<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(MARK ONE)


[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JULY 31,
         1997

                                       OR



[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM
         _________TO___________

                         Commission File Number: 1-9135


                                   ALFIN, INC.
             (Exact name of Registrant as specified in its charter)

          NEW YORK                                             13-3032734
(State or other Jurisdiction of                             (I.R.S. Employer
incorporation or organization)                            Identification Number)

720 Fifth Avenue, New York, New York                           10019
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code: (212) 333-7700

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

Title of each class                                Name of each exchange
Common Stock, $.01 par                             on which registered
value per share                                    American Stock Exchange

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                               YES__X__                   NO_____

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 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-K or any amendment to this
Form 10-K [X].

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price on November 5, 1997, was $2,615,090. As
of November 5, 1997, the Registrant had 11,787,983 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders is
incorporated by reference into Part III of this Annual Report on Form 10-K.



<PAGE>   2
PART I

ITEM 1.  BUSINESS

GENERAL

Alfin Inc., a New York corporation (the "Company"), is engaged through its
wholly-owned subsidiary, ADRIEN ARPEL, INC. ("ARPEL"), in distributing
cosmetics and other beauty products and providing facial and other beauty
services in department stores and in specialty stores throughout the United
States and Canada. From April 1994 through January 1997, ARPEL also distributed
specially packaged cosmetic products through television marketing on the Home
Shopping Network ("HSN").

PRODUCTS AND MAJOR DISTRIBUTION AGREEMENTS

CURRENT PRODUCTS

The Company develops, distributes and sells skin care and cosmetic products
under the trademark "ADRIEN ARPEL". ARPEL acts as an operator of
service-oriented skin care salons in department and specialty stores. From April
1994 through January 1997, ARPEL also distributed specially packaged cosmetic
products through television marketing on the HSN. The Company's relationship
with HSN ended as of January 27, 1997, following a contract dispute between the
Company and Ms. Adrienne Newman which led to the departure of Ms. Newman from
the Company. Ms. Newman served as the President of ARPEL and had been the
Company's selling host, under the name of Adrien Arpel, in its sales program on
HSN. For a detailed discussion of the legal action between the Company and Ms.
Newman as a result of this dispute see "Item 3. Legal Proceedings".

ARPEL'S product line consists of a line of high quality natural based skin care
products and a line of make up products. ARPEL products are positioned in the
better segment of the market and are competitively priced with other comparable
brands. In fiscal 1997, approximately 48.4% of ARPEL'S net sales were made to
HSN and approximately 51.6% were made to department stores.

DISCONTINUED PRODUCTS

The Company was originally engaged in the manufacturing, importation,
distribution, marketing and merchandising of fine imported fragrance products.
Beginning in 1993, the Company significantly reduced its distribution of
fragrance products and in July 1995, the Company ceased its distribution of
fragrance products.

During March 1996 the Company sold its exclusive worldwide manufacturing,
distribution and licensing rights for FRACAS and BANDIT and other fragrances by
Robert Piquet to Fashion Fragrances and Cosmetics Ltd. ("FF&C") for an aggregate
price of $1.2 million to be payable in installments. During the first quarter of
fiscal 1997 the Company and FF&C agreed to reduce the purchase price payable by
FF&C to the Company by $100,000. This adjustment was necessary because certain
molds included in the purchase price were damaged and unusable. The Company
received the remaining purchase price installment of $350,000 from this
transaction in July 1997.

SALES AND MARKETING

The Company's major domestic accounts include Boscov's, Burdines, Dayton/Hudson,
Dillards, Federated Department Stores, Foley's, Hechts, HSN, Kaufmanns, and
Mercantile. ARPEL also sells directly to the Canadian department store, the Bay.
Sales to department stores accounted for approximately 51.6% of sales for fiscal
1997. The arrangement with HSN represented approximately 48.4% of sales for
fiscal 1997. No

                                        1

<PAGE>   3



other single domestic account, foreign distributor or independent sales agent
accounted for sales in an aggregate amount equal to 10% or more of the Company's
consolidated net sales.

As is common in the fragrance and cosmetic industry, the Company provides its
domestic customers with the limited right to return merchandise in order to
balance inventory and stock levels. The rate of return experienced by the
Company was approximately 4.7%, 6.1% and 3.0% for the fiscal years ended July
31, 1997, 1996 and 1995, respectively.

Sales to foreign accounts, expressed as a percentage of net sales, were 7.2%,
6.4% and 3.0% for the fiscal years ended July 31, 1997, 1996 and 1995,
respectively.

On August 6, 1997 the Company entered into an agreement with Target Mailing
Lists, Inc., ("Target"). Under the agreement the Company and Target will place
advertisements in publications for the sale of specialty packaged cosmetic and
skin care products. Target will advance all production costs for advertisements
approved by the Company and the Company will advance all creative costs
associated with such advertising. Expenses incurred by Target and the Company
shall be reimbursed pro rata from gross revenues received from the sale of
products. All revenues remaining after payment of expenses shall be allocated
49.5% to Target, 40.5% to the Company and 10% to other parties. The agreement
terminates on February 6, 1999 and renews automatically if the advertising
placed by Target and the Company generates more than $1.5 million in retail
sales within a one year period from the date the advertisement first appears in
the media.

The Company has developed a professionally designed Catalogue. The initial
edition was mailed during October and November 1997 to approximately 70,000
consumers and featured approximately 25 of Arpel's most popular products and
skin care kits. The Company plans to have subsequent editions featuring
approximately 50 products and to mail its catalogue four times each year during
the winter, spring, summer and fall, with an anticipated increase in volume from
mailing to mailing. This Catalogue was conceived primarily in response to
customer demands.

The Company is in the final stages of preparing to introduce its products in
Italy through Shopping America an Italian home shopping program. The format will
be similar to HSN and QVC in the United States and Teleshopping, the most
successful home shopping show in France. This shopping network will reach 40
million viewers which represents 81.7% total coverage in Italy. The Company
plans to launch a test market during November 1997 and is scheduled to be the
exclusive cosmetic line.

RESEARCH AND DEVELOPMENT

The Company did not spend a material amount on research and development during
the fiscal years ended July 31, 1997, 1996 and 1995. The Company introduces new
products and improves its packaging in response to changing consumer demands.


ADVERTISING

The Company advertises through cooperative advertising programs, and catalogues.
Advertising costs as a percentage of consolidated retail store sales for the
fiscal years ended July 31, 1997, 1996 and 1995 were 11.7%, 9.7%, and 9.4%,
respectively. The Company also promotes its products through the use of
promotional materials, special promotions and in-store displays.

                                        2

<PAGE>   4
MANUFACTURING

The Company does not maintain any manufacturing facilities. It subcontracts to
manufacture its products, in accordance with the Company's specifications and
formulas. (Note: See Trademark and Regulations paragraph). The Company believes
that other manufacturing subcontractors are available if alternative production
sources need to be obtained. The Company believes that it is in compliance with
all applicable laws and regulations pertaining to its business and to any
federal, state or local laws and regulations designated to protect the
environment.

TRADEMARKS AND REGULATIONS

The Company owns the relevant trademarks of the products which are distributed
by the Company. The ADRIEN ARPEL and ARPEL names are registered as trademarks in
the United States and a number of foreign countries.

The Food and Drug Administration ("FDA") monitors certain aspects of the
cosmetic industry, particularly those that relate to advertising claims and
purported benefits with respect to cosmetic products and the physical
composition of cosmetics. The Company has not been notified by the FDA, nor, to
its knowledge, have any of its manufacturers been notified by the FDA, that any
of the products that the Company distributes are presently the subject of any
FDA investigation or that any claims or complaints have been made or are
threatened against the products that the Company distributes. Notwithstanding
the foregoing, the Company does not believe that any FDA approvals or consents
are required with respect to any of the products the Company distributes.

The Federal Trade Commission ("FTC") monitors certain other aspects of the
Company's business, particularly as they relate to product packaging and
advertising. The Company designs the packaging of all products it distributes,
and for which it owns the relevant trademark. The Company has not been notified
by the FTC that any of the Company's products or practices are presently the
subject of any FTC investigation or that any, claims or complaints have been
made or are threatened against the Company.

The Company believes that it is in compliance with all applicable laws and
regulations pertaining to its business.

PRODUCT LIABILITY

The Company believes that the manufacturers of its products carry product
liability insurance in an amount sufficient to cover any foreseeable product
liability claim and that the Company is protected thereunder. In addition, the
Company maintains product liability coverage in an amount which it believes is
adequate to cover any exposure it may have with respect to its products. The
Company has never been the subject of any material product liability litigation.

COMPETITION

The market for cosmetics is volatile, competitive and sensitive to changing
consumer preferences and demands. There are products which are better known than
the products distributed by the Company and there are many companies which are
substantially larger, more diversified and which have substantially greater
resources than the Company and which have the ability to develop and market
products which are similar to and competitive with those distributed by the
Company.

                                        3

<PAGE>   5



GENERAL ECONOMIC CONDITIONS

Retail cosmetic purchases are discretionary and are frequently made by customers
using consumer credit. The Company believes that a decline in consumer credit
purchases could adversely affect the business and financial condition of
department stores and therefore, the Company.

EMPLOYEES

As of July 31, 1997, the Company had 84 employees. Of these, 59 were engaged in
sales and marketing activities, 18 in administrative functions and 7 in
distribution activities.

ITEM 2. PROPERTIES

The Company maintains its corporate headquarters in New York City and occupies
approximately 7,400 rentable square feet under a lease expiring on November 30,
2001. The lease provides for annual payments of approximately $240,000.

During June 1997 the Company sold its Norwood, New Jersey distribution and
administration center for $1,416,000. From the proceeds of this sale the Company
satisfied the remaining balance of its term promissory note in the amount of
$450,000 which was due to PNC Bank. The Company occupies approximately 15,000
rentable square feet in the same facility under a lease expiring June 2000. The
lease provides for annual payments of $107,000.

ITEM 3. LEGAL PROCEEDINGS

On October 28, 1996 the Company received notice from Adrienne Newman purporting
to terminate her April 4, 1990 Employment Agreement with the Company (such
agreement as subsequently amended is the "Employment Agreement"), based on an
alleged breach of the Employment Agreement by the Company. Ms. Newman served as
the President of ARPEL, the Company's wholly-owned subsidiary, and had been
selling host, under the name of Adrien Arpel, in its sales program on HSN. The
Employment Agreement provided for salary, fringe benefits and commission
payments based upon 33% of the revenues, net of direct expenses attributable to
television shopping sales. Ms. Newman also had vested rights in 625,000
warrants, 500,000 of which were scheduled to expire in November 1998 and the
remaining 125,000 of which were scheduled to expire on July 31, 2001.

On November 8, 1996 the Company and Adrienne Newman reached an agreement (the
"Interim Agreement") whereby Ms. Newman agreed to appear as the selling host for
ARPEL on HSN shows scheduled for November and December 1996 and January 1997
(the "HSN Selling Period"). During the HSN Selling Period, Ms. Newman acted as
an independent contractor and not as an employee of the Company. The Company and
Ms. Newman also agreed to refrain from initiating legal action against the other
in connection with their dispute over Ms. Newman's termination of the Employment
Agreement until after the expiration of the HSN Selling Period.

On January 28, 1997, after the expiration of the HSN Selling Period, the Company
was served by Adrienne Newman with a summons and complaint returnable in the
Supreme Court, New York County whereby Ms. Newman asserted claims for damages
against the Company based upon alleged breaches by the Company of Ms. Newman's
Employment Agreement and the Interim


                                        4

<PAGE>   6



Agreement. Unspecified damages were claimed. A further claim requested a
judicial determination that the Employment Agreement was materially breached by
the Company resulting in its termination.

On March 19, 1997 the Company served an Answer and Counterclaim in response to
the action commenced by Ms. Newman. The Company's Counterclaim asserts various
claims against Ms. Newman, seeking damages and injunctive relief. Among other
things, it is the position of the Company that Ms. Newman was in material
breach of her Employment Agreement when she terminated the Employment Agreement
on October 28, 1996. As a consequence, it is the Company's belief that Ms.
Newman's refusal to provide services to the Company throughout the term of her
Employment Agreement which expires in April 1998, particularly her willful
refusal and failure to appear as the Company's selling host on HSN, will damage
the Company in the sum of at least eleven million dollars ($11,000,000). The
Company also asserted claims against Ms. Newman for breaches of her covenant
not to compete and her covenant not to disclose trade secrets and proprietary
data.

During May 1997, Ms. Newman started appearing on HSN as a representative of her
own company selling cosmetic products under the name "Signature Club A". Ms.
Newman has subsequently appeared on HSN on a monthly basis. The Company and its
attorneys are currently reviewing these appearances and may seek further legal
remedies and actions against Ms. Newman. During these appearances Ms. Newman was
not acting on behalf of the Company or its trademark protected Adrien Arpel
product line.

The case is currently in the discovery phase. Upon completion of discovery the
action will be ready for trial but no trial date has yet been fixed.

In addition to the above, the Company, in the normal course of business, is a
defendant in numerous actions/lawsuits. The Company does not believe the outcome
of these action/lawsuits will have a material impact on the Company's financial
position or results from operations.

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

None

PART II

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

In July 1997 the Company, was advised by the American Stock Exchange (the
"ASE") that it wished to review with the Company its continued listing
eligibility on the ASE based upon the Company falling below certain ASE
continued listing guidelines. The Company met with representatives of the ASE
and made both oral and written presentations to the ASE. The Company was
advised by the ASE, by letter dated September 15, 1997, that the Company's
listing on the ASE would be continued subject to future review by the ASE of
the Company's favorable progress in satisfying the ASE's guidelines for
continued listing and to the ASE's routine periodic reviews of the Company's
SEC and other filings. The ASE has requested an updated report from the Company
to be submitted on or before December 17, 1997 which must address, among other
things, the Company's ability to satisfy its cash needs and to achieve its
projections of profitability. There can be no assurance that the ASE will
continue to permit the Company to be listed on the ASE.

                                        5

<PAGE>   7



Since May 5, 1986, shares of the Company's $.01 par value Common Stock, have
traded on the American Stock Exchange (symbol "AFN"). The following table sets
forth, for the periods indicated and as reported by the American Stock Exchange,
the high and low sales prices for shares of the Company's Common Stock.




 Quarter Ended          High           Low
 -------------          ----           ---


JULY 31, 1995            2-1/8         11/16
October 31, 1995         1-3/4        1-1/16
January 31, 1996        1-9/16         15/16
April 30, 1996           2-1/8         1-1/8
JULY 31, 1996           3-1/16         1-1/4
October 31, 1996         2-3/8         1-1/2
January 31, 1997       1-11/16         1-1/8
April 30, 1997          1-9/16         13/16
JULY 31, 1997            1-1/4           1/2




The number of shareholders of record of the Common Stock on November 7, 1997 was
2,228. The Company believes that there are a significant number of beneficial
owners of its Common Stock whose shares are held in "Street Name".

The Company has paid no cash dividends with respect to its Common Stock since
its inception.





                                        6

<PAGE>   8
ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this report.

<TABLE>
<CAPTION>
(000's omitted, except                                 Fiscal Years Ended July 31
per share amounts)                  1997            1996           1995            1994            1993
                                    ----            ----           ----            ----            ----
<S>                             <C>             <C>            <C>             <C>             <C>     
0perating Data:
Net sales                       $ 24,701        $ 34,733       $ 32,151        $ 29,358        $ 34,764

Gross profit                      16,517          23,353         22,859          21,707          21,729

Operating (loss)income            (3,877)          2,820          1,960            (924)         (7,555)

Other income (expense)               948              54           (460)           (503)            832


(Loss) income  before
 provision for
 income taxes                     (2,929)          2,874          1,500          (1,427)         (6,723)

Net (Loss) income               $ (3,009)       $  2,693       $  1,365        $ (1,427)       $ (6,723)
                                --------        --------       --------        --------        --------

Net (loss)income  per
 Common equivalent share:       $  (0.25)       $   0.22       $   0.12        $  (0.14)       $  (0.85)
                                ========        ========       ========        ========        ========



Balance Sheet Data:

  Working Capital               $  1,254        $    988       $ (2,629)       $ (5,905)       $ (6,835)

        Total assets               4,611          11,228         10,756          12,362          14,615

  Short-term debt                      0           1,938          2,863           5,421           7,641

  Long-term debt                       0             425            725             149             149

  Shareholders' equity          $  1,181        $  4,131       $  1,388        $     24        $    151
                                ========        ========       ========        ========        ========
</TABLE>




                                        7

<PAGE>   9
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS -

Certain statements in this report under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including, without limitation, statements
regarding future cash requirements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance and achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, general economic and business conditions;
industry capacity; industry trends, competition, litigation, material costs and
availability; the loss of any significant management personnel; the loss of any
significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of capital; business
abilities and judgement of personnel; availability of qualified personnel;
changes in, or the failure to comply with, government regulations; and other
factors referenced in this report.

The following table sets forth items in the Statements of Operations as a
percent of net sales:

<TABLE>
<CAPTION>
                                         Relationship to Net Sales
                                    for the Fiscal Years Ended July 31,
                                    1997           1996          1995
                                   ------         ------        ------
<S>                                 <C>            <C>           <C>   
Net sales                           100.0%         100.0%        100.0%

Cost of goods sold                   33.1           32.8          28.9

Selling, general and
 administrative expenses             71.7           59.1          65.0

Write off of goodwill                10.9             --            --

Operating (loss) income             (15.7)           8.1           6.1

Other income (expense) , net          3.8            0.2          (1.4)
Net (loss) income before
 provision for income tax           (11.9)           8.3           4.7
                                   ------         ------        ------

Net (loss) income                   (12.2)%          7.8%          4.2%
                                   ======         ======        ======
</TABLE>








                                        8

<PAGE>   10
FISCAL YEARS ENDED JULY 31, 1997 AND 1996

The Company recorded a net loss of $3,008,562 for the fiscal year ended
July 31, 1997, as compared to net income of $2,692,692 for the fiscal year
ended July 31, 1996. The net loss per common and common equivalent share was
$0.25 for the year ended July 31, 1997, as compared to income of $0.22 for the
year ended July 31, 1996. Included in the loss is the write off of goodwill in
the amount of $2,620,081 recorded during the fourth quarter of the current
fiscal year, as a result of the Company's assessment of future operating cash
flows in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". Excluding the effect of the write off of goodwill
the net loss for the fiscal year ended July 31, 1997, was $407,307. Excluding
the effect of the write off of goodwill the net loss per common and common
equivalent shares was $0.03 for the fiscal year ended July 31, 1997.

Net sales for the fiscal year ended July 31, 1997, decreased to $24,700,684 from
$34,733,375 recorded in the prior fiscal year, a decrease of $10,032,691 or
28.9%. The sales decrease is primarily related to an end to the Company's
relationship with the Home Shopping Network ("HSN") combined with a decrease in
sales to department stores. Sales to HSN for the year ended July 31, 1997, were
$11,965,350 as compared to $17,858,631 for the year ended July 31, 1996, a
decrease of $5,893,281 or 33.0%. The Company's relationship with HSN ended
during January 1997 due to the Company's contract dispute with Adrienne Newman.
For a further discussion of the Company's relationship with Adrienne Newman and
HSN see Item 3, "Legal Proceedings".

Net Sales to department stores for the year ended July 31, 1997, decreased to
$12,735,334 from $16,570,070 for the year ended July 31, 1996, a decrease of
$3,834,736, or 23.1%. The Company was selling its Arpel product line in 243
locations throughout the United States and Canada at July 31, 1997, as compared
to 315 locations at July 31, 1996. The Company no longer distributes its
products through Federated Department Stores Macy's East and Macy's West
Divisions. Distribution through Macy's East and Macy's West ceased during
October 1996 and May 1997, respectively.

Cost of goods sold as a percentage of net sales was 33.1% for the fiscal year
ended July 31, 1997, as compared to 32.8% for the fiscal year ended July 31,
1996. The decrease is primarily related to product mix offset by the decrease in
HSN sales.

Selling, general and administrative expenses decreased to $17,774,382 for the
fiscal year ended July 31, 1997, from $20,532,894 for the fiscal year ended July
31, 1996, a 13.4% decrease. The decrease is primarily related to a decrease of
approximately $1,688,000 in compensation payments to Adrienne Newman. Ms.
Newman's employment agreement with the Company required that the Company
compensate Ms. Newman for 33.3% of the net revenues after direct expenses
attributable to sales of products on HSN. Contributing to the expense decrease
was the expense reduction program which has been implemented by the Company
during January 1997.

In accordance with SFAS No. 121, the Company recorded a noncash write off
of $2,620,081 in the fourth quarter of fiscal year 1997 as a result of its
evaluation of expected future cash flows from operations before interest.

The Company recorded net interest expense for the fiscal year ended July 31,
1997, in the amount of $38,013 as compared to interest expense for the fiscal
year ended July 31, 1996, in the amount of $313,100. This decrease is primarily
attributable to significantly lower debt levels. The Company has reduced bank
debt to $0 at July 31, 1997. During June 1997 the Company satisfied the
remaining balance due on its Term Promissory note with PNC Bank.





                                        9

<PAGE>   11
The Company recorded other income of $986,320 for the fiscal year ended July 31,
1997, related to the sale of its Norwood, New Jersey distribution and
administration facility in June 1997. For the fiscal year ended July 31, 1996,
the Company recorded a gain of $394,392 related to the sale of its licensing and
distribution rights for certain fragrances by Robert Piguet to Fashion
Fragrances and Cosmetics Ltd. ("FF&C").

The remaining NOL available to the Company for federal income tax reporting
purposes at July 31, 1997, is approximately $5.4 million. The Company has
$2.2 million of the NOL carryforward available for use for the fiscal year ended
July 31, 1998.

The Company has recorded a valuation allowance equal to the amount of deferred
assets for the fiscal year ended July 31, 1997. In making this determination the
Company considered the operating history of the Company and the end of the
Company's relationship with HSN during January 1997 following the departure of
Adrienne Newman from the Company.

FISCAL YEARS ENDED JULY 31, 1996 AND 1995

The Company recorded net income of $2,692,692 for the fiscal year ended July 31,
1996 as compared to $1,364,646 for the fiscal year ended July 31, 1995.

Net sales for the fiscal year ended July 31, 1996 increased to $34,733,375 from
$32,151,204 recorded in the prior fiscal year, an increase of $2,582,171 or
8.0%. Sales of cosmetic products increased to $34,428,701 from $31,073,515 as
compared to the prior year, a 10.8% increase. Sales of fragrance products
decreased to $304,674 from $1,077,689, as compared to the prior fiscal year, a
71.7% decrease attributable in large part to the Company's decision to suspend
its fragrance business during the latter part of fiscal 1995. The fiscal 1996
fragrance sales were related to the sale of the Company's remaining inventory of
fragrance products.

The cosmetic sales increase of $3,355,186 was primarily attributable to the
Company's continued success in selling cosmetic products through HSN. Sales to
HSN increased to $17,858,631 from $15,667,416 recorded in the prior fiscal year,
an increase of $2,191,215 or 14.0%. The Company commenced selling products
through HSN of Canada during January 1996 with $933,261 of sales to HSN of
Canada being recorded during the fiscal year ended July 31, 1996. Sales of
cosmetic products to department stores increased to $16,570,070 from $15,406,099
recorded in the prior fiscal year, an increase of $1,163,971 or 7.6%. This
increase was primarily due to increased awareness of the ARPEL brand name as a
result of the Company's appearances on HSN, as well as normalization of the
Company's inventory out of stock situation in the second half of fiscal 1996.

Cost of goods sold as a percentage of net sales was 32.8% for the fiscal year
ended July 31, 1996, as compared to 28.9% for the fiscal year ended July 31,
1995. Cost of goods sold for cosmetic products was 32.1% for the fiscal year
ended July 31, 1996, as compared to 28.5% for the fiscal year ended July 31,
1995. The increase in the cosmetic cost of goods sold percentage was primarily
related to sales of cosmetic products to HSN.

Selling, general and administrative expenses decreased to $20,532,894 for the
fiscal year ended July 31, 1996 from $20,898,893 for the fiscal year ended July
31, 1995, a 1.8% decrease. The decrease was primarily attributable to decreases
in advertising and promotional expenses related to the Company's decision to
cease its fragrance business.

Interest expenses decreased to $313,100 for the fiscal year ended July 31, 1996,
from $439,743 recorded during the prior fiscal year ended July 31, 1995, a 28.8%
decrease. This decrease is primarily attributable to lower debt levels. The
Company recorded a gain of $394,392 related to the sale of its licensing and
distribution rights for certain fragrances by Robert Piquet to FF&C during March
1996.


                                       10

<PAGE>   12
Net income per common and common equivalent share for the fiscal year ended July
31, 1996 was $0.22 as compared to $0.12 for the fiscal year ended July 31, 1995.

The remaining NOL available to the Company for federal income tax reporting
purposes at July 31, 1996 is approximately $4,300,000. The Company had $707,000
of the NOL carryforward available for use for the tax year ending July 31, 1997.

FISCAL YEARS ENDED JULY 31, 1995 AND 1994

The Company recorded net income of $1,364,646 for the fiscal year ended July 31,
1995 as compared to a net loss of ($1,427,148) for the fiscal year ended July
31, 1994. This marked the first year since fiscal 1989 that the Company has
recorded profits.

Net sales for the fiscal year ended July 31, 1995 increased to $32,151,204 from
$29,357,922 recorded in the prior fiscal year, an increase of $2,793,282 or
9.5%. Sales of cosmetic products increased to $31,073,515, from $24,771,150 or
24.5%, while sales of fragrance products decreased to $1,077,689 from $4,586,772
or 76.5%, as compared to the prior fiscal year.

The cosmetic sales increase of $6,302,365 was primarily attributable to the
success of selling cosmetic products through HSN. Sales to HSN amounted to
$15,667,416 for the fiscal year ended July 31, 1995. The Company commenced
marketing products through HSN during April 1994 with sales of $4,574,262 for
the final four months of the fiscal year ended July 31, 1994. Net sales of
cosmetic products through department stores decreased by $773,089 primarily due
to a net decrease of 38 unprofitable locations through which ARPEL products were
sold.

The fragrance sales decrease of $3,509,083 was primarily attributable to the
Company's decision to temporarily suspend its current fragrance business, during
the latter part of fiscal 1995.

The Company's fragrance sales have decreased during the last three fiscal years
as follows:

<TABLE>
<CAPTION>
Fiscal Year Ended
     July 31,                            Net Sales                 $ Decrease                   % Decrease
-------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                      <C>                                   <C>
     1995                             $          1,077,689     $        3,509,083                    76%
     1994                                        4,586,772              6,184,468                    57%
     1993                                       10,771,240              6,242,760                    36%
</TABLE>

Cost of goods sold as a percentage of net sales was 28.9% for the fiscal year
ended July 31 1995, as compared to 26.1% for the fiscal year ended July 31,
1994. Cost of goods sold for cosmetic products was 28.5% for the fiscal year
ended July 31, 1995, as compared to 22.4% for the fiscal year ended July 31,
1994. Cost of goods sold for fragrance products was 40.4% for the fiscal year
ended July 31, 1995 as compared to 46.1% for the fiscal year ended July 31,
1994. The improvement in the fragrance cost of goods sold percentage was
primarily attributable to lower margins earned during fiscal 1994 related to the
sale of discontinued product lines and inventory overstocks.

Selling, general and administrative expenses decreased 7.7% to $20,898,893 for
the fiscal year ended July 31, 1995 from $22,630,785 for the fiscal year ended
July 31, 1994. The decrease was primarily attributable to decreases in
advertising and promotional expenses related to the Company's reduction in its
fragrance business and the expenses related to




                                       11

<PAGE>   13
ARPEL'S former relationship with Premier. The July 31, 1995 fiscal year selling,
general and administrative expenses included a charge of $500,000 related to
salon assets, which were determined to be outdated.

Net expenses from non-operating items were $460,632 for the fiscal year ended
July 31, 1995, as compared to $503,296 for the fiscal year ended July 31, 1994.
The decrease was primarily attributable to decreased interest expenses related
to lower debt levels.

Net income per common and common equivalent share for the fiscal year ended July
31, 1995 was $0.12 as compared to a net loss of ($0.14) for the fiscal year
ended July 31, 1994.

The remaining NOL available to the Company for federal income tax reporting
purposes at July 31, 1995 was approximately $4,300,000.

OTHER

Revenue is recognized upon shipment of merchandise to the customer with a
reserve for return recorded based upon historical experience.

The Company expenses all advertising costs in the period in which the cost is
incurred.

Trade Receivables are shown net of certain valuation allowances which consist of
reserves for bad debts, reserves for returns and provisions for advertising and
salary chargebacks. The provisions for advertising and salary chargebacks are
based on agreements with department stores with which the Company does business.
The Company is liable for certain advertising and salary charges which take
place at the store level which will be deducted by the department store at the
time payment is made to the Company. The Company believes that this presentation
more accurately reflects the actual amount which will be collected as cash
receipts. At July 31, 1997, and 1996 the Company's provision for advertising and
salary deductions was $844,162 and $661,353 respectively.

The Company has implemented financial and distribution software that is year
2000 compliant. The Company assessed the impact of the year 2000 on its
operations, including the development of cost estimates for and the extent of
programming changes required to address the issue and determined the costs
related thereto would not have a material impact on its ongoing results of
operation.

LIQUIDITY AND CAPITAL RESOURCES

The Company had positive working capital of $1,254,149 at July 31, 1997, an
increase of $267,352 from working capital of $986,797 at July 31, 1996.

Total bank borrowings were reduced by $2,325,000 to $0 at July 31, 1997. On
November 29, 1996, the Company paid the remaining balance of its revolving
secured line of credit with Credit Lyonnais, New York. This loan was secured by
domestic accounts receivable of ARPEL. At July 31, 1996, borrowings under this
line of credit were $1.6 million. On June 23, 1997, the Company paid the
remaining balance of its term promissory note with PNC Bank (formerly Midlantic
National Bank). The term promissory note was collateralized by a distribution
and administration facility which was sold by the Company. The balance under
this term promissory note was $725,000 at July 31, 1996.

During fiscal year 1997, significant losses from operations and cash used in
operations were incurred as a result of the discontinuance of appearances on HSN
resulting from the dispute with Adrienne Newman. The Company has been
significantly dependent on HSN during

                                       12

<PAGE>   14
the fiscal years 1995 and 1996. The Company does not maintain any external
financing arrangements and relies upon cash generated from operations. In
addition, the Company has planned on implementing a number of new initiatives
to improve upon its fiscal 1997 results. If the Company is not successful, 
they anticipate to continue to incur losses from operations. The combination of
the above factors raises substantial doubt about the Company's ability to
continue as a going concern and its ability to generate sufficient cash to
support its operations during fiscal 1998.

The Company implemented a restructuring plan during January 1997 designed to
move its operations towards profitability and to reduce the adverse effect of
the departure of Adrienne Newman. This plan included $2.2 million in annualized
operating expense reductions implemented during January 1997. The Company
continues to seek additional expense reductions beyond this amount.

The Company is attempting to improve its current retail business by
capitalizing on its niche salon / service presence and has identified areas of
opportunity for fiscal 1998. Areas where the Company is focusing upon are as
follows:


-        The Company has developed a professionally designed Catalogue. The
         initial edition was mailed during October and November 1997 to
         approximately 70,000 consumers and featured approximately 25 of Arpel's
         most popular products and skin care kits. The Company plans to have
         subsequent editions featuring approximately 50 products and kits and to
         mail its catalogue four times each year during the winter, spring,
         summer and fall, with an increase in volume from mailing to mailing.
         This Catalogue was conceived primarily in response to customer demands.

-        The Company is in the final stages of preparing to introduce its
         products in Italy through Shopping America an Italian home shopping
         network. The format will be similar to HSN and QVC in the United States
         and Teleshopping, the most successful home shopping show in France.
         This shopping network will reach 40 million viewers which represents
         81.7% of the total population in Italy. The Company plans to launch a
         test market during November 1997 and is scheduled to be the exclusive
         cosmetic line on Shopping America.

-        On August 6, 1997, the Company entered into an agreement with Target.
         Under the agreement the Company and Target will place advertisements in
         publications for the sale of specialty packaged cosmetic skin care
         products. Target will advance all production costs for advertisements
         approved by the Company and the Company will advance all creative costs
         associated with such advertising. Expenses incurred by Target and the
         Company shall be reimbursed pro rata from gross revenues received from
         the sale of products. All revenues remaining after payment of expenses
         shall be allocated 49.5% to Target, 40.5% to the Company and 10% to
         other parties. The agreement terminates on February 6, 1999 and renews
         indefinitely if the advertising placed by Target and the Company
         generates more than $1.5 million in retail sales within a one year
         period from the date the advertisement first appears in the media.

-        The Company has appointed an agent the exclusive retail distribution
         rights for the Company's products in Saudi Arabia and the United Arab
         Emirates. The Company and the agent have until January 1, 1998 to agree
         on the proposed terms of the agreement. There can be no assurance that
         such an agreement will be reached.




                                       13

<PAGE>   15



Although there can be no assurance that management will successfully implement
the initiatives discussed previously, they believe that its cost reduction
programs combined with the new initiatives will enable the Company to improve
upon its fiscal 1997 performance, minimize the impact of the end of the
Company's relationship with HSN and provide satisfactory liquidity through
fiscal 1998.

EFFECTS OF INFLATION-

The Company did not have any significant price increases for its products during
the fiscal years ended July 31, 1997, 1996, or 1995.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The required financial statements and supplementary financial information are
attached at the end of this report. For page of reference, see the Index to the
Consolidated Financial Statements appearing on page F-1 of this Annual Report on
Form 10-K.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Information with respect to the directors and executive officers of the Company
will be included in the Company's Proxy Statement ("Proxy Statement") for its
annual meeting of shareholders which is expected to be filed within 120 days
from the end of the fiscal year and such information is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to the executive compensation is incorporated herein by
reference to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT

Information with respect to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related transactions is
incorporated herein by reference to the Proxy Statement.





                                       14

<PAGE>   16
PART IV

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

(a) (1)        Financial Statements

The audited consolidated financial statements of the Company and its
subsidiaries and the Report of Independent Public Accountants thereon, as
required, are set forth in the Index to Consolidated Financial Statements on
page F-1 of this report.

(a) (2)        Financial Statement Schedules

Except for Schedule VIII, which is included herein, all other schedules have
been omitted as not applicable or not required, or because information required
is shown in the consolidated financial statements or notes thereto.

(a) (3)        Exhibits

The following items are filed herewith or incorporated by reference:

3.1      Certificate of Incorporation of the Company, as amended (1) (Exhibit
         3.1)

3.2      Certificate of Amendment to the Certificate of Incorporation of the
         Company, as amended, as filed with the New York State Department of
         State on September 11, 1991. (2)(Exhibit 3.2)

3.3      By-laws of the Company, as amended. (2) (Exhibit 3.3)

4.1      Form of specimen of the Company's Common Stock certificate. (3)
         (Exhibit 4.1)

10.1     Stock Option Plan. (4) (Exhibit 10.1)

10.2     New Jersey EA. Bond Financing Agreement, dated July 20,1983 and Note of
         Company thereunder.(5) (Exhibit 10.2)

10.3     Lease Agreement, dated November 30, 1983, for 720 Fifth Avenue, New
         York, New York. (6) (Exhibit 10.3)

10.4     Form of Stock Option Agreement under the Stock Option Plan. (4)
         (Exhibit 10.4)

10.5     Alfin, Inc. (f/k/a/ Alfin Fragrances, Inc.) Stock Option Plan, as
         amended. (3) (Exhibit 10.5)

10.6     Stock Purchase Agreement, dated April 5, 1990, among the Company,
         Adrien Arpel, Inc. and the Security holders of Adrien Arpel, Inc. (1)
         (Exhibit 10.6)






                                       15
<PAGE>   17
10.7     Employment Agreement, dated as of April 4, 1990, between the Company
         and Adrienne Newman, amending the employment agreement dated as of
         November 1, 1983, with Adrienne Newman and Seligman and Latz Inc. (2)
         (Exhibit 10.7)

10.8     Warrant Agreement, dated as of April 4, 1990, between the Company and
         Adrienne Newman. (2) (Exhibit 10.8)

10.9     Revolving Credit and Term Loan Agreement, dated as of July 31, 1990,
         among the Company, Adrien Arpel, Inc. and Midlantic National Bank. (6)
         (Exhibit 10.9)

10.10    Departmental License Agreement, dated as of July 10, 1991, between
         Bullock's, Inc. and Adrien Arpel, Inc.(7) (Exhibit 10.10)

10.11    First Amendment, dated January 31, 1991, to Credit and Term Loan
         Agreement dated as of July 31, 1990, among the Company, Adrien Arpel,
         Inc. and Midlantic Bank. (7) (Exhibit 10.11)

10.12    Second Amendment, dated June 10, 1991, to Credit and Term Loan
         Agreement dated July 31, 1990, as amended, among the Company, Adrien
         Arpel, Inc. and Midlantic National Bank. (7) (Exhibit 10.12)

10.13    Form of Executive Incentive Compensation Plan Agreement, dated as of
         September 1991, between the Company and Adrienne Newman. (7) (Exhibit
         10.13)

10.14    Amended and Restated Revolving Credit and Term Loan Agreement, dated
         June 30, 1992, between Midlantic National Bank and the Company and
         Adrien Arpel, Inc. (8) (Exhibit 10.14)

10.15    Continuing Letter of Credit Agreement, dated May 13, 1993, between the
         Company, Adrien Arpel, Inc. and Credit Lyonnais Bank. (8) (Exhibit
         10.15)

10.16    Amended and Restated Loan Agreement, dated June 24, 1993, between the
         Company and Midlantic National Bank.(8) (Exhibit 10.16)

10.17    Third Amendment to Amended and Restated Revolving Credit and Term Loan
         Agreement, dated August between Midlantic National Bank and the Company
         and Adrien Arpel, Inc. (9) (Exhibit 10.17)

10.18    Amendment No. 2, dated November 19, 1993, to Employment Agreement dated
         April 4, 1990, between the Company and Adrienne Newman. (9) (Exhibit
         10.18)

10.19    Amendment No.1 to the Continuing Letter of Credit Agreement, dated
         February 28, 1994, between the Company, Adrien Arpel, Inc. and Credit
         Lyonnais Bank. (9) (Exhibits 10.19)

10.20    Term Promissory Note dated February 1994, between Midlantic National
         Bank and the Company. (9)(Exhibit 10.20)





                                       16
<PAGE>   18
10.21    Second Amendment to Amended and Restated Revolving Credit and Term Loan
         Agreement, dated February 1994, between Midlantic National Bank and the
         Company and Adrien Arpel, Inc. (9),(Exhibit 10.21)

10.22    Warrant Agreement, dated November 19, 1993, between the Company and
         Adrienne Newman. (9)(Exhibit 10.22)

10.23    The 1993 Stock Option Plan of Alfin, Inc. (9)(Exhibit 10.23)

10.24    Agreement dated August 1, 1995 between the Company and CECE SA (Exhibit
         10.24)

10.25    Fourth Amendment to Amended and Restated Revolving Credit and Term Loan
         Agreement dated July 31, 1995, between the Company and Midlantic
         National Bank (Exhibit 10.25)

10.26    Agreement dated March 7,1996 between the Company and Fashion Fragrances
         and Cosmetics, Ltd. related to the sale of the business known as Robert
         Piquet (Exhibit 10.26).

10.27    Agreement dated April, 1996 between the Company and Fashion Fragrances
         and Cosmetics Ltd. related to the licensing of Robert Piquet (Exhibit
         10.27).

10.28    Agreement dated December 11, 1995, between the Company and Lauren
         Greenwald (Exhibit 10.28)

10.29    Fifth Amendment to Amended and Restated Revolving Credit and Term Loan
         Agreement dated December 11, 1995, between the Company and Midlantic
         National Bank (Exhibit 10.29)

10.30    Amendment No. 5 dated as of January 31, 1996, between the Company,
         Adrien Arpel, Inc. and Credit Lyonnais Bank (Exhibit 10.30)

10.31    Agreement dated November 8, 1996 between the Company and Adrienne
         Newman with respect to the sale of Adrien Arpel cosmetic products and
         kits on The Home Shopping Network. (Exhibit 10.31)

22       Subsidiaries of the Company - Adrien Arpel, Inc., a Delaware
         corporation; Suisse Laboratories Ltd., a Delaware corporation.

(1)      Incorporated by reference from the designated Exhibit of the Company's
         Current Report on Form 8-K, reporting an event on April 5, 1990 (File
         No. 1-9135).

(2)      Incorporated by reference from the designated Exhibit to the Company's
         Annual Report on Form 10-K for the year ended July 31, 1990. (File No.
         1- 9135).

(3)      Incorporated by reference from the designated Exhibit to the Company's
         Annual Report on Form 10-K for the year ended July 31, 1989. (File
         No.1-9135).




                                       17
<PAGE>   19
(4)      Incorporated by reference from the designated Exhibits to the Company's
         Annual Report on Form 10-K for the year ended July 31, 1985. (File No.
         1- 9135).

(5)      Incorporated by reference from the designated Exhibit to the Company's
         Registration Statement on Form S-1. (File No. 2-85600).

(6)      Incorporated by reference from the designated Exhibits to the Company's
         Annual Report on from 10-K for the year ended July 31, 1984. (File No.
         1-9135).

(7)      Incorporated by reference from the designated Exhibits to the Company's
         Annual Report on Form 10-K for the year ended July 31, 1992. (File No.
         1-9135)

(8)      Incorporated by reference from the designated Exhibits to the Company's
         Annual Report on Form 10-K for the year ended July 31, 1993. (File No.
         1-9135)

(9)      Incorporated by reference from the designated Exhibits to the Company's
         Annual Report on Form 10-K for the year ended July 31, 1994. (File No.
         1-9135).

(10)     Incorporated by reference from the designated Exhibits to the Company's
         Annual report in Form 10K for the year ended July 31, 1995. (file No.
         1-9135).

(b)       Reports on Form 8-K.


No reports on Form 8-K were filed by the Company during the last quarter of the
period covered by this report.



                                       18
<PAGE>   20
                                   SIGNATURES


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

Dated: November 12, 1997                    ALFIN, INC.

                                            By:  /s/ Elisabeth Fayer    
                                                     ------------------------
                                                     Elisabeth Fayer
                                                     Chief Executive Officer/
                                                      Director

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Elisabeth Fayer and his true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitutes,
may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on November 12, 1997 on behalf of the
Registrant and in the capacities indicated.


               Signature                             Title


            S/Elisabeth Fayer              Chief Executive Officer and
              Elisabeth Fayer              Director


            S/Michael D. Ficke             Vice President and
              Michael D. Ficke             Chief Financial Officer


            S/Jacques Desjardins           Director
              Jacques Desjardins




            S/Steven Korda                 Director
              Steven Korda



            S/Suzanne Langlois             Director
              Suzanne Langlois
<PAGE>   21
                          ALFIN, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS






                                                                     PAGE
                                                                     ----




Report of Independent Public Accountants                              F-2


Consolidated Balance Sheets as of July 31,
1997 and 1996                                                         F-3


Consolidated Statements of Operations for
the Three Fiscal Years Ended July 31, 1997.                           F-4


Consolidated Statements of Shareholders' Equity
for the Three Fiscal Years Ended July 31, 1997.                       F-5


Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended July 31, 1997.                               F-6

Notes to Consolidated Financial Statements                            F-7


Schedule VIII - Valuation and Qualifying Accounts
for the Three Fiscal Years Ended July 31, 1997                        F-19










                                       F-1
<PAGE>   22
Report of Independent Public Accountants

To Alfin, Inc.:

We have audited the accompanying consolidated balance sheets of Alfin, Inc. (a
New York corporation) and subsidiaries as of July 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended July 31, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial state ments and the schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alfin, Inc. and
subsidiaries as of July 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1996, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, during fiscal year ended July 31, 1997 significant losses
from operations and cash used in operations were incurred as a result of the
discontinuance of appearances on the Home Shopping Network ("HSN") resulting
from the dispute with Adrienne Newman. The Company has been significantly
dependent upon HSN during the fiscal years 1995 and 1996. The Company does not
maintain any financing arrangements and relies upon cash generated from
operations. The above factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.


New York, New York
November 11, 1997                                       ARTHUR ANDERSEN  LLP




                                       F-2
<PAGE>   23
                          ALFIN, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             JULY 31, 1997 AND 1996


                                                                                

<TABLE>
<CAPTION>
ASSETS                                                        1997                1996 
                                                          ------------        ------------
<S>                                                       <C>                 <C>         
CURRENT ASSETS:
CASH & CASH EQUIVALENTS
                                                          $    658,378        $  2,210,972
ACCOUNTS RECEIVABLE, NET OF ALLOWANCES
FOR DOUBTFUL ACCOUNTS AND CHARGEBACKS
OF $891,532 AND $998,769 AT JULY 31,
1997 AND 1996, RESPECTIVELY AND SALES
ALLOWANCES OF $80,197 AND $256,264 AT
JULY 31, 1997 AND 1996, RESPECTIVELY                           167,021             680,370

INVENTORIES                                                  2,227,549           3,271,126

PREPAID EXPENSES & OTHER CURRENT ASSETS                        880,938             746,513
                                                          ------------        ------------
TOTAL CURRENT ASSETS                                         3,933,886           6,908,981
                                                          ------------        ------------
PROPERTY & EQUIPMENT                                         2,333,028           4,998,954
LESS-ACCUMULATED DEPRECIATION &
      AMORTIZATION                                          (1,740,341)         (3,537,025)
                                                          ------------        ------------

      PROPERTY & EQUIPMENT, NET                                592,687           1,461,929


OTHER ASSETS:

GOODWILL, NET OF ACCUMULATED AMORTIZATION
OF $0 AND $472,957 AT JULY 31,1997
AND 1996, RESPECTIVELY                                              --           2,680,081

OTHER                                                           83,938             177,195
                                                          ------------        ------------
      TOTAL OTHER ASSETS                                        83,938           2,857,276
                                                          ------------        ------------

      TOTAL ASSETS                                        $  4,610,511        $ 11,228,186
                                                          ============        ============
</TABLE>


<TABLE>
<CAPTION>
LIABILITIES &                                                                                        
SHAREHOLDERS' EQUITY                                          1997                1996 
                                                          ------------        ------------
<S>                                                       <C>                 <C>         
 CURRENT LIABILITIES:
     CURRENT PORTION OF MORTGAGE,
     NOTE & OTHER LOANS PAYABLE                           $         --        $  1,933,499
     DUE TO RELATED PARTIES                                         --               4,826

     ACCOUNTS PAYABLE                                        1,365,767           2,177,078

     ACCRUED EXPENSES-OTHER                                  1,313,971           1,806,781
                                                          ------------        ------------

     TOTAL CURRENT LIABILITIES                               2,679,738           5,922,184

 NOTE PAYABLE                                                       --             425,000
                                                          ------------        ------------

     TOTAL LIABILITIES                                       2,679,738           6,347,184
                                                          ------------        ------------

 REDEEMABLE PREFERRED STOCK                                    750,000             750,000

 SHAREHOLDERS' EQUITY:
      COMMON STOCK, $.01 PAR VALUE
      17,000,000 SHARES AUTHOR-
      IZED; 11,787,983 & 11,662,926
      SHARES ISSUED & OUTSTANDING AT
      JULY 31,1997 & 1996, RESPECTIVELY                        117,879             116,629

      ADDITIONAL PAID-IN CAPITAL                            12,953,123          12,787,290

      ACCUMULATED DEFICIT                                  (11,890,229)         (8,772,917)
                                                          ------------        ------------

      TOTAL SHAREHOLDERS' EQUITY                             1,180,773           4,131,002
                                                          ------------        ------------
           TOTAL LIABILITIES AND
           SHAREHOLDERS' EQUITY                           $  4,610,511        $ 11,228,186
                                                          ============        ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.



                                       F-3
<PAGE>   24
                          ALFIN, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    FOR THE THREE FISCAL YEARS ENDED JULY 31



<TABLE>
<CAPTION>
                                      1997                1996                1995
                                  ------------        ------------        ------------
<S>                               <C>                 <C>                 <C>         
NET SALES                         $ 24,700,684        $ 34,733,375        $ 32,151,204

COST OF GOODS SOLD                   8,183,676          11,380,089           9,292,033
                                  ------------        ------------        ------------

GROSS PROFIT ON SALES               16,517,008          23,353,286          22,859,171

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES             17,774,382          20,532,894          20,898,893

WRITE OFF OF GOODWILL                2,620,081                  --                  --
                                  ------------        ------------        ------------

OPERATING (LOSS) INCOME             (3,877,455)          2,820,392           1,960,278
                                  ------------        ------------        ------------

OTHER INCOME (EXPENSE)

  INTEREST EXPENSE,NET            $    (38,013)       $   (313,100)       $   (439,743)

  GAINS ON SALES OF
   ASSETS                              986,320             394,392                  --

 OTHER EXPENSE                              --             (27,992)            (20,889)
                                  ------------        ------------        ------------

  TOTAL OTHER INCOME                   948,307              53,300            (460,632)
                                  ------------        ------------        ------------
  (EXPENSE)

(LOSS) INCOME BEFORE
 PROVISION FOR INCOME TAXES         (2,929,148)          2,873,692           1,499,646

PROVISION FOR INCOME TAXES              79,414             181,000             135,000
                                  ------------        ------------        ------------


NET (LOSS) INCOME                 $ (3,008,562)       $  2,692,692        $  1,364,646
PREFERRED STOCK DIVIDENDS              108,750             108,750             108,750
                                  ------------        ------------        ------------
INCOME AVAILABLE TO COMMON
SHAREHOLDERS                        (3,117,312)          2,583,942           1,255,896
                                  ============        ============        ============

NET (LOSS) INCOME PER
COMMON & COMMON
EQUIVALENT SHARE                  $      (0.25)       $       0.22        $       0.12
                                  ============        ============        ============

NET (LOSS) INCOME PER
SHARE AVAILABLE TO
COMMON SHAREHOLDERS               $      (0.26)       $       0.21        $       0.11
                                  ============        ============        ============
</TABLE>
                     THE ACCOMPANYING NOTES ARE AN INTEGRAL
                     PART OF THESE CONSOLIDATED STATEMENTS.

                                       F-4
<PAGE>   25
                           ALFIN, INC. & SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE THREE FISCAL YEARS ENDED JULY 31, 1997


<TABLE>
<CAPTION>
======================================================================================================
                                       NUMBER OF                            ADDITIONAL
                                        COMMON              COMMON          PAID-IN        ACCUMULATED
                                        SHARES              STOCK           CAPITAL          DEFICIT
======================================================================================================
<S>                                 <C>                   <C>            <C>              <C>         
BALANCE, JULY 31, 1994               11,402,904            114,029        12,522,390       (12,612,755)
 STOCK DIVIDENDS ON
 REDEEMABLE PREFERRED STOCK             116,407              1,164           107,586          (108,750)

NET INCOME                                                                                   1,364,646
                                    -----------        -----------       -----------       -----------

BALANCE, JULY 31, 1995               11,519,311        $   115,193        12,629,976       (11,356,859)

STOCK DIVIDENDS ON REDEEMABLE
PREFERRED STOCK                          93,615                936           107,814          (108,750)
STOCK ISSUED FOR OPTIONS                 50,000                500            49,500                --
NET INCOME                                                                                   2,692,692
                                    -----------        -----------       -----------       -----------

BALANCE, JULY 31, 1996               11,662,926            116,629        12,787,290        (8,772,917)

STOCK DIVIDENDS ON REDEEMABLE
PREFERRED STOCK                          66,724                667           108,083          (108,750)
STOCK ISSUED FOR OPTIONS                 58,333                583            57,750                --
NET LOSS                                                                                    (3,008,562)
                                    -----------        -----------       -----------       -----------

BALANCE, JULY 31, 1997               11,787,983            117,879        12,953,123       (11,890,229)
                                    ===========        ===========       ===========       ===========
</TABLE>




THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.

                                       F-5
<PAGE>   26
                          ALFIN, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE THREE FISCAL YEARS ENDED JULY 31, 1997

<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES           1997               1996               1995
-------------------------------------       -----------        -----------        -----------
<S>                                         <C>                <C>                <C>        
NET (LOSS) INCOME                           $(3,008,562)       $ 2,692,692        $ 1,364,646

ADJUSTMENTS TO RECONCILE NET
 (LOSS) INCOME  TO NET CASH
 (USED IN) PROVIDED BY
   OPERATING ACTIVITIES:

DEPRECIATION AND AMORTIZATION                   461,485            749,887          1,491,472

LOSS ON DISPOSAL OF FIXED ASSETS                270,188              3,750            192,605

GAINS ON SALES OF ASSETS                       (986,320)          (394,392)                --

WRITE OFF OF GOODWILL                         2,620,081                 --                 --

CHANGE IN ASSETS AND LIABILITIES:

 DECREASE  ACCOUNTS RECEIVABLE                  513,349            711,945          1,296,533
 DECREASE (INCREASE) INVENTORY                1,043,577             55,441           (773,234)
 (INCREASE) DECREASE PREPAID EXPENSES
 AND OTHER                                      (41,168)           (56,726)           291,344
DECREASE ACCOUNTS PAYABLE &
 ACCRUED EXPENSES                            (1,304,121)        (1,046,256)          (989,177)


                                            -----------        -----------        -----------
TOTAL ADJUSTMENTS                             2,577,071             23,649          1,509,543
                                            -----------        -----------        -----------
NET CASH (USED IN) PROVIDED BY
 OPERATING ACTIVITIES                          (431,491)         2,716,341          2,874,189
                                            -----------        -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES

CAPITAL EXPENDITURES                           (231,786)          (346,485)          (387,616)

SALE OF LICENSE AGREEMENT                            --            500,000                 --

SALE OF BUILDING                              1,415,675                 --                 --
                                            -----------        -----------        -----------
NET CASH PROVIDED BY (USED IN)
 INVESTING ACTIVITIES                         1,183,889            153,515           (387,616)
                                            -----------        -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES

PAYMENT OF LINES OF CREDIT                   (1,600,000)          (822,520)        (1,371,408)


BORROWINGS FROM LINE OF CREDIT                       --            328,000            730,175


PAYMENTS TO RELATED PARTIES                      (4,826)           (30,000)          (265,174)

PAYMENT OF DEBT OBLIGATIONS                     (33,499)          (300,000)        (1,074,974)

PAYMENT OF TERM PROMISSORY NOTE                (725,000)          (400,000)                --

PROCEEDS FROM SALE OF STOCK                      58,333             50,000                 --
                                            -----------        -----------        -----------

CASH (USED IN),
 FINANCING ACTIVITIES                        (2,304,992)        (1,174,520)        (1,981,381)
                                            -----------        -----------        -----------

NET(DECREASE) INCREASE IN CASH               (1,552,594)         1,695,336            505,192

 CASH & CASH EQUIVALENTS AT
 BEGINNING OF YEAR                            2,210,972            515,636             10,444
                                            -----------        -----------        -----------

 CASH & CASH EQUIVALENTS AT
 END OF YEAR                                $   658,378        $ 2,210,972        $   515,636
                                            ===========        ===========        ===========


CASH PAID DURING THE YEAR FOR:
   INTEREST                                 $   114,994        $   297,432        $   398,774
   INCOME TAXES
                                                158,109            271,695             25,819
</TABLE>



                   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                        OF THESE CONSOLIDATED STATEMENTS.

                                       F-6
<PAGE>   27
                          ALFIN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



      (1)  DESCRIPTION OF BUSINESS:


      Alfin, Inc. (the "Company") was engaged in the distribution, marketing and
      merchandising of imported fragrance brands worldwide pursuant to various
      distribution and licensing agreements. During the latter part of fiscal
      year 1995, the Company ceased its distribution of fragrance products.

      Adrien Arpel, Inc. ("ARPEL"), a wholly owned subsidiary, develops,
      distributes and sells treatment and cosmetic products. Additionally, the
      Company acts as an operator of service-oriented skin care salons in
      department stores. From April 1994 through January 1997 ARPEL also
      distributed specially packaged cosmetic products through television
      marketing on the Home Shopping Network ("HSN").


      (2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


      PRINCIPLES OF CONSOLIDATION -


      The accompanying consolidated financial statements include the accounts of
      Alfin, Inc., and ADRIEN ARPEL, INC.

      All significant intercompany transactions and accounts have been
      eliminated in consolidation.

      Certain reclassifications have been made to prior year balances to conform
      with current year presentation.

      INVENTORIES -

      Inventories are stated at the lower of cost or market. Cost is determined
      using the first-in, first-out method.

      Inventories at July 31, 1997 and 1996 were comprised of:

<TABLE>
<CAPTION>
                                1997             1996
                             ----------       ----------
      <S>                    <C>              <C>       
      Finished Goods         $  790,079       $1,303,538
      Raw Material and
       Components             1,437,470        1,967,588
                             ----------       ----------
                             $2,227,549       $3,271,126
                             ==========       ==========
</TABLE>

                                       F-7
<PAGE>   28
      REVENUE RECOGNITION -

      The Company recognizes revenue upon shipment of its merchandise to the
      customer and provides a reserve for sales returns based upon historical
      experience.

      CASH AND CASH EQUIVALENTS-

      The Company maintains money market accounts with maturities of three
      months or less which are reflected as cash equivalents.

      TRADE RECEIVABLES -

      Trade Receivables are shown net of certain valuation allowances which
      consist of reserves for bad debts, reserves for returns and provisions for
      advertising and salary chargebacks. The provisions for advertising and
      salary chargebacks are based on agreements with department stores with
      which the Company does business. The Company is liable for certain
      advertising and salary charges which take place at the store level which
      will be deducted by the department store at the time payment is made to
      the Company. The Company believes that this presentation more accurately
      reflects the actual amount which will be collected as cash receipts. At
      July 31, 1997 and 1996 the Company's provision for advertising and salary
      deductions was $844,162 and $661,353 respectively.

      PROPERTY AND EQUIPMENT -

      Property and equipment are stated at cost and depreciated using the
      straight-line method over their estimated useful lives ranging from 4 to
      15 years. Leasehold improvements are amortized on a straight-line basis
      over the remaining terms of the respective leases or estimated useful
      lives, whichever is shorter. Betterments and renewals that extend the life
      of the related asset are capitalized; other repairs and maintenance costs
      are expensed as incurred.

      Property and equipment were comprised of the following at July 31, 1997
and 1996:

<TABLE>
<CAPTION>
                                           1997               1996
                                       -----------        -----------
      <S>                              <C>                <C>        
      Land                             $        --        $   427,500
      Building & Improvements                   --          1,224,687
      Furniture & Fixtures               1,450,653          1,393,462
      Machinery & Equipment                882,375          1,710,590
      Leasehold Improvements                    --            242,715
                                       -----------        -----------

      Total Property & Equipment         2,333,028          4,998,954
      Accumulated Depreciation          (1,740,341)        (3,537,025)
                                       -----------        -----------

       Net Property & Equipment        $   592,687        $ 1,461,929
                                       ===========        ===========
</TABLE>


      During June, 1997 the Company sold its Norwood, New Jersey distribution
      and administration center for approximately $1,416,000 and recorded a gain
      of approximately $986,000.







                                       F-8
<PAGE>   29
      OTHER ASSETS -

      During March 1996, the Company sold its exclusive worldwide manufacturing,
      distribution and licensing rights for FRACAS and BANDIT and other
      fragrances by Robert Piquet to Fashion Fragrances and Cosmetics Ltd.
      ("FF&C") for $1.2 million which was payable in installments. During the
      first quarter of fiscal 1997 the Company and FF&C agreed to reduce the
      purchase price payable by FF&C to the Company by $100,000. This adjustment
      was necessary because certain molds included in the purchase price were
      damaged and unusable. The Company received the remaining purchase price
      installment of $350,000 in July, 1997.

      During November 1996, pursuant to an outstanding agreement, dated November
      1, 1983, between Adrienne Newman and Seligman & Latz, Inc., Ms. Newman
      elected to purchase a diamond ring from the company for the amount of
      $96,195. Such amount was equal to the amount reflected as an asset on the
      Company's balance sheet.

      During December 1996 the Company made a deposit of $1 million towards the
      purchase of fragrance products from Laboratories Selecta in France
      ("Selecta"). This transaction was designed to provide additional product
      sales for the Company in markets other than those currently handled by the
      Company's retail cosmetic operations. During May 1997 the Company and
      Selecta agreed to cancel this purchase. Under the agreement to cancel
      Selecta has refunded the Company $260,125, $266,833 and $271,281 on May
      21, August 7, and October 7, 1997, respectively with the remaining payment
      of $277,990 due to be made on December 31, 1997. Interest on the repayment
      was charged at 10.5%.

      Goodwill was being amortized using the straight-line method over 40 years.
      The Company evaluates the recoverability of goodwill based upon an
      analysis of operating results and consideration of other significant
      events or changes in the business in accordance with SFAS No. 121. If
      operating losses are experienced and based upon projections that they will
      continue, the Company evaluates whether impairment exists on the basis of
      undiscounted expected future cash flows from operations before interest.
      If impairment exists, the carrying value amount is reduced by the
      estimated shortfalls of cash flows. As a result of the Company's
      evaluation of its future cash flows from operations before interest a
      noncash write off of $2,620,081 was recorded in the fourth quarter
      of fiscal 1997.                      
      
      COST OF ADVERTISING -

      The Company expenses all advertising costs in the period in which the
      cost is incurred.

      INCOME TAXES-

      Income taxes consist of taxes on taxable income and deferred taxes for
      differences in the basis of assets and liabilities for financial statement
      and income tax reporting. The differences arise primarily because of the
      reserve method for bad debts, accrued expenses and the use of accelerated
      depreciation methods.

      FOREIGN SALES -

      Net sales to foreign accounts located in Canada were approximately
      $1,779,049, $2,214,243 and $949,188 for the fiscal years ended July 31,
      1997, 1996 and 1995, respectively.



                                       F-9
<PAGE>   30
      NET INCOME (LOSS) PER SHARE -

      Net income (loss) per share was computed for the fiscal years 1997, 1996
      and 1995, using the weighted average number of common shares outstanding,
      as follows:

      1997 - 11,884,471     1996 -12,200,730      1995 - 11,529,542

      CONCENTRATION OF CREDIT RISK -

      Financial instruments that potentially subject the Company to
      concentrations of credit risk consist principally of trade receivables.
      The Company's major customers are department stores, in the United States
      and Canada and HSN which represented 48.4% of net sales during fiscal year
      1997.

      RECENTLY ISSUED ACCOUNTING STANDARDS-

      During fiscal year 1997, the Company adopted Statement of Financial
      Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
      Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
      statement establishes financial accounting and reporting standards for the
      impairment of long lived assets, certain identifiable intangibles, and
      goodwill related to those assets to be held and used, and for long-lived
      assets and certain identifiable intangibles to be disposed of. The
      adoption of this statement resulted in a non-cash charge of $2.6 million
      related to the write off of goodwill.

      During fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for
      Stock-Based Compensation". This statement establishes a fair value based
      method of accounting for an employee stock option or similar equity
      instrument but allows companies to continue to measure compensation cost
      for those plans using the intrinsic value based method of accounting
      prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
      Employees". The Company has elected to remain with the accounting under
      APB opinion No. 25 and make pro forma disclosures of net income and
      earnings per share as if the fair value based method of accounting defined
      in SFAS No. 123 had been applied. (Note 10).

      In December 1996, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 128, "Earnings Per Share". This statement establishes standards
      for computing and presenting earnings per share ("EPS"), replacing the
      presentation of currently required primary EPS with a presentation of
      Basic EPS. For entities with complex capital structures, the statement
      requires the dual presentation of both Basic EPS and Diluted EPS on the
      face of the statement of operations. Under this new standard, Basic EPS is
      computed based on weighted average shares outstanding and excludes any
      potential dilution. Diluted EPS reflects potential dilution from the
      exercise or conversion of securities into common stock or from other
      contracts to issue common stock and is similar to the currently required
      fully diluted EPS. SFAS 128 is effective for financial statements issued
      for periods ending after December 15, 1997, including interim periods, and
      earlier application is not permitted. When adopted, the Company will be
      required to restate its EPS data for all prior periods presented. The
      Company does not expect the impact of the adoption of this statement to be
      material to previously reported EPS amounts.

      In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
      Income," which is effective for the Company beginning with the fiscal year
      ending July 31, 1999. SFAS No. 130 will require that total comprehensive
      income (the change in equity from transactions and other events except
      those resulting from investment by owners) be reported in the financial
      statements. The Company does not anticipate any significant modifications
      to its current financial statement presentation.

      In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
      an Enterprise and Related Information," which is effective beginning with
      fiscal year ending July 31, 1999. SFAS No. 131 will require that segment
      financial information be publicly reported on the basis that is used
      internally for evaluating segment performance. The Company is still
      assesing the impact of this statement on its Financial Statement
      disclosure.
     
     



                                      F-10
      
<PAGE>   31
USE OF ESTIMATES-

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

      CONCENTRATION OF REVENUES-

      Approximately 79% of department store sales are derived from merchandise,
      6% from salon services and 16% from seasonal promotional items.

      (3) GOING CONCERN:

      Significant losses from operations and cash used in operations were
      incurred as a result of the discontinuance of appearances on the Home
      Shopping Network ("HSN") resulting from the dispute with Adrienne Newman.
      The Company has been significantly dependent upon HSN during the fiscal
      years 1995 and 1996. The Company does not maintain any external financing
      arrangements and relies upon cash generated from operations. In addition,
      the Company has planned on implementing a number of new initiatives to
      improve upon its fiscal 1997 results.  If the Company is not successful,
      they anticipate to continue to incur losses from operations.  The
      combination of the above facts raises substantial doubt about the
      Company's ability to continue as a going concern and its ability to
      generate sufficient cash to support its operations during fiscal 1998.  
                
      The Company implemented a restructuring plan designed to move its
      operations towards profitability and minimize the effect of the departure
      of Adrienne Newman. This plan included operating expense reductions which
      the Company implemented during January 1997. The Company is seeking
      further expense reductions beyond this amount. In addition to the expense
      reduction program the Company is attempting to improve its current retail
      business by capitalizing on its niche salon / service presence, it also
      has introduced a professionally designed direct mail catalogue, plans to
      introduce its products on a home shopping network in Italy, has an
      agreement for the distribution of its products through adfomercials and
      has plans to introduce its products through an agent to retailers
      in Saudi Arabia and the United Arab Emirates. 
                                              
      Although there can be no assurance that management will successfully
      implement the initiatives discussed previously, they believe that its
      cost reduction programs combined with the new initiatives will enable the
      Company to improve upon its fiscal 1997 performance, minimize the impact
      of the end of the Company's relationship with HSN and provide
      satisfactory liquidity through fiscal 1998.                     
                                              

  

  

                                      F-11

<PAGE>   32

      (4) COMMON STOCK DIVIDENDS:

      The Company has paid no cash dividends with respect to its common stock
      since its inception. Dividends of common stock have been issued to holders
      of the Company's Senior Cumulative Redeemable Preferred Stock (Note 8).

      (5)  WARRANTS:

      The following table lists the warrant transactions that have occurred for
      the period August 1, 1994 through July 31, 1997:


<TABLE>
<CAPTION>
                                             FISCAL YEARS ENDED
                                               J U L Y   3 1

                                     1997            1996            1995
--------------------------------------------------------------------------------
<S>                                 <C>           <C>             <C>      
      Warrants outstanding,
        beginning of period         875,000       1,000,000       1,110,000
      Granted                            --              --              --
      Exercised                          --              --              --

      Forfeited                     875,000         125,000         100,000

      Warrants outstanding,
       end of period                    -0-         875,000       1,000,000
      Exercise prices per share
        for shares under warrant,
        end of period                   N/A       $    1.25       $    1.25
</TABLE>

      These warrants expired due to the termination of Ms. Newman's employment
      agreement with the Company

      (6)  INCOME TAXES:

      The Company follows the provisions of Statement of Financial Accounting
      Standards ("SFAS") No. 109 "Accounting for Income Taxes" which requires
      using the asset and liability method of accounting for income taxes. Under
      the asset and liability method, deferred income taxes are recognized for
      the tax consequences of temporary differences between financial statement
      and taxable income by applying statutory tax rates applicable to future
      years. Under SFAS No. 109, the effect on deferred taxes of a change in tax
      rates is recognized as income in the period that includes the enactment
      date of the change. If it is more likely than not that some portion or all
      of the deferred asset will not be realized, a valuation allowance is
      recognized. The Company has recorded a valuation allowance equal to the
      amount of deferred income tax asset for the fiscal years ended July 31,
      1997 and 1996 due to:

                        -     The operating history of the Company.

                        -     The end of the Company's relationship with HSN
                              during January 1997 as a result of the litigation
                              with Adrienne Newman


                                      F-12
<PAGE>   33
      Significant components of the Company's deferred income tax assets and
      liabilities at July 31, 1997 and July 31, 1996, are as follows:


<TABLE>
<CAPTION>
                                         July 31            July 31
                                           1997               1996
                                       -----------        -----------
<S>                                    <C>                <C>        
Deferred Income Tax Assets:

Net operating loss
             carry forwards            $ 2,140,000        $ 1,468,000

Alternate Minimum Tax Credit
Carry forward                              114,000            114,000

Bad debt reserve                           106,000            202,000

Inventory reserve                          549,000            672,000

 Other                                      50,000            114,000
                                       -----------        -----------

                                         2,959,000          2,570,000

Valuation allowance                     (2,959,000)        (2,341,000)
                                       -----------        -----------

  Net deferred tax asset                         0            229,000

Deferred Income Tax Liabilities:

  Depreciation and Amortization                  0           (229,000)
                                       -----------        -----------



Deferred tax liability                 $         0        $  (229,000)

Net deferred income tax                          0                  0
                                       ===========        ===========
</TABLE>

 At July 31, 1997, the amount of federal operating loss carry forwards was
 $5,412,000 with expiration dates from 2005 to 2009, however, the use of
 pre-acquisition operating loss carryforward is limited by the Internal Revenue
 Code. As a result the Company has $2,170,000 of the carry forwards available
 for use for the year ended July 31, 1998.

 The Provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                        For the Fiscal Year Ended July 31,

                             1997           1996
                           --------       --------
<S>                        <C>            <C>     
     Current:
     Federal               $      0       $ 96,000
     State                   79,414         85,000
                           --------       --------

     Total Current           79,414        181,000
                           --------       --------

Deferred
     Federal                      0              0
     State                        0              0
                           --------       --------
     Total Deferred               0              0

     Total Provision       $ 79,414       $181,000
                           ========       ========
</TABLE>


                                      F-13
<PAGE>   34
 (7)  LONG TERM DEBT:

 Long term debt consists of the following:

<TABLE>
<CAPTION>
                                       1997              1996
                                   ------------       -----------
<S>                                <C>                <C>        
Term Promissory Note               $         --       $   725,000
Lines of credit                              --         1,600,000
Related party loans                          --             4,826
Notes payable (construction)                 --            33,499
                                   ------------       -----------

                                             --         2,363,325
Less, current portion                        --        (1,938,325)
                                   ------------       -----------

Long-term notes payable            $         --       $   425,000
                                   ============       ===========
</TABLE>


 TERM PROMISSORY NOTE:

 During June 1997 the Company paid the remaining balance of $450,000 which was
 due to PNC Bank on its term promissory note. The term promissory note was
 collateralized by a distribution and administration facility which was sold by
 the Company. The balance under this term promissory note was $725,000 at July
 31, 1996. Principal payments under this note were $25,000 per month.

 LINES OF CREDIT:

 In addition to the above, ARPEL entered into a financing agreement with Credit
 Lyonnais for a revolving secured line of credit of up to $2,100,000, expiring
 on October 15, 1995, subject to renewals on a yearly basis under certain
 conditions. During January 1996, the Company amended its agreement with Credit
 Lyonnais to extend the expiration date of its line of credit to November 29,
 1996. The loan is secured by domestic accounts receivable of ARPEL. On November
 29, 1996, the Company paid the balance of $1.3 million which was due under this
 line of credit. Borrowings under this line of credit were $1,600,000 and
 $2,100,000 at July 31, 1996 and 1995, respectively.

 (8)  REDEEMABLE PREFERRED STOCK:

 On July 6, 1993, the Company issued 30,000 shares of $25.00, 14.5% Preferred
 Stock, maturing 10 years after issuance. Dividends paid in Common stock are
 payable in advance. The value of the Common Stock payable as dividends is
 calculated based on the average closing price of the Company's Common Stock
 during the 40 trading days prior to October 22nd of each year, minus 20% of
 that average price.

 The Company declared a Common Stock dividend of 66,000 shares in November 1996.
 The Company's Board of Directors is expected to declare a Common Stock dividend
 of approximately 230,160 shares in November 1997.

 (9) EMPLOYEE BENEFIT PLANS:

 401(k) PLAN

 During November 1995, the Board of Directors of the Company approved the
 adoption of a 401(k) Profit Sharing Plan. Under the plan eligible employees can
 contribute up to a maximum of 15% or $9,500 of their annual gross compensation.
 The Company has the option to make discretionary matching contributions. For
 the plan year ending December 31, 1997 no Company matching contribution is
 anticipated.
                                      F-14
<PAGE>   35
 (10)  STOCK OPTION PLANS:

 During December 1992, the Board of Directors of the Company adopted the 1993
 Stock Option Plan ("the 1993 Plan") pursuant to which up to 300,000 shares of
 Common Stock are authorized to be subject to options.

 During October 1994, the Board of Directors approved the grant of stock options
 totaling 500,000 shares of the Company's Common Stock to directors and to legal
 counsel, of the Company, of an exercise price of $1.00 per share.

 The options available under the plan are in the form of incentive options and
 non-qualified options. Incentive options are available to key employees of the
 Company and non-qualified options are available to key employees, non-employee
 directors and consultants of the Company at the fair market value of the Common
 Stock at the date of the grant. Options are exercisable as determined by the
 Board of Directors.

 The Company has adopted the disclosure only provision of SFAS No. 123 and is
 continuing to recognize compensation expense using the intrinsic value method
 under APB No. 25. Had compensation expense for the Company's stock options been
 determined based on the fair market value at the grant date for awards in
 fiscal years 1995, 1996 and 1997, consistent with the provision of SFAS No.
 123, the Company's net (loss) income and (loss) income per share would have
 been as follows:


<TABLE>
<CAPTION>
                                              1997                 1996                1995
                                          -------------        -------------       -------------
<S>                                       <C>                  <C>                 <C>          
Net (Loss) Income as reported             $  (3,008,562)       $   2,692,692       $   1,364,646
Net (Loss) Income proforma                   (3,008,888)           2,692,692           1,145,896
(Loss) Income per share as reported       $       (0.25)       $        0.22       $        0.12
(Loss) Income per share proforma          $       (0.25)       $        0.22       $        0.10
</TABLE>


 This proforma impact only takes into account options granted since January 1,
 1995. The SFAS No. 123 fair value of each option granted was estimated on the
 date of the grant using a number of factors that resulted in a net value of
 approximately 50% of the stock price on the grant date.

 Changes in outstanding options and options available for grant pursuant to the
 1993 Plan, expressed in numbers of shares, are as follows:

<TABLE>
<CAPTION>
                                July 31, 1997   July 31, 1996     July 31, 1995
                                -------------   -------------     -------------
<S>                              <C>             <C>              <C>   
Options outstanding,
 beginning of period                500,000         550,000          75,000
Granted                              50,000              --         500,000
Exercised                           (58,333)        (50,000)
Forfeited                           (55,000)             --         (25,000)
Options outstanding,
 end of period                      436,667         500,000         550,000
Options available for grant,
 end of period                      250,000              --              --
Exercise price per share for
 shares under option, end of
 period                            $0.63-$1.00     $1.00-$1.75     $1.00-$1.75
</TABLE>



                                      F-15
<PAGE>   36
 (11) COMMITMENTS AND CONTINGENCIES:

 LEASES:

 The Company leases office space and other equipment under various
 non-cancelable operating lease agreements. Rental expense for the fiscal years
 ended 1997, 1996 and 1995 was approximately $1,129,765, $1,436,121 and
 $1,392,893 respectively.

 Minimum annual rental commitments under non-cancelable leases in effect at July
 31, 1997, excluding escalations:

   Fiscal year ending July 31:
     1998...........................                   584,029
     1999...........................                   420,115
     2000...........................                   285,675
     2001...........................                   282,440
     2002 and thereafter............                     -0-

 LITIGATION:

 On October 28, 1996 the Company received notice from Adrienne Newman purporting
 to terminate her April 4, 1990 Employment Agreement with the Company (such
 agreement as subsequently amended is the "Employment Agreement"), based on an
 alleged breach of the Employment Agreement by the Company. Ms. Newman served as
 the President of the Company's wholly owned subsidiary, (Adrien Arpel, Inc.
 ("ARPEL")) and had been selling host, under the name of Adrien Arpel in its
 sales program on the Home Shopping Network, Inc. ("HSN"). The Employment
 Agreement provided for salary, fringe benefits and commission payments based
 upon 33% of the revenues, net of direct expenses attributable to television
 shopping sales. Ms. Newman also had vested rights in 625,000 warrants, 500,000
 of which were scheduled to expire in November 1998 and the remaining 125,000 of
 which were scheduled to expire on July 31, 2001.

 On November 8, 1996 the Company and Adrienne Newman reached an agreement (the
 "Interim Agreement") whereby Ms. Newman agreed to appear as the selling host
 for ARPEL on HSN shows scheduled for November and December 1996 and January
 1997 (the "HSN Selling Period"). During the HSN Selling Period, Ms. Newman
 acted as an independent contractor and not as an employee of the Company. The
 Company and Ms. Newman also agreed to refrain from initiating legal action
 against the other in connection with their dispute over Ms. Newman's
 termination of the Employment Agreement until after the expiration of the HSN
 Selling Period.

 On January 28, 1997, after the expiration of the HSN Selling Period, the
 Company was served by Adrienne Newman with a summons and complaint
 returnable in the Supreme Court, New York County whereby Ms. Newman asserted
 claims for damages against the Company based upon alleged breaches by the
 Company of Ms. Newman's Employment Agreement and the Interim Agreement.
 Unspecified damages were claimed. A further claim requested a judicial
 determination that the Employment Agreement was materially breached by the
 Company resulting in its termination.

 On March 19, 1997, the Company served an Answer and Counterclaim in response to
 the action commenced by Ms. Newman. The Company's Counterclaim asserts various
 claims against Ms. Newman, seeking damages and injunctive relief. Among other
 things, it is the position of the Company that Ms. Newman was in material
 breach of her Employment Agreement when she terminated the Employment Agreement
 on October 28, 1996. As a consequence, it is the Company's belief that Ms.
 Newman's refusal to provide services to the Company throughout the term of her
 Employment Agreement which expires April 1998, particularly her willful refusal
 and failure to appear as the Company's selling host on HSN, will damage the
 Company in the sum of at least eleven million ($11,000,000). The Company also
 asserted claims against Ms. Newman for breaches of her covenant not to compete
 and her covenant not to disclose trade secrets and proprietary data.

                                      F-16




<PAGE>   37
 During May 1997, Ms. Newman started appearing on HSN as a representative of her
 own company selling cosmetic products under the name "Signature Club A". Ms.
 Newman has subsequently appeared on HSN on a monthly basis. The Company and
 its attorneys are currently reviewing these appearances and may seek further
 legal remedies and actions against Ms. Newman. During these appearances
 Ms. Newman was not acting on behalf of the Company or its trademark protected
 Adrien Arpel product line.

 The case is currently in the discovery phase. Upon completion of discovery the
 action will be ready for trial but no trial date has yet been fixed.

 The Company, in the normal course of business is a defendant in numerous
 actions/lawsuits. The Company does not believe that the outcome of these
 actions/lawsuits will have a material impact on the Company's financial
 position or results from operations.


 (12)  SUPPLEMENTAL INCOME STATEMENT INFORMATION:

<TABLE>
<CAPTION>
                                                FOR THE FISCAL YEARS ENDED
                                                         JULY 31,
                          
                               1997               1996                   1995
                           -----------       ------------------       ----------
<S>                        <C>               <C>                      <C>
Advertising Costs          $ 1,469,569       $        1,557,905       $1,543,927

</TABLE>


                                     F-17



<PAGE>   38
               (13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                FIRST             SECOND            THIRD             FOURTH
       FISCAL 1997             QUARTER           QUARTER           QUARTER            QUARTER
----------------------       -----------       -----------       -----------        -----------
<S>                          <C>               <C>               <C>                <C>        
Net Sales                    $ 9,634,712       $10,188,567       $ 3,130,544        $ 1,746,861
Gross Profit                   6,539,418         6,331,733         2,339,636          1,306,221
Net Income (loss)                590,458           701,405        (1,126,135)        (3,174,290)
Net Income (loss),
per Common and Common
 Equivalent Share:           $      0.05       $      0.06       $     (0.09)       $     (0.27)




FISCAL 1996

Net Sales                    $ 7,673,898       $ 9,110,445       $ 8,582,452        $ 9,366,580
Gross Profit                   5,502,846         5,975,188         5,712,894          6,162,358
Net Income (loss)                435,104           741,451           785,836            730,301
Net Income (loss),
 per Common and Common
 Equivalent Share:           $      0.04       $      0.06       $      0.07        $      0.05


      FISCAL 1995

Net Sales                    $ 7,261,587       $ 8,771,169       $ 8,266,118        $ 7,852,330
Gross Profit                   5,215,467         5,984,667         6,229,797          5,429,240
Net Income(loss)                  50,201           655,698           684,227            (25,480)
Net Income (loss),
 per Common and Common
 Equivalent Share:           $      0.00       $      0.06       $      0.06        $      0.00
</TABLE>




                                      F-18



<PAGE>   39
 ALFIN, INC. AND SUBSIDIARIES

                                  SCHEDULE VIII

                        VALUATION AND QUALIFYING ACCOUNTS
                    FOR THE THREE FISCAL YEARS ENDED JULY 31


<TABLE>
<CAPTION>
                                                                           A D D I T I O N S

                                            Balance at         Charged to         Charged                          Balance at
                                            Beginning          Costs and          to Other      Deductions         End of
           Description                      of Period          Expenses           Accounts         (1)             Period
<S>                                         <C>               <C>                <C>           <C>               <C>          
 1997      Allowance for Doubtful
           Accounts Receivable,

           Chargebacks and Sales
           Returns                          $ 1,255,033       $ 2,732,434        $    -        $  3,015,738      $     971,729
                                                                                      
                                                                                      
 1996      Allowance for Doubtful                                                     
           Accounts Receivable,                                                       
                                                                                      
           Chargebacks, and Sales                                                     
           Sales Returns                    $ 1,040,857       $ 4,339,814        $    -        $  4,125,638      $   1,255,033
                                                                                      
                                                                                      
 1995      Allowance for Doubtful                                                     
           Accounts Receivable                                                        
                                                                                      
           Chargebacks, and Sales                                                     
           Returns                          $ 1,833,123       $ 3,525,344        $    -        $  4,317,610      $   1,040,857
</TABLE>
                                                                                

(1) Charges to the accounts are for the purposes for which the reserves were
    created.




                                      F-19
<PAGE>   40
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              EXHIBITS ON FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                                OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                     FOR THE FISCAL YEAR ENDED JULY 31, 1997

                                   ALFIN, INC.

                                  EXHIBIT INDEX



 Exhibit
   No.                      Exhibit Title                                  Page





10.32    Agreement dated May 13, 1997 between the Company and Selecta SA related
         to the cancellation of fragrance purchases and the refund of advances
         (Filed herewith).

10.33    Agreement dated June 13, 1997 between the Company and H. Galow related
         to the sale of the Company's Norwood, New Jersey distribution facility.
         (Filed herewith)

10.34    Agreement dated June 13, 1997 between the Company and H. Galow related
         to the leasing of 15,000 square feet of warehouse space. (Filed
         herewith)

10.35    Agreement dated August 6, 1997 between the Company and Target Mailing
         Lists, Inc. related to the advertising and sale of products. (Filed
         herewith)

10.36    Consulting agreement dated July 1, 1997, between the Company and Harold
         Lightman related to Direct Mail Sales. (Filed herewith).



 (b)Reports on Form 8-K.

 No reports on Form 8-K were filed by the Company during the last quarter of the
 period covered by this report.



                                      F-20