<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)
[X]   Annual Report Under Section 13 of the Securities Exchange Act of 1934
      For the fiscal year ended January 2, 1999; or

[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 
      From the transition period from ________ to ________.


                                  FANTASMA, LLC
             ------------------------------------------------------ 
             (Exact Name of Registrant as Specified in Its Charter)


            DELAWARE                                            11-3340245
-------------------------------                             -------------------
(State or Other Jurisdiction of                                (IRS Employer
Incorporation or Organization)                              Identification No.)


500 George Washington Highway, SmithfielD RI                       02917 
--------------------------------------------                -------------------
  (Address of Principal Executive Offices)                       (Zip Code)


                                 (401) 231-3800
                 -----------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


     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: NONE

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 [ ]

         Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         As of March 15, 1999, the aggregate market value of the voting equity
held by non-affiliates of the Registrant was none.

         The Registrant meets the conditions set forth in General Instructions
(I)(1)(a) and (b) of Form 10-K (as modified by prior no-action release) and is
therefore filing this form with the reduced disclosure format.

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



<PAGE>   2


================================================================================
                                     PART I
================================================================================


ITEM 1.  BUSINESS

         Fantasma, LLC, a Delaware limited liability company, (the "Company" or
"Fantasma"), is a mostly-owned subsidiary of AAi.FosterGrant, Inc., a Rhode
Island corporation (the "Parent").

         Fantasma designs, imports and wholesales licensed watches, clocks and
other novelties to customers located primarily throughout the United States.
Customers include mass merchandisers, department stores, chain drug stores,
theme parks and private labels. Fantasma distributes products under numerous
licensed names, including Winnie the Pooh(R), Sesame Street(R), The National
Football League(R), and Peanuts(R). Approximately 51.6% of total sales are
generated from three mass merchandisers.

         Fantasma outsources manufacturing for virtually all of its products to
manufacturers in Asia with the remainder outsourced to independent domestic
manufacturers. Costs associated with Fantasma's numerous royalty agreements,
based on net sales, are classified in costs of goods sold. Accordingly, the two
principal elements comprising Fantasma's cost of goods sold are the price of
purchased manufactured goods and royalties. Fantasma believes outsourcing
manufacturing allows it to reliably deliver competitively priced products to the
retail market while retaining considerable flexibility in its cost structure.
Operating expenses are comprised primarily of payroll, occupancy costs related
to Fantasma's New York office and showroom, freight, depreciation and
amortization.

         In June 1998, AAi.FosterGrant, Inc. acquired an 80% interest in
Fantasma. The operating agreement under which Fantasma is managed provides
AAi.FosterGrant, Inc. with sole voting rights on numerous significant matters.

ITEM 2.  PROPERTIES

         The Company's principal executive office is located at 500 George
Washington Highway, Smithfield, Rhode Island 02917, which is owned by the
Parent. The Company also leases an office at 307 5th Avenue, 4th Floor, New
York, New York 10016. The Company believes that its facilities are suitable and
adequate for its intended purposes.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is subject to legal proceedings in the ordinary course of
business. While the outcome of law suits or other proceedings cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial condition, results of the operation or
cash flow of the Company.





                                       2
<PAGE>   3


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

         Omitted pursuant to General Instruction I to Form 10-K.


================================================================================
                                     PART II
================================================================================

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         The Company's equity securities are not publicly traded. The Parent
owns 80% of the Company's membership interests and the remaining minority
interests are held by an officer of the Company. Thus, no trading market exists
for such stock.

ITEM 6.  SELECTED FINANCIAL DATA

         Omitted pursuant to General Instruction I to Form 10-K.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following discussion may contain "forward-looking" statements and
are subject to risks and uncertainties that could cause actual results to differ
significantly from expectations. In particular, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section which are not historical facts, including, but not limited
to, statements regarding the anticipated adequacy of cash resources to meet
Fantasma's working capital requirements and statements regarding the anticipated
proportion of revenues to be derived from a limited number of customers, may
constitute forward-looking statements. Although Fantasma believes the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. These
risks and uncertainties include dependence on licensed brands, customer
concentration and consolidation, a single site distribution facility, a limited
number of delivery companies, unpredictability of discretionary consumer
spending, competition, susceptibility to changing consumer preferences and
uncertainties relating to the Year 2000 computer issue. The following discussion
and analysis of financial condition and results of operations should be read in
conjunction with the Financial Statements and related Notes thereto included
elsewhere herein.

RESULTS OF OPERATION

Year Ended January 2, 1999 compared to December 31, 1997

         Net Sales. Net sales were $14.7 million for the year ended January 2,
1999 as compared to $17.2 million for the year ended December 31, 1997, a
decrease of 14.7% or $2.5 million. The 




                                       3
<PAGE>   4

decrease is attributable to decreased sales of certain licensed analog watches
in 1998 as compared to 1997.

         Gross Profit. Gross profit was $4.5 million for the year ended January
2, 1999 compared to $4.6 million for the year ended December 31, 1997 a decrease
of $142,000. Gross profit as a percentage of net sales increased to 30.4% from
26.8% due to a shift in product mix from low margin analog watches to higher
margin digital watches.

         Operating Expenses. Operating expenses were $3.8 million for the years
ended January 2, 1999 and December 31, 1997. Operating expenses were impacted by
the costs associated with moving Fantasma's sales office to New York City and
moving warehouse operations from a New Jersey facility to the Company's
distribution facility in Rhode Island. These costs were offset by decreased
variable costs associated with the decrease in net sales.

         Interest Expense. Interest expense was $453,000 for the year ended
January 2, 1999 compared to $480,000 for the year ended December 31, 1997, a
decrease of 5.6% or $27,000.

         Net Income. As a result of the factors discussed above, net income was
$197,000 for the year ended January 2, 1999 compared to net income of $303,000
for the year ended December 31, 1997, a decrease of $106,000.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not believe that the adoption of SFAS No.
133 will have a material impact on its financial statements.

         In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 Reporting on the Costs of Start Up Activities
(SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start up
activities and organization costs to be expensed as incurred. The Company does
not believe that the adoption of SOP 98-5 will have a material impact on its
financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.




                                       4
<PAGE>   5


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The index to Financial Statements is included on page F-1 this Annual
Report and is incorporated by reference herein.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         There are no changes in or disagreements with accountants on accounting
and financial disclosure as defined by Item 304 of Regulation S-K.

================================================================================
                                    PART III
================================================================================

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         Omitted pursuant to General Instruction I to Form 10-K.





                                       5
<PAGE>   6


ITEM 11. EXECUTIVE COMPENSATION

         Omitted pursuant to General Instruction I to Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Omitted pursuant to General Instruction I to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Omitted pursuant to General Instruction I to Form 10-K.

================================================================================
                                     PART IV
================================================================================

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)      (1)      FINANCIAL STATEMENTS

         The Financial Statements are listed in the index on page F-1 of this
         Annual Report.

         (2)      FINANCIAL STATEMENT SCHEDULE

         Valuation and Qualifying Accounts is included in the Notes to the
         Financial Statement on Page F-12 of this Annual Report.





                                       6
<PAGE>   7

         (3)      EXHIBITS

  EXHIBIT              
  NUMBER                        DESCRIPTION
  -------                        -----------


   3.1*   Certificate of Formation of Fantasma, LLC

   3.2*   Amended and Restated Operating Agreement of Fantasma, LLC

   4.1*   Indenture dated as of July 21, 1998, by and among AAi.FOSTERGRANT,
          Inc. ("AAi"), its domestic subsidiaries named therein (the
          "Guarantors") and IBJ Schroder Bank & Trust Company, as Trustee, with
          respect to the Series A and Series B 103/4% Senior Notes due 2006.

   4.2*   Purchase Agreement dated as of July 16, 1998, by and among AAi, the
          Guarantors and NationsBanc Montgomery Securities LLC, Prudential
          Securities Incorporated and BancBoston Securities Inc. (the "Initial
          Purchasers").

  10.1*   Second Amended and Restated Financing and Security Agreement by and
          among AAi, certain of its Subsidiaries, NationsBank, N.A., as agent,
          and other lenders party thereto, dated July 21, 1998.

  10.2*   Fantasma, LLC Member Agreement by and among AAi, Roger D. Dreyer and
          Houdini Capital LTD dated as of June 23, 1998.+

  10.3.1* Fantasma, LLC Member Agreement by and among AAi and Paul Michaels
          dated as of June 23, 1998.

  10.3.2  Amendment to Fantasma, LLC Member Agreement by and among AAi and 
          Paul Michaels dated as of March 26, 1999.+

  10.4    Employment Agreement between Fantasma and Roger D. Dreyer dated June
          23, 1998.+

  10.5    Employment Agreement between Fantasma and Paul Michaels dated as of
          June 23, 1998.+

  24.1    Power of Attorney

  27.1    Financial Data Schedule for the year ended January 2, 1999.


----------
*    Previously filed as an exhibit to the Company's Registration Statement No.
     333-61119 on Form S-4 and by this reference is incorporated herein.

+    Management or compensatory plan or arrangement.


(B)      REPORTS ON FORM 8-K

         None.



                                       7

<PAGE>   8

                                  FANTASMA, LLC

                                   SIGNATURES


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


                                        FANTASMA, LLC


Date:     April 2, 1999                 By: /s/ Duane M. DeSisto
                                            ----------------------------------
                                            Duane M. DeSisto
                                            Treasurer




         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.


               *                        /s/ Duane M. DeSisto
---------------------------------       -------------------------------------- 
Roger D. Dreyer                         Duane M. DeSisto                       
President                               Treasurer                              
(Principal Executive Officer)           (Principal Financial Officer)          
Date:  ______________, 1999             Date: April 2, 1999             

                                                                               
/s/ Stephen J. Korotsky                      
---------------------------------                                              
Stephen J. Korotsky, Controller                                                
(Principal Accounting Officer)                                                 
Date: April 2, 1999                                                     

                                                                               
                                                                               
AAi.FosterGrant, Inc.                   Houdini Capital Ltd.                   
                                                                               
                                                                               
By: /s/ Gerald F. Cerce                 By:               *                    
    ------------------------------         ----------------------------------- 
    Gerald F. Cerce                        Roger D. Dreyer                     
    President                              President                           
Date: April 2, 1999                     Date: ______________, 1999          
                                                                               
                                                                               

By: /s/ Gerald F. Cerce     
    -----------------------------                                              
    (Attorney-in-fact for               
    individuals indicated by 
    asterisk)
Date: April 2, 1999



                                       8

<PAGE>   9
                                     INDEX


                                                                           PAGE
FANTASMA, LLC:

     Report of Independent Public Accountants                              F-2

     Balance Sheets as of December 31, 1997 and January 2, 1999            F-3

     Statements of Operations for the Years Ended
     December 31, 1996 and 1997 and January 2, 1999                        F-4

     Statements of Members' Equity for the Years Ended
     December 31, 1996 and 1997 and January 2, 1999                        F-5

     Statements of Cash Flows for the Years Ended
     December 31, 1996 and 1997 and January 2, 1999                        F-6

     Notes to Financial Statements                                         F-7




                                      F-1
<PAGE>   10

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Members of
Fantasma LLC:

We have audited the accompanying balance sheets of Fantasma LLC as of December
31, 1997 and January 2, 1999 and the related statements of operations, members'
equity and cash flows for each of the three years in the period ended January 2,
1999. These financial statements are the responsibility of Fantasma LLC's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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 provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fantasma LLC as of December 31,
1997 and January 2, 1999 and the results of its operations and its cash flows
for each of the three years in the period ended January 2, 1999, in conformity
with generally accepted accounting principles.


                                               /s/ Arthur Andersen LLP

Boston, Massachusetts
February 19, 1999


                                      F-2
<PAGE>   11

                                  FANTASMA LLC

                                 BALANCE SHEETS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                     DECEMBER 31,       JANUARY 2,
                                                                                         1997              1999
<S>                                                                                 <C>              <C>            
CURRENT ASSETS:
   Cash                                                                             $           238  $           104
   Accounts receivable, less reserves of approximately $402 and $373                          5,108            5,088
   Inventory                                                                                  1,908            3,878
   Prepaids and other current assets                                                             72              203
                                                                                    ---------------  ---------------

         Total current assets                                                                 7,326            9,273
                                                                                    ---------------  ---------------

PROPERTY AND EQUIPMENT, AT COST:
   Equipment                                                                                     68               29
   Furniture and fixtures                                                                        11               --
                                                                                    ---------------  ---------------

                                                                                                 79               29

   Less--Accumulated depreciation                                                                (13)              (5)
                                                                                     ---------------  ---------------

                                                                                                 66               24
OTHER ASSETS:
   Intangible assets, net of accumulated amortization of $0 and $270                              3            4,357
                                                                                    ---------------  ---------------

         Total assets                                                               $         7,395  $        13,654
                                                                                    ===============  ===============

                         LIABILITIES AND MEMBERS' EQUITY

CURRENT LIABILITIES:
   Note payable to member                                                           $         3,764  $         7,088
   Advances payable to member                                                                 1,661               --
   Accounts payable and accrued expenses                                                      1,657            1,960
                                                                                    ---------------  ---------------

         Total current liabilities                                                            7,082            9,048

COMMITMENTS AND CONTINGENCIES (NOTE 1)

MEMBERS' EQUITY                                                                                 313            4,606
                                                                                    ---------------  ---------------

         Total liabilities and members' equity                                      $         7,395  $        13,654
                                                                                    ===============  ===============
</TABLE>

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


                                      F-3
<PAGE>   12

                                  FANTASMA LLC

                            STATEMENTS OF OPERATIONS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 -------------------- YEARS ENDED -----------------
                                                                           DECEMBER 31,                JANUARY 2,
                                                                       1996             1997              1999
<S>                                                              <C>               <C>              <C>            
NET SALES                                                        $        10,815   $        17,163  $        14,645

COST OF GOODS SOLD                                                         8,838            12,562           10,186
                                                                 ---------------   ---------------  ---------------

         Gross profit                                                      1,977             4,601            4,459

OPERATING EXPENSES:
   Selling expenses                                                          643             1,501            2,197
   General and administrative expenses                                     1,023             2,259            1,612
                                                                 ---------------   ---------------  ---------------

         Income from operations                                              311               841              650

INTEREST EXPENSE                                                             236               480              453
                                                                 ---------------   ---------------  ---------------

INCOME BEFORE INCOME TAXES                                                    75               361              197

PROVISION FOR INCOME TAXES                                                   (17)              (58)              --
                                                                 ---------------   ---------------  ---------------

         Net income                                              $            58   $           303  $           197
                                                                 ===============   ===============  ===============
</TABLE>

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


                                      F-4
<PAGE>   13

                                  FANTASMA LLC

                          STATEMENTS OF MEMBERS' EQUITY

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      PARENT 
                                                                      COMPANY         MEMBERS'
                                                                    INVESTMENT         EQUITY            TOTAL
<S>                                                              <C>               <C>              <C>            
BALANCE, DECEMBER 31, 1995                                       $         1,838   $           --   $         1,838
  Capital contribution                                                        --                1                 1
  Additional parent company investment                                       807               --               807
  Conversion of parent company investment to note payable to
    member                                                                (2,498)              --            (2,498)
  Net (loss) income                                                         (147)             205                58
                                                                 ---------------   --------------   ---------------

BALANCE, DECEMBER 31, 1996                                                    --              206               206
  Distribution to members                                                     --             (196)             (196)
  Net income                                                                  --              303               303
                                                                 ---------------   --------------   ---------------

BALANCE, DECEMBER 31, 1997                                                    --              313               313
  Distribution to members                                                     --             (531)             (531)
  Pushdown of purchase price related to AAi.FosterGrant's
    investment in Fantasma                                                    --            4,627             4,627
  Net income                                                                  --              197               197
                                                                 ---------------   --------------   ---------------

BALANCE, JANUARY 2, 1999                                         $            --   $        4,606   $         4,606
                                                                 ===============   ==============   ===============
</TABLE>

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


                                      F-5
<PAGE>   14

                                  FANTASMA LLC

                            STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 -------------------- YEARS ENDED -----------------
                                                                           DECEMBER 31,                JANUARY 2,
                                                                       1996             1997              1999
<S>                                                               <C>               <C>              <C>            
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                     $            58   $           303  $           197
   Adjustments to reconcile net income to net cash provided by
   (used in) operating activities-
     Depreciation and amortization                                             15                11              277
     Write-off of property and equipment                                       20                --               49
     Change in assets and liabilities-
       Accounts receivable                                                 (1,811)           (1,700)              20
       Inventory                                                           (1,178)               87           (1,970)
       Prepaid expenses and other current assets                             (121)               49             (131)
       Advances payable to member                                           1,078               674           (1,661)
       Accounts payable and accrued liabilities                                54               861              303
                                                                  ---------------   ---------------  ---------------

         Net cash (used in) provided by operating activities               (1,885)              285           (2,916)
                                                                  ---------------   ---------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of equipment                                                       --               (40)             (14)
   Decrease in other assets                                                    --                --                3
                                                                  ---------------   ---------------  ---------------

         Net cash used in investing activities                                 --               (40)             (11)
                                                                  ---------------   ---------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from note payable to member                                     1,266                --            7,088
   Repayments of note payable to member                                        --                --           (3,764)
   Parent company investment                                                  807                --               --
   Member contributions (distributions)                                         1              (196)            (531)
                                                                  ---------------   ---------------  ---------------

         Net cash provided by (used in) financing activities                2,074              (196)           2,793
                                                                  ---------------   ---------------  ---------------

NET INCREASE (DECREASE) IN CASH                                               189                49             (134)

CASH, BEGINNING OF PERIOD                                                      --               189              238
                                                                  ---------------   ---------------  ---------------

CASH, END OF PERIOD                                               $           189   $           238  $           104
                                                                  ===============   ===============  ===============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest paid                                                  $           156   $           480  $            --
                                                                  ===============   ===============  ===============
   Taxes paid                                                     $            --   $            27  $            --
                                                                  ===============   ===============  ===============

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
   Conversion of parent company investment to note payable to
     member                                                       $         2,498   $            --  $            --
                                                                  ===============   ===============  ===============
   Pushdown of purchase price related to AAi.FosterGrant's
     investment in Fantasma                                       $            --   $            --  $         4,627
                                                                  ===============   ===============  ===============
</TABLE>

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


                                      F-6
<PAGE>   15

                                  FANTASMA LLC

                          NOTES TO FINANCIAL STATEMENTS
                                 JANUARY 2, 1999

(1)   OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

      Organization and Business Activity

      Fantasma LLC (Fantasma) was organized under the laws of the State of
      Delaware on August 22, 1996 and began business operations on September 1,
      1996. Fantasma imports and wholesales licensed watches, clocks, and other
      novelties, and grants credit to customers located primarily in the United
      States.

      Prior to September 1, 1996, Fantasma operated as a division (the Fantasma
      division) of Overdrive Capital Corp. (formerly known as Good Stuff Corp.).
      Overdrive Capital Corp. (Overdrive) sold the Fantasma division's operating
      assets to Fantasma LLC in exchange for a two-year $3,764,366 note.
      Overdrive maintained a 67% ownership interest in Fantasma, with a former
      stockholder of Overdrive holding a 33% ownership interest. The assets were
      transferred at historical book value and consisted of the following (in
      thousands):

                  Unexpired royalties                       $       289
                  Accounts receivable                               798
                  Inventory                                       2,600
                  Prepaid expenses                                   49
                  Furniture and equipment                            25
                  Trademarks                                          3
                                                            -----------
                           Total assets transferred         $     3,764
                                                            ===========

      The accompanying financial statements prior to the formation of Fantasma
      LLC represent the financial results of the Fantasma division as included
      in the financial statements of Overdrive from January 1, 1995 to August
      31, 1996.

      In June 1998, AAi.FosterGrant, Inc. (AAi.FosterGrant) acquired an 80%
      interest in Fantasma for approximately $4.1 million in cash (the
      Acquisition). The operating agreement under which Fantasma is managed
      provides AAi.FosterGrant with sole voting rights on numerous significant
      matters. The Acquisition was accounted for using the purchase method. The
      purchase price was allocated based on estimated fair market value of
      assets and liabilities at the date of acquisition, as follows (in
      thousands):

                  Cash                                      $        73
                  Accounts receivable                             1,603
                  Inventory                                       2,002
                  Other current assets                              165
                  Furniture and equipment                            15
                  Goodwill                                        4,626
                  Notes payable                                  (3,500)
                  Other current liabilities                        (934)
                                                            -----------
                           Cash paid                        $     4,050
                                                            ===========


                                      F-7
<PAGE>   16

                                  FANTASMA LLC

                          NOTES TO FINANCIAL STATEMENTS
                                 JANUARY 2, 1999

                                   (Continued)

      The book value of Fantasma's assets and liabilities immediately prior to
      the Acquisition approximated fair market value. Goodwill is being
      amortized ratably over 10 years.

      Basis of Accounting

      The accompanying financial statements reflect the application of certain
      significant accounting policies, as discussed below and elsewhere in the
      notes to financial statements. 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 disclosure of contingent assets and
      liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting period. Actual
      results could differ from those estimates.

      Inventory

      Inventories are stated at the lower of cost (first-in, first-out) or
      market and consist of finished goods for all years presented. Finished
      goods inventory consists of material and overhead.

      Property and Equipment

      Fantasma provides for depreciation and amortization by charges to
      operations in amounts that allocate the cost of these assets on the
      straight-line and accelerated bases over their estimated useful lives as
      follows:

                    ASSET CLASSIFICATION           ESTIMATED USEFUL LIFE

                 Equipment                                5 years
                 Furniture and fixtures                   7 years

      Fantasma has adopted the provisions of Statement of Position No. 98-1,
      Accounting for the Costs of Computer Software Developed or Obtained for
      Internal Use. The adoption of this pronouncement did not have a material
      effect on Fantasma's financial position or financial results.

      Royalties

      Fantasma has several agreements that require royalty payments based on a
      percentage of certain net product sales, subject to specified minimum
      payments. Minimum future royalty obligations relating to these agreements
      total $849,000. Royalty expense was approximately $1,049,000, $1,734,000
      and $1,477,000 for the years ended December 31, 1996 and 1997 and January
      2, 1999, respectively. Accrued royalties, which are included in accounts
      payable and accrued expenses on the accompanying balance sheets, totaled
      $732,000 and $707,000 at December 31, 1997 and January 2, 1999,
      respectively.

      Revenue Recognition

      Fantasma recognizes revenue from product sales, net of anticipated returns
      and discounts, taking into account historical experience, upon shipment to
      the customer.

      Concentration of Credit Risk


                                      F-8
<PAGE>   17

                                  FANTASMA LLC

                          NOTES TO FINANCIAL STATEMENTS
                                 JANUARY 2, 1999

                                   (Continued)

      Financial instruments that potentially subject Fantasma to concentrations
      of credit risk are principally accounts receivable. A significant portion
      of its business activity is with domestic mass merchandisers whose ability
      to meet their financial obligations is dependent on economic conditions
      germane to the retail industry. During recent years, many major retailers
      have experienced significant financial difficulties and some have filed
      for bankruptcy protection; other retailers have begun to consolidate
      within the industry. To reduce credit risk, Fantasma routinely assesses
      the financial strength of its customers.

      Intangible and Other Long-Lived Assets

      In accordance with Statement of Financial Accounting Standards (SFAS) No.
      121, Accounting for Impairment of Long-Lived Assets and For Long-Lived
      Assets To Be Disposed Of, Fantasma reviews its long-lived assets
      (consisting primarily of goodwill) for impairment as events and
      circumstances indicate the carrying amount of an asset may not be
      recoverable. Fantasma evaluates the realizability of its long-lived assets
      based on profitability and cash flow expectations for the related asset.
      Management believes that as of each of the balance sheet dates presented
      none of Fantasma's long-lived assets were impaired. Amortization expense
      was approximately $270,000 for the year ended January 2, 1999.

      Disclosure of Fair Value of Financial Instruments

      Fantasma's financial instruments consist mainly of cash, accounts
      receivable, accounts payable and debt. The carrying amounts of Fantasma's
      financial instruments approximate fair value.

      New Accounting Standards

      In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 133, Accounting for Derivative Instruments and Hedging Activities.
      SFAS No. 133 establishes accounting and reporting standards for derivative
      instruments, including certain derivative instruments embedded in other
      contracts, and for hedging activities. It requires that an entity
      recognize all derivatives as either assets or liabilities in the statement
      of financial position and measure those instruments at fair value. SFAS
      No. 133 is effective for all fiscal quarters of fiscal years beginning
      after June 15, 1999. Fantasma does not believe that the adoption of SFAS
      No. 133 will have a material impact on its financial instruments.

      In April 1998, the American Institute of Certified Public Accountants
      issued Statement of Position 98-5, Reporting on the Costs of Start-up
      Activities (SOP 98-5). SOP 98-5 provides guidance on the financial
      reporting of start-up activities and organization costs to be expensed as
      incurred. Fantasma does not believe that the adoption of SOP 98-5 will
      have a material impact on its financial statements.

      Income Taxes

      Fantasma is treated as a partnership for federal and state income tax
      purposes, whereby the membership owners are taxed on their proportionate
      share of Fantasma's income. As a result, Fantasma has not provided for
      federal income taxes. The provision for income taxes reflects New York
      City Unincorporated Business Tax and New York State filing fees. For the
      period from January 1, 1996 to August 31, 1996, Fantasma accounted for
      state income taxes on a separate company basis.

(2)   NOTE PAYABLE


                                      F-9
<PAGE>   18

                                  FANTASMA LLC

                          NOTES TO FINANCIAL STATEMENTS
                                 JANUARY 2, 1999

                                   (Continued)

      Fantasma issued a note payable to Overdrive as consideration for the asset
      purchase on September 1, 1996 (see Note 1), under which it could borrow up
      to $5,000,000. At December 31, 1997, approximately $3,764,000 was
      outstanding under this note. The note accrued interest at the prime rate
      (8.5% at December 31, 1997). Total interest charged on this note was
      approximately $107,000, $320,000 and $141,000 in the years ended December
      31, 1996 and 1997 and January 2, 1999, respectively. This note was repaid
      in June 1998 with the proceeds from a note payable issued to
      AAi.FosterGrant.

      On June 13, 1998, the Company entered into a $15,000,000 demand revolving
      promissory note payable with AAi.FosterGrant. Borrowings under the note
      are secured by substantially all of Fantasma's assets and bear interest at
      a rate equal to AAi.FosterGrant's borrowing rate. The note is payable on
      demand with thirty-days notice. Total interest charged on this note was
      approximately $282,000 for the year ended January 2, 1999. At January 2,
      1999, $7,088,000 was outstanding under this note payable.

(3)   OPTIONS

      In connection with AAi.FosterGrant's investment in Fantasma, Fantasma
      issued options to two employees. The options provide that the employees
      may purchase up to 13% of Fantasma at the fair market value on the date of
      grant. Certain of these options contain performance criteria and,
      therefore, will be accounted for as variable options. Based on 1998
      activity, options to purchase 3% of Fantasma expired during the fiscal
      year. As of January 2, 1999 options to purchase 10% of the Company were
      outstanding and the exercise price was equal to or greater than the fair
      market value, therefore no expense was recorded.

      In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
      Compensation. SFAS No. 123 requires the measurement of the fair value of
      stock options granted to employees to be included in the statement of
      operations or disclosed in the notes to financial statements. Fantasma has
      determined that it will account for stock-based compensation for employees
      under Accounting Principles Board Opinion No. 25, Accounting for Stock
      Issued to Employees, and elect the disclosure-only alternative under SFAS
      No. 123.

      Had compensation cost for Fantasma's options been determined based on the
      fair value at the grant dates, as prescribed in SFAS No. 123, Fantasma's
      net loss for the fiscal year ended January 2, 1999 would have been
      $63,000.

      The fair value of each option grant is estimated on the date of grant
      using the Black-Scholes option pricing model with the following
      assumptions used for grants during the applicable period: no dividend;
      yield volatility of 35.53%; risk-free interest rates of 6.00% and a
      weighted average expected option term of 5 years. The weighted average
      grant date fair value for an option to purchase a 1% membership interest
      in Fantasma granted during the year ended January 2, 1999 was
      approximately $14,400.

(4)   RELATED PARTY TRANSACTIONS

      Shared Resources

      As discussed in Note 1, for the period from January 1, 1995 to August 31,
      1996, Fantasma operated as the Fantasma division of Overdrive. During this
      period, and for the period from September 1, 1996 to June 10, 


                                      F-10

<PAGE>   19

                                  FANTASMA LLC

                          NOTES TO FINANCIAL STATEMENTS
                                 JANUARY 2, 1999

                                   (Continued)

      1998, general corporate overhead costs related to corporate headquarters
      and shared administrative support were allocated by Overdrive to Fantasma
      based on a number of factors, including, for example, personnel and space
      utilized. In addition, Fantasma has operated as a division of
      AAi.FosterGrant since June 10, 1998 and has had similar expenses allocated
      to it by AAi.FosterGrant using similar factors. Management believes these
      allocations were reasonable and the costs of the services charged to
      Fantasma were not materially different from the costs that would have been
      incurred had Fantasma performed these functions as a stand-alone entity.

      Overdrive allocated expenses through advances. Interest on advances was
      charged monthly until June 10, 1998, based on the prime rate applied to
      the average outstanding monthly balance. Total interest charged on
      advances payable to Overdrive was $129,000, $160,000, and $27,000 in the
      years ended December 31, 1996 and 1997 and January 2, 1999, respectively.
      Advances from Overdrive were repaid on June 10, 1998. Expenses allocated
      by AAi.FosterGrant are funded through the note payable (see Note 2 for
      further discussion).

(5)   SIGNIFICANT CUSTOMERS

      During the year ended January 2, 1999, three customers accounted for
      approximately 22%, 17% and 10% of net sales, respectively. These
      customers' accounts receivable balances represented approximately 27%, 14%
      and 4% of gross accounts receivable as of January 2, 1999.


                                      F-11
<PAGE>   20

                                  FANTASMA LLC

                          NOTES TO FINANCIAL STATEMENTS
                                 JANUARY 2, 1999

                                   (Continued)

(6)   SEGMENT REPORTING

      The Company has adopted SFAS No. 131, Disclosures About Segments of an
      Enterprise and Related Information, in the 1998 fiscal year. SFAS No. 131
      establishes standards for reporting information regarding operating
      segments in annual financial statements and requires selected information
      for those segments to be presented in interim financial reports issued to
      stockholders. SFAS No. 131 also establishes standards for related
      disclosures about products and services and geographic areas. Operating
      segments are identified as components of an enterprise about which
      separate discrete financial information is available for evaluation by the
      chief operating decision maker, or decision making group, in making
      decisions now to allocate resources and assess performance. To date, the
      Company has viewed its operations and manages its business as principally
      one segment.

(7)   VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                            ADDITIONS
                           BALANCE AT       CHARGED TO      DEDUCTIONS    
                          BEGINNING OF      COSTS AND          FROM         BALANCE AT 
                             PERIOD          EXPENSES       RESERVES(1)    END OF PERIOD
<S>                          <C>              <C>             <C>            <C>    
Accounts receivable-
   December 31, 1996         $    80          $   171         $    65        $   186
   December 31, 1997             186              360             144            402
   January 2, 1999               402               --              29            373
</TABLE>

(1)   Amounts deemed uncollectible


                                      F-12