SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    ---------

                                   FORM 10-KSB

(Mark One)

[X]  Annual Report to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year ended December 31, 1997.

[ ] 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. 333-15127

                                   AZUREL LTD.
            (Exact name of registrant as specified in its character)

           DELAWARE                                   13-3842844
           --------                                   ----------
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)

509 MADISON AVENUE NEW YORK, NEW YORK                         10022
-------------------------------------                         -----
(Address of principal executive offices)                    (Zip code)

Registrant's telephone number, including area code:   (212) 317-0712
                                                      --------------

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

TITLE OF EACH CLASS            NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------            -----------------------------------------
Not Applicable                                   None

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

                          COMMON STOCK, $.001 PAR VALUE
                          -----------------------------
                                (Title of Class)

                    REDEEMABLE COMMON STOCK PURCHASE WARRANTS
                    -----------------------------------------
                                (Title of Class)


<PAGE>

          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  prior 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  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB.     Yes       No X
                                       ---     ---

           The issuer's net sales for the most recent fiscal year were
$12,481,556.

           The aggregate market value of the voting stock held by non-affiliates
based upon the last sale price on March 26, 1998 was approximately $11,159,562.

           As of March 26, 1998 there were 5,292,079 shares of Common Stock, par
value $.001 per share, outstanding.




<PAGE>



                                     PART I

ITEM 1.  BUSINESS


GENERAL

           The Company, directly and through wholly-owned subsidiaries,
manufactures, markets and sells cosmetics, fragrances, skin care products and
also provides accounting, marketing, warehousing and other administrative
services to cosmetic, fragrance and accessory companies. Through wholly-owned
subsidiaries comprising its Private Label Group, acquired by the Company in
August 1996, the Company operates a manufacturing and filling facility which
sells cosmetics principally to major cosmetic companies for sale by each
customer under the customer's own brand name (commonly known as "private label"
sales). In addition, in order to take advantage of the Company's manufacturing
capabilities and product development expertise, the Company currently is
developing cosmetic, skin care and fragrance lines which it intends to market
under brand names created internally or owned by others and licensed to the
Company. These products are sometimes referred to as "Branded Products." To
date, the Company has developed only one line of Branded Products internally and
has obtained two licenses to sell product lines using brand names owned by third
parties, but is seeking to terminate one of these licenses. The Company
intended, through its Scent 123 subsidiary, which acquired the assets of Scent
Overnight in October 1996, to sell well- recognized men's cologne and women's
fragrances directly to the consumer by overnight delivery through toll-free
telephone numbers. Due to mixed consumer reaction to the concept, the Company
has determined to defer further development of this marketing concept at this
time. The Company is considering refinements to the concept, but the Company has
not determined at this time, whether it will again actively seek to develop the
concept.

PRODUCTS AND SERVICES

           Virtually all of the Company's business during 1997 was conducted
through the Private Label Group. The Company's Private Label Group consists of
subsidiaries acquired in August 1996 from Michael J. Assante ("Assante"), who
continues to be employed as the President and CEO of the Private Label Group.
These subsidiaries operate a cosmetic facility (the "Facility") which
manufactures, fills and packages a broad range of cosmetics. The Facility also
includes a laboratory which develops cosmetic products formulae for customers
according to their specific requirements. The laboratory also develops and
maintains a library of cosmetic products formulae for use by customers who have
not developed their own formulae for a specific product. The laboratory also
performs quality control functions for the Facility and is responsible for
assuring compliance with governmental regulations regarding the manufacture and
packaging of cosmetics including compliance with good manufacturing practices
("GMP"). Substantially all of the Private Label Group's assets have been pledged
to financing institutions to secure indebtedness relating to financing
agreements. In addition, all of the outstanding capital stock of the entities
comprising the Private Label Group has been pledged to Assante to secure
indebtedness related to the acquisition of the Private Label Group.




<PAGE>

          The Facility manufactures and fills a wide variety of cosmetics,
including body lotions and powders, lipsticks, mascara, eye shadows, eye liners,
skin care products and hair care products. Depending upon the customer's
requirements, the Company either provides some or all of the raw ingredients and
packaging for the customer's product or uses material provided directly by the
customer. A quantity of raw ingredients and packaging material is maintained in
inventory, but generally such materials are purchased by the Company to fill
specific orders. Presently, the Facility does not manufacture or fill
fragrances, which require additional machinery, nor does the Facility
manufacture or fill nail products or liquid soaps.

           Generally, a customer places an order for a quantity of merchandise
to be produced and shipped over a period of time, typically one to three months,
with payment due 30 days after each shipment. While the raw ingredients and
packaging materials to produce an order are generally readily available, for
cash management purposes, the necessary raw materials and packaging are ordered
by the Company for receipt by it in stages to coincide with the
manufacturing/packaging cycle and the customer's delivery requirements. In this
way, the Company minimizes the need to maintain an inventory of raw ingredients
and packaging materials, and in effect, produces product only against the order.

           Except for nail products, liquid soaps and fragrances, which it does
not manufacture or fill, the Facility does not limit its services to a
particular market niche within the cosmetic industry. It manufactures a wide
variety of high and low priced products sold in department, specialty and
discount stores. The Company believes that this diversity minimizes its exposure
to business cycles and changes in customer preferences over time.

           Since the manufacturing operation has been in business for over 49
years, the laboratory maintains a large library of formulae for a wide variety
of products. Moreover, the laboratory continuously develops new formulae based
on the Company's assessment of future product demand, changing consumer
preferences and the availability of new ingredients. The Company believes that
it can quickly and efficiently develop formulations for a customer's product by
using or adapting a formula from its library. When the Company develops a
formula for a customer's product, the Company, and not the customer, owns the
formula; however, since it is the Company's policy not to use the same formula
for different customers, customers generally continue purchasing from the
Company so long as they sell the product and do not change the formula or have
another laboratory replicate the product formula.

           The Company's marketing efforts revolve around its sales force of
three full-time sales representatives and contacts maintained or developed by
its management.

           In order to take advantage of the Company's manufacturing
capabilities and product development expertise, the Company currently is
developing cosmetic, skin care and fragrance lines which it intends to market
and distribute under brand names created internally or owned by others and
licensed to the Company. These products are sometimes referred to as "Branded
Products." To date, the Company has developed one line of Branded Products
internally and has obtained two


                                       4
<PAGE>


licenses to sell product lines using brand names owned by third parties.

          Development of the Company's first Branded Product line, an original
unisex fragrance line and related grooming products to be sold under the SPORTS
EXTREME USA(TM) trade name, commenced in January 1996 and was completed in
September 1996, at which time marketing of the line commenced. Presently, the
SPORTS EXTREME USA(TM) line consists of a unisex fragrance, bath and shower gel,
muscle and body relaxer and face moisturizer containing sunscreen and
alphahydroxy fruit acids, of which the unisex fragrance and bath and shower gel
are being marketed. The marketing of the SPORTS EXTREME USA(TM) line featurse
"extreme" sports such as mountain climbing, ice climbing, bungee jumping, sky
surfing, in-line skating, snowboarding, snow bicycling and mountain biking. The
fragrance for the SPORTS EXTREME USA(TM) line was developed for the Company by
Firmenich Incorporated, a major developer of fragrances for the cosmetic
industry. Retail sales of this line commenced in the second quarter of 1997.

           The Company seeks to sell Branded Products in the United States and
currently sells Branded Products internationally. In the United States, the
Company expects to sell directly to retail outlets that sell similar products,
such as chain drug stores, mass merchandisers and discount stores. Initially,
the Company's personnel, independent sales representatives or a combination of
the two will sell the Branded Products in the United States. Internationally,
the Company currently sells Branded Products and expects to continue to sell to
distribution companies having a major presence in the Far East, Middle East and
parts of Europe. The Company entered into distribution agreements with two
foreign distributors which cover certain countries in the Middle East and the
Far East, pursuant to which such distributors will purchase the Company's
products for resale in their distribution territories. In addition, the Company
currently has a sales agency agreement with foreign sales agent which covers
certain countries in Europe. The Company's foreign distribution agreements are
exclusive for the Far East and the Middle East and do not require the
distributor to purchase any minimum quantity of products. The Company intends to
establish a wholly-owned subsidiary for international distribution of its
Branded Products and licensed products in France.

           In October 1997, the Company began developing cosmetics, fragrances
and related products for sale under the HANG TEN trade name pursuant to a
license agreement with the owner of the HANG TEN trade name (the "Licensor").
The HANG TEN trade name is a brand name used on men's outerwear, active wear and
a wide variety of other merchandise which has been marketed in print media in
both the United States and internationally. Hang Ten currently operates
approximately 400 retail outlets internationally.

           The license agreement relating to the Hang Ten trade name provides
for the Hang Ten products developed by the Company to be sold and marketed
directly and exclusively to the Hang Ten outlets until March 31, 1999. Hang Ten
has the option to sell the products developed by the Company exclusively in
their stores. From January 1, 1999 until December 31, 2003 the Company may sell,
distribute and market products developed under the Hang Ten tradename to other
parties in the United States and internationally and to Hang Ten outlets. Under
the License, the Company is required to pay a royalty of five percent of net
sales, subject to minimum royalties. The


                                        5

<PAGE>


Company's manufacture, sale and promotion of Hang Ten fragrances, grooming
products and cosmetics is subject to the prior review and approval of such
products by the Licensor as is typical in similar licenses. The Licensor has
approved the products currently being developed by the Company.

           The Company entered into a license agreement with Members Only
("Licensor") on May 15, 1996. The Company is negotiating with the Licensor to
terminate such agreement. If such negotiations do not result in such termination
the Company may remain liable for minimum royalties thereunder. Initially a
customer had indicated that it would purchase significant amounts of product
bearing the Members Only name. After development of such products the customer
informed the Company that current market conditions did not call for purchase of
the products from the Company. Based upon such customer information the Company
decided to seek to terminate the license agreement with Members Only.

           While the Company has had discussions with other companies, it has
not entered into any other formal agreements for the development of cosmetic and
fragrance lines under brand names owned by other companies. There can be no
assurance that the Company will market successfully any original cosmetic or
fragrance line, or that the Company will enter into any additional formal
agreements for the development of cosmetic and fragrance lines for other
companies either under brand names created internally or owned by others and
licensed to the Company.

          In October 1997, the Company acquired all of the outstanding capital
stock of Cambridge Business Services, Inc. ("Cambridge") for a purchase price of
$212,000, of which $95,000 was paid in October 1997 and the balance was paid in
February 1998. Cambridge provides outsourcing and distribution services such as:
accounting, sales, marketing, warehousing and other administrative and back
offices services to cosmetic, fragrance and accessory companies.


COMPETITION

           All aspects of the cosmetic, fragrance and skin care industry are
subject to intense competition throughout the world. In all aspects of its
business, the Company will compete with numerous companies, many of which are
better known in the industry and have established channels of distribution and
substantially all of which have greater financial and other resources than the
Company. These competitors include Estee Lauder, Revlon, Avon and Maybelline.

           The Company competes against approximately thirty companies in the
United States which manufacture and/or package cosmetic products for
third-parties. To a lesser degree, the Company competes with cosmetic companies
which have their own manufacturing facilities that can produce all, or a part,
of their own products. The Company believes that the primary elements of
competition in the private label manufacture of cosmetics differ depending upon
the retail price point of the particular product. With respect to higher priced
cosmetics and fragrances, the principal methods of competition are quality,
including consistency of the work performed, and reliability of meeting



                                       6


<PAGE>

delivery dates. With respect to lower priced products, the principal method of
competition is price. The Company believes that the Facility has a reputation in
the cosmetic industry as a high quality, reliable source for manufacturing and
packaging cosmetics. It is the Company's belief that the availability of its
laboratory gives it a competitive advantage over those firms not having
laboratories to assist customers in the formulation of their products. The
Company also believes that its ability to produce a broad range of products for
sale at varying retail price points is beneficial in attracting and retaining
customers who would prefer all of their products to be produced by the same
manufacturer.

           In selling the Branded Products, and licensed products the Company
competes against numerous companies, some of which are customers of the Private
Label Group. Many of these competitors are better known in the industry, have
established channels of distribution and greater financial and other resources
than the Company.

           The Company believes that the primary elements of competition in the
sale of Branded Products are product awareness and consumer acceptance of the
competing brands. Achieving market acceptance may require substantial marketing
efforts and expenditure of significant funds. The Company markets its Branded
Products to niche markets such as chain drug stores, discount stores and mass
merchandisers and to develop Branded Products which it believes will appeal to
the customers of these retailers.

           The Company believes that Cambridge is the only company organized to
provide complete accounting, marketing, warehousing and other administrative
services to cosmetic, fragrance and accessory companies, by a single company.
Although the Company believes it is the only Company which performs all of these
services, there are other companies that perform each of these services
individually, and such companies have greater financial and personnel resources,
and are better known in the industry than the Company.

GOVERNMENT REGULATION

           The Company's manufacturing activities and the Facility are subject
to extensive and rigorous governmental regulation relating to the protection of
the environment and the quality of manufacturing. Federal, state and local
regulatory agencies actively enforce these regulations and conduct periodic
inspections to determine compliance with such government regulations. The FDA
enforces regulations regarding GMP through periodic surveillances and audits.
The Company believes that the Private Label Group has obtained all material
approvals, permits and licenses for its manufacturing activities. In the event
that the Company seeks to expand its operations to manufacture and fill
fragrances, the Company would have to obtain new or expanded governmental
permits. However, changes in existing regulations, the interpretation thereof,
or adoption of new regulations could impose costly new procedures for
compliance, or prevent the Company from obtaining, or affect the timing of,
additional regulatory approvals. There can be no assurance that the Private
Label Group, if audited, will be found in compliance with GMP or environmental
regulations. Failure to comply with GMP, environmental or other applicable
regulatory


                                       7
<PAGE>


requirements may result in fines, suspension of approvals, cessation of
distribution,  product recalls and criminal prosecution, any of which would have
a material adverse effect on the Company.

          The Federal Trade Commission ("FTC") and state and local authorities
regulate the advertising of over-the-counter drugs and cosmetics. The Federal
Food, Drug and Cosmetic Act, as amended (the "Food and Drug Act"), and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, composition storage, record keeping, approval,
advertising and promotion of the Company's products. In general, products
falling within the FDA's definition of "new drugs" require pre-market approval
by the FDA. Products falling within the FDA's definition of "cosmetics' do not
require pre-market approval. In the Company's opinion, the Company's products,
as they are and will be promoted, fall within the FDA's definition of
"cosmetics" and therefore do not require pre-market approval. There can be no
assurance that the FDA will concur in this view. In the event that the Company
fails to comply with applicable regulations with respect to any products, the
Company may be required to change its labeling, formulation or possibly cease
manufacture and marketing of such products.

           The FDA may require post-marketing testing and surveillance to
monitor the record of the Company's products and continued compliance with
regulatory requirements. The FDA also may require the submission of any lot of
product for inspection and may restrict the release of any lot that does not
comply with FDA standards, or may otherwise order the suspension of manufacture,
recall or seizure of non-compliant product is discovered. Product approvals may
be withdrawn if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of a product are discovered following
approval.

           The Company may also be subject to foreign regulatory authorities
governing testing or sales of certain of the Company's products. Whether or not
FDA approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained in certain cases
prior to the commencement of marketing of the product in those countries. There
can be no assurance that any product developed or marketed by the Company will
be approved by the FDA or any foreign regulatory authority.

           Various laws and regulations relating to safe working conditions, and
other employment matters, including the Occupational Safety and Health Act, are
also applicable to the Company. The Company believes it is in substantial
compliance with all material federal, state and local laws and regulations
regarding safe working conditions, and other employment matters.

TRADEMARKS

           The Company has three United States registered trademark, Scent
Overnight(R), which was acquired in the acquisition of Scent Overnight, Scent
123(R) and Sports Extreme(R).

           The right to use trademarks and trade names in connection with the
sale of the Branded


                                       8
<PAGE>


Products is material to the Company's business. In cases where the Company is
the licensee of the trademark or trade name, the ownership of the trademark or
trade name will be retained by the licensor. In such cases, the Company may be
subject to material claims of infringement by third- parties and may or may not
be indemnified by the licensor.

          The Company will be the owner of brand names developed by it and will
seek to establish protection of names. There can be no assurance, however, that
trademark rights would sufficiently protect the Company's right to use such
names or that, if and when the Company files trademark applications for such
names, such applications would be approved. Notwithstanding such ownership,
third-parties may claim that such names infringe such third party's rights. Such
claims may seek to require the Company to cease use of the names as well as pay
monetary damages. At the time any such claim is brought, the Company may not
have the financial resources to defend against such claim. The cessation of the
use of any brand name used by the Company might have a material adverse effect
on it.

INSURANCE

           In view of the activities conducted by the Company, there are
inherent risks of exposure to certain liabilities including product liability
and negligence claims resulting from the use of the Company's products. The
Company currently carries a general liability insurance policy (including
products liability) which provides for coverage of $1,000,000 per occurrence and
$2,000,000 in the aggregate. The Company also carries property damage insurance
of approximately $2,000,000. The Company does not have insurance coverage for
product withdrawal or recall. Although the Company believes such insurance is
sufficient, no assurance can be given that the amount of the Company's present
coverage will prove to be adequate.

           The Company currently maintains officer and director liability
insurance which provides for coverage of $2,000,000 per occurrence and
$2,000,000 in the aggregate.

MAJOR CUSTOMERS AND SUPPLIERS

           Approximately 19% and 10% of the Company's revenues for the year
ended December 31, 1997 were derived from two major customers. Approximately 22%
and 12% of the Company's revenues derived from manufacturing activities for the
year ended December 31, 1996 were derived from the same two major customers. A
loss of the sales to either or both of these customers could have a material
adverse effect on the Company's results of operations.

EMPLOYEES

           The Company presently employs approximately 256 employees of which
251 are located at the Facility. Of the 251 employees located at the Facility,
43 are employed on a full-time basis and approximately 208 are employed on an
as-needed basis. The Company has regularly employed between 175 and 225
individuals on an as-needed basis for approximately 12 months and anticipates


                                       9

<PAGE>

a continued need for a minimum of 208 such employees in order to maintain its
current level of operations. Of the 251 employees located at the Facility, 222
are manufacturing personnel, 14 are laboratory personnel, three are executive
and administrative personnel and 12 are engaged in sales, marketing and customer
service. The manufacturing employees located at the Facility are covered by a
collective bargaining agreement with Local #300-S, Affiliated with the
Production Service and Sales Distribution Council, Industrial Union Council,
expires on May 31, 1998, extended from February 28, 1998.

           Of the five employees that are not located at the Facility, four are
executive officers. The Company believes that there is an available pool of
persons and firms who could be hired or retained by the Company when needed. The
Company considers its relationships with both union and non-union employees to
be satisfactory.

SEASONALITY AND BACKLOG

           The cosmetic and fragrance business in general is subject to seasonal
fluctuations, with net sales in the second half of the year substantially higher
than those in the first half as a result of increased demand by retailers in the
United States in anticipation of and during for the back-to- school,
Thanksgiving and Holiday seasons. The Company anticipates that the sales of
Branded Products and Distributed Fragrances will follow the general industry
trend.

           Although the Company's manufacturing business, as a whole, is not
seasonal, its product mix is subject to seasonal variations. Since the gross
profit margins on various products differ, the backlog and results of operations
in any period are not necessarily indicative of the result for the fiscal year.
At December 31, 1997 the Private Label Group's backlog of orders believed by the
Company to be firm was approximately $2,926,000 and at December 31, 1996 the
amount of such orders was approximately $3,068,000. The Company expects that
approximately 97% of the current backlog will be filled during the current
fiscal year. Since the Company's orders for manufacturing and filling are
generally for the delivery of merchandise over a period of time, backlog is
viewed as an important indication of future performance.


ITEM 2.   PROPERTIES

PROPERTIES

           The Company leases 2,400 square feet of space at 509 Madison Avenue,
New York, New York, which is used as its executive offices. The lease expires in
April 2001 and provides for an annual base rent of $74,000, including utilities.
These facilities are in good condition and adequate for the Company's current
needs, and substitute space is readily available.

           The Company's manufacturing and packaging plant and laboratory and
the Private Label Group's general and executive offices are located at a leased
155,000 square foot building in


                                       10

<PAGE>

Fairlawn, New Jersey. The lease, expiring in August 2002 provides for annual
rent of approximately $500,000, including common charges and real estate taxes
and is subject to increase based on increases in the Consumer Price Index. In
addition, the Company is responsible for substantially all repairs to the
building. The Facility is presently operating at less than full capacity and is
in good condition and physically adequate for the Company's present and
foreseeable purposes. The Company expects to continue to update the
manufacturing and packaging equipment at the Facility with more modern and
automated equipment.

           Contemporary, a related party, utilizes approximately 10,000 square
feet of the Facility on a month-to-month basis for approximately $6,500 per
month under an oral arrangement. There is no assurance that the landlord will
continue to permit this arrangement.

           Cambridge leases approximately 2,500 square feet of office space in
Port Washington, New York. The lease is on a month to month basis at a rate of
$3,000 per month.


ITEM 3.   LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

           The Company is not a party to any material legal proceeding, nor is
it aware of any pending or threatened claim of a material nature. The Company
anticipates that it will be subject to claims and suits in the ordinary course
of its business in the future, including product liability and negligence
claims. The Company believes that it will maintain adequate insurance to cover
such anticipated claims, of which, however, there can be no assurance.



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

           During the fourth quarter of the fiscal year covered by this report,
the Company did not submit any matters to a vote of security holders.


                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK


          As of the date hereof, the Company has outstanding 5,292,079 shares of
its Common Stock $.001 par value ("Common Stock"). The Company's Common Stock is
traded on the Nasdaq SmallCap Market ("Nasdaq SmallCap") under the symbol
"AZUR." The following table sets forth the high and low bid prices for Common
Stock as reported by on the Nasdaq SmallCap. The high and low bid prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.

                                       11


<PAGE>

                                                         COMMON STOCK
                                                         ------------
FISCAL 1997                                         HIGH                LOW
-----------                                         ----                ---
Third (from July 31, 1997)                        $4.6875             $3.875
Fourth                                             5.03125             4.25

FISCAL 1998
-----------
First (through March 26, 1998)                     $4.9375            $3.1875



           On March 26, 1998, there were approximately 72 holders of record of
the Company's 5,292,079 outstanding shares of Common Stock.

           On March 26, 1998, the last sale price of the Common Stock as
reported on the Nasdaq SmallCap Market was $3.625.



                                 DIVIDEND POLICY

           The Company has never paid or declared dividends on its Common Stock.
The payment of cash dividends, if any, in the future is within the discretion of
the Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

AZUREL LTD. AND SUBSIDIARIES
----------------------------

FORWARD-LOOKING STATEMENTS

           When used in this Form 10-KSB and in future filings by the
Company with the Securities and Exchange commission, the words or phrases "will
likely result" and "the company expects," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions are intended to
identify "forward-looking statements." The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, each of which
speak only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.


                                       12

<PAGE>


GENERAL

           Azurel, through its wholly-owned subsidiaries, manufactures, markets
and sells private label cosmetics, fragrances and skincare products and also
provides accounting, marketing, warehousing and other administrative.

           In August 1996, Azurel acquired the stock of the Private Label Group,
and in October 1996, Azurel acquired the stock of Scent Overnight. In October
1997, Azurel acquired the stock of Cambridge Business Services.

           The following discussion and analysis should be read together with
the financial statements and notes for Azurel included herein.

RESULTS OF OPERATIONS

           The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items included in the statements
of operations:





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

                                            Year ended December 31,
                                        ----------------------------

                                              1997       1996
                                          -----------  ----------

                                            (Dollars in thousands)

                Net sales ................. $ 12,482    $ 3,745


                Cost of goods sold ........    8,608      2,871
                                            --------    -------

                Gross profit ..............    3,874        874

                Selling, general and
                administrative expenses ...    3,897      1,652

                Amortization expense ......                 --
                                            --------    -------

                Operating (loss) ..........      (23)      (778)

                Interest expense ..........      475        595
                                            --------    -------

                Net (loss) ................ $   (499)   $(1,373)
                                            ========    =======



                                       13


<PAGE>


YEAR ENDED DECEMBER 31, 1997 (THE "1997 PERIOD") AND YEAR ENDED DECEMBER 31,
1996 (THE "1996 PERIOD").

           Net sales for the year ended December 31, 1997 increased by
$8,736,220, or approximately 233%, from the 1996 Period. The increase resulted
almost entirely from the acquisition of Private Label Group on August 22, 1996
("Acquisition Date"). The increase is attributable to the net sales of Private
Label Group for the period ended December 31, 1997 as compared with 1996 Net
Sales of Private Label Group from the Acquisition Date until December 31, 1997.

           Cost of goods sold for the 1997 Period were $8,607,759, or 69% of net
sales, as compared to cost of goods sold of $2,870,888, or 77% of net sales for
the 1996 Period. The increase in cost of goods sold resulted almost entirely
from the acquisition of the Private Label Group on August 22, 1996. The
reduction in the percentage of cost of goods sold as a percentage of net sales
to 69% in the 1997 Period to 77% in the 1996 Period was due primarily to
increased sales volume and the favorable mix of products sold in the 1997
Period.

          Selling, general and administrative expenses for the 1997 Period were
$3,896,990, or 31.2% of net sales, as compared to $1,652,240, or 44.1% of net
sales for the 1996 Period. The increase resulted almost entirely from the
acquisition of the Private Label Group on August 22, 1996. The reduction the
selling, general and administrative costs as a percentage of net sales is
attributable to higher sales volume in the 1997 Period, and reduced selling,
general and administrative expenses in the second half of 1997.

           Interest expense decreased from $595,129 in the 1996 Period to
$475,310 in the 1997 Period. The decrease is attributable to the reduction in
debt due to equity received from the public offering in July 1997.



LIQUIDITY AND CAPITAL RESOURCES

           From inception to date, Azurel's operations have been funded by a
combination of debt and equity financings. Azurel completed its initial public
offering of its securities in August 1997, whereby the Company issued 1,200,000
shares of common stock and 1,200,000 common stock purchase warrants. The Company
received approximately $5,538,000 from its initial public offering. In addition,
Azurel sold 750,000 shares of Common Stock at $2.00 per share from February
through July 1996.

           Azurel secured a revolving line of credit of $3,500,000 with Finova
Capital Corporation until February 2000. Such line of credit bears an interest
rate of 2.5% above the prime rate. The line of

                                       14

<PAGE>

credit is secured by the Company's receivables, inventory and a second lien on
machinery and equipment. In December 1997 the Company secured a 4 year term loan
of $800,000 at 11.3% from GE Capital. Such loan is secured by the Company's
existing machinery and equipment. In March of 1997, the Company secured a 5
year term loan of $260,000 at a rate of approximately 10.5% from CIT, secured by
new machinery and equipment acquired by the Company.

           Azurel borrowed an aggregate of $1,037,827 in the 1996 Period and
repaid an aggregate of $626,149 of such borrowings in that period (The various
obligations are more fully described in the notes to the financial statements).
In the 1997 Period, Azurel borrowed an additional aggregate amount of $424,000
from various lenders and repaid $48,304 of borrowings in that same period.
Azurel offered certain holders of outstanding promissory notes the right to
convert their debt into shares of common stock at $2.00 per share. In July and
October 1996, lenders with obligations totaling $667,494 (including principal
and interest) elected to convert such loans into 438,747 shares of Common Stock.
Azurel sold 750,000 shares of Common Stock at $2.00 per share from February
through July 1996. In the 1996 Period, Azurel had net proceeds of $1,283,900
from these sales.

          Proceeds of the aforementioned financings were utilized from inception
to date to (i) finance operations, (ii) advance funds to the Private Label
Group, (iii) fund increases to deferred financing costs, furniture and equipment
and deferred registration costs, (iv) fund advances to certain stockholders, (v)
fund the acquisition of the Private Label Group, (vi) repay outstanding accrued
expenses, indebtedness and payroll taxes, (vii) marketing, and (viii) purchase
inventory and equipment.

           In January and April of 1997 the Company secured additional debt
financing in connection with the completion of private placements of $200,000
and $350,000 respectively, which were repaid upon the completion of the
Company's initial public offering.

ITEM 7.  FINANCIAL STATEMENTS


                                      -15-
<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

                             REPORT ON CONSOLIDATED
                              FINANCIAL STATEMENTS

                          YEAR ENDED DECEMBER 31, 1997




<PAGE>






                           AZUREL LTD.AND SUBSIDIARIES

                              FINANCIAL STATEMENTS



                                      INDEX

                                                                     Page
                                                                    Number
                                                                --------------
INDEPENDENT AUDITORS' REPORT                                        F - 1
FINANCIAL STATEMENTS:

      Balance Sheet                                                 F - 2

      Statement of Operations                                       F - 3

      Statement of Stockholders' Equity                             F - 4

      Statement of Cash Flows                                     F - 5-6

      Notes to Financial Statements                              F - 7-15




<PAGE>









                          INDEPENDENT AUDITOR'S REPORT



To the Shareholders and Board of Directors
Azurel Ltd. and Subsidiaries

           We have audited the accompanying consolidated balance sheet of Azurel
Ltd. and Subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Azurel Ltd. And Subsidiaries' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

           We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Azurel
Ltd. and Subsidiaries as of December 31, 1997 and the results of its
consolidated operations, stockholders' equity and its consolidated cash flows
for each of the years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.




February 20, 1998
New York, New York

Certified Public Accountants




                                       F-1

<PAGE>



                       AZUREL LTD. AND SUBSIDIARIES
                        CONSOLIDATED BALANCE SHEET
                             DECEMBER 31, 1997


                                  ASSETS
                                  ------

CURRENT ASSETS:
  Cash                                                 $     414,731
  Restricted cash                                            290,521
  Accounts receivable net of allowance for doubtful
     accounts of $60,000                                   1,985,232
  Inventories                                              1,882,807
  Due from related parties                                   232,921
  Prepaid expenses and other current assets                  262,886
                                                         -----------
    TOTAL CURRENT ASSETS                                   5,069,098
                                                         -----------

FURNITURE AND EQUIPMENT                                    1,462,580
                                                         -----------

INTANGIBLES                                                3,137,248
                                                         -----------

OTHER ASSETS:
 Due from related party                                     135,000
 Deferred financing costs                                    35,700
                                                        -----------
                                                            170,700

                                                       $  9,839,626
                                                       ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Revolving line of credit                     $           1,133,393
  Accounts payable                                           819,514
  Accrued expenses and other liabilities                     436,899
  Customer advances                                          104,145
  Current portion of long term debt                          634,294
  Due to related parties                                     269,916
                                                         -----------
    TOTAL CURRENT LIABILITIES                              3,398,161
                                                         -----------

LONG TERM DEBT                                             1,623,757
                                                         -----------

STOCKHOLDERS' EQUITY:
  Preferred stock - par value $.001 per share
    1,000,000 shares authorized; issued and outst               -
  Common stock, par value $.001 per share;
    24,000,000 authorized;  5,293,745 issued
    and outstanding                                            5,294
  Additional paid in capital                               7,438,001
  Accumulated deficit                                     (2,609,830)
  Cumulative translation adjustment                          (13,582)
  Stock subscription receivable                               (2,175)
                                                         -----------
    TOTAL STOCKHOLDERS' EQUITY                             4,817,708
                                                         -----------

                                                         $ 9,839,626
                                                         ===========

                     See notes to financial statements
                                    F-2



<PAGE>



                       AZUREL LTD. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF OPERATIONS

                                                        YEARS ENDED DECEMBER 31,
                                                        ------------------------
                                                         1997           1996
                                                         ----           ----
NET SALES                                           $ 12,481,556    $ 3,745,336

COST OF GOODS SOLD                                     8,607,759      2,870,888
                                                    ------------    -----------

GROSS PROFIT                                           3,873,797        874,448

SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES          3,896,990      1,652,240
                                                    ------------    -----------

LOSS FROM OPERATIONS                                     (23,193)      (777,792)

INTEREST EXPENSE                                         475,310        595,129
                                                    ------------    -----------

NET LOSS                                            $   (498,503)   $(1,372,921)
                                                    ============    ===========

LOSS PER COMMON SHARE                               $         (0)   $        (0)
                                                    ============    ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING             4,468,325      3,287,759
                                                    ============    ===========




                       See notes to financial statements
                                       F-3




<PAGE>




<TABLE>
<CAPTION>


                          AZUREL LTD. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1997 AND 1996



                                                    COMMON STOCK    ADDITIONAL                 STOCK       CUMULATIVE    TOTAL
                                               NUMBER OF             PAID-IN    ACCUMULATED SUBSCRIPTIONS  TRANSLATION STOCKHOLDERS'
                                               SHARES      AMOUNT    CAPITAL      DEFICIT    RECEIVABLE    ADJUSTMENT    EQUITY
                                               ------      ------    -------      -------    ----------    ----------    ------

<S>                                          <C>         <C>      <C>           <C>            <C>        <C>       <C>
Balance - January 1, 1996                      2,450,000   $2,450   $    64,734   $ (513,406)    $(2,175)   $   --    $  (448,397)

  Stock issued in connection with
    bridge financing                             125,000      125       124,875          --         --          --        125,000
  Sale of common stock                           750,000      750     1,283,150          --         --          --      1,283,900
  Stock issued for services                       60,000       60       119,940          --         --          --        120,000
  Stock issued in connection with acquisition      5,000        5        21,245          --         --          --         21,250
  Stock issued in connection with a penalty       25,000       25        49,975          --         --          --         50,000
  Stock issued in connection with a loan          25,000       25        38,070          --         --          --         38,095
  Conversion of debt to common stock             438,747      439       642,701          --         --          --        643,140
  Stock options issued for services                 --       --          37,500          --         --          --         37,500
  Distribution                                      --       --            --        (225,000)      --          --       (225,000)
  Net loss                                          --       --            --      (1,372,921)      --          --     (1,372,921)
                                               ---------   ------   -----------   -----------    -------    --------  -----------

Balance - December 31, 1996                    3,878,747    3,879     2,382,190    (2,111,327)    (2,175)       --        272,567

  Sale of common stock - initial
    public offering                            1,200,000    1,200     5,536,810          --         --          --      5,538,010

  Expenses associated with initial
    public offering                                 --       --      (1,373,278)         --         --          --     (1,373,278)

  Stock issued to shareholders as additional     199,998      200       892,294          --         --          --        892,494

  Stock issued for legal services                 15,000       15           (15)         --         --          --           --

  Cumulative effect of foreign currency             --       --            --            --         --       (13,582)     (13,582)
    translation
  Net loss                                          --       --            --        (498,503)      --          --       (498,503)
                                               ---------   ------   -----------   -----------    -------    --------  -----------

Balance December 31, 1997                      5,293,745   $5,294   $ 7,438,001   $(2,609,830)   $(2,175)   $(13,582) $ 4,817,708
                                               =========   ======   ===========   ===========    =======    ========  ===========



</TABLE>


                       See notes to financial statements.
                                       F-4






<TABLE>
<CAPTION>

                       AZUREL LTD. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                    YEARS ENDED DECEMBER 31,
                                                                    ------------------------
                                                                      1997           1996
                                                                      ----           ----


<S>                                                                <C>            <C>
Net loss                                                           $  (498,503)   $(1,372,921)
Adjustments to reconcile net loss to net cash
   provided by operating activities:
   Depreciation                                                        224,789         57,384
   Amortization                                                        202,025        397,432
   Other                                                                  --          237,494

Changes in assets and liabilities, net of effect of acquisition:
   (Increase) decrease in accounts receivable                         (444,027)        34,613
   (Increase) decrease in inventories                                 (641,298)       249,265
   (Increase) decrease in prepaid expenses and other                  (142,925)       (59,736)
   (Increase) decrease in other assets                                 217,845       (276,721)
   Increase (decrease) in accounts payable and accru                (1,302,005)       684,173
   Increase (decrease) in customers advances                            46,385        (97,382)
   Increase (decrease) in related party loans                          343,154       (767,700)
                                                                   -----------    -----------
   NET CASH USED IN OPERATING ACTIVITIES                            (1,994,560)      (914,099)
                                                                   -----------    -----------



   Business acquisitions, net of cash acquired                         (57,556)      (665,107)
   Purchase of property and equipment                                 (286,193)       (87,411)
                                                                   -----------    -----------
   NET CASH USED IN INVESTING ACTIVITIES                              (343,749)      (752,518)
                                                                   ------------    -----------


   Increase (decrease) in cash overdraft                               (10,635)        10,635
   Increase in restricted cash                                         (21,790)        (7,304)
   Decrease (Increase) in long-term debt                            (1,349,426)       411,680
   Decrease in capital lease obligations                               (16,259)       (11,520)
   Net proceeds from stock issuance                                  4,164,732      1,259,545
                                                                   -----------    -----------
   NET CASH PROVIDED BY FINANCING ACTIVITIES                         2,766,622      1,663,036
                                                                   -----------    -----------

   Effect of exchange rate changes on cash and cash                    (13,582)          --

                                                                       414,731         (3,581)

                                                                          --            3,581
                                                                   -----------    -----------

                                                                   $   414,731    $      --
                                                                   ===========    ===========



                       See notes to financial statements.
                                     F-5



<PAGE>







                                                                    YEARS ENDED DECEMBER 31,
                                                                    ------------------------
                                                                       1997           1996
SUPPLEMENTAL DISCLOSURES OF CASH FLOW                                  ----           ----
INFORMATION:
Cash paid for interest                                             $   231,656    $   259,083
Cash paid for income taxes                                         $      --      $      --

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
   AND FINANCING ACTIVITIES:
   Additional stock issued to shareholder as compe                 $   892,494    $      --
                                                                   ===========    ===========
   Note issued for the acquisition of Cambridge Bu                 $   121,012    $      --
                                                                   ===========    ===========
   Issuance of common stock through conversion of                  $      --      $   163,095
   Issuance of common stock in connection with acq                 $      --      $    21,250
                                                                   ===========    ===========
   Conversion of debt to common stock                              $      --      $   637,500
                                                                   ===========    ===========
   Distribution through assumption of long-term de                 $      --      $   225,000
                                                                   ===========    ===========
   Purchase of equipment through capital lease                     $      --      $    11,304
                                                                   ===========    ===========
   Assumption of debt in connection with acquisiti                 $      --      $ 1,758,750
                                                                   ===========    ===========
   Stock issued for services                                       $      --      $   170,000
                                                                   ===========    ===========


</TABLE>


                                      F-6


<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.         ORGANIZATION AND SIGNIFICANT EVENTS

           Azurel Ltd. (the "Company") was incorporated in Delaware on June 26,
           1995. In July 1996, the Company formed a subsidiary, Scent 123, Inc.
           and subsequently acquired the assets of Scent Overnight, Inc., an
           overnight delivery service of men's cologne and women's fragrances.
           The Company intends to market and develop original cosmetic and
           fragrance lines. At year end, no significant operations had
           commenced.

           In August 1996, Azurel, Ltd. purchased all of the outstanding common
           stock of Private Label Cosmetics, Inc. and affiliates ("Private Label
           Group") for cash, notes and common stock aggregating $2,782,500 plus
           acquisition costs of $285,000. The Private Label Group is located in
           New Jersey and manufactures cosmetics for sale to major cosmetic
           companies.

           In August 1997, the Company sold 1,200,000 units consisting of
           1,200,000 shares of common stock and an equal number of common stock
           purchase warrants in an initial public offering. The Company received
           gross proceeds before underwriter discounts and offering expenses of
           $5,538,000. Offering expenses were approximately $1,373,000.

           The Company concurrently issued approximately 200,000 common shares
           to a principal shareholder and a former shareholder as additional
           consideration for machinery and equipment included in the Private
           Label Group acquisition.

           In October 1997, the Company acquired all of the outstanding shares
           of Cambridge Business Services Corporation for $212,000 of which
           $95,000 was paid at the closing and the balance in February 1998.

           The Company opened a sales and distribution facility in France in the
           latter part of 1997. Significant operations had not commenced at
           December 31, 1997.

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           a.        Principles of consolidation - The consolidated financial
                     statements include the accounts of the Company and its
                     wholly owned subsidiaries. All material intercompany
                     transactions and balances have been eliminated.

           b.        Accounting estimates - The preparation of financial
                     statements in accordance with generally accepted accounting
                     principles requires management to make significant
                     estimates and assumptions that affect the reported amounts
                     of assets and liabilities at the date of the financial
                     statements and the reported amounts of revenues and
                     expenses during the reporting period. Actual results could
                     differ from those estimates.

                                       F-7

<PAGE>



           c.        Inventories - Inventories are recorded at the lower of cost
                     or market. Cost was determined using the average cost
                     method.

           d.        Property and equipment - Property and equipment are stated
                     at cost and depreciated using the straight-line method over
                     the estimated useful lives of the assets.

           e.        Deferred registration costs - Deferred registration costs
                     were charged against additional paid-in capital upon
                     completion of the Company's public offering.

           f.        Deferred financing costs - Deferred financing costs are
                     charged to interest expense over the terms of the
                     respective loans.

           g.        Fair value of financial instruments - The carrying amounts
                     reported in the balance sheet for cash, receivables,
                     accounts payable, and accrued expenses approximate fair
                     value based on the short-term maturity of these
                     instruments.

           h.        Income taxes - The Company accounts for income taxes under
                     the provisions of Statement of Financial Accounting
                     Standards No. 109, "Accounting for Income Taxes" (SFAS No.
                     109). SFAS No. 109 requires the recognition of deferred tax
                     assets and liabilities for both the expected impact of
                     differences between the financial statements and tax basis
                     of assets and liabilities, and for the expected future tax
                     benefit to be derived from tax loss and tax credit
                     carryforwards. SFAS No. 109 additionally requires the
                     establishment of a valuation allowance to reflect the
                     likelihood of realization of deferred tax assets.

           i.        Stock based compensation - The Company accounts for
                     employee stock transactions in accordance with APB Opinion
                     No. 25, "Accounting For Stock Issued To Employees." The
                     Company has adopted the proforma disclosure requirements of
                     Statement of Financial Accounting Standards No. 123,
                     "Accounting For Stock-Based Compensation."

           j.        Goodwill - Goodwill resulting from various acquisitions
                     represents the remaining unamortized value of the excess of
                     the purchase price over the fair value of the net assets
                     acquired. Goodwill is amortized on a straight line basis
                     over a period of 20 years.

           k.        Impairment of long - lived assets - The Company has adopted
                     Statement of Financial Accounting Standards No. 121,
                     "Accounting For The Impairment Of Long-Lived Assets And For
                     Long-Lived Assets To Be Disposed Of" as of January 1, 1996.
                     Such adoption had no material effect on the financial
                     statements of the Company.


                                       F-8

<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

           l.        Earnings per share - In February 1997, the Financial
                     Accounting Standards Board issued Statement of Financial
                     Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
                     Share". SFAS 128 is effective for financial statements
                     issued for interim and annual periods ending after December
                     15,1997; after the effective date, all prior period
                     earnings per share data are required to be restated. Net
                     Loss per common share is based on the weighted average
                     number of shares outstanding. Potential common shares
                     includable in the computation of fully diluted per share
                     results are not presented in the financial statements as
                     their effect would be anti-dilutive.

           m.        Foreign currency translation - The assets and liabilities
                     of the Company's foreign operation were translated into
                     U.S. dollars based on the current exchange rate at December
                     31, 1997 and at the weighted average rate for the statement
                     of operations for the period then ended.


3.        INVENTORIES

          Inventories at December 31, 1997 consisted of the following:



          Raw Materials              $               874,304

          Work In Process                            828,115

          Finished Goods                             180,388
                                       -----------------------

                                     $             1,882,807
                                       =======================


4.         RELATED PARTY TRANSACTIONS

                     Amounts due from related parties consist of loans and
           advances to officers, shareholders and an affiliated entity. The
           loans are interest-free and are as follows:

Loans to affiliate                          $                      332,279

Advances to officers/shareholders                                   35,642
                                                   -------------------------
                                                                   367,921

Less loans to affiliate - non-current                              135,000
                                                   -------------------------
                                            $                      232,921
                                                   =========================


                                       F-9

<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



           Additionally, trade receivables included $308,840 due from affiliates
           at December 31, 1997.

           Private Label Group has an informal arrangement with an affiliate to
           sublease part of its facilities at a cost of $86,000 per annum. Sales
           in 1997 to two entities controlled by a principal shareholder were
           $655,000.


5.         PROPERTY AND EQUIPMENT

           Property and equipment consists of the following:

<TABLE>
<CAPTION>

                                              Estimated years                              December 31,
                                              of useful lives                                  1997
                                        ------------------------------             -----------------------------

<S>                                              <C>                          <C>
Machinery and equipment held under
capital leases                                   5-7 years                    $        41,478

Machinery and equipment                         5-9.5 years                          3,775,752

Leasehold improvements                            15 years                             211,498
                                                                                   -----------------------------

                                                                                     4,028,728

Less accumulated depreciation                                                        2,566,148
                                                                                    -----------------------------

                                                                              $      1,462,580
                                                                                    =============================
</TABLE>

6.         INTANGIBLE ASSETS:

           Intangible assets result primarily from the acquisition of Private
           Label Group and are as follows:

                          Estimated Useful                         Cost
                                Life
                      -----------------------------      -----------------------

Formulae                      15 Years              $      2,285,000

Customer List                 19 Years                       952,000

Goodwill                      20 Years                       164,265
                                                         -----------------------
                                                           3,401,265

 Less: Accumulated Amortization                              264,017

                                                         -----------------------
                                                    $      3,137,248
                                                        ========================


                                      F-10

<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED






7.         REVOLVING CREDIT FACILITY

           In February 1998, the Company refinanced their borrowing arrangement
           with Finova. The line of credit was increased to $3,500,000 and bears
           interest at 2.5% per annum above the existing prime rate. Borrowings
           are secured by trade receivables, inventories and a second lien on
           machinery and equipment. The agreement expires in February 2000.

8.         LONG-TERM DEBT

           The following is a summary of long-term debt:
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                                        1997
                                                                                 ------------------------
<S>                                                                        <C>
Note payable - shareholder, payable in monthly  installments of
$5,551 including interest at 6% per annum, through August 2003              $            313,154

Note payable - shareholder, payable in semi-annual installments of
$9,219 plus interest at 9% per annum, through 2000.                                       55,314


Note payable - shareholder payable in semi-annual installments of
$184,375 plus interest at 9% per annum, through 2000.                                  1,106,250


Note payable - GE Capital Corp. - payable in monthly installments
of $16,667 plus interest at 11.3% per annum through 2001. The
note is secured by machinery and equipment.                                              783,333
                                                                                 -----------------
                                                                                       2,258,051

Less current portion                                                                     634,294
                                                                                 -----------------
                                                                            $          1,623,757
                                                                                 =================
</TABLE>

           Notes payable to shareholders are unsecured.

           Long-term debt maturities for the next five years are as follows:
           1998 - $634,294; 1999 - $638,976; 2000 - $642,170; 2001 - $241,706;
           2002 - $61,974.




                                      F-11

<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


9.         INCOME TAXES

           The Company accounts for income taxes under Statement of Financial
           Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
           109"). SFAS No. 109 requires the recognition of deferred tax assets
           and liabilities for both the expected impact of differences between
           the financial statements and tax basis of assets and liabilities, and
           for the expected future tax benefit to be derived from tax loss and
           tax credit carry forwards. SFAS No. 109 additionally requires the
           establishment of a valuation allowance to reflect the likelihood of
           realization of deferred tax assets. At December 31, 1997, the Company
           had net deferred tax assets of $1,331,000. The Company has recorded a
           valuation allowance for the full amount of the net deferred tax
           assets.

           The following table illustrates the source and status of the
           Company's major deferred tax assets:

Net operating loss carryforward         $                    1,227,000

Accounts receivable allowance                                   24,000

Inventory allowance                                             80,000

Valuation allowance                                        (1,331,000)
                                             -----------------------------

Net deferred tax asset recorded         $                            -
                                             =============================

           The provision for income taxes for year ended December 31, 1997
           differs from the amount computed applying the statutory federal
           income tax rate to income before income taxes as follows:


Income tax benefit computed at statutory       $              (199,000)
rate

Tax benefit not recognized                                      199,000
                                                    -----------------------

Provision for income taxes                     $                        -
                                                    =======================

                     The Company has net operating loss carry forwards for tax
                     purposes totaling $3,068,000 at December 31, 1997 expiring
                     in the years 2008 to 2012. Approximately $952,000 of the
                     carry forwards are subject to limitations on annual
                     utilization because there are "equity structure shifts" or
                     "owner shifts" involving 5% stockholders (as these terms
                     are defined in Section 382 of the Internal Revenue Code),
                     which have resulted in a more than 50% change in ownership.
                     The annual limitation is based primarily on the value of
                     the Private Label Group as of the date of the ownership
                     change multiplied by the applicable Federal Long Term Tax
                     Exempt Bond Rate.

                                      F-12

<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



10.        STOCK OPTION PLAN

           In March 1997 the Company adopted a stock option plan which provides
for grants to officers and other employees, directors, consultants and other
persons who perform significant services for the Company. The exercise price of
each option may not be less than 100% of the fair market value of the common
stock at the time of the grant. Options to acquire up to 750,000 shares may be
granted under the plan.

           As of December 31, 1997, 130,750 options were outstanding, of which
129,000 were exercisable at $4.25 per share and 1,750 were exercisable at $4.375
per share. No options were exercised as of December 31, 1997.

           Pro-forma information regarding net loss and loss per share is
presented below as if the Company had accounted for its employee stock options
under the fair value method; such pro forma information is not necessarily
representative of the effect on reported net loss for future years due to the
vesting period of the stock options and the fair value of additional stock
options in future years.

           Had compensation cost for the Company's stock option plan been
determined based on fair value at the grant date, the Company's pro-forma net
loss for the year ended December 31, 1997 would have been $780,000 or $0.17 per
share.

           The weighted average fair value of the options granted during the
year ended December 31, 1997 are estimated as $2.17 on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for the year ended December 31, 1997: expected dividend yield of 0%, expected
volatility of 50%, risk free interest rate of 5.7% and estimated life of five
years.

11.        REDEEMABLE COMMON STOCK PURCHASE WARRANTS

           The Company issued 1,200,000 warrants in connection with the initial
public offering of its common stock. Each warrant entitles its holder to
purchase one share of Common Stock at an exercise price of $4.50 per share. The
warrants are exercisable commencing July 30, 1998 and expire in July 2003. The
warrants are redeemable by the company at a price of $.10 each commencing July
30, 1998 and thereafter up to their expiration. The Company additionally issued
120,000 redeemable warrants to the underwriter for $18,000. Such warrants are
exercisable for four years commencing July 30, 1998 at a price equal to 150% of
the initial public offering price of the Common Stock and Redeemable Warrants.
The Company has reserved 1,320,000 shares of common stock for issuance upon
exercise of the warrants.


                                      F-13

<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


12.        PREFERRED STOCK

           The Company is authorized to issue preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights. The Company has no preferred
stock outstanding at December 31, 1997.

13.        LEASES

           The Company is obligated under a lease for its operating facilities
in New Jersey for annual rentals ranging from $475,000 to $529,000 through
August 31, 2002. The Company sub-lets part of its premises to a related party
for an annual rental of $86,000. The Company is further obligated under a lease
for its administrative facility in New York City for annual rentals of $74,512
through April 2001.

           Total rent expense for the year ended December 31, 1997 was $574,000
and for the four months ended December 31, 1996 rent expense was $212,000.

           Future minimum rental payments under non cancelable leases as of
December 31, 1997 were as follows: 1998 - $557,000; 1999 - $573,000; 2000 -
$589,000; 2001 - $605,000; 2002 - $361,512.



14.        SIGNIFICANT CUSTOMERS

           During the year ended December 31, 1997, one customer accounted for
19% and another accounted for 10% of the total sales.

15.        COMMITMENTS

           a.        In May 1996, the Company entered into a license agreement
                     with the owner of the "Members Only" trademark. The
                     agreement grants the Company the exclusive right to
                     manufacture and distribute cosmetics and other items under
                     the "Members Only" mark. The agreement expires in September
                     2001, with the Company's option to renew the license
                     agreement for an additional five year term. Under this
                     agreement, the Company is to required to pay aggregate
                     minimum royalties of $1,225,000 through September 2001.
                     The Company is currently in negotiations to terminate
                     this contract.  Management believes that any potential
                     settlement will not be material to the Company.

           b.        In October 1997, the Company entered into a license
                     agreement with the owner of the "Hang-Ten" trademark. The
                     agreement grants the Company the exclusive right

                                      F-14

<PAGE>


                          AZUREL LTD. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



                     to manufacture and distribute cosmetics and other items
                     under the "Hang-Ten" mark. The agreement which expires in
                     December 2003, requires the Company to pay aggregate
                     minimum royalties of $563,000 through December 2003.

           c.        The Company has a three year employment agreement with an
                     officer for a base salary of $195,000 which expires in
                     August 1999. The officer has an option to renew the
                     agreement for an additional two years. Additionally, the
                     officer will receive a bonus equal to 10% of the Private
                     Label Group's annual profits, as defined, in excess of
                     $500,000 for the years ending December 31, 1997, 1998 and
                     1999.

           d.        The Company is obligated under a consulting agreement with
                     a former officer for monthly payments of $11,117 through
                     August 2003.

           e.        The Company is obligated under a three year employment
                     agreement with its chief executive officer commencing July
                     30, 1997. The officer will receive an annual salary of
                     $95,000 plus bonuses as determined by the Board of
                     Directors.

                                      F-15

<PAGE>





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

There were no changes in or disagreements with the Company's Accountants on
accounting or financial disclosures.


                                    PART III




                                      16
<PAGE>


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

Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.


ITEM 10.  EXECUTIVE COMPENSATION

Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.

ITEM 13.         EXHIBITS, LISTS AND REPORTS ON FORM 8-K
                 ---------------------------------------

(A)  EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-B).


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

      3.1**              Certificate of Incorporation of the Registrant.

      3.2**              Amended By-Laws of the Registrant.

      3.3**              Amended Certificate of Incorporation of the Registrant

      4.1**              Specimen Common Stock Certificate.

      4.2**              Specimen Redeemable Common Stock Purchase Warrant
                         Certificate.


                                       17


<PAGE>

      4.3**              Form of Public Warrant Agreement.

      4.4**              Form of Warrant Agreement between the Registrant and
                         Network 1, including Form of Underwriter's Warrant
                         Certificate.

      10.1**             Employment Agreement between the Registrant and Gerard
                         Semhon dated October 28, 1996.

      10.2**             Employment Agreement between the Registrant and Michael
                         J. Assante dated August 22, 1996.

      10.3**             Lease for 509 Madison Avenue, New York, New York 10022
                         dated April 29, 1996.

      10.4**             Lease for 20-10 Maple Avenue, Fair Lawn, New Jersey
                         dated April 11, 1991.

      10.5**             License Agreement between the Registrant and Europe
                         Craft Imports, Inc. dated May 15, 1996.

      10.6**             Stock Purchase and Sale Agreement dated July 17, 1996
                         by and among Michael J. Assante, Azurel Ltd., Private
                         Label Cosmetics, Inc., P.L.C. Specialties, Inc.,
                         International Cosmetic Group, Inc. and Fashion
                         Laboratories, Inc.

      10.7**             Agreement by and between Scent Overnight, Inc. and
                         Scent 123, Inc. dated September 9, 1996.

      10.8**             Registrant's 1997 Stock Option Plan.

      10.9**             Registrant's Promissory Note dated August 22, 1996 in
                         the principal amount of $1,675,000 issued to Michael J.
                         Assante.

      10.10**            Registrant's Promissory Note dated
                         August 22, 1996 in the principal
                         amount of $83,750 issued to Louis
                         DiVita.

      10.11**            Consulting Services Agreement dated August 12, 1993
                         between Louis DiVita and Private Label Cosmetics, Inc.
                         PLC Specialties, Inc., Fashion Laboratories, Inc.,
                         Contemporary Cosmetic Group, Inc., International
                         Cosmetic Group, Inc., D.A. Advertising Group
                         International, Inc. and Intra-Africa Corporation.



                                       18


<PAGE>


      10.13**            Collective Bargaining Agreement

      10.14**            Rubigo Cosmetics Agreement - January 1992

      10.15**            Revolving Credit Agreement

      10.16**            Agreement by and among Azurel, Ltd., Scent Overnight, .
                         Inc. and Gerard Semhon dated July 14, 1997.

      10.17*             License Agreement between Azurel Ltd. and International
                         Licensing Corporation dated October 6, 1997.

      10.18*             Security Agreement dated February 6, 1998 by and
                         between Azurel Ltd. and Finova Capital Corporation.

      10.19***           Security Agreement dated December 30, 1997 by and
                         between Azurel Ltd. And Private Label Cosmetics, and
                         General Electric Capital Corporation.

      21.1**             Subsidiaries of the Registrant.

      24.1**             Power of Attorney (included with signature page).

      27.1*              Financial Data Schedule

----------
*     Filed herewith.
**    Incorporated by Reference from the Company's Registration Statement
      filed with the Securities and Exchange Commission on July 30, 1997.
***   To be filed by amendment.









                                       19


<PAGE>




                                   SIGNATURES

           In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.


                                             AZUREL LTD.

                                             By: /S/ GERARD SEMHON
                                             Gerard Semhon, Chief Executive
                                             Officer and Chairman of the Board


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

       SIGNATURE         TITLE                                DATE
       ---------         -----                                ----

/S/ GERARD SEMHON        Chief Executive Officer and        March 31, 1998
Gerard Semhon              Chairman of the Board

/S/ CONSTANTINE BEZAS    President and Director             March 31, 1998
Constantine Bezas

/S/ FRANK DESIMONE       Executive Vice President, Chief    March 31, 1998
Frank DeSimone             Financial Officer and Director

/S/ JOSEPH TRUITT BELL   Executive Vice President           March 31, 1998
Joseph Truitt Bell         and Director

/S/ VAN CHRISTAKOS       Secretary, Treasurer               March 31, 1998
Van Christakos             and Director

                         Director                           March 31, 1998
Kay Shortway

                         Director                           March 31, 1998
Norman Grief