UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

            [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended March 31, 2001
                                       or
           [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                      FOR THE TRANSITION PERIOD FROM -------------
                        TO ------------- Commission File No. 000-14747

                               AZUL HOLDINGS INC.
                            (Formerly Xyvision, Inc.)
             (Exact name of registrant as specified in its charter)

                               DELAWARE 04-2751102
                  (State or other jurisdiction (I.R.S. Employer
              of incorporation or organization) Identification No.)

                6672 GUNPARK DRIVE, SUITE 100, BOULDER, CO 80301
               (Address of principal executive offices) (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 448-9441

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $.03 PAR VALUE
                                (Title of class)

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 check mark 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  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. []

The aggregate  market value of common stock held by  non-affiliates  on June 21,
2001, based on the closing bid quotation of the common stock on June 21, 2001 of
$1.25  per  share as  reported  on the OTC  Bulletin  Board,  was  approximately
$1,222,910.

As of June 21, 2001, the  registrant had 5,134,605  shares of Azul Holdings Inc.
common stock, $.03 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                       1
<PAGE>

Portions  of  the  registrant's   definitive   Information   Statement  for  the
registrant's 2001 annual meeting of stockholders, to be filed not later than 120
days after the end of the fiscal  year (March 31,  2001),  are  incorporated  by
reference in Part III.


                                       2
<PAGE>



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

ITEM                                                                                               PAGE

                                     PART I
<S>                                                                                                <C>
ITEM 1. Business.....................................................................................3
----------------

ITEM 2. Properties..................................................................................10
------------------

ITEM 3. Legal Proceedings...........................................................................11
-------------------------

ITEM 4. Submission of Matters to a Vote of Security Holders.........................................11
-----------------------------------------------------------

              Executive Officers of the Registrant..................................................11
--------------------------------------------------


                                PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................13
-----------------------------------------------------------------------------

ITEM 6. Selected Financial Data.....................................................................15
-------------------------------

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......17
---------------------------------------------------------------------------------------------

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.................................21
-------------------------------------------------------------------

ITEM 8. Financial Statements and Supplementary Data.................................................22
---------------------------------------------------

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........49
--------------------------------------------------------------------------------------------


                               PART III
ITEM 10. Directors and Executive Officers of the Registrant.........................................50
-----------------------------------------------------------

ITEM 11. Executive Compensation.....................................................................50
-------------------------------

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................50
-----------------------------------------------------------------------

ITEM 13. Certain Relationships and Related Transactions.............................................50
-------------------------------------------------------


                                PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................51
-------------------------------------------------------------------------

</TABLE>


             Cautionary Information about FORWARD-LOOKING Statements

This Annual Report on Form 10-K contains  forward-looking  statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. For this purpose,  any statements  contained  herein
that  relate to events or  circumstances  that may occur or exist in the future,
including the  statements  under "Item 1.  Business"  and "Item 7.  Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
located elsewhere herein regarding  business prospects and the Company's results
of  operations  or  financial  position,  may be  deemed  to be  forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans,"   "expects,"   and  similar   expressions   are  intended  to  identify
forward-looking  statements.  The important  factors  discussed  below under the
caption  "Risk  Factors,"  among  others,  could cause actual  results to differ
materially  from those indicated by  forward-looking  statements made herein and
presented  elsewhere  by  management  from  time to time.  Such  forward-looking
statements  represent  management's  current  expectations  and  are  inherently
uncertain. Investors are warned that actual results may differ from management's
expectations.



                                       3
<PAGE>



                                     PART I

ITEM 1. Business

General

Azul Holdings Inc. ("Azul" or the "Company") was incorporated under Delaware law
in 1981. At this time, Azul's principal asset is its ownership of a 52.5% equity
ownership in Xyvision Enterprise Solutions Inc.  ("XyEnterprise").  XyEnterprise
develops,  markets,  integrates and supports  content  management and publishing
software for a variety of customers in numerous industries.  These products help
companies create,  manage and deliver large amounts of content in Web electronic
or paper formats (or media).  XyEnterprise  integrates its internally  developed
products with selected  third-party  products to create complete  publishing and
content  management  solutions  through  its  professional  services  group  and
qualified  third-party  resellers  and service  partners.  These  solutions  are
designed to increase  productivity  of content  creation  and  editing,  enhance
document and knowledge management  functions,  improve quality and timeliness of
formatted  information and support the growing use of Extensible Markup Language
("XML") as a core business technology.

Azul provides  financial and management support to a few carefully selected high
technology  companies  generally in their emerging or  early-stages of corporate
development and to mid-stage  companies.  To date, Azul's principal asset is its
holdings in XyEnterprise which previously was a wholly-owned subsidiary.  During
2000, Azul made an initial investment in NanoFrames,  LLC ("NanoFrames") and now
has a 15% preferred ownership interest. NanoFrames is in the early stages of the
research and  development  of  nanotechnology  using the principles of molecular
biology.  Such  technology is expected to have  applications  in  reinforcement,
separation and material design fields.  Nanotechnology is expected to become the
new  frontier  for research in such fields as  electronics,  optics,  materials,
medicine and pharmaceuticals.

From time to time Azul may make additional  investments in the above  referenced
companies  and may  make an  occasional  investment  in  other  companies.  Such
investments  would be in areas  where the  Company  believes  there  are  unique
opportunities  for the  potential  of  significant  rapid  growth  within  large
markets,  with the corresponding  potential of profitability and appreciation in
investment  values.  Such investments,  particularly in emerging and early-stage
companies,  require  the  taking  of  certain  risks  that  may be  significant.
Opportunities  to be considered by Azul have  generally been provided to Azul by
Tudor Trust ("Tudor"),  the majority  shareholder of the Company, as a result of
Tudor's existing  investments in, and frequent  control of, other companies.  In
those instances an investment by Azul is approved by its  independent  directors
with  independent  legal  and  financial  advice.  Other  opportunities  may  be
identified by the Company  through  various  sources  including  contacts of the
Company's  officers with investment  companies,  brokers,  and by direct contact
with  principals  of potential  investees.  As a result of the  foregoing,  Azul
entered  into a loan  agreement  with  PlazaBlue  Inc.  ("PlazaBlue")  (formerly
Antiqnet.com,  Inc.),  a  company  in  which  Tudor  Trust  had a 70%  ownership
interest.  During fiscal year 2001,  Azul advanced  PlazaBlue  $2,450,000.  As a
result of  PlazaBlue  becoming  in default on the  repayment  of the loan,  Azul
participated  in a  foreclosure  sale of the  assets of  PlazaBlue  and,  at the
election of Azul, subsequently sold its interest in the assets back to Tudor for
the original  principal  amount of the loan plus accrued interest to the date of
sale, March 31, 2001.

Financial capital has historically  been provided to Azul by Tudor Trust.  Tudor
Trust has committed to lend Azul at least $17.5 million,  of which approximately
$14 million has already been provided.  In the future,  Azul may receive further
investment  from Tudor  Trust to expand  its  investment  in  current  and newly
acquired  companies.  There is however, no assurance of further investments from
Tudor or of Azul's  ability  to expand  its  investments  in  current  or other
companies.

The Company's current strategy  contemplates  maximizing long-term economic gain
to its  shareholders  over  time by one or more of the  following  avenues  with
respect to each of the companies in which Azul has made an  investment;  ongoing
earnings from Azul's share of operating and other gains of such companies;  sale
of some or all of Azul's  holdings at  appreciated  values when Azul  determines
that partial or complete  exit is  appropriate,  funding  future  growth of such
companies by accepting the  investment of new equity or debt  financing from one
or more  third  parties  or  related  parties  in  amounts  that  recognize  the
appreciated  value of Azul's  existing  holdings,  or  creating  public  trading
markets for the shares of such companies.  There can,  however,  be no assurance
that any of the foregoing results will be achieved.

                                       4
<PAGE>

Capital  investments  made by Azul in  companies  may be consumed  by  operating
losses and negative cash flows normally  expected in emerging,  early-stage,  or
expanding and growing mid-stage business activities.  Therefore, there can be no
assurance  that Azul will be able to  ultimately  benefit  with  respect  to any
particular  company.  Also,  there can be no assurance that Azul will be able to
sell  some or all of its  holdings  or that a  company  will  be  successful  in
obtaining additional capital investments from third parties or related parties.

XyEnterprise develops,  markets,  integrates and supports content management and
publishing  software for a variety of customers  in numerous  industries.  These
products help companies  create,  manage and deliver large amounts of content in
Web  electronic  or  paper  formats  (or  media).  XyEnterprise  integrates  its
internally  developed  products  with  selected  third-party  products to create
complete  publishing and content  management  solutions through its professional
services group and qualified third-party  resellers and service partners.  These
solutions are designed to increase productivity of content creation and editing,
enhance  document  and  knowledge  management  functions,  improve  quality  and
timeliness of formatted information and support the growing use of XML as a core
business technology.

During 1998,  XyEnterprise acquired the operating assets of Xyvision,  Inc. (now
Azul Holdings  Inc,) which had been founded in 1982 with the goal of introducing
a new  generation  of  production  publishing  systems  to  the  commercial  and
corporate marketplace.  Xyvision Production Publisher pioneered new concepts for
automating the rapid production of high-volume  complex  documents.  Building on
this  technology,  XyEnterprise  developed  one of the first  compound  document
management systems, Parlance Content Manager (Parlance). Parlance is designed to
manage XML content and facilitate the re-use and  re-purposing  of XML and other
data  content  for  Web  or  other  deliverables.   Parlance  provides  history,
versioning,  workflow,  and often has been integrated  with Xyvision  Production
Publisher or other applications to provide an automated publishing process.

Recently,  XyEnterprise  has  begun  to  offer  a  broader  variety  of  content
management and publishing software solutions. In the first part of calendar year
2000,  XyEnterprise  introduced  a new  set of  applications;  Parlance  Content
Manager v3.0,  Content@  (pronounced  contenta),  and XML  Production  Publisher
("XPP").  These applications  address the requirement of XML content management,
re-use, versioning, workflow and document control in an enterprise environment.

The business of XyEnterprise was formerly wholly owned by Azul. In December 1998
the  XyEnterprise  business was placed in a new  corporation.  At the same time,
12.5%  of the new  company  was  acquired  by  Tudor  Trust  in  exchange  for a
$1,000,000  equity  investment.  Tudor Trust also provided a $1,000,000  line of
credit to  XyEnterprise.  In  February  2000,  XyEnterprise  was able to attract
$7,000,000  in new  capital in exchange  for a 28.3%  ownership  interest.  As a
result of this transaction, the Company recognized a gain of $5,084,694.  During
February  and March 2001,  a small  group of  investors  provided an  additional
$4,000,000  of  capital  to  XyEnterprise  in  exchange  for a  11.3%  ownership
interest.

NanoFrames  is a  Delaware  limited  liability  company  founded in 1997 for the
purpose  of  completing  research  and  product  development  in  the  field  of
nanotechnology. Such technology, and thusly NanoFrames, is in its early stage of
development. However, success in the research and early development phases could
result in significant  breakthroughs  in the creation of building  blocks in the
nanometer  (one   billionth  of  a  meter)   dimension  that  could  change  the
technologies of such fields as material science, printing, data transmission and
others.  Research being done at NanoFrames involves the application of molecular
biology to the development of proteins of predictable characteristics that could
form the basis for the creation of nano-devices with capabilities  applicable in
many industrial and scientific fields.

                                       5
<PAGE>

Azul's executive offices are located at 6672 Gunpark Drive,  Suite 100, Boulder,
CO    80301     (303-448-9441).     The    Company's    website    address    is
http://www.azulholdings.com,  XyEnterprise's is http://www.xyenterprise.com, and
NanoFrames' is http://www.nanoframes.com.

PRODUCTS AND SERVICES

XyEnterprise  provides  content  management  and delivery  solutions that enable
companies to reduce the cost and time required to create,  manage and distribute
mission  critical  information  assets.  The  content  management  and  delivery
solutions of  XyEnterprise  are  successfully  utilized by  customers  including
product manufacturers,  scientific and reference publishers, government agencies
and others to effectively manage complex  information  creation and distribution
needs.

Numerous aircraft  manufacturers (Boeing,  Pratt & Whitney,  Embraer,  Sikorsky,
Gulfstream,  Bombardier and others) use  XyEnterprise's  content  management and
publishing systems to develop and publish complex technical  information used to
repair and operate  aircraft.  Other  customers  such as  Freightliner,  Tweddle
Litho,  EDS and  Maruboshi  use the  software  to  produce  owners  manuals  and
maintenance manuals for truck and automotive manufacturers such as Ford, General
Motors,  Daimler/Chrysler,  Nissan, and others.  Information providers,  such as
legal publishers and professional associations,  who are increasingly faced with
the need to better  manage  information  content and products  use  XyEnterprise
technology to reduce costs, shorten turnaround time, and generate new revenue by
repackaging  existing  information  into new  publications  or media.  Standards
organizations and reference publishers such as Cadmus Communications, the Bureau
of National Affairs, ASTM, and Underwriter's  Laboratories also use the software
to create, manage and deliver legal, citation and standards information.

XPP is a server-based  composition  engine designed to shorten production cycles
and reduce publishing production costs by automating  composition and pagination
of either high-volume and/or typographically-demanding documents frequently from
XML source data. A powerful  solution for corporate and  commercial  publishers,
XPP  streamlines  and  automates  document  production  and provides  "pages per
second" performance unmatched by desktop systems.

XPP is  frequently  used as a  publishing  engine  with a  variety  of  document
management  systems that support SGML (Standard  Generalized Markup Language) or
XML (Extensible  Markup  Language).  In fiscal 2001,  XyEnterprise  released the
latest version of XPP (version 7.0) that provides  enhanced support for SGML and
XML  processing  and output in formats  such as HTML for the  worldwide  web and
Portable Document Format ("PDF") for Adobe Acrobat.  A key feature of XPP 7.0 is
the ability to preserve and view XML structure on each page. Additional releases
of  XPP  are  planned  for  calendar  2001  that  enhance  the   software's  web
capabilities,   graphical   user   interface,   and   automated   page  assembly
capabilities.

The growth of multiple  media  delivery,  the need for  customized and localized
publications  and the  growth in the need for  timely  technical  and  reference
information has increased the demand for powerful document  production  engines.
In fiscal 2001, XPP continued to be  incorporated  into solutions from companies
including  Thomson & Thomson,  Equitable  Life  Insurance,  Pratt & Whitney  and
National Fire Protection  Association.  XyEnterprise  believes the speed, power,
and background  processing  capabilities of XML Production Publisher make it the
most versatile and powerful batch composition system available today.

Content@ is a robust content management engine that facilitates the creation and
management of dynamic XML components from desktop to the Web.  Content@ features
include  collaboration  and group authoring and automatic loading of XML encoded
data from  editors or legacy  systems.  Once data is in the  Content@  database,
re-use and automated information assembly for "virtual"  publications are easily
achievable for critical information assets that need to be managed, revised, and
fragment distributed from a secure system. Content@ provides standard interfaces
to  Framemaker,  Xmetal,  ArborText EPIC and Microsoft Word software for content
creation.  It manages at the  component  level,  including  XML or SGML objects,
graphics,  multimedia  objects and  collections of these  objects.  Because this
content is stored as  individual  information  components,  workgroups  can edit
information  once and then  share  and reuse the same  information  in  multiple
documents or formats for multi-channel delivery.

                                       6
<PAGE>

A key  feature  of  Content@  is the  integrated  workflow  application  used to
automate and manage the information creation and delivery process. This approach
can  significantly   reduce  the  time  and  cost  associated  with  traditional
information creation and delivery and creates new opportunities for companies to
resell information while improving quality and accuracy. Content@ stores data as
objects inside  relational  database  technology from Oracle and Informix.  This
combination of object-oriented and relational  technologies provides a reliable,
transportable  storage environment that can handle large volumes of complex data
types while providing fast data access. Content@ is also compatible with a range
of  hardware  and  operating  system  environments   including  Unix,  Microsoft
Windows/NT and IBM AIX. The use of proven,  industry-standard  technology  makes
Content@ compatible with many existing corporate platform database environments.
XyEnterprise  integrates several third-party  products with Content@ providing a
complete integrated publishing solution for customers.

Content@ 3.0, released in November, 2000, has been XyEnterprise's most ambitious
new  release to date.  Features  include XML based  dynamic  import  tools,  XML
workflow wizards for automated content routing and processing, and new graphical
user  interfaces.  In  addition,  version  3.0  provides  completely  redesigned
application   programming  interfaces  ("API's")  built  on  industry  standards
including COM, Corba and Java.

PROFESSIONAL SERVICES

XyEnterprise offers a comprehensive range of professional services that includes
systems  integration,  implementation  planning,  onsite and classroom training,
applications  support,  program  management,  process  reengineering,   document
analysis,  XML analysis and Web consulting.  XyEnterprise service  professionals
are  considered  experts in analyzing  and  implementing  sophisticated  content
management,  publishing,  and  electronic  delivery  systems.  In February 2001,
XyEnterprise acquired  Lightbinders,  Inc., and merged their San Francisco based
consulting staff into the professional  services group.  Lightbinders  staff has
expertise  related to the  scientific,  technical and medical  (STM)  publishing
market,  SGML/XML publishing tools and services,  as well as data conversion for
electronic delivery.

A significant  number of  XyEnterprise's  customers  enter into  maintenance and
support  contracts and purchase training and consulting  services.  As part of a
standard   software  support  contract,   XyEnterprise   provides  software  and
documentation updates and telephone support.

MARKETS, APPLICATIONS AND CUSTOMERS

XyEnterprise  solutions  are  targeted for  businesses  and  organizations  that
produce   documentation   in  support  of   manufactured   products   (technical
documentation),   those  that  produce   information  as  the  primary   product
(commercial publishing),  and combinations of the two that use collaborative and
remote  connectivity to facilitate  greater  efficiencies.  Within the technical
documentation arena,  XyEnterprise's solutions are used by product manufacturers
to  support a  product  or  service.  Market  segments  that  produce  technical
documentation include aerospace, automotive, discrete manufacturing,  computers,
electronics,  telecommunications,  and transportation companies who publish such
documents   as   maintenance   manuals,   tariff   directories,   and   end-user
documentation.  These  publications  often have a long shelf life, need frequent
revisions,  and  require  output in a variety of formats  including  Interactive
Electronic  Technical  Manuals (IETMs),  World Wide Web pages,  PDF, and printed
pages.  Companies that produce technical  documentation often produce manuals in
loose-leaf  format and  distribute  updates as loose-leaf  change  pages.  XPP's
unique Automatic  Loose-leaf  option enables  companies to automatically  create
update pages when new  information  is added to previously  released  documents,
enabling  users to  distribute  only  changed  pages  instead of reprints of the
entire document.  This dramatically  reduces printing and warehousing costs, and
allows more timely updates of technical information.

                                       7
<PAGE>

XyEnterprise's  customers in the technical documentation segment include: Allied
Signal,  Atraxis/Swiss  Air,  The Boeing  Company,  British  Aerospace,  Cummins
Engine,  Allison  Transmissions,  IBM  Corporation,  Maruboshi,  Pratt & Whitney
Canada,  Raytheon  Service  Company and the Royal  Australian  Air Force,  among
others.

Commercial  publishing  customers include commercial  printers and trade service
bureaus;  book, journal, and financial  publishers;  professional  associations;
financial services and insurance companies;  government agencies;  and wholesale
distributors. In order to remain competitive,  commercial printers,  publishers,
and  service  providers  must  be  able  to  efficiently  produce  high-quality,
cost-effective printed and electronic documents.  Information providers, such as
legal publishers and professional associations,  are increasingly faced with the
need to better manage  information  content,  versions,  and workflow.  Content@
Document Manager provides these companies with a complete information management
solution that reduces costs,  shortens turnaround time, and enables customers to
generate new revenue by repackaging  existing  information into new publications
or media.  Commercial  publishing  customers include AAA, American  Institute of
Physics,  American  Chemical  Society,  American  Medical  Association,  British
Medical Association, Bureau of National Affairs, Cadmus Communications,  Merck &
Co., Reed, Telia, Underwriters Laboratories, ValueLine Inc., West Publishing and
Wolters Kluwer.  Underwriters  Laboratories  accounted for  approximately 18% of
revenues for the year ended March 31, 2000;  no single  customer  accounted  for
more than 10% of revenues for the years ended March 31, 2001, or March 31, 1999.

SALES AND DISTRIBUTION

In North  America,  XyEnterprise  markets  its  products  and  related  services
primarily through its direct sales force. In fiscal 2001, XyEnterprise increased
its sales  efforts by adding sales  consultants  geographically  throughout  the
United  States  and  sales  management  and staff  focused  on  vertical  market
solutions.  In fiscal 2001,  XyEnterprise  initiated strategic partnerships with
Pennant Information Services Limited,  BenefitNation and Cadmus  Communications.
It also continued its strategic  relationships  with companies such as IBM, CSC,
Atraxis,  and  Telcordia.  XyEnterprise  maintains a European  sales and support
headquarters  in England with  additional  offices in Paris,  France and Munich,
Germany. The Company also has sales and support representatives in Australia. It
also resells its products through selected  distributors in Europe,  Africa, and
Asia.  Sales to  unrelated  customers by  geographic  region for the years ended
March 31, 2001, 2000 and 1999, were as follows:
                                   2001            2000            1999
                                   ----            ----            ----
North America                   $7,520,417      $7,980,680      $8,029,850
Western Europe                     881,709       1,127,000       1,861,347
Asia/Pacific                       516,302         301,187         664,000
                                 ---------       ---------       ---------
Total                           $8,918,428      $9,408,867      $10,555,197

Revenue is recognized in  accordance  with  Statement of Position No. 97-2 ("SOP
97-2") "Software Revenue Recognition" as amended by "SOP 98-9" "Software Revenue
Recognition."  XyEnterprise's  systems  revenue is derived from licensing of its
page composition,  content management and third party software. Service revenues
include maintenance and support,  consulting and training services. Revenue from
license arrangements is recognized upon shipment of the product if collection of
the  resulting  receivable  is probable and  remaining  vendor  obligations  are
insignificant.  The strategy of providing  customers  with  complete  integrated
publishing  solutions  may result in  bundling  of services  with  software  and
recognition  of software  licensing  revenue and services over the length of the
implementation   in  conformity  with  Accounting   Research  Bulletin  No.  45,
"Long-Term Construction Type Contracts" using the relevant guidance of SOP 81-1,
"Accounting for  Performance of  Construction-Type  and Certain  Production Type
Contracts."  Service revenues include maintenance and support,  consulting,  and
training  services.  Payments  received in advance of delivery  are  recorded as
deferred revenue in the  consolidated  balance sheet until goods or services are
delivered.  Revenues from annual  maintenance  contracts are recognized  ratably
over the duration of the related contracts.  Revenue for consulting and training
is  recognized  when the services are  performed  and  collectibility  is deemed
probable.

                                       8
<PAGE>

In December 1999, the  Securities and Exchange  Commission  ("SEC") issued Staff
Accounting  Bulletin 101 ("SAB 101"),  Revenue  Recognition,  which outlines the
basic criteria that must be met to recognize  revenue and provides  guidance for
presentation  of revenue  and for  disclosure  related  to  revenue  recognition
policies in financial statements filed with the SEC. The Company adopted SAB 101
on April 1,  2000,  and it did not have any  impact on the  Company's  financial
position or results of operations.

RESEARCH AND DEVELOPMENT

The market for XyEnterprise's  products is characterized by rapid  technological
change  that  requires  continuous  enhancement  of  existing  products  and the
development  of new products.  During the past three fiscal years,  XyEnterprise
has invested 34 - 47% of its revenues in product  development  and  engineering,
including  capitalized  development  costs. In the future,  product  development
efforts  will  focus  on  enhancing  its  open-architecture  systems,  enhancing
ease-of-use with graphical user interfaces,  increasing the price/performance of
its products,  enhancing web based access mechanisms and developing software for
specific  application  needs.  During  fiscal years 2001,  2000,  and 1999,  the
Company incurred research and development expenses,  net of capitalized software
development  costs,  in the amounts of $4,049,924,  $3,241,969,  and $3,776,692,
respectively.  Capitalized  software development costs during these periods were
$125,000, $0, and $263,000, respectively.

The Company  believes it is appropriate for XyEnterprise to continue to invest a
significant  portion of its  revenues in  development  of both XPP and  Content@
product lines to remain competitive in its markets.

COMPETITION

The  markets  for   XyEnterprise's   products  are   characterized   by  intense
competition,   rapid   technology   developments,   and   frequent  new  product
introductions. Future success will depend on its ability to enhance its existing
products  on a timely  basis,  meet  changing  customer  needs,  and  respond to
emerging standards and other technological changes. Competition is usually based
on price/performance,  functionality differences,  quality and extent of service
and support,  and the financial  strength of the vendor.  Many of XyEnterprise's
competitors have greater financial, technical, and other resources, greater name
recognition, and a larger installed base of customers.

XPP  competitors  include  Advent  3B2,  Miles  33,  and  Datalogics.   Content@
competitors  include  Documentum,  Chrystal (a Xerox New Enterprise Company) and
Arbor Text.

BACKLOG

XyEnterprise  believes  that it is able to anticipate  near-term  demand for its
products and ship  products  shortly  after  receipt of the order.  Accordingly,
XyEnterprise's  backlog for software licenses is generally  neither  significant
nor indicative of future sales levels. Backlog for services is a function of the
timing  and  volume  of  software  license  sales  and  service  and  consulting
contracts.

PATENTS, LICENSES, AND TRADEMARKS

XyEnterprise  relies on copyright,  patent, and trade secret laws to protect its
technology.  XyEnterprise  Solutions and XyEnterprise are registered trademarks.
XyEnterprise also uses the following trademarks:  Content@,  Parlance, WebPorter
and SGML  Conductor.  All other  trademarks  and trade names referred to in this
Annual Report are the property of their respective owners.

                                       9
<PAGE>

XyEnterprise  has  acquired  non-exclusive  licenses for certain  software  from
several  companies.  These  licenses  permit  it to  grant  sublicenses  to  its
customers. Loss of these rights to grant sublicenses to its customers on some of
these software products could have a material adverse effect on the Company.

EMPLOYEES

As of March 31, 2001, Azul had 1 full time employee, whose employment terminated
on June 30,  2001.  Azul has a permanent  part time Chief  Financial  Officer in
addition to its permanent part time Chief  Executive  Officer.  For a short time
during  early 2001 the Company  employed a full time  President.  Both the Chief
Executive and the Chief Financial  officers provide their services to Azul on an
as needed  basis.  The Company  contracts for its legal,  accounting,  and other
services.  To date the Chief Executive  Officer has agreed to serve without cash
compensation for his services.  As of March 31, 2001,  XyEnterprise employed 108
persons,  which  included  26 in  research  and  development,  28 in  sales  and
marketing,  36 in  customer  support,  and  18 in  finance  and  administration.
Additional  resources,  particularly  in research and  development  and customer
support  are  provided  by  engineering  and  consulting   outsource   partners.
NanoFrames  employs  the  services  of two full  time  molecular  biologists  in
addition to having  available  the  services of an  additional  senior  research
scientist in the field of  nanotechnology  and other business  specialists on an
as-needed basis.

XyEnterprise  fits the category of companies that is commonly  referred to as an
"intellectual  property" company.  As such,  management believes that the future
success of XyEnterprise  will depend in large part on its ability to attract and
retain qualified  employees.  Due to the competitive market for skilled software
engineers and other employees in the greater Boston area, XyEnterprise from time
to time experiences  difficulty in hiring and retaining personnel.  XyEnterprise
also employs independent contractors located in the US and abroad to support its
research  and  development,  marketing  and  administrative  organizations.  Its
employees are not  represented  by a labor union,  and it has never  suffered an
interruption of business as a result of a labor dispute.  XyEnterprise  believes
its employee relations are good.

RISK FACTORS

In addition to other  information  contained  in this report,  investors  should
carefully consider the following factors when evaluating Azul:

Future  operations  of the  Company  depend on the  Company's  ability  to raise
additional  capital or borrow  additional  funds from Tudor Trust, its principal
shareholder,  and others. Further, future results of operations are dependent on
individual  companies  meeting or exceeding the returns on investment and growth
potentials  anticipated by Azul. Azul investments are made in companies in their
emerging,   early  stages,   and  mid-stages  of  their  development  and  which
participate in high technology arenas. As such, these investment are speculative
in nature and can  result in  significant  profits or losses to early  investors
like Azul. Further, the Company is dependent on the continued forbearance by the
holders of the Debentures,  15% Promissory Notes and 4% Promissory Notes (Note 7
to the Consolidated Financial Statements).

Future operating results of XyEnterprise will depend upon many factors including
the demand for its  products,  the level of product and price  competition,  the
length of its sales cycle, the timing of individual  license  transactions,  the
mix of  products  and  services  sold,  and the delay or  deferral  of  customer
implementations.  Results  of  operations  are also  dependent  on  XyEnterprise
locating and recruiting new hires, expanding its direct sales force and indirect
distribution  channels,  and developing and introducing new products and product
enhancements  timely.  Additional factors include activities of and acquisitions
by competitors, changes in foreign currency exchange rates, and general domestic
and international  economic and political conditions.  Sales generally reflect a
relatively  high amount of revenues per order.  The loss or delay of  individual
orders,  therefore,  could have a  significant  impact on revenues and quarterly
results.  In  addition,  the timing of license  revenue is  difficult to predict
because  of the  length of the sales  cycle,  which is  typically  six to twelve
months  from the  initial  contact.  Because  operating  expenses  are  based on
anticipated  revenue  trends  and  because a high  percentage  of the  Company's
expenses are  relatively  fixed,  a delay in the  recognition  of revenue from a
limited number of license  transactions  could cause  significant  variations in
operating results from quarter to quarter and could result in losses.

                                       10
<PAGE>

The financial statements of the Company have been prepared assuming that it will
continue  as a going  concern,  as set forth in the  report  of its  independent
auditors.  The Company however has sustained  recurring  losses from operations,
has a working capital deficiency,  and has a substantial  stockholders' deficit.
The Company has also been in default for a number of years on interest  payments
due on its outstanding  unsecured debentures and promissory notes,  exclusive of
its senior secured obligations to Tudor Trust. These  uncertainties  necessarily
represent  substantial  risks  with  respect to the  ability  of the  Company to
continue as a going concern.

RELATED PARTY TRANSACTIONS

The  Company  maintains  a credit  facility  with Tudor  Trust in the  aggregate
principal amount of up to $17,500,000. The current President and Chairman of the
Board of Directors of the Company is also  Chairman of the Board of Directors of
XyEnterprise,   the  Chairman  of  NanoFrames,  and  is  the  sole  trustee  and
beneficiary  of  Tudor  Trust.   Each  of  these   positions  are  held  without
compensation. Through shares of common stock of the Company owned by Tudor Trust
and shares which Tudor Trust has the right to acquire by the conversion of debt,
Tudor Trust  controls the Company.  Tudor Trust also  directly  holds a minority
stock interest in XyEnterprise; and a majority stock interest in PlazaBlue, Inc.
and  its  successor  company,  2001  Investments  LLC;  and in  NanoFrames.  The
transactions between the Company,  XyEnterprise, and NanoFrames with Tudor Trust
have  been  unanimously  approved  by the  independent  members  of the board of
directors of each company.

During the fiscal year, the Company provided a $2,450,000 loan to PlazaBlue Inc.
Tudor  Trust held a majority  interest  in  PlazaBlue  Inc. as a result of stock
owned and stock which it had a right to acquire  through the conversion of debt.
As a result of default by PlazaBlue in the repayment of its debts,  the lenders,
including Tudor Trust and Azul, foreclosed on the assets of PlazaBlue. Effective
March 31, 2001, the Company,  at the election of Azul,  sold its entire interest
in the Assets to Tudor Trust for its carrying value in the company.

Effective March 31, 2001, the Company entered into an agreement with Tudor Trust
to purchase  shares of  XyEnterprise  from Tudor  Trust such that the  Company's
interest in  XyEnterprise  would exceed 50% even in the event of  conversion  to
common stock of the recently issued  convertible  preferred stock.  Accordingly,
during  March  2001  the  Company  acquired  an  additional  575,000  shares  of
XyEnterprise  common stock in exchange  for the issuance of 1,092,500  shares of
Azul common stock. The transaction was based upon the values of the XyEnterprise
and Azul common  stocks at the last sales price for  XyEnterprise  common shares
and the value of the Azul shares at the close of business on March 31, 2001, the
effective date of the agreement.

In March 2001,  Tudor Trust and the Company agreed to amend their loan agreement
extending the maturity date to March 31, 2002.  Tudor Trust and the Company also
agreed that the interest  payable of  $1,621,024  be added to and become part of
the principal sum of the  indebtedness,  and agreed that interest for subsequent
periods  would  similarly  be added to and become part of the  principal  in the
event that Tudor fails to elect to receive  such  interest in the form of common
stock of the Company.

All  transactions  among the  companies  have been  approved by the  independent
members of the Boards of Directors of each company.

ITEM 2. Properties

Azul  maintains  an  office  leased on a  monthly  basis for its  administrative
offices,  located  in  Boulder,  Colorado.  There are no long  term  commitments
relative to this location.

                                       11
<PAGE>

XyEnterprise's  executive,  administrative,  research and development,  and home
office sales support  facilities,  which consist of approximately  31,200 square
feet of office space,  are located in Reading,  Massachusetts.  This facility is
occupied under a lease which expires in January, 2002 and which requires monthly
payments totaling $593,800 per year.  XyEnterprise also leases smaller sales and
service facilities at other locations in the United States and abroad.

NanoFrames  maintains  approximately  400  square  feet of space as a  molecular
biology research lab and office on a monthly basis in Boston, MA.

ITEM 3. Legal Proceedings

Azul has been advised  that  certain  minority  shareholders  of PlazaBlue  have
retained counsel for the purpose of possibly asserting a claim against Azul, the
president of Azul, Tudor Trust and one other person with respect to transactions
of such persons with PlazaBlue.  As discussed under Item 1 above, Azul and Tudor
Trust made loans to PlazaBlue that  subsequently  became in default and resulted
in a foreclosure on the assets of PlazaBlue.  Azul believes, based on the advice
of counsel after a review of the facts and circumstances related to the possible
claim,  that the  claim  is  without  merit.  Counsel  for  Azul  has  commenced
discussions with the potential  claimants for the purpose of avoiding the claim.
However,  there can be no assurance that a legal proceeding  asserting the claim
will not be subsequently initiated against Azul.

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

No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended March 31, 2001.

     Executive Officers of the Registrant

     The executive officers of the Company are as follows:
<TABLE>
<CAPTION>

    Name                                Age      Position

<S>                                     <C>
    Jeffrey L. Neuman......  57       President, Chairman of the Board and Chief Executive Officer of Azul, Chairman of
                                      the Board of XyEnterprise, and Chairman of NanoFrames

    Edward S. Wittman......  54       Chief Financial Officer, Vice-President, Secretary and Treasurer of Azul, and Chief
                                      Operating Officer of NanoFrames

    Kevin J. Duffy.........  46       President and Chief Executive Officer of XyEnterprise
</TABLE>

Mr.  Neuman has been  Chairman of the Board of  Directors of Azul since 1996 and
been  President and Chief  Executive  Officer since 1999. He is also Chairman of
XyEnterprise.  Mr. Neuman has been a private investor since 1986 when he founded
Tudor Trust,  a merchant  banking firm which has interests in a number of public
and  private  companies.  Mr.  Neuman  received  his BA from the  University  of
Pennsylvania and his MBA from the Wharton School of Business.

Mr. Wittman joined Azul in May 2000 as Vice President,  Chief Financial Officer,
Secretary and Treasurer.  Since April 2001 he has also served as Chief Operating
Officer for  NanoFrames.  For the previous  nine years he has been  President of
Wittman Associates Inc., a privately held consulting  services firm specializing
in strategic and managerial  services to  entrepreneurships,  both privately and
publicly held.  From October 1997 through March 1999 he served as Vice President
of Business  Development for Itex Corporation,  a publicly held company.  He has
held  or  presently   holds  positions  as  member  of  the  board  for  several
corporations and not-for-profit organizations. Previously Mr. Wittman has served
in various operations and financial  management  positions for publicly-held and
private  organizations.  He holds a BSBA from California State University and an
MBA from the University of Colorado.

                                       12
<PAGE>

Mr. Duffy was elected  President and Chief Executive  Officer of XyEnterprise in
December  1998.  Mr. Duffy joined the Company in June 1983.  In December 1995 he
was promoted to Senior Vice President and General Manager,  Xyvision  Publishing
Group.  From  April 1991 to  December  1995 he served as Vice  President,  North
American Sales.

Each officer serves at the discretion of the Company's  board of directors or of
XyEnterprise's  board of directors.  There are no family relationships among any
of the directors and executive officers of the Company.



                                       13
<PAGE>




                                     PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

Azul Holdings  Inc.'s common stock is currently  traded through the OTC Bulletin
Board under the symbol  "AZUL".  Price per share of Azul  Holdings  Inc.  common
stock is reported on the OTC Bulletin  Board and through the National  Quotation
Bureau Pink Sheets.

The following  table sets forth the reported high and low bid quotations for the
Company's  common  stock  for the  periods  indicated,  as  reported  on the OTC
Bulletin Board. These quotations  reflect  inter-dealer  prices,  without retail
markup,  mark-down  or  commission  and may  not  necessarily  represent  actual
transactions.

                                           High             Low

Fiscal Year Ended March 31, 2001
April 1 - June 30.......................  $5.50            $2.63
July 1 - September 30...................   4.50             3.13
October 1 - December 31.................   4.25             1.63
January 1 - March 31....................   3.96             1.25

Fiscal Year Ended March 31, 2000
April 1 - June 30.......................  $ .81            $ .69
July 1 - September 30...................    .69              .56
October 1 - December 31.................   2.19              .53
January 1 - March 31....................  11.13             1.50

As of June 20,  2001,  there  were  approximately  537  holders of record of the
common  stock.  No cash  dividends  have been declared on the common stock since
Azul's  formation.  The Company does not expect to declare cash dividends on the
common stock in the foreseeable  future. The Company cannot pay dividends on the
common stock until accrued  dividends on Series B preferred stock are paid or at
any time while shares of Series C preferred stock are outstanding.  The Delaware
General  Corporation  Law and the Company's line of credit  agreement with Tudor
Trust each currently prohibit the payment of dividends on the common stock.

During  the  fiscal  year  ended  March 31,  2001,  Azul  issued  the  following
securities, which were not registered under the Securities Act of 1933:

o        1,142,900  shares of common  stock to Tudor Trust in payment of accrued
         interest  in  the  amount  of  $1,870,816  under  the  credit  facility
         agreement between Tudor Trust and Azul,

o        1,092,500  shares of common  stock to Tudor Trust in  exchange  for the
         transfer  of 575,000  shares of  XyEnterprise  common  stock from Tudor
         Trust to Azul, which were valued at $1,638,750,

o        warrants  to  purchase  500,000  shares of common  stock to Tudor Trust
         which  expired on March 31,  2001,  at an  exercise  price of $5.25 per
         share as  consideration  for extension of the credit  facility to March
         31, 2001,

o        warrants to purchase  500,000  shares of common  stock to Tudor  Trust,
         which expire on March 31, 2002 at an exercise  price of $3.00 per share
         as  consideration  for  extension  of the credit  facility to March 31,
         2002, and

o        warrants to purchase 15,000 shares of common stock to Greenley Capital
         Company at an exercise price of $3.25 per share as
         consideration for consulting services.

                                       14
<PAGE>

These  securities  were  not  registered  under  the  Securities  Act of 1933 in
reliance on Rule 506 of Regulation D promulgated by the SEC since the recipients
are  accredited  investors  and  certificates  representing  the  shares and the
warrants bear a legend restricting the transfer of those securities.




                                       15
<PAGE>




ITEM 6. Selected Financial Data

The following table summarizes certain selected financial data and should be
read in conjunction with the financial statements and related notes appearing
elsewhere in this report.

<TABLE>
<CAPTION>
                                                                                  Fiscal Year Ended March 31,
                                                         ---------------------------------------------------------------------------
                                                              2001             2000           1999            1998          1997
                                                              ----             ----           ----            ----          ----
                                                                             (in thousands, except per share data)

Income Statement Data
<S>                                                         <C>            <C>             <C>               <C>           <C>
Revenues............................................        $   8,918      $    9,409      $  10,555         $ 16,501      $22,234
Gross margin........................................            4,051           4,030          4,570            5,675       10,406
Operating expenses..................................           10,976           9,030         11,762           12,574       10,765
Loss from operations................................           (6,925)         (5,000)        (7,192)          (6,899)        (359)
Minority interest share of loss.....................            3,386           2,143            ---             ---           ---
Loss from operations after minority
 interest share.....................................           (3,538)         (2,857)        (7,192)          (6,899)        (359)
Gain on capital transactions of subsidiary..........              ---           5,085            ---             ---           ---
Income (loss) before extraordinary item (1)                    (7,831)            441         (8,707)          (7,913)      (1,359)
Net income (loss) allocable to common stock -
    holders (1).....................................           (7,926)            701         (8,801)          (8,007)      (1,353)
Income (loss) per share:
 Basic (1)..........................................       $    (2.12)    $      0.24     $    (3.08)      $   (2.81)   $    (.56)
 Diluted (1)........................................       $    (2.12)    $      0.10     $    (3.08)      $   (2.81)   $    (.56)
Weighted average shares outstanding:
 Basic..............................................            3,741           2,857          2,854            2,854        2,419
 Diluted............................................            3,741          10,169          2,854            2,854        2,419

Financial Position at March 31
Cash and cash equivalents...........................        $   4,418       $   6,890     $      446       $      357    $     261
Working capital deficit.............................          (13,739)        (11,761)       (15,918)         (10,788)      (4,834)
Total assets........................................           10,023           9,871          4,066            6,916        9,977
Long-term debt......................................           --               1,850          --              --              165
Stockholders' deficit...............................          (15,633)        (14,809)       (15,731)          (8,847)      (1,867)

Other Information
Research and development expenditures,
 including capitalized software costs...............         $  4,175          $3,242         $4,040          $ 4,743      $ 4,381

</TABLE>

         (1) Fiscal 2001  results  include an unusual  charge to earnings in the
amount  of  $2,794  or $.75 per  basic  and  diluted  share  as a result  of the
settlement of an interest  obligation  by the issuance of common  stock.  Fiscal
2000 results include an  extraordinary  gain of $353 or $.12 per basic share and
$.03 per  diluted  share  from the early  extinguishment  of debt.  Fiscal  1997
results  include  an  extraordinary  gain of $100,  or $.04 per  share  from the
exchange of Debentures for unsecured, unsubordinated promissory notes and shares
of  common  stock  (also,  see  Note 7 of the  Notes to  Consolidated  Financial
Statements).





                                       16
<PAGE>




Quarterly Financial Data (Unaudited)

The Company's interim financial  information for the quarterly period ended June
30, 2000 has been  reclassified  to include in Other income and expense,  net, a
loss of $2,794  incurred on settlement  of an accrued  interest  liability.  The
Company's interim financial information for the quarterly period ended September
30, 2000 has been restated to reverse a previously  recorded  $900,000 gain on a
capital transaction of a subsidiary.

In thousands  (except per share amounts)
<TABLE>
<CAPTION>

                                                                                 Quarters Ended
                                                             ------------- ---------------------------- ---- -------------
                                                             ---------------- --------------- -------------- -------------
                                                                 6/30/00         9/30/00        12/31/00       3/31/01
                                                             (Reclassified)    (Restated)*
                                                             ---------------- --------------- -------------- -------------
Fiscal Year 2001
<S>                                                                 <C>            <C>            <C>          <C>
Revenues                                                            $ 2,093        $ 1,659        $ 2,315      $ 2,851
Cost of sales                                                         1,180          1,056          1,219        1,412
Operating expenses                                                    2,345          2,561          2,690        3,380
Minority interest share of loss                                         578            782            676        1,350
Other income (expense)                                               (3,189)          (317)          (330)        (457)
Net loss allocable to common stockholders                           $(4,067)       $(1,516)       $(1,272)     $(1,071)
Weighted average number of shares of common stock
outstanding                                                           3,297          3,884          3,884        3,899
Basic  loss per share                                               $ (1.23)       $ (0.39)       $ (0.33)     $ (0.27)
Diluted  loss per share                                             $ (1.23)       $ (0.39)       $ (0.33)     $ (0.27)

                                                                                 Quarters Ended
                                                                 --------------------------------------------------------
                                                                 --------------------------------------------------------
                                                                    6/30/99        9/30/99       12/31/99      3/31/00

Fiscal Year 2000
                                                                --------------------------------------------------------
                                                                --------------------------------------------------------
Revenues                                                             $2,624         $2,330         $2,293       $2,162
Cost of sales                                                         1,438          1,417          1,217        1,307
Operating expenses                                                    2,247          2,299          2,116        2,368
Minority interest share of loss                                         802            948            ---          393
Other income (expense), net (including $5,085 of gain on
capital transactions of a subsidiary in the quarter ended
March 31, 2000)                                                        (429)          (432)          (449)       4,608
Income (loss) before extraordinary item                                (688)          (870)        (1,489)       3,488
Extraordinary item - gain on early extinguishment of debt               353            ---            ---          ---
Net income (loss) allocable to common stockholders                   $ (359)        $ (893)       $(1,512)      $3,465
Weighted average number of shares of common stock
outstanding                                                           2,854          2,854          2,854        2,867
Basic earnings (loss) per share                                      $(0.13)        $(0.31)        $(0.53)       $1.21
Diluted earnings (loss) per share                                    $(0.13)        $(0.31)        $(0.53)       $0.35

*  See Note 12 to Consolidated Financial Statements.
</TABLE>


                                       17
<PAGE>



ITEM 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

RESULTS OF OPERATIONS

YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000

During August 2000,  Tudor Trust  exercised its option to convert  $1,850,000 of
its outstanding term loan due from  XyEnterprise to common stock of XyEnterprise
at the rate $2.85 per share, the same value at which shares of common stock were
sold to third parties  during  February,  2000,  in  accordance  with the option
created at that time.

In  an  independent   transaction,   XyEnterprise  attracted  additional  equity
investment,  and during February and March, 2001, sold shares in a newly created
class of preferred stock to unrelated third parties totaling $4,000,000. Of this
amount, a single  investor,  Cadmus  Communications,  invested  $3,000,000.  The
issuance  of these  shares  reduced  the  Company's  proportionate  interest  in
XyEnterprise to 47.5%.  Effective March 31, 2001, the Company  purchased 575,000
shares of  XyEnterprise  common  stock  from  Tudor  Trust for the  issuance  of
1,092,500  shares of Azul common stock,  based on the most recent sale price for
XyEnterprise common stock and the market price at the close of business on March
31, 2001, for Azul stock.  This  transaction  increased the Company's  ownership
interest in XyEnterprise to 52.5% and the Company accounted for this transaction
as an acquisition of minority  interest and recorded  goodwill of  approximately
$1,616,000.

Common  and  preferred  stock of  XyEnterprise  held by  parties  other than the
Company are  classified  as  minority  interest  in the  Company's  consolidated
balance  sheet and not  included  in  consolidated  stockholders'  deficit.  The
Company  charges a pro rata  share of  XyEnterprise's  losses  to the  Company's
common  interest  and to the  minority  common  interest  in  proportion  to the
respective  ownership  interest  percentages.  If either  the  Company's  or the
minority's  common interest is fully  eliminated,  further losses are charged to
the remaining  Company or minority common interest until it is fully eliminated,
after  which any  further  losses  are  charged to the  balance of any  existing
preferred   minority   interest.   After  any  preferred  minority  interest  is
eliminated,  further  losses are fully absorbed in the  consolidated  profit and
loss of the Company.  The minority  interests'  share of losses of  XyEnterprise
were $3,386,333 in 2001, $2,142,874 in 2000 and $0 in 1999.

During  fiscal year 2001,  the Company made loans  totaling  $2,450,000  bearing
interest at 10% which had an original due date of September  30, 2000,  that was
subsequently  extended to November 30, 2000,  to  PlazaBlue,  Inc., a company in
which  Tudor held a majority  interest.  PlazaBlue  was a fine art,  antique and
collectibles  Internet store front and auction house.  PlazaBlue was not able to
secure equity funding to enable it to repay the loan when due. In December 2000,
PlazaBlue defaulted on the repayment of that debt. During January 2001, Azul and
Tudor  participated  in the purchase of the assets of PlazaBlue in a foreclosure
sale. Shortly  thereafter,  part of the acquired assets were sold to GoAntiques,
Inc.  for a 19%  interest in  GoAntiques,  a  development  stage  privately-held
company  providing an internet  auction site.  Effective  March 31, 2001, at the
election of Azul,  the Company  sold its entire  interest in the assets to Tudor
Trust at the Company's carrying value in 2001 Investments LLC,  resulting in no
gain or loss to Azul. The  transaction was completed as a reduction in debt owed
to Tudor Trust by the Company.

XyEnterprise  derives  its  systems  revenues  from  the  licensing  of its page
composition,  content  management and third party  software.  Services  revenues
include maintenance,  support, consulting and training. Cost of systems sales is
comprised of the amortization of capitalized product development costs,  royalty
and third-party product expenses for the licensing or resale of technology. Cost
of sales of services  includes  personnel-related  costs  incurred in  providing
consulting,  training and  telephone  support to our  customers,  costs of third
party contractors and other allocated expenses of the organization.

Revenues for 2001 decreased  $491,000,  a 5% decline,  from $9,409,000 in fiscal
2000 to $8,918,000 in 2001.  The decrease in revenues in fiscal 2001 reflected a
decline  in new  orders  during  the first six  months of the year as  customers
anticipated  previously announced new product releases which became available in
the  second  half of the year.  Revenues  for the  second  half of the year were
$5,166,000,  a 38% increase over the first six months of 2001.  Systems  revenue
were  $2,347,000,  a 10% decrease from $2,600,000 in 2000.  Systems revenues for
the second half of the year were $1,680,000,  a 152% increase over the first six
months  of  2001.  Service  revenues  decreased  3%  in  fiscal  2001  primarily
associated  with the initial decline in systems revenue for the first six months
of the year.

                                       18
<PAGE>

Gross  margins  were 45% of revenues in 2001, a slight  improvement  from 43% in
2000. Systems margins were 75% of systems revenues in fiscal 2001, a significant
improvement  over 61% in 2000. The improvement in systems margins is a result of
lower third party software costs than those  associated  with fiscal 2000 sales.
Service margins were 35% of service revenues in 2001,  approximately the same as
2000.

Research and  development  costs,  including  capitalized  software  development
costs,   were   $4,175,000  in  2001,  an  increase  from  $3,242,000  in  2000,
representing  47%  and  34%  of  revenues  for  2001  and  2000,   respectively.
Capitalized software costs were $125,000 and $0 in 2001 and 2000,  respectively.
The increase in research and  development  expenditures  in fiscal 2001 included
increased spending due to increased contract engineering expenses related to the
development  and testing of the new  products  releases.  Further,  XyEnterprise
recorded  a reserve  based on its  evaluation  of the  collectibility  of a note
receivable  for  $500,000 it had  previously  advanced to a vendor to complete a
product to be used to create XML versions from  Microsoft  Word files.  Although
XyEnterprise has recently sold a limited number of licenses of this product, the
loan was determined to be impaired due the vendor's limited financial  resources
and limited revenue growth of its primary product.

Marketing,  general  and  administrative  expenses  were  $6,926,000  in 2001 as
compared to $5,788,000 in fiscal 2000.  The 20% increase in expenses in 2001 was
primarily the result of hiring and  developing  an expanded  sales and marketing
staff,  initiating  marketing  programs  for new  product  releases  and general
management advisory services at XyEnterprise. In addition, Azul had employed the
services of a paid President for a five-month  period and a permanent  part-time
Chief Financial Officer for a nine-month period of 2001.

Interest  income was  $351,194 and $59,435 in 2001 and 2000,  respectively.  The
increase in interest  income  resulted from the investment of cash proceeds from
the private  placement  offering closed by XyEnterprise in the fourth quarter of
fiscal 2000. Interest expense accrued to third parties was $123,000 and $147,000
in fiscal 2001 and 2000, respectively.  Interest expense accrued to Tudor Trust,
the largest  stockholder of the Company,  remained level at $1,727,000 in fiscal
2001 and  $1,699,000  in fiscal  2000.  The  interest  expense  payable to third
parties  includes the interest  obligation  due on the Company's 6%  Convertible
Subordinated  Debentures (the  "Debentures") and the quarterly interest payments
due on the 4% Promissory Notes.

In October 2000, Azul agreed to invest up to $500,000 in NanoFrames,  LLC. Tudor
Trust also has an interest in  NanoFrames.  As of March 31,  2001,  $245,900 had
been  advanced  to  NanoFrames.  These  funds  were  used  for the  purchase  of
laboratory equipment and supplies, salaries, and rent and office expenses.

During fiscal 2001, Tudor Trust and the Company agreed that the interest payable
for the period from January 1, 1999,  through  March 31, 2000,  would be paid by
the  issuance to Tudor of 984,624  shares of common  stock of the  Company.  The
Company also agreed that on or before  March 31,  2001,  interest for the period
July 1, 1998, through December 31, 1998 would be convertible into 158,266 shares
of common stock of the Company at the option of Tudor.  Azul  recorded a loss on
settlement  of an accrued  interest  liability of $2,794,000 as a result of this
transaction.  During fiscal 2000, the Company realized an extraordinary  gain of
$353,000 on the extinguishment of certain indebtedness.

YEAR ENDED MARCH 31, 2000 COMPARED TO YEAR ENDED MARCH 31, 1999

During the fiscal year ended March 31, 2000,  XyEnterprise  attracted additional
equity investments totaling  $7,850,000.  While the issuance of new common stock
of XyEnterprise  decreased the Company's  proportionate interest in XyEnterprise
to 57.4%, the increased book value of the Company's interest after the new stock
issuance  resulted  in a gain to the  Company  of  $5,085,000,  which  has  been
included in the Statement of Operations.

                                       19
<PAGE>

Revenues for 2000  decreased  $1,146,000,  an 11% decline,  from  $10,555,000 in
fiscal 1999 to $9,409,000 in 2000.  This decrease in systems  revenues in fiscal
2000  reflects a decline in new orders  from  publishing  revenues  outside  the
United States due largely to increased  competition.  Service revenues decreased
4% in  fiscal  2000  primarily  due  to a  decrease  in  European  training  and
integration services associated with the decline in systems revenue.

Gross margins were 43% of revenues in 2000, the same as in 1999. Systems margins
were 61% of  systems  revenues  in  fiscal  2000,  the same as in 1999.  Service
margins  were 36% of service  revenues in 2000,  a slight  increase  from 35% in
1999.  The increase in margin was  attributable  to a relatively  lower level of
costs related to outsourcing training and consulting.

Research and  development  costs,  including  capitalized  software  development
costs, were $3,242,000 in 2000, a decrease from $4,040,000 in 1999, representing
34% and 38% of revenues for 2000 and 1999,  respectively.  Capitalized  software
costs were $0 and  $263,000  in 2000 and 1999,  respectively.  The  decrease  in
research and development expenditures in fiscal 2000 was primarily the result of
headcount  decreases  and  efficient  outsourcing  of  manpower.   Research  and
development expenses, excluding capitalized software development costs, were 34%
and  36% of  revenues  in 2000  and  1999,  respectively.  The  decrease  in the
percentage of revenue of net research and development expenses from 1999 to 2000
was due to the significant decrease in overall research and development spending
based on higher utilization of outside manpower.

Marketing,  general  and  administrative  expenses  were  $5,788,000,  or 62% of
revenues, in 2000 as compared to $7,985,000, or 76% of revenues, in fiscal 1999.
The 27% decrease in expenses in 2000 was  primarily the result of a reduction in
overall personnel costs,  reduced sales and marketing  expenditures  pending new
product  releases,  and the sale of the  Contex  division  in fiscal  year 1999.
XyEnterprise  anticipates  increasing  marketing and general and  administrative
expenses in fiscal 2001 as it increases  the  promotion of upcoming new products
and rebuilds the sales and marketing staff.

Interest  income was  $59,000 and  $15,000 in 2000 and 1999,  respectively.  The
increase in interest  income  resulted from the investment of cash proceeds from
the private  placement  offering closed by XyEnterprise in the fourth quarter of
fiscal 2000.  Interest expense accrued to third parties was $147,000 and $94,000
in fiscal 2000 and 1999,  respectively.  Interest expense accrued to Tudor Trust
was  $1,699,000 in fiscal 2000 and  $1,436,000 in fiscal 1999. The increase is a
result of increased  borrowings and interest rates. The interest expense payable
to  third  parties  includes  the  interest  obligation  due  on  the  Company's
Debentures and the quarterly interest payments due on the 4% Promissory Notes.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2001,  XyEnterprise  had cash and cash  equivalents  of  $4,275,000
which is a decrease  of  $2,566,000  from the  previous  fiscal  year end.  This
decrease in cash for fiscal 2001  resulted  from a use of cash for operating and
investing activities of $5,675,000 and $1,003,000,  respectively, offset by cash
provided from financing activities of $4,112,000.

In fiscal 2001,  XyEnterprise invested $438,000 in capital assets.  XyEnterprise
anticipates  that it will  continue  to invest in capital  assets as required to
support its product development efforts and general business needs.

As of March 31, 2001,  Azul has a $17,500,000  amended line of credit with Tudor
Trust,  the  largest  stockholder  of the  Company,  of which  $14,308,000  ,was
outstanding  at March 31,  2001.  The  grantor,  sole  trustee and sole  current
beneficiary of Tudor Trust, also serves as Chairman of the Board of Directors of
Azul and  XyEnterprise.  This credit line,  which is payable  March 31, 2002, is
collateralized  by the  Company's  stock in  XyEnterprise  and has been used for
working  capital and general  business  purposes.  The first  $5,000,000  of the
principal  balance  outstanding  bears interest at 6% per year and the remaining
principal  balance bears  interest at 8% per year.  (See Note 5 to  Consolidated
Financial Statements).

See Note 7 to the  Consolidated  Financial  Statements  for a description of the
Company's  efforts to restructure  the  outstanding  Debentures,  15% Promissory
Notes  and  4%  Promissory  Notes.   Despite  the  fact  that  the  Company  has
successfully  restructured  96% of the  Debentures,  the  Company  can  give  no
assurance  about the  outcome of  continued  restructuring  efforts and does not
expect the matters to be resolved in the near future.

                                       20
<PAGE>

The Company accrued dividends of $94,000 annually on Azul's Series B preferred
stock during 2001, 2000, and 1999.

The Company  reported a net loss allocable to common  stockholders of $7,926,000
in fiscal 2001 and net income  allocable to common  stockholders of $701,000 for
fiscal 2000,  respectively.  This difference can be attributed  primarily to the
gain on capital  transaction of a subsidiary  during 2000 of $5,085,000 that did
not recur in 2001.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company  will  continue as a going  concern.  The Company has  incurred
continuing  losses  from  operations  and  has  a  substantial  working  capital
deficiency  and a  stockholders'  deficit at March 31, 2001 and is in default on
its  6%  Convertible  Subordinated  Debentures,  15%  Promissory  Notes,  and 4%
Promissory  Notes  (See  Note  7  to  Consolidated  Financial  Statements).  The
Company's  attainment  of  profitable   operations  and  sufficient   additional
financing, as well as the continued forbearance of its debenture holders, cannot
be determined at this time. These  uncertainties  raise  substantial doubt about
the Company's ability to continue as a going concern.  The financial  statements
do not include any adjustments  relating to the recovery and  classification  of
recorded asset amounts or the amounts and  classifications  of liabilities  that
might be necessary should the Company be unable to continue as a going concern.

The  Company  anticipates  that its cash  requirements  for fiscal  2002 will be
satisfied  mainly  from its  working  capital  and  credit  line,  assuming  the
continued  forbearance  by  the  holders  of  the  6%  Convertible  Subordinated
Debentures, 15% Promissory Notes and 4% Promissory Notes.

FOREIGN CURRENCY - CONVERSION TO EURO

The euro has been adopted by the European Union as their legal currency. There
was no effect on the operations of XyEnterprise and its subsidiaries as a
result.



                                       21
<PAGE>




ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Neither  the  Company  nor  XyEnterprise   currently  use  derivative  financial
instruments.  The Company and XyEnterprise,  when and if practicable,  generally
place  marketable  security  investments  in high  credit  quality  instruments,
primarily U.S. Government and Federal Agency obligations,  tax-exempt  municipal
obligations and corporate  obligations with contractual  maturities of ten years
or less.  Neither the Company nor  XyEnterprise  expect any  material  loss from
marketable  security  investments and therefore believe that potential  interest
rate exposure is not material.

Internationally,  XyEnterprise  invoices customers  primarily in local currency.
XyEnterprise  is  exposed  to  foreign  exchange  rate  fluctuations  from  when
customers are invoiced in local currency until  collection  occurs.  Neither the
Company  nor  XyEnterprise  enters into  foreign  currency  hedge  transactions.
Through March 31, 2001,  foreign currency  fluctuations  have not had a material
impact on the financial position or results of operations of the Company.



                                       22
<PAGE>



ITEM 8. Financial Statements and Supplementary Data



                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Azul Holdings Inc.:


We have audited the  accompanying  consolidated  balance  sheet of Azul Holdings
Inc.  and  subsidiary  (the  "Company")  as of March  31,  2001 and the  related
consolidated  statements of operations,  changes in stockholders'  deficit,  and
cash  flows  for  the  year  then  ended.  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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  consolidated  financial  position of the Company as of
March 31, 2001 and the  consolidated  results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.

The accompanying  consolidated financial statements as of and for the year ended
March 31, 2001 have been  prepared  assuming that the Company will continue as a
going  concern.  As  described  in Notes 1 and 7 to the  consolidated  financial
statements,  the Company's  recurring  losses from  operations,  working capital
deficiency, stockholders' deficit and default on its 6% Convertible Subordinated
Debentures,  15% Promissory  Notes,  and 4% Promissory  Notes raise  substantial
doubt  about its  ability to continue  as a going  concern.  Management's  plans
concerning  these matters are also described in Notes 1 and 7. The  consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.



DELOITTE & TOUCHE LLP
Denver, Colorado

June 29, 2001




                                       23
<PAGE>





                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Azul Holdings Inc.:


We have audited the  accompanying  consolidated  balance  sheet of Azul Holdings
Inc.  and  subsidiaries  as of March  31,  2000,  and the  related  consolidated
statements of operations,  changes in stockholders'  deficit, and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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  audit  provides  a
reasonable basis for our opinion.  We have not audited the financial  statements
of Azul Holdings Inc. for any period subsequent to March 31, 2000.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Azul Holdings Inc.
and  subsidiaries as of March 31, 2000, and the results of their  operations and
their  cash  flows  for the  year  then  ended  in  conformity  with  accounting
principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in Note 1b to the
financial   statements,   the  Company  has  sustained   recurring  losses  from
operations, has a working capital deficiency and a stockholders' deficit, and is
in default on interest payments on its 6% Convertible  Subordinated  Debentures,
15% Promissory Notes, and its 4% Promissory  Notes.  These  uncertainties  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The financial  statements do not include any adjustments  that might result from
the outcome of this uncertainty.


Richard A. Eisner & Company, LLP


New York, New York
May 12, 2000



                                       24
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of Azul Holdings Inc.:

In our opinion,  the  accompanying  consolidated  statements of  operations,  of
changes in  stockholders'  deficit  and of cash  flows  present  fairly,  in all
material  respects,  the results of  operations  and cash flows of Azul Holdings
Inc. (formerly Xyvision, Inc.) and its subsidiaries for the year ended March 31,
1999 in conformity with accounting  principles  generally accepted in the United
States of America.  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  conducted  our audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States of America,  which  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,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits  provide a  reasonable  basis for our  opinion.  We have not  audited the
consolidated   financial  statements  of  Azul  Holdings  Inc.  for  any  period
subsequent to March 31, 1999.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going  concern.  As discussed in Note 1 to the fiscal
1999  financial  statements,  the Company  has  incurred  recurring  losses from
operations,  a working capital deficit,  stockholders' deficit and is in default
on  interest   payments   on  its  6%   Convertible   Subordinated   Debentures,
15%Promissory   Notes  and  4%  Promissory  Notes.  These   uncertainties  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans in regard to these  matters are also  described in Note 1 to
the  fiscal  1999  statements.  The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
June 25, 1999





                                       25
<PAGE>




                       AZUL HOLDINGS INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             MARCH 31, 2001 AND 2000
<TABLE>
<CAPTION>

ASSETS                                                                                                   2001                2000
                                                                                                         ----                ----
Current assets:
<S>                                                                                                 <C>                  <C>
Cash and cash equivalents...................................................................        $ 4,418,033         $ 6,889,513
Accounts receivable:
  Trade, less allowance for doubtful accounts of $154,516
    and $224,345 at March 31, 2001 and 2000, respectively...................................          1,892,496           1,746,952
Other current assets........................................................................            910,223             360,511
                                                                                                ---------------        ------------
Total current assets........................................................................          7,220,752           8,996,976
Property and equipment, net.................................................................            608,530             547,552
Goodwill....................................................................................          1,697,919             --
Investment in unconsolidated entity.........................................................            245,894             --
Other assets, net, principally capitalized software costs ..................................            250,006             326,836
                                                                                                ---------------        ------------
Total assets................................................................................       $ 10,023,101         $ 9,871,364
                                                                                                   ============         ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to stockholder................................................................        $14,307,911         $12,357,150
Current portion of long-term debt...........................................................          1,895,089           1,872,056
Accounts payable and accrued expenses.......................................................          1,658,359           3,591,971
Deferred service revenues...................................................................          1,640,280           1,657,627
Other current liabilities...................................................................          1,458,009           1,279,073
                                                                                                 --------------       -------------
Total current liabilities ..................................................................         20,959,648          20,757,877
Notes payable to stockholder - long term....................................................               --             1,850,000
                                                                                                -----------------     -------------
Total liabilities ..........................................................................         20,959,648          22,607,877
                                                                                                 --------------        ------------

Minority interest in subsidiary.............................................................          4,696,279           2,072,430
                                                                                                 --------------       -------------
Commitments and contingencies
Stockholders' deficit:
  Capital stock:
    Series preferred stock, $1.00 par value; 1,700,000 shares
      authorized; no shares issued and outstanding..........................................           ---                  ---
    Series B convertible preferred stock, $1.00 par value; 300,000 shares
      authorized; 229,131 and 232,407 shares issued and outstanding at March 31,
      2001 and 2000 respectively (aggregate liquidation preference of $3,349,763
      and $3,306,536, respectively)..........................................................           229,131             232,407
    Series C convertible preferred stock, $1.00 par value; 1,000,000
      shares authorized; 175,000 shares issued and outstanding at
      March 31, 2001 and 2000 respectively (aggregate liquidation  preference of $1,750,000).           175,000               1,750
    Common stock, $.03 par value; 25,000,000 shares authorized;
      5,231,622 and 2,991,496 shares issued and outstanding at
      March 31, 2001 and 2000, respectively, ...............................................            156,949              89,745
Additional paid-in capital..................................................................         59,959,543          53,094,764
Accumulated deficit.........................................................................        (74,984,912)        (67,059,072)
                                                                                                  --------------       -------------
                                                                                                    (14,464,289)        (13,640,406)
Less:
Treasury common stock, at cost; 95,333 shares at March 31, 2001 and
  2000, respectively .......................................................................         (1,168,537)         (1,168,537)
                                                                                                  --------------      --------------
Total stockholders' deficit.................................................................        (15,632,826)        (14,808,943)
                                                                                                  --------------       -------------
Total liabilities and stockholders' deficit.................................................    $    10,023,101       $   9,871,364
                                                                                                ===============       =============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       26
<PAGE>


                       AZUL HOLDINGS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>

                                                                           2001             2000             1999
                                                                           ----             ----             ----

Revenues:
<S>                                                                         <C>             <C>               <C>
  Systems..............................................................     $2,347,079       $2,599,690       $3,474,551
  Service..............................................................      6,571,349        6,809,177        7,080,646
                                                                         -------------    -------------    -------------
      Total revenues...................................................      8,918,428        9,408,867       10,555,197
                                                                         -------------    -------------     ------------
Cost of sales:
  Systems..............................................................        596,750       1,008,890         1,371,012
  Service..............................................................      4,270,548        4,370,172        4,613,865
                                                                         -------------    -------------    -------------
      Total cost of sales..............................................      4,867,298        5,379,062        5,984,877
                                                                         -------------    -------------    -------------
Gross margin..........................................................       4,051,130        4,029,805        4,570,320

Operating expenses:
  Research and development.............................................      4,049,924        3,241,969        3,776,692
  Marketing, general, and administrative...............................      6,926,015        5,787,637        7,985,172
                                                                         -------------    -------------    -------------
      Total operating expenses.........................................     10,975,939        9,029,606       11,761,864
                                                                          ------------    -------------     ------------
Loss from operations...................................................     (6,924,809)     (4,999,801)       (7,191,544)
Minority interest share of loss                                              3,386,333        2,142,874              --
                                                                         -------------    -------------   --------------
Loss from operations after minority interest share                          (3,538,476)      (2,856,927)      (7,191,544)
                                                                          -------------   -------------      ------------
Other income (expense), net:
  Gain on capital transactions of subsidiary...........................            ---        5,084,694              ---
  Loss on settlement of an accrued interest liability - stockholder....     (2,793,550)             ---              ---
  Interest income......................................................        351,194           59,435           14,639
  Interest expense - third party.......................................       (123,511)        (147,301)         (93,627)
  Interest expense - stockholder.......................................     (1,727,377)      (1,698,527)      (1,436,299)
                                                                          -------------   -------------     ------------
      Total other income (expense), net................................     (4,293,244)       3,298,301       (1,515,287)
                                                                          -------------   ------------       ------------
Income (loss) before extraordinary item ...............................     (7,831,720)         441,374       (8,706,831)
Extraordinary item:
  Gain on early extinguishment of debt.................................            ---          353,490              ---
                                                                         -------------    -------------      ------------
Net income (loss)......................................................     (7,831,720)         794,864       (8,706,831)
Accrued preferred stock dividends......................................         94,120           94,120           94,120
                                                                         --------------   --------------   -------------
Net income (loss) allocable to common stockholders.....................  $  (7,925,840)   $     700,744      $(8,800,951)
                                                                           ============       =========      ============
Basic earnings (loss) per share:
  Before extraordinary item............................................  $       (2.09)   $         .15      $     (3.05)
  Extraordinary item...................................................            ---              .12              ---
  Accrued preferred stock dividends                                               (.03)            (.03)            (.03)
                                                                         -------------     -------------     ------------
  Basic earnings (loss) per share......................................  $       (2.12)   $         .24      $     (3.08)
                                                                         ================ ================ ==============
Diluted earnings (loss) per share:
  Before extraordinary item............................................  $       (2.09)   $         .08      $     (3.05)
  Extraordinary item...................................................            ---              .03              ---
  Accrued preferred stock dividends                                               (.03)            (.01)            (.03)
Diluted earnings (loss) per share......................................  $       (2.12)   $         .10      $     (3.08)
                                                                         ================ ================= =============
  Basic weighted average shares outstanding............................      3,741,235        2,857,247        2,854,283
  Diluted weighted average shares outstanding..........................      3,741,235       10,168,769        2,854,283

    </TABLE>
               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       27
<PAGE>





                       AZUL HOLDINGS INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
                FOR THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
<TABLE>
<CAPTION>

                                                   Series B   Series C            Additional                                Total
                                                   Preferred  Preferred Common    Paid-in    Accumulated     Treasury  Stockholders'
                                                   stock      stock      Stock     Capital    Deficit         Stock         Deficit
                                                   -----       ----      -----     --------   -------         -----         -------
<S>                                                <C>        <C>     <C>      <C>         <C>           <C>           <C>
Balance, March 31, 1998..........................  $235,299   $ ---   $ 88,488 $50,956,310 $(58,958,865) $(1,168,537)  $ (8,847,305)
Issuance of Series C convertible preferred stock.             175,000            1,575,000                                1,750,000
Issuance of common stock purchase  warrants......                                  300,000                                  300,000
Writedown of discount from forgiveness of
  warrants.......................................                                 (132,501)                                (132,501)
Dividends on Series B convertible preferred stock                                               (94,120)                    (94,120)
Net loss.........................................                                            (8,706,831)                 (8,706,831)
                                                    ========  ======   ======== =========== ============= ============ =============
Balance, March 31, 1999..........................   235,299   175,000   88,488  52,698,809  (67,759,816)  (1,168,537)   (15,730,757)
Conversion of Series B convertible preferred ....
   stock to common stock.........................    (2,892)                34       2,858                                        -
Exercise of stock options........................                        1,223      71,299                                   72,522
Compensation paid in stock options ..............                                  148,548                                  148,548
Dividends on Series B convertible
   preferred stock...............................                                               (94,120)
Net income.......................................                                               794,864                     794,864
                                                    ========  ======   ======== =========== ============= ============ =============
Balance, March 31, 2000 .........................   232,407   175,000   89,745  52,921,514  (67,059,072)  (1,168,537)   (14,808,943)
Conversion of Series B convertible preferred
  stock to common stock                              (3,276)                39       3,237                                        -
Conversion of debt and accrued interest
  payable to stockholder to common stock                                34,287   4,630,080                                4,664,367
Issuance of common stock purchase warrants and
  fair value of debt conversion, primarily to
  shareholder as consideration for extensions of
  line-of-credit.................................                                  791,146                                  791,146
Issuance of common stock to Tudor Trust in
  exchange for 575,000 shares of common stock of
  Xyvision Enterprise Solutions, Inc. ...........                       32,775   1,605,975                                1,638,750
Dividends on Series B convertible preferred .....
  stock..........................................                                               (94,120)                    (94,120)
Other, including exercise of stock options ......                          103       7,591                                    7,694
Net loss.........................................                                            (7,831,720)                 (7,831,720)

Balance, March 31, 2001 .........................  $229,131  $175,000 $156,949 $59,959,543 $(74,984,912) $(1,168,537)  $(15,632,826)
                                                   ========  ======   ======== =========== ============= ============ =============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       28
<PAGE>




                       AZUL HOLDINGS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED MARCH 31, 2001, 2000, AND 1999

<TABLE>
<CAPTION>
                                                                                    2001            2000             1999
                                                                                    ----            ----             ----
Operating Activities:
<S>                                                                               <C>              <C>             <C>
Net income (loss)...........................................................      $(7,831,720)     $ 794,864       $(8,706,831)
Adjustments to reconcile net income (loss) to net cash used by  operating
   activities:
Depreciation and amortization...............................................          622,354        611,000         1,225,278
Noncash compensation........................................................           75,000        148,548               ---
Common stock and warrants issued to a shareholder in payment of    interest
and as consideration for extension of credit facility.......................        3,309,071            ---               ---
Reserve for note receivable.................................................          500,000            ---               ---
Gain on early extinguishment of debt........................................             ---        (353,490)              ---
Gain on capital transactions of subsidiary..................................              ---     (5,084,694)              ---
Minority share of loss of subsidiary........................................       (3,386,333)    (2,142,874)              ---
Interest expense related to warrants........................................          157,000        679,730           519,479
Writedown of capitalized software to net realizable value...................              ---            ---           410,000
Loss on sale of Contex assets...............................................              ---            ---           379,000
Provision for (recovery of) losses on accounts receivable...................          (69,829)      (218,601)          366,184
Changes in operating assets and liabilities:
  Accounts receivable.......................................................          (75,715)        79,348         1,656,482
  Inventories...............................................................              ---        513,144          (176,099)
  Other assets..............................................................         (663,954)       (53,371)          347,539
  Accounts payable and accrued expenses.....................................        1,163,035        747,911          (180,624)
  Deferred service revenues.................................................          (17,347)       279,530               ---
  Other current liabilities.................................................                                           325,719
                                                                                      -------       --------       ---------------
                                                                                      178,936         81,582
                                                                                  ------------    ----------
Net cash used by operations.................................................       (6,039,502)    (3,917,373)       (3,833,873)
                                                                                  ------------    -----------  -    -----------
Investing Activities:
Loan to PlazaBlue and Hypervision...........................................       (2,950,000)           ---               ---
Investment in NanoFrames, LLC...............................................         (245,894)           ---               ---
Additions to property and equipment.........................................         (438,473)      (294,203)         (288,287)
Capitalized software costs..................................................         (125,184)                        (262,949)
                                                                                    ---------  --------------         ---------

Net cash used by investments................................................       (3,759,551)      (294,203)         (551,236)
                                                                                   -----------      ---------        ---------
Financing Activities:
Proceeds from credit facility from a stockholder, net.......................         3,241,763     2,832,150         3,475,000
Proceeds from bridge loan...................................................              ---        300,000               ---
Proceeds from sale of subsidiary's preferred stock, net of issuance costs...        4,082,254        750,000         1,000,000
Proceeds from sale of subsidiary's common stock, net of issuance costs......              ---      6,700,000               ---
Exercise of stock options...................................................            3,556
                                                                                  -------------      -------         ----------
                                                                                                      72,522               ---
                                                                                                     -------               ---
Net cash provided from financing............................................      7,327,573       10,654,672         4,475,000
                                                                                  ------------     -----------       ---------
Net increase (decrease) in cash and cash equivalents........................       (2,471,480)     6,443,096            89,891
Cash and cash equivalents at the beginning of the year......................        6,889,513        446,417           356,526
                                                                                   ---------     ------------         ---------
Cash and cash equivalents at the end of the year............................      $ 4,418,033    $ 6,889,513         $ 446,417
                                                                                  ===========    ===========         =========

</TABLE>
                                                                     (continued)




                                       29
<PAGE>





                       AZUL HOLDINGS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED MARCH 31, 2001, 2000, AND 1999
<TABLE>
<CAPTION>
                                                                                                                         (concluded)

Supplemental cash flow information:


<S>                                                                                  <C>
Conversion of note receivable from PlazaBlue...............................          2,450,000            ---               ---
Sale of investment in 2001 Investments LLC to Tudor Trust for reduction in
 amount outstanding from credit facility .................................           2,450,000            ---               ---

Conversion of debt to stockholder to subsidiary's common stock..............         1,850,000                        1,750,000
                                                                                                          ---
Accrued dividends on preferred stock........................................            94,120         94,120            94,120
Issuance of common stock in payment of prior periods' accrued interest......         1,870,816            ---               ---
Issuance of common stock to Tudor Trust in exchange for 575,000 shares    of
  common stock of Xyvision Enterprise Solutions, Inc..........................       1,638,750            ---               ---
Issuance of warrants to purchase common stock and fair value of debt
  conversion as consideration for    extension of credit facility to March             118,626
  31,2002..................................................................                              ---               ---

    </TABLE>
          The accompanying notes are an integral part of the
                       consolidated financial statements.



                                       30
<PAGE>



                       AZUL HOLDINGS INC. and SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

a        Nature of Business:  Azul Holdings Inc.  ("Azul" or the  "Company"),  a
         Delaware corporation,  through its majority owned subsidiary,  Xyvision
         Enterprise   Solutions   Inc.   ("XyEnterprise")   develops,   markets,
         integrates and supports content management and publishing  software for
         a variety of  customers in numerous  industries.  These  products  help
         companies  create,  manage and deliver  large amounts of content in Web
         electronic or paper  formats (or media).  XyEnterprise  integrates  its
         internally  developed  products with selected  third-party  products to
         create complete publishing and content management solutions through its
         professional  services  group and qualified  third-party  resellers and
         service partners. These solutions are designed to increase productivity
         of  content  creation  and  editing,  enhance  document  and  knowledge
         management  functions,  improve  quality and  timeliness  of  formatted
         information  and  support  the  growing  use of XML as a core  business
         technology.  Azul provides financial and management support principally
         to a few carefully  selected  high  technology  companies  generally in
         their emerging or early-stages  of corporate  development and mid-stage
         companies.   To  date,  Azul's  principal  asset  is  its  holdings  in
         XyEnterprise  which  previously  was a  wholly-owned  subsidiary and in
         which Azul has a 52.5% ownership as of March 31, 2001.

         Over the past two years, XyEnterprise has invested significantly in the
         development   and   expansion  of  its  product   line.   Additionally,
         XyEnterprise has greatly expanded its sales force during the year ended
         March 31, 2001 to serve the market interest generated by the release of
         the new  versions of the  products.  To become  profitable  and achieve
         positive  operating cash flow,  XyEnterprise  must generate and sustain
         higher levels of revenue.

         During  2001,  Azul  made an  initial  investment  in  NanoFrames,  LLC
         ("NanoFrames")  and at March  31,  2001 has a 15%  preferred  ownership
         interest  accounted for by the cost method.  NanoFrames is in the early
         stages of the  research and  development  of  nanotechnology  using the
         principles of molecular  biology.  Such  technology is expected to have
         applications in  reinforcement,  separation and material design fields.
         Nanotechnology  is expected to become the new  frontier for research in
         such  fields  as   electronics,   optics,   materials,   medicine   and
         pharmaceuticals.  As of March 31,  2001,  the Company had  committed to
         invest up to $500,000 in NanoFrames.

b.       Basis of Presentation and  Consolidation:  The  accompanying  financial
         statements  have been prepared  assuming that the Company will continue
         as a going  concern.  The Company has sustained  recurring  losses from
         operations,  and has a  working  capital  deficiency,  a  stockholders'
         deficit  and  is  in  default  on  its  6%   Convertible   Subordinated
         Debentures,  15% Promissory  Notes, and 4% Promissory Notes as of March
         31,  2001.  The  Company's  attainment  of  profitable  operations  and
         sufficient additional  financing,  as well as the continued forbearance
         of its debenture  holders,  cannot be  determined  at this time.  These
         uncertainties  raise  substantial  doubt about the Company's ability to
         continue as a going  concern.  The financial  statements do not include
         any adjustments relating to the recovery and classification of recorded
         asset amounts or the amounts and  classifications  of liabilities  that
         might be necessary  should the Company be unable to continue as a going
         concern. See also Note 7.

         The accompanying consolidated financial statements include the accounts
         of the Company and its subsidiary,  XyEnterprise.  XyEnterprise has the
         following  wholly owned  subsidiaries:  Xyvision  Enterprise  Solutions
         Europe  Ltd.  (an English  corporation),  Xyvision  S.A.R.L.  (a French
         corporation)   and  Xyvision   Enterprise   Solutions  GmbH  (a  German
         corporation), and Lightbinders, Inc. (a U.S. Delaware corporation). All
         material intercompany transactions and balances have been eliminated in
         consolidation.

                                       31
<PAGE>


                       AZUL HOLDINGS INC. and SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

c.       Cash and cash  equivalents:  The Company  considers  all highly  liquid
         instruments purchased with an original maturity of three months or less
         to be cash equivalents.

d.       Property and Equipment:  Property and equipment are stated at cost less
         accumulated  depreciation  and  amortization.  Major  improvements  are
         capitalized  while repair and  maintenance  charges are  expensed  when
         incurred. Depreciation and amortization are computed on a straight-line
         basis  over  the  useful  lives of the  assets,  except  for  leasehold
         improvements  which are  amortized  over the  lesser of the term of the
         lease or the estimated  useful life of the related  asset.  When assets
         are sold or retired,  their cost and related  accumulated  depreciation
         are removed from the accounts. Any gain or loss is included in income.

         The  following  useful lives are used to provide for  depreciation  and
         amortization:

                                     Lives In Years

        Computer equipment..................  3
        Office furniture and fixtures.......  7
        Leasehold improvements.............. 2-4
        Purchased software.................. 3-5
        Other...............................  3

e.       Goodwill  and  Other  Acquisition-Related   Intangibles:   Goodwill  is
         recorded when the consideration paid for acquisitions  exceeds the fair
         value of net  tangible and  identifiable  intangible  assets  acquired.
         Other  identifiable  intangibles  include  assets such as the  acquired
         workforce.  Goodwill and other acquired  intangibles are amortized on a
         straight-line  basis over the periods  indicated  below.  During fiscal
         2001 the Company  acquired  575,000 shares of  XyEnterprise  from Tudor
         Trust (see Note 16). The Company  accounted for this  transaction as an
         acquisition of minority interest and recorded goodwill of approximately
         $1,616,000.

         Net goodwill and other intangibles at March 31, 2001, and 2000, were as
         follows:

                                  Life in Years        2001      2000
                                  -------------        ----      ----
         Goodwill.............       10            $1,697,919     ---
         Other Intangibles....        7                53,158     ---
                                                   -----------    ---
                                                    $1,751,077    ---
                                                    ==========    ===

         The  total  balances  presented  above  are  net of  total  accumulated
         amortization of $22,621 at March 31, 2001.

f.       Impairment of Long-Lived Assets:  Long-lived assets to be held and used
         are reviewed for impairment  whenever  circumstances  indicate that the
         carrying  amount  of an  asset  may  not be  recoverable.  The  Company
         assesses the  recoverability  of its assets by comparing  the projected
         undiscounted  net cash flows associated with those assets against their
         respective carrying amounts. Impairment, if any, is based on the excess
         of the carrying amount over the fair value of those assets.  Long-lived
         assets to be  disposed  of are  reported  at the lower of the  carrying
         amount or fair value, less cost of disposal. No impairment charges have
         been  recognized  during the years ended March 31, 2001,  and 2000. See
         Note 1(h).

g.       Revenue Recognition: Revenue is recognized in accordance with Statement
         of Position No. 97-2 ("SOP 97-2")  "Software  Revenue  Recognition"  as
         amended by "SOP 98-9" "Software  Revenue  Recognition."  XyEnterprise's
         systems  revenue is derived  from  licensing  of its page  composition,
         content  management and third party software.  Service revenues include
         maintenance and support, consulting and training services. Revenue from
         license  arrangements  is  recognized  upon  shipment of the product if
         collection of the resulting receivable is probable and remaining vendor
         obligations are insignificant. The strategy of providing customers with
         complete  integrated  publishing  solutions  may result in  bundling of
         services with software and  recognition of software  licensing  revenue
         and services over the length of the  implementation  in conformity with
         Accounting  Research  Bulletin  No. 45,  "Long-Term  Construction  Type
         Contracts"  using the relevant  guidance of SOP 81-1,  "Accounting  for
         Performance   of   Construction-Type   and  Certain   Production   Type
         Contracts."   Service   revenues   include   maintenance  and  support,
         consulting,  and  training  services.  Payments  received in advance of
         delivery are recorded as deferred revenue in the  consolidated  balance
         sheet until  goods or  services  are  delivered.  Revenues  from annual
         maintenance  contracts are recognized  ratably over the duration of the
         related  contracts.  Revenue for  consulting and training is recognized
         when the services are performed and collectibility is deemed probable.

                                       32
<PAGE>

h.       Software Development Costs: Costs for research, design, and development
         of software for sale to others  incurred  prior to the  achievement  of
         "technological  feasibility"  are charged to expense as  incurred.  The
         Company capitalizes certain software costs in accordance with Statement
         of Financial  Accounting  Standards  ("SFAS") No. 86,  "Accounting  for
         Costs of Computer Software to be Sold,  Leased or Otherwise  Marketed."
         The Company's policy is to amortize  capitalized  software costs by the
         greater of (a) the ratio that current gross revenues for a product bear
         to the total of current and anticipated  future gross revenues for that
         product or (b) the  straight-line  method over the remaining  estimated
         life of the  product  including  the period  being  reported  on. It is
         possible that the estimate of anticipated  future gross  revenues,  the
         remaining  estimated  economic  life of the  product or both could vary
         from  management's   estimates.   The  Company   periodically   reviews
         capitalized  software to report such capitalized  software at the lower
         of unamortized cost or the realizable value. Any adjustments  resulting
         from this  analysis are included in results of  operations.  During the
         year ended March 31, 1999, the Company recorded a charge of $410,000 to
         reduce its  capitalized  software  development  costs to estimated  net
         realizable value.

i.       Earnings (Loss) Per Common Share:  The Company reports  earnings (loss)
         per common share in accordance  with Statement of Financial  Accounting
         Standards (SFAS) No. 128, "Earnings Per Share". This statement requires
         the  presentation  of basic  and  diluted  earnings  per  share.  Basic
         earnings per share  excludes the  dilutive  effect of potential  common
         shares and is computed by dividing  income or loss  available to common
         stockholders   by  the  weighted   average   number  of  common  shares
         outstanding  for the period.  Diluted  earnings per share  reflects the
         potential  dilution that could occur if stock options and warrants were
         exercised, or preferred stock or debt were converted into common stock,
         unless their effect would be antidilutive. The Company has restated all
         share  references  due to the 1 for 5  reverse  stock  split  effective
         October 20, 1998.

j.       Foreign  Currency:  The Company has  determined  that the United States
         dollar is its functional  currency for all entities.  Accordingly,  all
         balance sheet accounts of foreign operations are remeasured into United
         States  dollars.  The results of  operations  are  measured at rates in
         effect  during the  periods in which  transactions  occur.  Transaction
         gains  and  losses  are  recorded  to  the  statement  of   operations.
         Transaction gains and losses are not material.

k.       Comprehensive   Income:  For  the  periods  presented,   the  Company's
         comprehensive  income and loss, as defined by SFAS No. 130,  "Reporting
         Comprehensive Income", is equal to its net income and loss.

l.       Fair Value of Financial Instruments: The Company's financialinstruments
         include  cash  and  cash  equivalents,  accounts  receivable,  accounts
         payable,   accrued   liabilities   and  current  and  noncurrent   debt
         obligations.  The carrying amounts for short-term financial instruments
         approximate  fair value due to their  short  maturities.  The  carrying
         value of long-term  obligations is considered to approximate their fair
         value due to the rates approximating what the Company believes it could
         currently secure for the relative risks of the debt.

                                       33
<PAGE>

m.       Income Taxes: The Company accounts for income taxes using the asset and
         liability  approach for financial  accounting and  reporting.  Deferred
         income tax assets and liabilities are computed for differences  between
         the  financial  statement  basis and the income tax basis of assets and
         liabilities  that will result in taxable or  deductible  amounts in the
         future.  Deferred income tax computations are based on enacted laws and
         rates  applicable to the years in which the differences are expected to
         affect taxable  income.  Deferred tax assets are reduced by a valuation
         allowance if, based on the weight of the available evidence, it is more
         likely than not that these benefits will not be realized.

n.       Concentration  of Credit Risk:  Financial  instruments that potentially
         subject  the  Company  to   concentrations   of  credit  risk   consist
         principally of trade  receivables.  XyEnterprise sells its products and
         services primarily to major  corporations and systems  integrators that
         serve a wide  variety of U.S.  and  foreign  markets.  The  practice of
         establishing reasonable credit lines limits risk. The Company maintains
         an allowance for doubtful accounts and believes it is adequate to cover
         potential  credit risks.  The loss of a major customer or a delay in an
         order  by  such  customer  may  have  a  material   adverse  effect  on
         XyEnterprise's business, operating results and financial condition.

o.       Use of Estimates:  In conformity with accounting  principles  generally
         accepted in the United States of America, management of the Company has
         made a number of estimates and assumptions relating to the reporting of
         assets,   liabilities,   revenues   and   expenses  to  prepare   these
         consolidated  financial  statements.   Some  of  the  more  significant
         estimates include allowances for doubtful accounts and note receivable,
         estimated useful lives and the related depreciation and amortization of
         long-lived  assets  and the  deferred  tax asset  valuation  allowance.
         Actual  results  could differ from these  estimates.  The allowance for
         doubtful accounts receivable  recorded in these consolidated  financial
         statements  relates  to  XyEnterprise,  which  recorded  net  bad  debt
         recoveries through its allowance for doubtful accounts of approximately
         $69,000  and  $176,000  for the years  ended  March 31,  2001 and 2000,
         respectively,  and no movement in this account for the year ended March
         31, 1999. In June 2000, XyEnterprise entered into a loan agreement with
         HyperVision,  Ltd.  ("HVL")  and  advanced  $500,000  to  HVL  for  the
         completion  of the  development  of its product,  WorX. As of March 31,
         2001, Company and XyEnterprise  management determined that the loan was
         impaired due to HVL's limited  financial  resources and limited revenue
         growth of its primary product. Accordingly, a reserve for the principal
         amount of the outstanding note was recognized.

p.       Accounting  for  Stock-Based  Compensation:  The Company  accounts  for
         stock-based   compensation   to  employees  and  directors   under  the
         intrinsic-value   method  prescribed  in  Accounting  Principles  Board
         ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
         its  related  interpretations.  In  accordance  with  this  method,  no
         compensation  expense is  recognized  in the  financial  statements  in
         connection with stock awards to employees and directors  provided that,
         as of the grant date, all terms associated with the award are fixed and
         the fair value of the  Company's  stock,  as of the grant date,  is not
         greater than the amount an employee must pay to acquire the stock.

         The Company  accounts for grants to  nonemployees  or directors  not in
         connection  with their  service as directors of the Company  under SFAS
         No. 123, "Accounting for Stock-Based Compensation," and Emerging Issues
         Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
         That  Are  Issued  to  Other  Than  Employees  for  Acquiring,   or  in
         Conjunction with Selling, Goods or Services." All transactions in which
         services  are the  consideration  received  for the  issuance of equity
         instruments   are  accounted  for  based  on  the  fair  value  of  the
         consideration  received  or the fair  value of the  equity  instruments
         issued, whichever is more reliably measurable.

         Disclosures of pro forma operating results had the Company prepared its
         consolidated    financial    statements   in   accordance    with   the
         fair-value-based  method, as stated in SFAS No. 123, have been included
         in Note 10.

                                       34
<PAGE>

q.       Minority  Interest  in  Subsidiary:  Minority  interest  in  subsidiary
         represents the minority stockholders' share of XyEnterprise's income or
         loss and the  liquidation  preference  value,  $4,311,811,  of Series A
         convertible  preferred stock issued by XyEnterprise during fiscal 2001,
         as well the carrying value of minority common interest of $384,468. The
         holders of  XyEnterprise's  Series A convertible  stock are entitled to
         receive dividends pro rata with the holders of shares of XyEnterprise's
         common  stock  through  February 15, 2003,  if any such  dividends  are
         declared. After February 15, 2003, each holder of XyEnterprise's Series
         A convertible preferred stock shall receive quarterly dividends,  which
         shall accrue at eight percent per annum.

r.       Subsidiary   Stock  Issuances:   The  Company   recognizes  gains  from
         subsidiary   common  stock  in  fiscal  2000  issuances  in  income  in
         accordance  with Staff Topic 5(h),  "Accounting for Sales of Stock by a
         Subsidiary,"  issued  by the  United  States  Securities  and  Exchange
         Commission.  During the fiscal year ended March 31, 2001,  Tudor Trust,
         the majority stockholder of the Company,  converted an outstanding loan
         of $1,850,000 owed by XyEnterprise  into 649,123 shares of XyEnterprise
         common stock at the price of $2.85 per share, the price at which shares
         were sold to third parties during  February 2000;  however,  since this
         was a voluntary  action by Tudor Trust,  a related  party,  no gain was
         recognized.  During the fiscal year ended March 31, 2000, the Company's
         subsidiary,  XyEnterprise issued 4,154,386 shares of common stock. This
         included the required  conversion into 1,400,000 shares of XyEnterprise
         common stock of the minority interests that were previously outstanding
         in the form of preferred stock of XyEnterprise.

         The other  newly-issued  shares of XyEnterprise  common stock in fiscal
         year 2000 consisted of; (a) the required conversion of a bridge loan of
         $850,000  owed by  XyEnterprise  into  298,246  shares of  XyEnterprise
         common stock, at a price of $2.85 per share and (b) the completion of a
         private  placement of 2,456,140  shares of  XyEnterprise  common stock,
         resulting  in  net  proceeds   (after  costs  of  the   placement)   to
         XyEnterprise  of  $6,700,000,   or  $2.73  per  share.   The  Company's
         proportionate  interest in  XyEnterprise  decreased from 80% (after the
         conversion  of the  preferred  stock) to 57.4%  (after  the  subsequent
         conversion of the bridge loan and the private  placement).  As a result
         of the  increase in equity of  XyEnterprise,  the Company  recognized a
         gain of $5,084,694.

s.       New Accounting  Pronouncements:  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  requiring  that all
         derivative   instruments   (including  certain  derivative  instruments
         embedded in other contracts) be recorded in the balance sheet as either
         an asset or  liability  measured  at its fair  value.  SFAS No. 133, as
         amended,  requires  that  changes  in the  derivative's  fair  value be
         recognized  currently  in earnings  unless  specific  hedge  accounting
         criteria are met. The accounting provisions for qualifying hedges allow
         gains and losses  related  to a hedged  item  recognized  in the income
         statement to be offset by the related derivative's gain and losses, and
         requires the Company to formally  document,  designate  ,and assess the
         effectiveness of transactions  that qualify for hedge  accounting.  The
         Company  adopted this  statement on April 1, 2001. The adoption of SFAS
         No. 133, as amended, did not have any impact on the Company's financial
         position or results of operations.

         On June 29, 2001,  FASB  concluded its voting  process on SFAS No. 141,
         "Business Combinations" and this statement will be issued in July 2001.
         SFAS No. 141 requires  that the purchase  method of  accounting be used
         for all business  combinations  initiated after June 30, 2001. Goodwill
         and certain  intangible assets will remain on the balance sheet and not
         be amortized.  On an annual basis,  and when there is reason to suspect
         that their values have been  diminished or impaired,  these assets must
         be tested for impairment, and write-downs may be necessary. The Company
         is  required to  implement  SFAS No. 141 on July 1, 2001 and it has not
         determined  the impact,  if any, that this  statement  will have on its
         consolidated financial position or results of operations.

                                       35
<PAGE>

         On June 29, 2001,  FASB  concluded its voting  process on SFAS No. 142,
         "Goodwill  and Other  Intangible  Assets"  and this  statement  will be
         issued in July 2001.  SFAS No. 142 changes the  accounting for goodwill
         from  an   amortization   method   to  an   impairment-only   approach.
         Amortization of goodwill,  including goodwill recorded in past business
         combinations,  will cease upon adoption of this statement.  The Company
         is required to  implement  SFAS No. 142 on April 1, 2002 and it has not
         determined  the impact,  if any, that this  statement  will have on its
         consolidated financial position or results of operations.

         In December 1999, the Securities and Exchange Commission ("SEC") issued
         Staff Accounting Bulletin 101 ("SAB 101"), Revenue  Recognition,  which
         outlines the basic  criteria that must be met to recognize  revenue and
         provides  guidance  for  presentation  of  revenue  and for  disclosure
         related to revenue recognition  policies in financial  statements filed
         with the SEC.  The  Company  adopted SAB 101 as of April 1, 2000 and it
         did not have any impact on the Company's  financial position or results
         of operations.

t.       Reclassifications:  Certain  reclassifications  have been made to prior
         year financial statement balances to conform to the 2001 presentation.

2. Property and Equipment

         Property and  equipment  consists of the following as of March 31, 2001
         and 2000:
<TABLE>
<CAPTION>

                                                       March 31, 2001       March 31, 2000
                                                       -------------        --------------
<S>                                                    <C>                     <C>
        Computer hardware............................  $ 1,305,710             $ 1,063,075
        Office furniture and fixtures................      126,692                 124,350
        Leasehold improvements.......................      447,954                 444,428
        Purchased software...........................      635,151                 445,182
        Other........................................        9,333                   9,333
                                                     -------------           -------------
                                                         2,524,840               2,086,368
        Accumulated depreciation and amortization....   (1,916,310)             (1,538,816)
                                                       ------------             ------------
        Net property and equipment................... $    608,530             $   547,552
                                                        ============            ===========
</TABLE>

         Depreciation  and  amortization  expense for property and equipment was
         approximately $377,000, $386,000 and $452,000 for the years ended March
         31, 2001, 2000 and 1999, respectively.

3. Other Current Assets

         Other current  assets consist of the following as of March 31, 2001 and
         2000:

                                         March 31, 2001         March 31, 2000
                                         -------------         ---------------
      Costs of projects in-progress.....         $141,080               $8,124
      Prepaid insurance.................          116,730               56,177
      Prepaid maintenance...............          107,822               95,874
      Prepaid royalties.................           79,136               21,095
      Prepaid rent......................           54,590                   --
      Prepaid interest..................          137,705                3,362
      Prepaid trade shows...............           33,665               13,918
      Other.............................          239,495              161,961
                                                ---------            ---------
                                                 $910,223             $360,511
                                                 ========             ========

                                       36
<PAGE>

Debenture  issuance costs amortized and charged to expense were $7,000,  $4,000,
and  $3,000 in  fiscal  2001,  2000,  and 1999,  respectively.  The  accumulated
amortization of the Debenture  issuance costs was $788,000 and $781,000 at March
31, 2001 and 2000, respectively.

4. Other Assets

Other assets (net of accumulated  amortization)  consists of the following as of
March 31, 2001 and 2000:

                                 March 31, 2001     March 31, 2000
                                 -------------      --------------
Capitalized Software Costs.......    $137,166            $254,333
Deposits.........................      55,385              64,743
Identifiable Intangibles.........      53,158                 ---
Other............................       4,297               7,760
                                   ----------         -----------
Totals...........................    $250,006            $326,836
                                     ========            ========

The Company capitalized $125,184,  $0, and $262,000 during the years ended March
31,  2001,  2000,  and  1999,  respectively,  as a  result  of  the  significant
enhancements  to its product  line.  Capitalized  software  costs  amortized and
charged to expense were  approximately  $242,000,  $225,000 and $262,000 for the
years ended March 31, 2001, 2000, and 1999  respectively.  Capitalized  software
costs are presented net of accumulated  amortization of  approximately  $663,000
and $421,000 at March 31, 2001 and 2000, respectively.  Accumulated amortization
of identifiable  intangibles was approximately  $13,000 at March 31, 2001 and $0
at March 31, 2000. XyEnterprise  continually evaluates the future benefit of its
capitalized  software costs.  During fiscal 1999,  XyEnterprise  determined that
certain  costs  exceeded  their  net  realizable   value  due  to  new  software
technologies developed and released by XyEnterprise.  Accordingly,  XyEnterprise
wrote down these  capitalized  software costs by $410,000 in fiscal 1999.  There
were no write downs in fiscal 2001 and 2000.

5. Notes Payable to Stockholder

Azul Holdings Inc. has a line of credit with Tudor Trust  ("Tudor  Trust"),  the
majority stockholder of the Company. The grantor,  sole trustee and sole current
beneficiary  of Tudor  Trust,  also serves as Chairman of the Board of Directors
and  President  of Azul  Holdings  Inc.,  Chairman of the Board of  Directors of
XyEnterprise,  and Chairman of NanoFrames.  The line, which was payable on March
31, 2001, and which has been extended until March 31, 2002, is collateralized by
the Company's  stock in  XyEnterprise  and has been used for working capital and
general  business  purposes.  Interest on the line of credit is payable on March
31, 2001 in cash; however, Tudor Trust has had the option to receive interest on
a quarterly basis after January 1, 1999, payable in shares of common stock based
on the fair market value as determined  at the end of each  quarter.  As part of
the amendment to extend the maturity date of the  Company's  credit  facility to
March 31, 2002,  Tudor Trust and the Company  agreed that the  interest  payable
equal to  $1,621,024  as of March 31,  2001,  be added to and become part of the
principal  sum of the  indebtedness,  and agreed that  interest  for  subsequent
periods  would  similarly be added to and become part of the  principal,  in the
event that Tudor  Trust does not elect to receive  such  interest in the form of
common stock of the Company. Since the initial establishment of the credit line
in 1992, there have been numerous  amendments  affecting the maximum loan amount
among other terms and provisions.

In December  1999,  the Company and Tudor Trust  agreed to increase  the line of
credit to  $12,327,000.  Subsequent  amendments and agreements  between Azul and
Tudor Trust  increased the line to $12,500,000  at March 31, 2000,  exclusive of
the separate  $5,000,000 loan facility described below, and changed the maturity
date to March  31,  2002.  Tudor  Trust and the  Company  also  agreed  that the
interest  payable of  $1,871,000  for the period from July 1, 1998 through March
31, 2000 would be paid by the issuance to Tudor Trust of 1,142,890 shares of the
common  stock of the Company and agreed that  interest  for  subsequent  periods
would,  at the option of Tudor Trust, be paid in cash or in shares of the common
stock of the Company  valued for such purposes  based upon their public  trading
market price at the end of each quarterly  interest payment period.  The Company
recorded a charge to earnings  during the current fiscal year of $2,793,000 as a
result of the  settlement of this interest  obligation by the issuance of common
stock.

                                       37
<PAGE>

During June 2000 Tudor Trust  agreed to provide a $5,000,000  loan  facility for
the Company to be utilized  for the making of loans to or  investments  in other
entities. The loan bears interest at 8% per annum, is due March 31, 2002, and is
secured by a pledge of all of the assets of the Company on the same basis as the
prior  indebtedness  of the  Company  to Tudor  Trust.  The  additional  loan is
convertible into the common stock of the Company at the option of Tudor Trust at
a price of $3.25 per share.  The Company has utilized such loan facility to make
loans to PlazaBlue  Inc. of  $2,450,000.  PlazaBlue  was a large  internet  art,
antiques and fine collectibles  portal.  PlazaBlue was formed through the merger
of Antique Networking,  Inc. and Sloan's Auction Galleries ("Sloan's").  Sloan's
is a 150-year old Washington D.C. based auction house  specializing in paintings
and sculpture,  jewelry, silver, American and European furniture, decorate arts,
rugs and rare books.  PlazaBlue operated in both the e-commerce  environment and
in the brick and mortar auction industry.  As a result of PlazaBlue  becoming in
default on the repayment of the loan, Azul participated in a foreclosure sale of
the assets of  PlazaBlue  and, at the  election of Azul,  subsequently  sold its
interest in the assets to Tudor for the  original  principal  amount of the loan
plus accrued interest to the date of sale, March 31, 2001.

On December 31, 1998, XyEnterprise and Tudor Trust entered into a Loan Agreement
providing  XyEnterprise  with a  $1,000,000  line of credit which was amended to
$2,400,000 and  subsequently  reduced to $1,850,000  upon conversion of $550,000
into  XyEnterprise  common stock. The line of credit was for working capital and
general  business  purposes.  The indebtedness was converted into 649,123 common
stock of XyEnterprise  during August 2000, at the option of the note holder.  As
of March 31, 2001, the Company had an outstanding loan balance of $14,308,000 of
the $17,500,000  available  under the credit lines with the first  $5,000,000 of
the  principal  balance  outstanding  bearing  interest  at 6% per  year and the
remaining principal balance bearing interest at 8% per year.

6. Other Current Liabilities
<TABLE>
<CAPTION>

     Other current liabilities consists of:
                                                                    March 31, 2001  March 31, 2000
                                                                    -------------   --------------
<S>                                                                   <C>             <C>
      Interest payable on debentures................................  $   791,076     $   711,276
      Dividends payable on Series B convertible preferred stock.....      492,568         398,448
      Other.........................................................      174,365         169,349
                                                                     ------------     -----------
                                                                       $1,458,009      $1,279,073

7. Current Maturities of Long-Term Debt

     Long-term debt consists of:

                                                                     March 31, 2001  March 31, 2000
                                                                     -------------  ---------------
      Note payable to shareholder................................... $       ---        $1,850,000
      6% Convertible Subordinated Debentures........................    1,330,000        1,330,000
      15% promissory notes due fiscal 1996..........................      176,589          153,556
      4% promissory notes, due fiscal 1998 and 1999.................      388,500          388,500
                                                                       ----------      -----------
                                                                        1,895,089        3,722,056
      Current maturities of long-term debt..........................   (1,895,089)      (1,872,056)
                                                                        ---------      -----------
      Long-term debt................................................ $       ---        $1,850,000
                                                                     =============      ==========

</TABLE>

                                       38
<PAGE>

In May 1987, the Company issued an aggregate  $25,000,000 principal amount of 6%
Convertible Subordinated Debentures due 2002 (the "Debentures") convertible into
common  stock at a  conversion  price of  $112.50  per  share.  Interest  on the
Debentures is payable  annually and the  Debentures may be called by the Company
under certain  conditions.  During  fiscal 1992,  the Company began a program to
restructure its financial position specifically relating to the Debentures. From
March 10,  1992 to  September  30,  1996,  the Company  completed  restructuring
transactions  pursuant to which the holders of a total of $19,035,000  aggregate
principal amount of Debentures  generally exchanged Debentures for a combination
of unsecured, unsubordinated promissory notes of the Company bearing interest at
15% per year and shares of common stock. Between September 30, 1996 and December
31, 1998, the Company completed restructuring transactions pursuant to which the
holders  of a total of  $2,020,000  aggregate  principal  amount  of  Debentures
generally exchanged Debentures for shares of common stock. As of March 31, 2001,
a total of $1,330,000 principal amount of Debentures remained  outstanding.  The
Company may seek to restructure  the remaining  Debentures,  but there can be no
assurance that it will do so.

The Company did not make the interest payment due on the Debentures on May 5, of
the years 1992 through  2001.  As of March 31, 2001,  and 2000,  the  cumulative
unpaid  interest  due on  the  Debentures  totaled  approximately  $791,000  and
$711,000,   respectively.   Under  the  terms  of  the  Indenture  covering  the
Debentures,  the  Trustee  or the  holders  of no less  than 25% of  outstanding
principal amount of the Debentures have the right toaccelerate the maturity date
of the  remaining  Debentures.  As of March 31, 2001, no such  acceleration  had
occurred or been threatened.

As of March 31,  1998,  the Company  had  completed  restructuring  transactions
pursuant to which the holders of 15% Promissory Notes in the aggregate principal
amount of $5,709,000 with accrued interest of $2,353,000 generally exchanged 15%
Promissory  Notes (including all rights to receive any interest accrued thereon)
for a combination of unsecured,  unsubordinated  promissory notes of the Company
bearing  interest at 4% per year,  shares of common stock and shares of Series B
preferred  stock.  As of March 31, 2001,  15%  Promissory  Notes in an aggregate
principal amount of $60,000 with accrued interest of approximately $117,000 were
overdue. The Company may seek to restructure the remaining 15% Promissory Notes,
but there can be no assurance that it will do so.

As of March 31,  1999,  the Company  had  completed  restructuring  transactions
pursuant to which the holders of 4% Promissory Notes in the aggregate  principal
amount of  $4,974,000  generally  exchanged  4%  Promissory  Notes for shares of
common  stock  plus  accrued  but  unpaid  interest.  As of March 31,  2001,  4%
Promissory  Notes in an  aggregate  principal  amount of $388,500  with  accrued
interest  of $42,000  were  overdue.  The Company  may seek to  restructure  the
remaining 4% Promissory Notes, but there can be no assurance that it will do so.

The Company continues to negotiate,  in good faith,  restructuring  transactions
with as many of the remaining holders of Debentures, 15% Promissory Notes and 4%
Promissory  Notes as possible.  Tudor Trust has made an offer to certain holders
of  Debentures,  15% Promissory  Notes and 4% Promissory  Notes to purchase such
securities  at 10% of their face  amount.  Tudor  Trust has agreed to reduce the
Company's  liability with respect to such  securities to the purchase price paid
by Tudor Trust. In June 1999,  Tudor provided the Company with $372,000 of notes
which the company  retired.  The Company  recognized  an  extraordinary  gain of
$353,000  in  fiscal  2000  as  a  result  of  this   extinguishment   of  debt.
Approximately  96% of the Debentures have been  restructured but the Company has
been unable to identify the holders of the remaining Debentures. The Company can
give no  assurance  about the outcome of these  restructuring  and  repurchasing
efforts.  The  Company  does not expect the  matters to be  resolved in the near
future.

8. Restructuring

On December 31, 1998, the Company completed a corporate  restructuring plan (the
"Restructuring") pursuant to which, among other things, substantially all of the
assets  of  the  Company's  publishing  and  content  management  business  were
transferred  to   XyEnterprise  in  exchange  for  shares  of  common  stock  of
XyEnterprise,  representing  an 87% equity  interest  while the  majority of its
liabilities,  including  obligations  under its line of credit with Tudor Trust,
remained  with Azul  Holdings  Inc. As described  in Note 5 to the  Consolidated
Financial  Statements,  the  Company's  credit  line from  Tudor  Trust has been
amended.  In  addition,  Tudor Trust  converted  $1,750,000  of the  outstanding
indebtedness  under the Azul Holdings line of credit into 175,000  shares of the
Company's  Series C preferred  stock,  which are convertible  into the Company's
common stock.

                                       39
<PAGE>

An additional  $5,000,000 of the  outstanding  indebtedness  under the Company's
line of credit  became  convertible  into shares of Series C preferred  stock in
June 1999 at the  option of Tudor  Trust at the  conversion  ratio of $10.00 per
share. Tudor Trust has also surrendered for cancellation all of its common stock
purchase  warrants,  covering an aggregate of 4,956,000  shares of the Company's
common stock at various exercise prices.

Tudor Trust initially provided XyEnterprise with a $1,000,000 line of credit, as
well as invested  $1,750,000 to purchase  1,400,000 shares of Series A preferred
stock of XyEnterprise.  In fiscal 2000,  XyEnterprise  reached an agreement with
Tudor  Trust to amend  the line of  credit  to  increase  the  amount  available
thereunder to  $2,400,000,  which was  subsequently  reduced to $1,850,000  upon
conversion of $550,000 into common stock. The notes were converted during August
2000 at the option of the note  holder into common  stock of  XyEnterprise  at a
price of $2.85 per share.  The Series A preferred  stock was converted to common
stock of  XyEnterprise  on a one-for-one  basis, as a requirement of the private
placement completed by XyEnterprise in February 2000.

9. Income Taxes

For fiscal  years 2001,  2000,  and 1999 the Company was not required to provide
for income taxes due to operating  losses and  utilization of net operating loss
carryforwards.  The Company was not  required  to make  alternative  minimum tax
payments in fiscal 2001, 2000, and 1999.

The income tax effects of temporary  differences  that give rise to  significant
portions of the Company's net deferred assets are as follows:

<TABLE>
<CAPTION>
                                                                          March 31, 2001    March 31, 2000
                                                                          -------------     --------------
         Deferred tax assets:
<S>                                                                          <C>               <C>
             Net operating loss carryforwards............................    $24,403,000       $22,705,000
             Stock warrant interest expense                                      160,000               ---
             Tax credit carryforwards....................................      1,175,000         1,315,000
                                                                            ------------     -------------
                                                                              25,738,000        24,020,000
         Deferred tax liability:
             Investment in subsidiary principally attributable to
               gain on capital transactions of subsidiary................    (1,932,000)       (1,932,000)
         Valuation allowance.............................................   (23,806,000)      (22,088,000)
                                                                            ------------      ------------
         Net deferred tax asset                                             $      ----       $       ----
                                                                          =================================
</TABLE>

The Company has recorded a full  valuation  allowance  against the excess of its
deferred tax assets over its deferred tax liability to reflect  uncertainties as
to the  realization  of these  deferred  tax  assets.  The  valuation  allowance
increased  by  $1,718,000,  $358,000,  and  $37,000  in 2001,  2000,  and  1999,
respectively.

As a result of  XyEnterprise's  issuance of additional common stock to unrelated
third  parties  during the fiscal year ended March 31, 2000, it can no longer be
included in a consolidated  federal income tax return with Azul (commencing with
the  date of the  stock  issuance).  As of  March  31,  2001,  XyEnterprise  has
approximately   $10,100,000   of  net   operating   loss   carryforwards   which
predominately  expire in fiscal 2019 through 2021.  These net  operating  losses
will be available for  utilization  only by  XyEnterprise on its separate income
tax returns in future periods and not against future income of Azul.

                                       40
<PAGE>

As of March 31, 2001 Azul has  $55,520,000 of net operating  loss  carryforwards
expiring at various dates from fiscal 2005 through 2020,  investment tax credits
of $10,000  expiring  in fiscal 2002 and  research  and  development  credits of
$1,165,000  expiring at various dates from fiscal 2002 to fiscal 2009. These net
operating  losses and credits will be available for utilization  only by Azul on
its separate  income tax returns in future periods and not against future income
of XyEnterprise.

Under Federal tax law, certain changes in ownership or classification of debt of
Azul or  XyEnterprise,  which may not be within either  company's  control,  may
restrict future utilization of these carryforwards.




                                       41
<PAGE>



10. Stock Option Plans

The  Company's  1982 Stock Option Plan  expired on May 5, 1992.  No options were
granted  under the 1982 Stock Option Plan after March 31,  1992.  Under the 1982
Stock Option Plan,  incentive stock options were granted at a price greater than
or equal to fair  market  value at the date of  grant.  Currently,  all  options
outstanding are vested. Options expire ten years subsequent to award. There were
options to purchase  10,903  shares of common stock  outstanding  under the 1982
Stock Option Plan at March 31, 2001.

During  fiscal  1992 the Board  adopted  the 1992  Stock  Option  Plan for which
200,000  shares of common  stock were  reserved.  The 1992 Stock Option Plan was
approved by the Company's  stockholders  at the Company's 1992 Annual Meeting of
Stockholders.  Under the 1992 Stock Option  Plan,  incentive  stock  options are
granted at a price  greater  than or equal to fair  market  value at the date of
grant.  Generally,  options become  exercisable at a rate of 25% per year over a
four year period.  Options expire ten years  subsequent to award. At the date of
termination,  an employee's unvested options are canceled and any vested options
are canceled  after 90 days.  At the 1994 Annual  Meeting of  Stockholders,  the
stockholders  of the Company  approved an amendment to the Company's  1992 Stock
Option Plan increasing the authorized number of options that may be granted from
200,000 to 400,000. Options issued under the 1992 Stock Option Plan remain under
the terms of such plan.  There were options to purchase 240,763 shares of common
stock  outstanding  under the 1992 Stock Option Plan at March 31,  2001.  During
fiscal 1998,  the Board adopted the 1997 Stock  Incentive Plan for which 400,000
shares of common stock are reserved.  No options had been granted under the 1997
Stock Incentive Plan at March 31, 2001.

Under the 1982 Stock Option Plan and the 1992 Stock  Option  Plan,  options were
exercisable for 211,566, 168,469 and 140,072 shares of common stock at March 31,
2001, 2000 and 1999,  respectively.  At March 31, 2001, 2000, and 1999,  options
for the  purchase  of 548,334,  504,902,  and  493,992  shares of common  stock,
respectively,  were available for future grants under the 1992 Stock Option Plan
and the 1997 Stock Incentive Plan.

On October  21,  1992,  the 1992  Director  Stock  Option  Plan was  approved by
stockholders of the Company.  Under this Plan, options to purchase up to a total
of 30,000  shares of common  stock may be granted to  outside  directors  of the
Company.  Each  outside  director  who is  initially  elected  to the  Board  of
Directors  may be  granted  an option for 4,000  shares of common  stock,  at an
exercise price equal to the fair market value of the common stock on the date of
grant.  In general,  an option  holder may  exercise  his option,  to the extent
vested,  only while he is a director of the  Company and for up to three  months
thereafter.  In connection  with the adoption of the 1992 Director  Stock Option
Plan, the Company terminated the 1989 Director Stock Option Plan. Under the 1992
Director Stock Option Plan,  options to purchase an aggregate of 4,000,  12,000,
and 12,000 shares of common stock were  outstanding at March 31, 2001,  2000 and
1999,  respectively.  At March 31, 2001, 2000 and 1999, options for the purchase
of  3,600,  12,000  and  12,000  shares  of  common  stock,  respectively,  were
exercisable.  At March 31, 2001, 2000 and 1999, there were 26,000,  18,000,  and
18,000  options,  respectively,  for the  purchase  of shares  of  common  stock
available for future grant under the Plan.

In June, 2000, the Company issued options at fair market value for 60,000 shares
of common stock to its  Directors  immediately  vested with a term of five years
unless otherwise  terminated due to the individual no longer continuing to serve
as a director.  Options for 10,000  shares of common  stock at fair market value
were issued during May 2000 to an officer of the Company vesting over a one year
period and having a three year term.

The  following  sets forth  certain  information  relating to the stock  options
described above for the years ended March 31, 2001, 2000 and 1999:



                                       42
<PAGE>
<TABLE>
<CAPTION>





                                                                                Weighted-Average Exercise
                                                                  Shares                  Price
                                                                  ------                  -----
<S>                                                                   <C>                  <C>
Options outstanding as of March 31, 1998                            352,780              $2.60
    Granted                                                          81,600               0.82
    Canceled                                                       (107,629)              2.70
    Exercised                                                           ---                ---
                                                              -------------

Options outstanding as of March 31, 1999                            326,751               2.10
    Granted                                                          29,000               1.80
    Canceled                                                        (23,735)              2.75
    Exercised                                                       (40,723)              1.93
                                                                  ----------

Options outstanding as of March 31, 2000                            291,293               2.01
    Granted                                                          70,000               3.32
    Canceled                                                        (32,177)              1.18
    Exercised                                                        (3,450)              1.03
                                                                 -----------

Options outstanding as of March 31, 2001                            325,666
                                                                   ========
</TABLE>

<TABLE>
<CAPTION>
                                                       Options Outstanding                          Options Exercisable
                                                      -------------------                           -------------------
                                            Weighted-average                                                   Weighted-Average
Range of Exercise Prices     Number       Remaining Contractual      Weighted-average      Number Exercisable    Exercise Price
                           Outstanding             Live               Exercise Price
<S>    <C>     <C>            <C>               <C>                      <C>                     <C>                 <C>
       $0.75 - $1.45          63,500            6.50                     $0.93                   37,350              $0.99
       1.50 -   2.45          30,257            1.28                     $1.66                   30,257              $1.66
       2.50 -   3.45         205,390            4.22                     $2.72                  191,040              $2.74
       3.50 -   4.45          11,500            3.66                     $3.79                    6,500              $3.82
       4.50 -   5.00          15,019            4.38                     $4.77                   15,019              $4.77
                            --------                                                           --------

       $0.75 - $5.00         325,666            4.38                     $2.40                  280,166              $2.52
                             =======                                                            =======
</TABLE>

The Company has adopted the disclosure  provisions of SFAS 123  "Accounting  for
Stock-Based   Compensation"   and  has   applied  APB  Opinion  25  and  related
interpretations  in  accounting  for its employee and director  plans.  The fair
value of each option granted  during fiscal 2001,  2000 and 1999 is estimated on
the date of the grant using the  Black-Scholes  pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>

                                                                Fiscal 2001    Fiscal 2000   Fiscal 1999

<S>                                                                <C>            <C>           <C>
 Dividend yield...........................................         0              0             0
 Expected volatility......................................        80%             80%       100.0%
 Risk-free interest rate..................................        6.3%           6.0%         5.3%
 Expected life (years)....................................        4.7           10.0          8.0
 Weighted-average fair value of options granted at or
     above fair value during:
   Fiscal 2001............................................      $1.96
   Fiscal 2000............................................    $   .93
   Fiscal 1999............................................    $   .58
</TABLE>

                                       43
<PAGE>

Had  compensation  cost for  fiscal  2001,  2000,  and 1999 been  determined  by
charging the cost of the options to expense based on the computations  described
above, the Company's net profit (loss) allocable to common  stockholders and net
loss per share would approximate the pro forma amounts below:
<TABLE>
<CAPTION>

                                                                       Net Income (Loss)        Basic/Diluted Net
                                                                      Allocable to Common       Income (Loss) Per
                                                                         Stockholders                 Share
       As reported:
<S>                                                                       <C>                        <C>
       Fiscal 2001............................................          $(7,925,840)              $    (2.12)
       Fiscal 2000............................................              700,744                   .24/.10
       Fiscal 1999............................................           (8,800,951)                   (3.08)

       Pro Forma:
       Fiscal 2001............................................          $(8,153,138)              $    (2.18)
       Fiscal 2000............................................             $585,708                  .20/.06
       Fiscal 1999............................................           (9,002,168)                   (3.15)
</TABLE>

The  effects  of  applying  SFAS No.  123 in this pro forma  disclosure  are not
indicative of future  amounts.  SFAS No. 123 does not apply to awards made prior
to fiscal 1996. Additional awards in future years are anticipated.

11. Employee Stock Ownership Plan

In fiscal  1990,  the Company  created the Azul  Holdings  Inc.  Employee  Stock
Ownership  Plan and Trust (the  "Trust") and entered into a Term Loan  Agreement
with the Trust whereby the Trust borrowed  $1,800,000  from the Company and paid
the proceeds to the Company to purchase  80,000 shares of the  Company's  common
stock at  $22.50  per  share.  The loan was fully  repaid  during  fiscal  1997.
Currently no new  participants  are being  admitted to the Plan.  No payment was
required and the Company incurred no charges to operations for  contributions to
the Trust in fiscal 2001, 2000 and 1999. The Company has applied to the Internal
Revenue  Service for approval to terminate  the Plan,  and, upon  approval,  the
Company intends to distribute the shares attributable to each participant.

12. Quarterly Financial Data (Unaudited)

The Company's interim financial  information for the quarterly period ended June
30, 2000, has been reclassified to include in other income and expenses,  net, a
loss of $2,794,000  incurred in settlement of an accrued interest liability to a
stockholder.  This loss was previously  classified as an  extraordinary  item. A
summary of  significant  effects of the  reclassification  and the amount of net
loss allocable to common  stockholders and loss per share, which did not change,
is as follows:

              Shown in thousands of US$ (except per share amounts)

For the quarter ended June 30, 2000      As previously reported  As reclassified
Other income (expense)                           $   (396)            $(3,190)
Loss before extraordinary item                     (1,250)             (4,044)
Net loss allocable to common stockholders          (4,067)             (4,067)
Basic and diluted loss per share                   $(1.23)             $(1.23)

The Company's  interim  financial  information  for the  quarterly  period ended
September 30, 2000, has been restated to reverse a previously  recorded $900,000
gain on a capital  transaction  of a  subsidiary.  Management  has  subsequently
determined  that the  subsidiary's  transaction  resulting  from  the  voluntary
actions  by a  related  party  did not  meet  the  Company's  criteria  for gain
recognition.  A summary  of the  significant  effects of the  restatement  is as
follows:

                                       44
<PAGE>

              Shown in thousands of US$ (except per share amounts)

For the quarter ended September 30, 2000   As previously reported   As restated
Other income (expense)                            $   583               $(317)
Loss before extraordinary item                       (593)             (1,493)
Net loss allocable to common stockholders            (616)             (1,516)
Basic and diluted loss per share                   $(0.15)             $(0.39)




                                       45
<PAGE>

The following is a summary of selected quarterly financial information for
each of the quarters in the years ended March 31, 2001 and 2000:

                   Shown in thousands of US$ (except per share
                                   amounts.)
                                                                 Quarters Ended
<TABLE>
<CAPTION>
                                                              ------------ ---------------------- ---------- -------------
                                                              --------------- --------------- -------------- -------------
                                                                 6/30/00         9/30/00        12/31/00       3/31/01
                                                              --------------- --------------- -------------- -------------
                                                              (Reclassified)    (Restated)
                                                              --------------- --------------- -------------- -------------
Fiscal Year 2001
<S>                                                                 <C>            <C>            <C>          <C>
Revenues                                                            $ 2,093        $ 1,659        $ 2,315      $ 2,851
Cost of sales                                                         1,180          1,056          1,219        1,412
Operating Expenses                                                    2,345          2,561          2,690        3,380
Minority interest share of loss                                         578            782            676        1,350
Other income (expense)                                              (3,189)          (317)          (330)        (457)
Net loss allocable to common stockholders                          $(4,067)       $(1,516)       $(1,272)     $(1,071)
Weighted average number of shares outstanding                         3,297          3,884          3,884        3,899
Basic  loss per share                                               $(1.23)        $(0.39)        $(0.33)      $(0.27)
Diluted  loss per share                                             $(1.23)        $(0.39)        $(0.33)      $(0.27)

                                                                              Quarters Ended
                                                              -----------------------------------------------------------
                                                                    6/30/99        9/30/99        12/31/99      3/31/00
                                                              --------------- --------------- -------------- -------------
Fiscal Year 2000
Revenues                                                             $2,624          $2,330        $2,293       $2,162
Cost of sales                                                         1,438          1,417          1,217        1,307
Operating Expenses                                                    2,247          2,299          2,116        2,368
Minority interest share of loss                                         802            948            ---          393
Other income (expense), net (including $5,085 of gain on
   capital transactions of a subsidiary in the quarter
   ended March 31, 2000)                                               (429)          (432)          (449)       4,608
Income (loss) before extraordinary item                                (688)          (870)        (1,489)       3,488
Extraordinary item - gain on early extinguishment of debt               353            ---            ---          ---
Net income (loss) allocable to common stockholders                   $ (359)        $ (893)       $(1,512)      $3,465
Weighted average number of shares outstanding                         2,854          2,854          2,854        2,867
Basic earnings (loss) per share                                      $(0.13)        $(0.31)        $(0.53)       $1.21
Diluted earnings (loss) per share                                    $(0.13)        $(0.31)        $(0.53)       $0.35
</TABLE>

13. Commitments and Contingencies

         Azul maintains a lease for its offices on a month to month basis.

         Lease  Commitments - At March 31, 2001, the Company was committed under
         operating leases, principally for office space. Certain leases required
         the  payment  of  expenses  under  escalation   clauses.   The  primary
         facilities lease is for an initial  four-year term,  ending January 31,
         2002. In April 2001 the Company  provided written notice to exercise an
         option to extend the lease agreement through January 31, 2004.



                                       46
<PAGE>




Future  minimum lease payments  under all  noncancelable  leases as of March 31,
2001 are as follows:

Fiscal Year
2002.....................................       $   727,351
2003.....................................           135,266
2004.....................................            95,965
2005.....................................            47,982
2006 and thereafter......................               ---
                                             ----------------
Total....................................        $1,006,564
                                                 ==========

Rental  expense  under all  operating  leases  was  approximately  $561,000  and
$582,000  and  $743,000  for the years  ended  March 31,  2000,  2000,  and 1999
respectively.  The Company received  approximately  $195,000 and $98,000 for the
years ended March 31, 2001 and 2000,  respectively,  under a sublease  agreement
expiring in June 2001.  The  sublease  income has been  recorded as an offset to
operating rents in the consolidated statement of operations.

      Contingencies

Azul has been advised  that  certain  minority  shareholders  of PlazaBlue  have
retained counsel for the purpose of possibly asserting a claim against Azul, the
president of Azul, Tudor Trust and one other person with respect to transactions
of such persons with PlazaBlue.  As discussed under Item 1 above, Azul and Tudor
Trust made loans to PlazaBlue that  subsequently  became in default and resulted
in a foreclosure on the assets of PlazaBlue.  Azul believes, based on the advice
of counsel after a review of the facts and circumstances related to the possible
claim,  that the  claim  is  without  merit.  Counsel  for  Azul  has  commenced
discussions with the potential  claimants for the purpose of avoiding the claim.
However,  there can be no assurance that a legal proceeding  asserting the claim
will not be subsequently initiated against Azul.

14. Industry Segments and Operations by Geographic Areas

Sales to unrelated  customers by geographic region for the years ended March 31,
2001, 2000 and 1999, were as follows:

                             2001             2000               1999
                             ----             ----               ----
North America..........   $7,520,417        $7,980,680         $8,029,850
Western Europe.........      881,709         1,127,000          1,861,347
Asia/Pacific...........      516,302           301,187            664,000
                         -----------       -----------      -------------
Total..................   $8,918,428        $9,408,867        $10,555,197
                          ==========        ==========        ===========

The Company operates  predominantly in one product segment,  the development and
marketing of content management and publishing software.  One customer accounted
for  approximately  18% of revenues for the year ended March 31, 2000; no single
customer  accounted  for more than 10% of revenues for the years ended March 31,
2001, or March 31, 1999.



                                       47
<PAGE>



15. Earnings Per Share

The following table reconciles the numerator and the denominators of the basic
and diluted earnings per share (EPS) computations as shown on the Consolidated
Statements of Operations included in this report on Form 10-K.
<TABLE>
<CAPTION>

                                                                Fiscal 2001         Fiscal 2000        Fiscal 1999
                                                                -----------         -----------        -----------
Numerator:
<S>                                                             <C>                   <C>              <C>
Income (loss) before extraordinary item...............          $(7,831,720)          $ 441,374        $(8,706,831)
Less accrued preferred stock dividends................               94,120              94,120             94,120
                                                               ------------------      ---------     --------------
Income (loss) available to common stockholders
   before extraordinary item (numerator for basic
   earnings (loss) per share).........................           (7,925,840)            347,254         (8,800,951)
   Effect of dilutive securities:
   Accrued preferred stock dividends..................                  ----             94,120              ----
   Interest on notes payable to stockholder...........                  ----            300,000              ----
                                                               ------------------     ---------     --------------
   Numerator for diluted earnings (loss) per share
      available to common stockholders after
         assumed conversions..........................           (7,925,840)            741,374         (8,800,951)
Extraordinary item                                                                      353,490
Net income (loss) available to common                          ------------------    ---------     --------------
   stockholders after assumed conversions.............          $(7,925,840)         $1,094,864        $(8,800,951)
                                                                ============         ==========        ============
Denominator:
Weighted average shares (denominator for basic
   earnings (loss) per share).........................            3,741,235           2,857,247          2,854,283
                                                                  ---------           ---------          ---------
Effect of dilutive securities:
   Employee stock options.............................                   --             168,469                 --
   Convertible preferred stock........................                   --           1,842,963                 --
   Convertible note payable to stockholder............                   --           5,300,000                 --
                                                                 ----------------      ---------     --------------
   Dilutive potential common shares...................                   --           7,311,432                 --
                                                                -----------------      ---------     --------------
Denominator for diluted earnings (loss) per
   share-adjusted weighted average shares after
    assumed conversions...............................            3,741,235          10,168,679          2,854,283
                                                                  =========          ==========          =========
        Basic earnings (loss) per share:
          Before extraordinary item...................      $         (2.09)   $            .15    $         (3.05)
          Extraordinary item..........................                   ---                .12                ---
          Accrued preferred stock dividends                            (.03)               (.03)              (.03)
                                                          -----------------   -----------------   -----------------
          Basic earnings (loss) per share.............      $         (2.12)   $            .24      $       (3.08)
                                                           ================    ================      ==============
        Diluted earnings (loss) per share:
          Before extraordinary item...................      $         (2.09)   $            .08     $        (3.05)
          Extraordinary item..........................                  ---                 .03                ---
          Accrued preferred stock dividends                            (.03)               (.01)              (.03)
                                                         ------------------   -----------------   -----------------
        Diluted earnings (loss) per share.............      $         (2.12)   $            .10     $       (3.08)
                                                           ================    ================     ==============
          Basic weighted average shares outstanding...            3,741,235           2,857,247          2,854,283
          Diluted weighted average shares outstanding.            3,741,235          10,168,769          2,854,283
</TABLE>

At March 31, 2001, the following  antidilutive  potential common shares were not
included  in the  diluted  EPS  calculation  as a result of the net loss for the
period (i) options to purchase  63,500 shares of common  stock,  (ii)  229,131
shares of Series B Preferred  Stock,  (iii) 175,000 shares of Series C Preferred
Stock,  and,  (iv)  199,666  common  equivalents  as a result of certain debt to
equity transactions.

                                       48
<PAGE>

At March 31, 2000, the following  antidilutive  potential common shares were not
included  in the  diluted  EPS  calculation  as a result of the net loss for the
period:  (i) options to purchase  271,794  shares of common stock,  (ii) 232,407
shares of Series B Preferred  Stock,  (iii) 175,000 shares of Series C Preferred
Stock, (iv) and 99,478 common  equivalents as a result of certain debt to equity
transactions.

At March 31, 1999, the following  antidilutive  potential common shares were not
included  in the  diluted  EPS  calculation  as a result of the net loss for the
period:  (i) options to purchase  326,751  shares of common stock,  (ii) 175,000
shares of Series C preferred  stock (iii)  235,299  shares of Series B Preferred
Stock and (iv) 99,478 common  equivalents  as a result of certain debt to equity
transactions.

16. Convertible Preferred Stock

Azul is  authorized  under  its  certificate  of  incorporation  to  issue up to
25,000,000  shares of common  stock,  par value  $.03 per share,  and  3,000,000
shares of preferred  stock,  par value $1.00 per share.  Preferred  stock may be
issued in one or more series with such  powers,  preferences,  relative  rights,
qualifications,  limitations  and  restrictions  as  designated  by the board of
directors.  As of March 31,  2001 and March 31,  2000,  there were  300,000  and
1,000,000  shares  designated  and authorized for issuance as Series B preferred
stock and Series C preferred stock, respectively.

Series B - As discussed in Note 7, shares of Series B preferred  stock have been
issued in connection with restructuring  transactions whereby certain holders of
15% Promissory  Notes have generally  exchanged those notes for a combination of
4%  Promissory  Notes,  shares of common  stock and shares of Series B preferred
stock.

Series C - As discussed in Note 8,  175,000  shares of Series C preferred  stock
were  issued  to  Tudor  Trust  on  December  31,  1998 in  connection  with the
conversion by Tudor Trust of $1,750,000 of outstanding indebtedness under Azul's
line of credit with Tudor Trust.

Conversion - Each share of Series B preferred stock and Series C preferred stock
may, at the option of the holder,  be  converted at any time into fully paid and
nonassessable  shares of Azul common stock. The conversion rate in effect at any
time is the quotient  obtained by dividing  $10.00 by the applicable  conversion
price. The conversion  prices are subject to adjustment to avoid dilution of the
Series B preferred  stock and Series C preferred  stock. As of March 31, 2001and
March 31,  2000,  the  conversion  prices for the Series B  preferred  stock and
Series C  preferred  stock were  $1.00 and  $25.00,  respectively,  and thus the
applicable conversion rates were two-for-five and ten-for-one, respectively.

Each  outstanding  share of  Series B  preferred  stock  shall be  automatically
converted  into  shares  of  Azul  common  stock,  based  on the  then-effective
conversion  rate,  if the average of the last  reported sale price of the common
stock on the  applicable  trading system for the common stock exceeds $25.00 per
share  over a period of 15  consecutive  trading  days.  There are no  automatic
conversion provisions for the Series C preferred stock.

Liquidation Rights - Upon any liquidation,  dissolution, merger or winding up of
Azul, before any distribution or payment is made to the common  stockholders the
holders of Series B preferred  stock and Series C preferred  stock are entitled,
on  proportionate  parity with each other, to liquidation  preferences of $12.50
per share plus any  accrued  but unpaid  dividends  (the  "Series B  Liquidation
Preference")  and  $10.00  per share (the  "Series C  Liquidation  Preference"),
respectively.  After  payment of the  liquidation  preferences,  the  holders of
Series B preferred  stock and Series C preferred  stock are not  entitled to any
remaining assets available for distribution to stockholders.

Redemption - Azul may, at its option, to the extent legally permissible and upon
prior written notice redeem the  outstanding  shares of Series B preferred stock
or Series C preferred stock by paying the Series B Liquidation Preference or the
Series C Liquidation Preference, respectively.

                                       49
<PAGE>

Voting Rights - Holders of Series B preferred stock and Series C preferred stock
generally  have  the same  voting  rights  as  common  stockholders  on an as-if
converted  basis.  Except as  provided  by law,  or as  discussed  below,  or by
provisions  establishing  any other  series of preferred  stock,  the holders of
Series C preferred  stock and Series B preferred  stock vote  together  with the
holders of common stock as a single class.

Azul  cannot  take  action to amend,  alter or repeal the  preferences,  special
rights,  or other powers of the Series B preferred stock that affects  adversely
the Series B preferred stock without the written consent or affirmative  vote of
the holders of a majority of the then  outstanding  shares of Series B preferred
stock, voting as a separate class. Such action includes the authorization of any
shares of capital stock with  preference or priority over the Series B preferred
stock as to the right to receive either dividends or amounts  distributable upon
liquidation, dissolution or winding up of Azul.

The  affirmative  vote or consent of the holders of at least  two-thirds  of the
outstanding  shares of  Series C  preferred  stock is  required  to  effect  the
following actions by Azul: (i) any amendment,  waiver or repeal of any provision
of the Azul certificate of  incorporation  or bylaws that affects  adversely the
voting   powers,   preferences,   or  other   special   rights  or   privileges,
qualifications,  limitations or  restrictions  of the Series C preferred  stock,
(ii) any authorization or any designation of any new class or series of stock or
any other  securities  convertible  into equity  securities of Azul ranking on a
parity  with or senior to the Series C preferred  stock in right of  redemption,
liquidation  preference,  voting or dividends, or any increase in the authorized
or  designated  number of any such new class or series,  (iii) any  issuance  of
additional  shares of Series C preferred stock,  other than up to 500,000 shares
issued in connection  with  conversions  of debt  outstanding as of December 30,
1998,  or in excess of an additional  64,701 shares of Series B preferred  stock
after December 30, 1998, (iv) any declaration or payment of any dividends or any
distributions  with respect to any securities of Azul,  other than to holders of
Series B preferred  stock as provided in the certificate of  incorporation,  (v)
any  redemption,  purchase or  acquisition  for value of any securities of Azul,
other than pursuant to redemption or conversion of the Series B preferred  stock
or Series C preferred stock as provided in the certificate of incorporation, and
(vi) any liquidation, dissolution, winding up, sale, lease, license, assignment,
transfer or other  disposition of all or substantially all of the assets of Azul
or of any  subsidiary of Azul, or any share  exchange,  consolidation  or merger
involving  Azul or any  subsidiary  of Azul,  or any  reclassification  or other
change of any stock or recapitalization of Azul.

Dividend  Rights - The  holders  of Series B  preferred  stock are  entitled  to
receive,  out of funds that are legally available,  cumulative dividends of $.40
per share per year, payable  quarterly.  As of March 31, 2001 cumulative accrued
but unpaid  dividends  on the  outstanding  shares of Series B  preferred  stock
totaled  $493,000.  Holders  of Series C  preferred  stock are not  entitled  to
receive any  dividends.  Azul cannot pay any  dividends  on shares of its common
stock until the holders of Series B preferred  stock  receive the  dividends  to
which they are entitled, or at any time while shares of Series C preferred stock
are outstanding.

17. Related Party Transactions

The  Company was  indebted  to Tudor  Trust at March 31,  2001 in the  aggregate
principal  amount of  $14,308,000.  During the year,  Tudor Trust  converted its
indebtedness  from  XyEnterprise  in  the  principal  amount  of  $1,850,000  to
approximately 649,000 shares of common stock of XyEnterprise.  The President and
Chairman  of the Board of  Directors  of the  Company,  Chairman of the Board of
Directors of  XyEnterprise,  and Chairman of  NanoFrames is the sole trustee and
beneficiary of Tudor Trust. He holds the foregoing  positions in those companies
without  compensation.  Through  shares of common stock of the Company  owned by
Tudor  Trust and  shares  which  Tudor  Trust has the  right to  acquire  by the
conversion of debt, Tudor Trust controls the Company.  Tudor Trust also directly
holds a minority  stock interest in  XyEnterprise.  The  transactions  among the
Company,  XyEnterprise, and NanoFrames and between any of the entities and Tudor
Trust have been unanimously  approved by the independent members of the Board of
Directors of each company with independent legal and financial advice.

Opportunities  to be considered by Azul have  generally been provided to Azul by
Tudor Trust ("Tudor"),  the majority  shareholder of the Company, as a result of
Tudor's existing  investments in, and frequent  control of, other companies.  In
those  instances  investment by Azul are approved by its  independent  Directors
with independent legal and financial advice.


                                       50
<PAGE>

Other  opportunities  may be identified by the Company  through  various sources
including  contacts of the Company's  officers with other investment  companies,
brokers,  and by direct  contact with  principals of potential  investees.  As a
result of the foregoing,  Azul entered into a loan agreement with PlazaBlue Inc.
("PlazaBlue") (formerly Antiqnet.com,  Inc.), a company in which Tudor Trust had
a 70% ownership.  During the fiscal year, the Company provided a $2,450,000 loan
to PlazaBlue  Inc.  Tudor Trust held a majority  interest in PlazaBlue Inc. as a
result of stock  owned and stock  which it had a right to  acquire  through  the
conversion  of debt. As a result of default by PlazaBlue in the repayment of its
debts, the lenders,  including Tudor Trust and Azul, foreclosed on the assets of
PlazaBlue.  Effective March 31, 2001, the Company, at the election of Azul, sold
its entire  interest  the assets to Tudor  Trust for its  carrying  value in the
company.

Effective March 31, 2001, the Company entered into an agreement with Tudor Trust
to purchase  shares of  XyEnterprise  from Tudor  Trust such that the  Company's
interest in XyEnterprise would exceed 50%. Accordingly,  the Company acquired an
additional  575,000  shares of  XyEnterprise  common  stock in exchange  for the
issuance of 1,092,500  shares of Azul common stock.  The  transaction  was based
upon the values of the  XyEnterprise  and Azul  common  stocks at the last sales
price for  XyEnterprise  common  shares and the value of the Azul  shares at the
close of business on March 31, 2001, the effective date of the agreement.

In October 2000, Azul agreed to invest up to $500,000 in NanoFrames, LLC. Tudor
Trust holds a majority interest in NanoFrames. As of March 31, 2001, $245,894
had been advanced to NanoFrames. These funds were used for the purchase of
laboratory equipment and supplies, salaries, and rent and office expenses.



                                       51
<PAGE>



ITEM  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

As previously  reported in Current  Reports on Form 8-K dated December 11, 2000,
and January 10, 2001,  during fiscal year 2001 the Company  changed  accountants
from  Richard A. Eisner & Company,  LLP to Deloitte & Touche LLP. As  previously
reported in a Current Report on Form 8-K dated February 28, 2000,  during fiscal
year 2000 the Company changed  accountants  from  PricewaterhouseCoopers  LLP to
Richard  A.  Eisner  and  Company  LLP.  There  were no  disagreements  with the
Company's  current and  predecessor  accountants on any accounting and financial
disclosure matters.


                                       52
<PAGE>






                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant

Information  required  by this  item (i) will be  included  under  the  headings
"Election  of  Directors"  and "Section  16(a)  Beneficial  Ownership  Reporting
Compliance"  in the  Company's  definitive  Information  Statement  for its 2001
Annual   Meeting  of   Stockholders   (the  "2001   Information   Statement   to
Stockholders"),  which information is incorporated herein by reference, and (ii)
is  included  in Part I of this  Annual  Report on Form 10-K  under the  heading
"Executive Officers of the Registrant," which information is incorporated herein
by reference.

ITEM 11. Executive Compensation

Information  required by this item will be included under the headings "Director
Compensation" and "Executive  Compensation" in the 2001 Information Statement to
Stockholders, which information is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

Information  required by this item will be included under the heading  "Security
Ownership of Certain  Beneficial  Owners and Management" in the 2001 Information
Statement  to  Stockholders,   which  information  is  incorporated   herein  by
reference.

ITEM 13. Certain Relationships and Related Transactions

Information  required by this item will be included  under the heading  "Certain
Transactions"  in  the  2001  Information   Statement  to  Stockholders,   which
information is incorporated herein by reference.



                                       53
<PAGE>



                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     a. (1) Financial Statements

The  following  financial  statements of Azul Holdings Inc. are included in Part
II, Item 8.

<TABLE>
<CAPTION>
                                                                                                                    Page(s) in
                                                                                                                    Form 10-K
<S>                                                                                                                     <C>
Independent Auditors' Report..................................................................................          23
Independent Auditors' Report..................................................................................          24
Report of Independent Accounts................................................................................          25
Consolidated Balance Sheets-March 31, 2001 and 2000..........................................................           26
Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999......................           27
Consolidated  Statements of Changes in  Stockholders'  Deficit for the years ended March 31, 2001, 2000 and
1999                                                                                                                    28
Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999......................           29
Notes to Consolidated Financial Statements...................................................................           31
</TABLE>

     a. (2) Financial Statement Schedules
     Financial statement schedules have been omitted because they are either not
     required, not applicable or because the required information has been
     included elsewhere in the financial statements or notes thereto.

     a. (3) Exhibits
     The Exhibits listed in the Exhibit Index immediately preceding such
     exhibits are filed as part of this Annual Report on Form 10-K.

     b. Reports on Forms 8-K
     Azul filed a report on Form 8-K dated January 10, 2001, which reported
     under Item 4 the appointment of Deloitte & Touche LLP as independent
     accountants for the Company.


                                       54
<PAGE>



                                   SIGNATURES

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

                               AZUL HOLDINGS INC.
Date: July 13, 2001
                                       By:  /s/ Jeffery L. Neuman
                                            ---------------------
                                            JEFFREY L. NEUMAN
                                            President and Chairman of the Board

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




Signature                Title                                    Date


/s/  Jeffery L. Neuman   Chairman of the Board of Directors,      July 13, 2001
----------------------
     JEFFREY L. NEUMAN   President




/s/ Edward S. Wittman    Vice President, Chief Financial Officer, July 13, 2001
---------------------
    EDWARD S. WITTMAN    Treasurer and Secretary (Principal
                         Financial and Accounting Officer)



/s/ Lance Laifer         Director                                 July 13, 2001
----------------
   LANCE LAIFER



                                       55
<PAGE>



                                  EXHIBIT INDEX

Exhibit No.                Description

2.1      Asset  Purchase  Agreement,  dated as of  September  18,  1998,  by and
         between the Registrant and Barco,  Inc. is incorporated by reference to
         Exhibit  2 to the  Registrant's  Current  Report  on  Form  8-K,  dated
         September 18, 1998

2.2      Agreement  dated as of December 22, 1998, by and among the  Registrant,
         Xyvision Enterprise  Solutions,  Inc. and Jeffrey L. Neuman, as trustee
         of the Tudor Trust u/d/t  December 12, 1997 is  incorporated  herein by
         reference  to Exhibit 2.1 to the  Registrant's  Current  Report on Form
         8-K, dated December 31, 1998.

2.3      Contribution and Assumption  Agreement,  dated as of December 31, 1998,
         by and between the Registrant and Xyvision Enterprise  Solutions,  Inc.
         is incorporated  herein by reference to Exhibit 2.2 to the Registrant's
         Current Report on Form 8-K, dated December 31, 1998.

3.1      Restated Certificate of Incorporation of the Registrant is incorporated
         herein by reference to the Registrant's  Annual Report on Form 10-K for
         the year ended March 31, 1988

3.2      Certificate  of  Amendment  to  Certificate  of  Incorporation  of  the
         Registrant  is  incorporated  herein by reference  to the  Registrant's
         Annual Report on Form 10-K for the year ended March 31, 1993

3.3      Certificate  of  Amendment  to  Certificate  of  Incorporation  of  the
         Registrant  is  incorporated  herein by reference  to the  Registrant's
         Annual Report on Form 10-K for the year ended March 31, 1996

3.4      Certificate  of Designation  to  Certificate  of  Incorporation  of the
         Registrant  designating Series B preferred stock is incorporated herein
         by reference  to the  Registrant's  Annual  Report on Form 10-K for the
         year ended March 31, 1996

3.5      Certificate  of  Amendment  of  Amended  and  Restated  Certificate  of
         Incorporation of the Registrant is incorporated  herein by reference to
         the  Registrant's  Quarterly  Report on Form 10-Q for the quarter ended
         September 30, 1996

3.6      Certificate  Eliminating  the Series A Junior  Participating  preferred
         stock of the Registrant is  incorporated by reference to Exhibit 3.1 to
         the  Registrant's  Quarterly  Report on Form 10-Q for the quarter ended
         December 31, 1998

3.7      Certificate of Designations of the preferred stock of the Registrant to
         be Designated  Series C preferred stock is incorporated by reference to
         Exhibit 3.2 to the  Registrant's  Quarterly Report on Form 10-Q for the
         quarter ended December 31, 1998

3.8      Certificate  of  Amendment  of  Amended  and  Restated  Certificate  of
         Incorporation of the Registrant

3.9      Amended  and  Restated  By-laws  of the  Registrant,  as  amended,  are
         incorporated  herein by reference to the Registrant's  Annual Report on
         Form 10-K for the year ended March 31, 1990

3.10     Certificate  of Ownership and Merger  merging  Xyvision  Design Systems
         into  Xyvision,  Inc. and  changing the name of Xyvision,  Inc. to Azul
         Holdings  Inc.  is  incorporated  by  reference  to  the   Registrant's
         Quarterly Report on Form 10Q for the quarter ended September 30, 1999.


                                       56
<PAGE>




Exhibit No.                Description

4.1      Indenture dated as of May 5, 1987 between the Company and Bankers Trust
         Company,  as Trustee,  regarding  the Company's  $25,000,000  principal
         amount  of  6%   Convertible   Subordinated   Debentures  Due  2002  is
         incorporated  herein by reference to the Registrant's  Annual Report on
         Form 10-K for the year ended March 31, 1987

*10.1    1992 Stock  Option Plan of the  Registrant  is  incorporated  herein by
         reference to the  Registrant's  Annual Report on Form 10-K for the year
         ended March 31, 1992

*10.2    1997 Stock Incentive Plan of the Registrant is  incorporated  herein by
         reference to Annex A to the Registrant's Preliminary Schedule 14A filed
         August 4, 1997

*10.3    1992 Director Stock Option Plan is incorporated  herein by reference to
         the Registrant's Registration Statement on Form S-8 (File No. 33-54018)

*10.4    Employee Severance Benefit Plan is incorporated  herein by reference to
         the  Registrant's  Annual  Report on Form 10-K for the year ended March
         31, 1990

*10.5    Employee  Stock  Ownership  Plan and  Trust is  incorporated  herein by
         reference to the  Registrant's  Annual Report on Form 10-K for the year
         ended March 31, 1990

*10.6    Xyvision  Enterprise  Solutions,  Inc.  1998  Stock  Incentive  Plan is
         incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly
         Report on Form 10-Q for the quarter ended December 31, 1998

10.7     Second Amended and Restated Advance  Facility Loan Agreement,  dated as
         of July 1, 1998,  by and  between  the  Registrant  and Tudor  Trust is
         incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly
         Report on Form 10-Q for the quarter ended September 30, 1998

10.8     Letter Agreement and Promissory Note, dated as of November 30, 1998, by
         and between the  Registrant  and Jeffrey L.  Neuman,  as trustee of the
         Tudor Trust u/d/t  December  12, 1997 is  incorporated  by reference to
         Exhibit 10.8 to the Registrant's  Quarterly Report on Form 10-Q for the
         quarter ended December 31, 1998

10.9     First Amendment to Second Amended and Restated Secured Advance Facility
         Loan  Agreement,  dated as of  December  31,  1998,  by and between the
         Registrant  and Jeffrey L. Neuman,  as trustee of the Tudor Trust u/d/t
         December 12, 1997 is  incorporated  by reference to Exhibit 10.2 to the
         Registrant's  Quarterly  Report  on Form  10-Q  for the  quarter  ended
         December 31, 1998

10.10    Secured Advance Facility Loan Agreement, dated as of December 31, 1998,
         by and  between  Xyvision  Enterprise  Solutions,  Inc.  and Jeffrey L.
         Neuman,  as trustee  of the Tudor  Trust  u/d/t  December  12,  1997 is
         incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly
         Report on Form 10-Q for the quarter ended December 31, 1998

10.11    Letter  Agreement,   dated  December  31,  1998,  by  and  between  the
         Registrant  and Jeffrey L. Neuman,  as trustee of the Tudor Trust u/d/t
         December 12, 1997 is  incorporated  by reference to Exhibit 10.1 to the
         Registrant's  Quarterly  Report  on Form  10-Q  for the  quarter  ended
         December 31, 1998


                                       57
<PAGE>



   Exhibit No.             Description

10.12    Series A Convertible  preferred stock Purchase  Agreement,  dated as of
         December 31, 1998, by and between Xyvision Enterprise  Solutions,  Inc.
         and Tudor Trust is  incorporated  by  reference  to Exhibit 10.3 to the
         Registrant's  Quarterly  Report  on Form  10-Q  for the  quarter  ended
         December 31, 1998

10.13    Services  Agreement,  dated as of December 31, 1998, by and between the
         Registrant and Xyvision Enterprise  Solutions,  Inc. is incorporated by
         reference to Exhibit 10.6 to the Registrant's  Quarterly Report on Form
         10-Q for the quarter ended December 31, 1998

10.14    Letter  Agreement,  dated  as of  December  31,  1998,  by and  between
         Xyvision Enterprise  Solutions,  Inc. and Jeffrey L. Neuman, as trustee
         of the Tudor Trust u/d/t December 12, 1997 is incorporated by reference
         to Exhibit 10.7 to the  Registrant's  Quarterly Report on Form 10-Q for
         the quarter ended December 31, 1998

10.15    Form of Exchange  Agreement for 15%  Promissory  Notes is  incorporated
         herein by reference to the  Registrant's  Quarterly Report on Form 10-Q
         for the quarter ended September 30, 1994

10.16    Form of Exchange  Agreement  for 4%  Promissory  Notes is  incorporated
         herein by reference to the  Registrant's  Quarterly Report on Form 10-Q
         for the quarter ended September 30, 1996

10.17    Form of Exchange Agreement for 6% Convertible  Subordinated  Debentures
         due  2002 is  incorporated  herein  by  reference  to the  Registrant's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 1996

10.18    Sublease Agreement,  dated as of September 18, 1997, by and between the
         Company  and TASC,  Inc. is  incorporated  herein by  reference  to the
         Registrant's  Quarterly  Report  on Form  10-Q  for the  quarter  ended
         December 31, 1997

10.19    Fifth  Amendment  dated as of March  31,  2001,to  Second  Amended  and
         Restated Secured Advance  Facility Loan Agreement,  dated July 1, 1998,
         by and between the Registrant and Jeffrey L. Neuman,  as trustee of the
         Tudor Trust u/d/t December 12, 1997.

10.20    Warrant  No. A for the  purchase  of  500,000  shares of common  stock,
         whereby Tudor Trust u/t/d is entitled, subject to the provisions of the
         Warrant,  to  purchase  from the  Company,  at any time after March 31,
         2000,  and  continuing  until March 31, 2001, up to the number of fully
         paid and non-assessable shares of common stock of the Company.

10.21    Amendment dated June 19, 2001,  effective as of March 31, 2001, between
         the  Registrant  and Tudor Trust with respect to the Azul Warrant No. A
         dated as of March 31, 2000, for the purchase of 500,000 shares.

10.22    Share  Purchase  and Sale  Agreement  dated June 5, 2001,  between  the
         Registrant and Tudor Trust.

10.23    Agreement  dated May,  2001,  between the Registrant and Tudor Trust, a
         trust of which  Jeffrey  L.  Neuman  is the sole  trustee  and  current
         beneficiary,  to assign,  sell and transfer to Tudor Trust Registrant's
         entire membership interest in 2001 Investments LLC.

10.24    Secured Advance Facility Loan Agreement  effective as of June 19, 2000,
         by  and  among  the  Registrant,   Antiqnet.com  Inc.,  Sloans  Auction
         Galleries Ltd., and Antique Networking,  Inc. (filed as Exhibit 10.1 to
         the  Registrant's  Quarterly  Report on Form 10-Q for the quarter ended
         September 30, 2000, and incorporated herein by reference).



                                       58
<PAGE>



Exhibit No.                Description

10.25    Series A Preferred Stock Purchase Agreement between Xyvision Enterprise
         Solutions,  Inc. and Cadmus  Communications  Corporation dated February
         16, 2001.

10.26    First  Amendment  dated July 1, 1999 to Secured  Advance  Facility Loan
         Agreement   dated  December  31,  1998  between   Xyvision   Enterprise
         Solutions,  Inc.  and  Jeffrey L.  Neuman as trustee of the Tudor Trust
         u/d/t  December  12,  1997 (filed as Exhibit  10.1 to the  Registrant's
         Quarterly  Report on Form 10-Q for the quarter ended September 30, 1999
         and incorporated herein by reference)

10.27    Series A Convertible  Preferred Stock Purchase  Agreement dated July 1,
         1999 between Xyvision Enterprise Solutions, Inc. and Tudor Trust (filed
         as Exhibit 10.2 to the  Registrant's  Quarterly Report on Form 10-Q for
         the  quarter  ended  September  30,  1999 and  incorporated  herein  by
         reference)

10.28    Second  Amendment dated December 7, 1999 to Second Amended and Restated
         Secured Advance  Facility Loan Agreement dated July 1, 1998 between the
         Registrant  and  Jeffrey L.  Neuman as trustee of the Tudor Trust u/d/t
         December  12, 1997 (filed as Exhibit 99 to the  Registrant's  Quarterly
         Report  on Form  10-Q  for the  quarter  ended  December  31,  1999 and
         incorporated herein by reference)

10.29    Third  Amendment  dated March 31, 2000 to Second  Amended and  Restated
         Secured Advance  Facility Loan Agreement dated July 1, 1998 between the
         Registrant  and  Jeffrey L.  Neuman as trustee of the Tudor Trust u/d/t
         December 12, 1997 (filed as Exhibit 10.1 to the Registrant's  Quarterly
         Report  on  Form  10-Q  for  the  quarter   ended  June  30,  2000  and
         incorporated herein by reference)

10.30    Fourth  Amendment  dated June 19, 2000 to Second  Amended and  Restated
         Secured Advance  Facility Loan Agreement dated July 1, 1998 between the
         Registrant  and  Jeffrey L.  Neuman as trustee of the Tudor Trust u/d/t
         December 12, 1997 (filed as Exhibit 10.2 to the Registrant's  Quarterly
         Report  on Form  10-Q for the  quarter  ended  September  30,  2000 and
         incorporated herein by reference)

16.1     Letter from  Richard A.  Eisner & Company,  LLP to the  Securities  and
         Exchange  Commission  dated December 15, 2000 (filed as Exhibit 16.1 to
         the Registrant's Current Report on Form 8-K dated December 11, 2000 and
         incorporated herein by reference).

21       List of Subsidiaries

23.1     Consent of Deloitte & Touche LLP

23.2     Consent of Richard A. Eisner & Company, LLP

23.3     Consent of PricewaterhouseCoopers LLP


* Management contract or compensatory plan or arrangement filed in response to
Item 14(a)(3) of the instructions to Form 10-K


                                       59
<PAGE>