
      No.        Description
      ---        -----------

      3.1   Articles of Incorporation, incorporated by reference from Form SB-2
            Registration Statement No. 33-76464-LA as filed on March 31, 1994,
            Exhibit 3(a).

      3.2   Amendment to Articles of Incorporation, incorporated by reference
            from Form SB-2 Registration Statement No. 33-76464-LA as filed on
            March 31, 1994, Exhibit 3(b).

      3.3   Bylaws, incorporated by reference from Form SB-2 Registration
            Statement No. 33-76464-LA as filed on March 31, 1994, Exhibit 3(c).

      3.4   Amendment to Bylaws, incorporated by reference from Form SB-2
            Registration Statement No. 33-76464-LA as filed on March 31, 1994,
            Exhibit 3(d).

      3.5   Certificate of Determination of Rights and Preferences of Series A
            Preferred Stock, incorporated by reference from Form 10K
            Registration Statement No. 41093.4-LA, as filed on December 31,
            1995, Exhibit 3.5(a).

      3.6   Amended and Restated Bylaws, incorporated by reference from Form 10K
            Registration Statement No. 41093.4-LA, as filed on December 31,
            1995, Exhibit 3.6(a).

      3.7   Amendment to Certificate of Determination of Rights and Preferences
            of Series A Preferred Stock, incorporated by reference from Form 10K
            Registration Statement No. 97WLA13270018 as filed on December 31,
            1996, Exhibit 3.7(a).

      4.1   Specimen Certificate of Common Stock, incorporated by reference from
            Form SB-2 Registration Statement No. 33-76464-LA as filed on March
            31, 1994, Exhibit 4(a).

      4.2   Form of Warrant Agreement, incorporated by reference from Form SB-2
            Registration Statement No. 33-76464-LA as filed on March 31, 1994
            Exhibit 4(b).

      4.3   Specimen A Warrant Certificate, incorporated by reference from Form
            SB-2 Registration Statement No. 33-76464-LA as filed on March 31,
            1994, Exhibit 4(c).

      4.4   Specimen B Warrant Certificate, incorporated by reference from Form
            SB-2 Registration Statement No. 33-76464-LA as filed on March 31,
            1994, Exhibit 4(d).

      4.5   Specimen C Warrant Certificate, incorporated by reference from Form
            SB-2 Registration Statement No. 33-76464-LA as filed on March 31,
            1994, Exhibit 4(e).


                                       32
<PAGE>

      Exh.
      No.        Description
      ---        -----------

      4.6   Specimen Certificate of Series A Preferred Stock, incorporated by
            reference from Form SB-2 Registration Statement No. 33-76464-LA as
            filed on March 31, 1994, Exhibit 4(g).

      10.1  Incentive Stock Option Plan, incorporated by reference from Form
            SB-2 Registration Statement No. 33-76464-LA as filed on March
            31,1994, Exhibit 4(g).

      10.2  Employment Agreement dated January 31, 1994 between the Company and
            Raquel Zepeda, incorporated by reference from Form SB-2 Registration
            Statement No. 33-76464-LA as filed on March 31, 1994, Exhibit 10(b).

      10.3  Trademark Application for "Colecciones de Raquel", incorporated by
            reference from Form SB-2 Registration Statement No. 33-76464-LA as
            filed on March 31, 1994, Exhibit 10(c).

      10.4  Trademark No. 1,709,662 for "Sabor A Mi", incorporated by reference
            from Form SB-2 Registration Statement No. 33-76464-LA as filed on
            March 31, 1994, Exhibit 10(d)

      10.5  Agreement dated December 31, 1993 between the Company and Raquel
            Zepeda, incorporation by reference from Amendment No. 1 to Form SB-2
            Registration Statement No. 33-76464-LA as filed on May 9, 1994,
            Exhibit 10(e),

      10.6  Settlement Agreement and General Mutual Release dated June 20,1995
            between the Raquel Zepeda dba Colecciones de Raquel and Rixima,
            Inc., incorporated by reference from Form 10KSB Registration
            Statement No. 34597.1 as filed on December 31, 1994, Exhibit
            10.6(a).

      10.7  Agreement dated September, 1994 between the Company and Moore
            McKenzie, Inc., incorporated by reference from Form 10KSB
            Registration Statement No.34597.1-LA as filed on December 31, 1994,
            Exhibit 10.7(a).

      10.8  Commercial Lease dated September 29, 1995 between the Company and
            Wallace H. Siegel and Allen Siegel, incorporated by reference from
            Form 10KSB Registration Statement No.34597.1-LA as filed on December
            31, 1994, Exhibit 10.8(a).

      10.9  Amendment No. 1 to Employment Agreement dated January 1, 1996
            between the Company and Raquel Zepeda, incorporated by reference
            from Form 10KSB Registration Statement No.34597.1-LA as filed on
            December 31, 1994, Exhibit 10.9(a).

      10.10 Commercial Lease dated September 29, 1995 between the Company and
            L.A. Pacific Center, Inc., incorporated by reference from Form 10KSB
            Registration Statement No. 97-WLA-13270018 as filed on December 31,
            1996.


                                       33
<PAGE>

      Exh.
       No.        Description
       ---        -----------

      10.11 Distribution Agreement between Colecciones de Raquel, Inc. and
            R-Town Entertainment incorporated by reference from Form 10KSB
            Registration Statement No. 98-WLA-123500 as filed March, 1998.

      10.12 Trademark No. 2,050,606 for "Colecciones De Raquel, Inc. Face Logo"
            incorporated by reference from Form 10KSB Registration Statement No.
            98-WLA-123500 as filed March, 1998..

      10.13 Certificate of Copyright Registration VA 736-099 for "CRQL Mark
            (Logo)" incorporated by reference from Form 10KSB Registration
            Statement No. 98-WLA-123500 as filed March, 1998.

      10.14 Certificate of Copyright Registration SR 190-794 for Sabor A Mi,
            "Melody Of Eternal Passion" incorporated by reference from Form
            10KSB Registration Statement No. 98-WLA-123500 as filed March,
            1998..

      10.15 Certificate of Copyright Registration VA 334-469 for "Colecciones De
            Raquel Color Collection Brochure".

      10.16 Notice of Allowance for Trademark "PELIGRO," SR 75/074408
            incorporated by reference from Form 10KSB Registration Statement No.
            98-WLA-123500 as filed March, 1998.

      10.17 Request For Extension of Time To File A Statement Of Use With
            Declaration for Trademark "PELIGRO", SR 75/074408 incorporated by
            reference from Form 10KSB Registration Statement No. 98-WLA-123500
            as filed March, 1998..

      10.18 Notice of Approval of Extension Request for Trademark "PELIGRO", SR
            75/074408 incorporated by reference from Form 10KSB Registration
            Statement No. 98-WLA-123500 as filed March, 1998.

      10.19 Contract with Con Estilo Latino

      10.20 Contracts with A.R. Hardy & Associates and John W. Vanover
            incorporated herein by reference from Form S-8 filed on June 17,
            1998 (File No. 333-57061)

      (b) Reports on Form 8-K.

      No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year ended December 31, 1998.


                                       34
<PAGE>

SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated: April 14, 1998                   COLECCIONES DE RAQUEL, INC.


                                        By: /s/ Raquel Zepeda 
                                           -------------------------------------
                                           Raquel Zepeda, President and 
                                             Chief Financial Officer

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature


/s/ Raquel Zepeda     President (Principal Executive              April 14, 1998
------------------    Officer, Principal Financial Officer)                     
RAQUEL ZEPEDA         and Director                                              


                                       35