SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

[X]   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 For the fiscal year ended December 31, 1998

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

      For the transition period from __________________ to __________________

      Commission File No. 001-23407

                                  SURREY, INC.
                 (Name of Small Business Issuer in its charter)

            TEXAS                                                     74-2138564
(State or Other Jurisdiction of                                 (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

                              13110 TRAILS END ROAD
                              LEANDER, TEXAS 78641
              (Address and zip code of principal executive offices)

                                  512-267-7172
                (Issuer's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Act:

                   COMMON STOCK, NO PAR VALUE ("COMMON STOCK")
              REDEEMABLE COMMON STOCK PURCHASE WARRANTS ("WARRANT")
                                (Title of class)

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

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|

The Issuer's revenues for the year ended December 31, 1998:  $9,247,000

Aggregate market value of Common Stock held by non-affiliates as of March 10,
1999: $2,864,500

Number of Shares of Common Stock outstanding as of the close of business on
March 1, 1999: 2,472,727

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant's definitive Proxy Statement for Annual Meeting
of Shareholders to be held April 13, 1999 ("Proxy Statement") are incorporated
by reference into Part III hereof.

Transitional Small Business Disclosure Format: Yes ___ No _X_.

<PAGE>


                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

            Surrey, Inc. ("Surrey" or the "Company") specializes in the
development and manufacture of high quality transparent glycerin and specialty
soap products, as well as the production of certain personal care and home
fragrance products. The Company has built four successful retail brands and a
strong private label and contract manufacturing business for high-profile
customers. Surrey uses a proprietary process for manufacturing poured bar soaps
that allows the Company to produce unique and affordable original soap products
in large quantities with consistent quality. Surrey also maintains a library of
chemical formulations for producing purer, milder and harder glycerin soap bars
primarily through the use of synthetic moisturizing ingredients rather than the
use of tallow (i.e., animal fat). The Company also manufactures and sells home
fragrance products and a full line of potpourri products as part of its crafts
market product line. The Company recently began manufacturing a line of high-end
scented candles that compliments its line of home fragrance products. In
addition, the Company recently began manufacturing a small amount of traditional
bar soap. See also "Competition."

BACKGROUND

            Surrey was incorporated in 1981 as a Texas corporation. The Company
was the successor to a venture begun in 1972 to market a brush, mug, and line of
shaving soap for men. Management began working to perfect techniques for
producing a milder bar soap for its shaving kits, and in 1979 began
manufacturing its own soap products and expanding a new library of soap
formulations. At that time, the Company discovered that specialty soaps were a
lucrative niche market which it believed was too small to attract significant
competition from the larger soap producers like Dial, Unilever,
Colgate-Palmolive and Procter & Gamble.

            During the eighties, management began developing a new generation of
soap formulations and selling its products to drug store chains, supermarket
chains, and discount/mass merchandisers across the country. Surrey found that
the chemistry of most glycerin bar soaps made the soap soft and difficult to
process. Surrey's newly formulated glycerin soaps were firmer, lasted longer,
and could be used to create various unique shapes and formats, such as Surrey's
original "soap suspended in soap" products.

            In the early nineties, Surrey entered the contract manufacturing
business and began producing specialty soap products for a variety of premier
brand consumer product companies and prestige accounts, including Elizabeth
Arden, Walt Disney Co., Avon, Ann Taylor, Wal-Mart, and Walgreen's. In 1990, the
Company acquired the assets of Simmer Scents, a line of potpourri home
fragrances and began moving into the major craft chains.

            In March 1987, the Company moved its operations to its current site
in Leander, Texas, close to Austin, originally occupying an 18,000 square foot
manufacturing plant. The Company has expanded several times over the years, and
in 1998, the Company again expanded its facility by adding approximately 39,100
square feet, which brought the total size of its facilities to approximately
77,100 square feet. In January 1999, the Company obtained financing to complete
an


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<PAGE>


additional expansion of approximately 14,000 square feet of warehouse space and
to remodel a 5,000 square foot existing space into a soap curing room in
response to the receipt of a large letter of commitment to purchase the
Company's products. In addition, the Company used a portion of such financing to
replenish working capital used in 1998 in relation to the construction of its
candle production room. See "Growth Strategy," "Bath & Body Works" and
"Significant Customers."

PRODUCTS AND DISTRIBUTION

            Surrey's principal product line has traditionally been its high
quality glycerin bar soaps which it markets, both directly and through
manufacturers' representatives, to a large variety of retail establishments, and
which it manufactures, on a contract basis, for a variety of private-label
customers. In addition, the Company now manufactures and markets a full line of
potpourri products. The Company's total sales mix in 1998 was approximately
equally divided among: (a) contract manufacturing products, and (b) retail
products, including soaps, shaving products, potpourri, and craft products.

            The Company has a wide variety of private label and contract
manufacturing clients for which it makes specialty glycerin soap bars and other
products. Many of the retail customers, such as Wal-Mart, Bath & Body Works,
K-Mart, Walgreen's and General Nutrition Centers, buy products designed, created
and manufactured exclusively by Surrey's personnel. Contract manufacturing
customers, such as Elizabeth Arden, Avon, Liz Claiborne and Walt Disney Co.,
work closely with the Company to create a product unique to that customer
through the use of specialty designs, fragrances, labeling, colors and shapes.
Surrey, through its proprietary processes, has been successful in creating
unique shapes and designs, including its "soap in a soap," tailored specifically
for certain customer requests.

            Surrey currently contracts with approximately 60 brokers and
manufacturers' representatives who sell the Company's products on a commission
basis to a variety of retail customers. All such brokers and manufacturers'
representatives sell products for manufacturers other than the Company. Such
products include both the Company's own branded products and private-label
products manufactured for such retailers under their individual labels. The
Company also produces, on a direct marketing basis, specialty products for a
variety of contract manufacturing customers. Those products are sold through
direct marketing efforts by the Company. The Company does not offer any products
through a retail catalogue.

            Surrey markets its products under its own four premium in-house
brand names:

         * THE PURE PLEASURE(TM) Line             * THE SIMMER SCENTS Line

           * boxed sets of glycerin soap bars       * potpourri bags
           * antibacterial liquid glycerin soap     * potpourri liquids
                                                    * oils
                                                    * sachets

         * THE SURREY MEN'S LINE                  * THE ILLUMATHERAPE(TM) Line

           * shaving mug, brush and soap set        * various shaped and scented
                                                      candles


                                      -3-
<PAGE>


            In mid-1997 the Company introduced a full line of potpourri intended
to capitalize on the Company's experience in producing high quality fragrances.
The Company's potpourri line is being sold both through craft stores (such as
Michael's) and discount mass merchandisers (such as Wal-Mart and K-Mart). At the
end of 1998, the Company entered the candle market with a line of high-end
scented candles that compliments its line of home fragrance products. These
products have increased the Company's ability to market to craft stores. In
1999, the Company intends to reintroduce its soap making kits as a holiday
product.

            As part of its 1998 expansion, the Company began manufacturing a
small amount of traditional bar soap. The Company does not expect to make
significant inroads into the traditional bar soap market; rather, the Company
intends to meet the existing demand of its customers for traditional bar soap.
The addition of a traditional line of bar soap allows the Company to offer a
more complete line of soap products including traditional soap products, liquid
soap, and glycerin bar soap. See "Competition."

GROWTH STRATEGY

            Over the past several years, the Company has embarked on a growth
strategy designed to substantially increase revenue and profitability. The
Company intended to significantly expand its business by:

            *     doubling its manufacturing and production capabilities

            *     hiring additional professional sales personnel

            *     continuing to diversify its product mix by promoting sales of
                  its liquid soap, potpourri and craft products

            *     developing new products for its retail market, including the
                  development of a line of traditional soap, which will allow
                  the Company to manufacture and sell most types of soap, and a
                  line of high-end scented candles

            *     increasing its direct marketing and sales efforts to attract
                  new contract manufacturing customers

            *     continuing to shift its marketing emphasis to its higher
                  margin products

            In 1996, the Company began a shift in its sales strategy away from
low-end volume discount accounts to concentrate on higher margin retail accounts
and products and on contract manufacturing.

            The Company hired a Vice President of Sales as a national retail
sales director in July 1997. The Company has hired a second sales director to
concentrate on the retail market, where the Company's goal is to increase retail
sales in the near term. The Company promoted a third person to handle contract
manufacturing sales, which includes working with customers to create and
manufacture products according to that customer's design, fragrance, labeling,
color and shape specifications. The Company also hired a design professional to
assist in the marketing and design of products and packaging. The Company has
entered into an agreement with two additional salespersons to sell its contract
manufacturing products. In connection with its 1998 and 1999


                                      -4-
<PAGE>


expansions, the Company has hired additional employees at the manufacturing
level and expects that it will ultimately require more manufacturing level
employees.

            In 1998, the Company expanded its facility by adding approximately
39,100 square feet, which increased the total size of its facilities to
approximately 77,100 square feet. Approximately 18,100 square feet were added to
the Company's production and manufacturing facilities, approximately 14,900
square feet were added to its warehousing and storage space, and approximately
6,100 square feet were added to its corporate office space. The 1998 expansion
more than doubled the Company's manufacturing and production capabilities. In
1999, the Company intends to add approximately 14,000 square feet to its
warehouse space.

            As part of its 1998 expansion, the Company added one soap making
line dedicated to producing traditional soap, two poured soap lines dedicated to
producing glycerin soaps, one high speed wrapping machine which doubled the
Company's wrapping capacity, and one candle making line. As part of its 1999
expansion, the Company added three poured soap lines dedicated to producing
glycerin soaps (bringing the total number to eight) and three high speed
wrapping machines (bringing the total number to four). The 1999 expansion was
necessary to meet the additional demand created by the Bath & Body Works
purchase orders expected by management. The 1999 expansion was complete and
operational at the end of February 1999. See also "Bath & Body Works,"
"Competition" and "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

            The Company has borne significant costs in relation to the
implementation of its growth strategy, which management expects will provide the
infrastructure for long-term growth. There can be no assurance that the Company
will not need to expand in the future or that the Company will efficiently
utilize its expanded facilities.

BATH & BODY WORKS

            The Company announced on November 23, 1998 that it received a major
letter of commitment from Bath & Body Works, a wholly owned subsidiary of The
Limited, Inc., to purchase Company products. Management estimates the commitment
will result in additional revenues of approximately $6,000,000. In such letter
of commitment, Bath & Body Works notified the Company of its intention to
purchase approximately 10,000,000 bars of glycerin specialty soap products in
the 12 month period beginning January 1, 1999.

            The letter of commitment is a letter of intent, which indicates that
the parties are to work toward a more formal agreement. However, other than
periodic purchase orders, management does not expect that any more formal
agreement will be entered into between Bath & Body Works and the Company.

            As of March 1, 1999, the Company had received purchase orders for
approximately $1,500,000 of the Company's products from Bath & Body Works. Bath
& Body Works required that the Company make the first delivery of ordered
product on or before February 19, 1999. The Company shipped such products to
Bath & Body Works on February 1, 1999, ahead of schedule.

            To accommodate the current and expected purchase orders from Bath
and Body Works, the Company constructed an additional 14,000 square foot
warehouse space expansion and remodeled 5,000 square feet of existing space into
a soap curing area in 1999 at a cost of approximately


                                       -5-
<PAGE>


$380,000. Such construction was financed with an additional term loan with Chase
Bank of Texas, N.A. and from working capital.

            The Company required three additional poured soap lines dedicated to
producing glycerin soaps and three additional high speed wrapping machines to
meet the current and expected orders from Bath and Body Works. To finance such
additional equipment, the Company drew approximately $560,000 on its lease line
of credit with Keycorp Leasing, a division of Key Corporate Capital, Inc.
("KCCI"), the total amount of which is approximately $1,562,000 ("KCCI Lease
Line of Credit"). KCCI required a personal guarantee of the Chief Executive
Officer of the Company in order to draw such amount. At this time, no further
amounts may be drawn from the KCCI Lease Line of Credit. The Company also relied
on a capital lease line of credit in the amount of $477,000 from Winthrop
Resources, Inc. to finance one traditional soap making line ("Winthrop January
1999 Lease Line of Credit").

            In addition, the Company has received a commitment to enter into a
lease line of credit from Amembal Capital Corporation in the total amount of
approximately $416,000 to finance the remaining pieces of equipment required to
complete the 1999 expansion. As of March 1, 1999, the Company had not negotiated
or signed any final agreements with Amembal Capital Corporation with respect to
such lease line of credit. See also "Item 6, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."

COMPETITION

            While there is extensive competition in the bar soap manufacturing
industry, the Company believes that it currently competes directly with only a
small number of manufacturers in the specialty soap market, notably Neutrogena,
Beiersdorf (Basis), and Johnson & Johnson (Purpose). In addition, many other
companies manufacture and/or market a range of personal care products which
compete with Surrey's soap and other products. These companies include, among
others, Twincraft Soap Company, Original Bradford Soap Works and Stahl Soap. See
also "Proprietary Processes and Trademarks."

            The Company recently began manufacturing a small amount of
traditional bar soap. Within the traditional soap market, the Company competes
directly with many larger manufacturers, such as Procter & Gamble,
Colgate-Palmolive, Unilever and Dial, which are much larger and have greater
financial resources than the Company. The Company does not expect to make
significant inroads into the traditional bar soap market; rather the Company
intends to meet the existing demand of its customers for traditional soap.
Currently, the Company contracts with a third party to fill its customers'
demand for traditional soap.

            The Company currently believes that it will experience little
competition from the large manufacturers of traditional bar soap in its
specialty soap niche market due to the small relative size of the market and the
larger relative cost to mass produce a high quality glycerin bar soap product.
These larger manufacturers may, however, present more competition to the Company
for its liquid soap products.

            In late 1998, the Company added a line of high-end scented candles
to compliment its potpourri and craft products. These additions are intended to
add variety to its product line. The candle industry is highly competitive and
dominated by larger manufacturers, most of which have greater financial
resources than the Company.


                                      -6-
<PAGE>


            The Company currently believes that it experiences the majority of
its competition based on the variety of its product line, and to a lesser extent
on price. The Company is broadening its product line and believes its current
and intended diversification into traditional bar soaps, liquid soaps,
potpourris, high-end scented candles and crafts will be advantageous in its
marketing, and instrumental in helping it maintain a competitive position in its
targeted markets. However, as the Company continues its diversification into
other product lines, it may experience competition from other sources, as well
as from foreign manufacturers.

SIGNIFICANT CUSTOMERS

            In 1997 and 1998, Wal-Mart accounted for approximately 34% and 26%,
respectively, of the Company's net sales. Avon accounted for approximately 7%
and 4% of sales in 1997 and 1998, respectively, and K-Mart accounted for
approximately 5% and 2% of sales in 1997 and 1998, respectively. No other
customer accounted for more than 5% of sales in 1998. The Company anticipates
that Bath & Body Works will comprise more than 25% of the Company's net sales in
1999.

CUSTOMER CONTRACTS

            The Company's large retail customers, such as Bath & Body Works,
Wal-Mart, K-Mart and Walgreen's generally establish their product order plans on
a 12 month cycle. Once such plan is in place it is often not reviewed for a
year; however, only the first order under any such plan is guaranteed. The
Company has no standing orders or long-term contracts with any of its retail
customers. Any such customer can re-order at any time or cancel or replace the
Company's product in its 12 month plan at any time with no notice to the
Company.

            Most of the Company's contract manufacturing customers, such as
Elizabeth Arden, Avon and Walt Disney, order on a job-by-job basis only. Such
orders are generally cancelable by the customer if not shipped within two weeks
of the scheduled shipping date. Unless the Company is developing a new product
for a contract manufacturing customer (for which the development period can take
from months to years depending on the product and the customer), the Company
typically ships products within 60 to 90 days after receiving a purchase order.
Such period may be longer if special packaging or labeling is required by the
customer. Individual contract manufacturing clients generally supply the Company
with soap boxes and labeling; therefore, the Company is not required to carry
such inventory on its balance sheet. In addition, many of the Company's contract
manufacturing customers pay for the development and production of the die stock
and molds and, therefore, own such molds and the formulas for their individual
products.

            Because the Company generally does not have any standing orders or
long-term contracts with its customers and orders are generally shipped within
60 to 90 days after receipt of purchase orders, the Company had no significant
backlog in 1998.

PROPRIETARY PROCESSES AND TRADEMARKS

            The Company holds no patents on any of its equipment or processes
and relies substantially on certain formulas and processes that are not
patentable. In addition, much of the Company's proprietary information is the
experience and knowledge of its employees, contractors and business partners. To
protect these rights, the Company requires certain contractors, business
partners and distributors to enter into confidentiality agreements. There can be
no assurance that these agreements


                                      -7-
<PAGE>


will provide meaningful protection for the Company's trade secrets, know-how or
other proprietary information in the event of any unauthorized use or
disclosure; however, the Company intends to defend its trademark and proprietary
information as appropriate. Further, in the absence of patent protection, the
Company may be exposed to competitors who independently develop substantially
equivalent technology or otherwise gain access to the Company's trade secrets,
knowledge or proprietary information. The Company became aware in mid-1997 that
a company which signed such a confidentiality agreement appears to be using
certain trade secrets of the Company in violation of their agreement. No action
is currently contemplated in relation to such violation. Management believes
that such infringement is not material. Because the Company is in a niche
market, any significant volume from a competitor could reduce the Company's
sales and revenue.

            The Company holds a registered trademark to use Floating Bath
Pals(R) and Hill Country Soap Company(R) and has applied for a trademark to use
Pure Pleasure(TM) and Illumatherape(TM). Although Surrey believes its trademarks
are important, it does not believe that its trademarks are material to its
business.

RESEARCH AND DEVELOPMENT

            During fiscal years 1997 and 1998, the Company's principal research
and development activities have been experimentation in the Company's laboratory
by its own personnel and ideas brought to the Company by its customers. The
Company has historically spent significantly less than 5% of its net sales on
research and development. While research and development is important to the
Company's ongoing business and a significant portion of certain employees' time
is committed to this area, the costs of research and development in the
Company's product line is significantly less than for other types of
manufacturing companies. The Company originally intended to use a portion of the
proceeds of its recent public offering for research and development; however,
the Company actually applied only a small portion of such proceeds to research
and development.

SEASONALITY

            The Company experiences seasonal fluctuations in operating results,
with sales and revenues generally higher during the third and fourth calendar
quarters. Orders shipped in the third and fourth quarters generally account for
approximately 60% of the Company's total net sales for the year, due primarily
to the holiday retail season. Generally, customers place holiday purchase orders
in early to mid summer for shipment around September and October. As a
consequence, the Company generally begins increasing its temporary staff in July
and August to accommodate such increased production volume. The Company operates
its production facilities using two shifts during the third and fourth quarters.

EMPLOYEES

            As of March 1, 1999, Surrey employed 146 full-time employees and had
no part-time employees. The Company maintains two shifts of production
personnel. In addition, the Company hires temporary full-time employees during
its heaviest production periods, generally July through December, or upon the
receipt of a special order. The Company has five full-time employees in sales,
marketing and design, seven in administration and finance, two in research and
development, 12 in procurement, 110 in production manufacturing, seven in
Quality Control and three in shipping and handling. In connection with its
expansion, the Company expects that it will ultimately require additional
employees at the manufacturing level. The Company's employees are not
represented by


                                      -8-
<PAGE>


any collective bargaining organization. The Company believes that its relations
with its employees are satisfactory.

SOURCES AND AVAILABILITY OF RAW MATERIALS

            Substantially all of the raw materials (predominantly glycerin and
other chemicals) used by the Company to manufacture its products are of a
generic nature and are available from several suppliers. To the best knowledge
of the Company, none of the raw materials for its products is in short supply,
and all are readily available from a variety of distributors. The Company has
recently purchased four 10,000 gallon containers to store key raw materials.
Management believes the Company will reduce the cost of such raw materials
slightly by buying in bulk. The Company does not anticipate any significant
difficulties in securing adequate supplies of raw materials of acceptable
quality and at acceptable prices in the foreseeable future.


ITEM 2.  DESCRIPTION OF PROPERTY

            The Company owns the property and facilities that comprise its
production plant and corporate headquarters. The property consists of
approximately 12.50 acres in Travis County, Texas, approximately 22 miles
northwest of Austin. All of the Company's operations are currently centered in
one 77,100 square foot single story warehouse building which houses the offices,
production facilities and warehouse and storage. Currently, the Company's
corporate offices and research facility occupy approximately 9,100 square feet,
the production and manufacturing facilities occupy approximately 25,900 square
feet, and the remaining 42,100 square feet are dedicated to warehousing and
storage.

            The Company is currently in the process of expanding its warehouse
space by adding approximately 14,000 square feet, which will bring the total
size of its warehouse space to approximately 56,100 square feet.

            The Company entered into a construction contract with Van and Van
Austin of Austin, Texas to complete the 1999 facility expansion and the
remodeling of 5,000 square feet of existing space into a soap curing area at a
proposed cost of approximately $380,000. Such construction is being financed
with an additional term loan from Chase Bank of Texas, N.A. and from working
capital.

            The Company's production and manufacturing equipment generally is
leased under certain capital and operating equipment leases. To finance the
equipment necessary to complete its 1998 and 1999 expansions, the Company relied
principally on the KCCI Lease Line of Credit, the Winthrop January 1999 Lease
Line of Credit, an additional lease line of credit with Winthrop Resources, Inc.
in the amount of approximately $300,000 ("Winthrop March 1999 Capital Lease Line
of Credit") and a lease line of credit with Amembal Capital Corporation. The
1998 expansion was completed and began operations at the end of 1998, and the
1999 expansion was completed and placed in service at the end of February 1999.

            The principal manufacturing equipment currently in use consists of
eight poured bar soap production line units, two liquid fill lines, one
traditional manufacturing soap line production unit and filler, one candle
making line, four high speed wrapping machines and four low speed wrapping
machines.


                                      -9-
<PAGE>


            In addition, the Company has purchased and is in the process of
installing four 10,000 gallon storage containers to store the Company's key raw
materials. To finance the purchase of the bulk storage containers and related
construction, the Company has drawn on its Winthrop March 1999 Capital Lease
Line of Credit. See "Item 6, Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

            The Company's existing and future plant and equipment are pledged to
secure its outstanding bank loans. Management believes that the Company's
properties are adequately covered by insurance.


ITEM 3.  LEGAL PROCEEDINGS

            The Company and its client Bath & Body Works were defendants in a
lawsuit filed in the Los Angeles Superior Court on April 2, 1997. The plaintiff,
Seretha F. Ebraham, claimed, among other things, that a liquid potpourri product
manufactured by the Company for Bath & Body Works failed to properly warn the
plaintiff of the potential dangers of the product and that she sustained burns
from the liquid potpourri as a result of such insufficient warning. The
Company's product liability insurer at the time of the occurrence defended the
claim. Such insurer settled the lawsuit for $200,000 in damages and $77,000 in
attorneys' fees. Management believes that the entire amount of the settlement
and costs will be covered by such insurer.

            Other than the above lawsuit, the Company is involved in legal
proceedings arising in the normal course of its business, none of which is
expected to result in any material loss to the Company.


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

            There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

            Surrey, Inc.'s Common Stock and Warrants are traded on the Nasdaq
SmallCap Market under the symbol "SOAP" and "SOAPW," respectively. The Company's
Units, which were comprised of two shares of Common Stock and one Warrant, began
trading on the Nasdaq SmallCap Market under the symbol "SOAPU" on December 4,
1997. On January 8, 1998, the Units were delisted, at the Company's request, and
the Units were separated into their component parts at such time.

            As of March 1, 1999, there were 2,472,727 outstanding shares,
approximately 12 holders of record, approximately 650 beneficial holders of the
Common Stock, and 675,000 outstanding Warrants to purchase Common Stock. The
Warrants are exercisable on or before December 3, 2002 at an exercise price of
$4.80 per share. The Company may redeem the Warrants in whole at a price


                                      -10-
<PAGE>


of $.01 per Warrant if the Company's price per share exceeds $5.00 per share for
20 consecutive trading days.

            The following table sets forth the high and the low bid prices for
the Company's Common Stock, Warrants and Units for the fourth quarter 1997 and
1998 as reported on the Nasdaq system. Prior to such time, the Company's Common
Stock, Warrants or Units were not publicly traded on a national exchange or
automated quotation system.


            Quarter Ended December 31, 1998          High Bid       Low Bid
            -------------------------------          --------       -------
                       Common Stock                   $2.875        $1.3125
                       Warrant                        $.6875         $.25

            Quarter Ended September 30, 1998         High Bid       Low Bid
            --------------------------------         --------       -------
                       Common Stock                  $2.9375         $1.25
                       Warrant                        $.625         $.4375

            Quarter Ended June 30, 1998              High Bid       Low Bid
                       Common Stock                  $3.4375        $2.6875
                       Warrant                        $.6875        $.4375

            Quarter Ended March 31, 1998             High Bid       Low Bid
            ----------------------------             --------       -------
                       Common Stock                   $3.75          $3.25
                       Warrant                         $.75          $.625

            Quarter Ended December 31, 1997(1)       High Bid       Low Bid
            -------------------------------          --------       -------
                       Unit                           $8.25          $8.00
                       Common Stock                    N/A            N/A
                       Warrant                         N/A            N/A

            ---------

            (1) Period from December 4, 1997 (the first day of trading after the
                effective date of Company's initial public offering) through
                December 31, 1997. From December 4, 1997 through December 31,
                1997, the Common Stock and the Warrants traded as part of the
                Units but did not trade separately. The Common Stock and
                Warrants began separate trading on January 8, 1998. At such
                time, the Units were delisted at the request of the Company

            The last sales price on March 10, 1999 was $2.125 per share for the
Common Stock and $.40625 per Warrant.


                                      -11-
<PAGE>


DIVIDEND POLICY

            The Company did not issue any dividends to stockholders during the
fiscal years 1997 or 1998. The Company currently intends to retain earnings for
use in the operation and expansion of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. The Company's
bank loan restricts the payment of any dividends or purchase by the Company of
any shares of Common Stock without the prior written consent of the lender. See
"Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations."


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

            The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Annual Report.

RESULTS OF OPERATIONS

            The following table sets forth for the periods indicated certain
items in the Company's Statements of Operations expressed as a percentage of net
sales for that period:

                                                          Year Ended
                                                         December 31,
                                                     --------------------
                                                      1998          1997
                                                      ----          ----
            Net Sales ............................    100%           100%
            Costs of Goods Sold ..................   85.0%          74.3%
            Gross Profit .........................   15.0%          25.7%
            Operating Expenses
                 Sales and Marketing .............    8.9%           5.3%
                 General & Administrative ........   16.8%          13.3%
                 Interest Expense ................    2.5%           3.0%
            Net Income ...........................   (9.2%)          2.5%


YEARS ENDED DECEMBER 31, 1998 AND 1997

            NET SALES. Net sales for the Company reflect total sales less cash
discounts and estimated returns. Net sales increased to $9,247,000 in 1998 from
$9,185,000 in 1997, an increase of 0.7%. This small increase in net sales is
attributed primarily to the fact that the Company's 1998 expansion was not fully
completed until the end of the fourth quarter of 1998, approximately six months
later than expected. This delay meant that the Company could not begin to use
its expanded production capabilities until first quarter of 1999. As a result,
the Company's sales efforts in 1998 were restricted by production capacity and
its inability to manufacture new product lines contemplated by the expansion.

            GROSS PROFIT. Gross profit decreased in 1998 to $1,391,000 from
$2,392,000 in 1997, a decrease of 41.8%. Gross profit margin also decreased from
25.7% in 1997 to 15.0% in 1998. This decrease in gross profit and gross profit
margin is attributed to flat net sales growth coupled with an


                                      -12-
<PAGE>


increase in cost of sales. The increase in cost of sales is attributed primarily
(i) to a disposal of inventory for no proceeds in the fourth quarter and
inventory shrinkage, valued in the aggregate at approximately $200,000, and (ii)
increased direct factory costs, primarily labor costs related to production
inefficiencies. Production inefficiencies resulted from a lack of sufficient
manufacturing and storage space pending the Company's expansion, which increased
in the fourth quarter due to higher holiday season production levels. Labor
costs also increased in the fourth quarter because the Company began to hire
additional workers in anticipation of production of the Bath & Body Works
purchase order.

            The Company does not expect any significant disposal of inventory in
1999. The Company also expects that labor costs as a percentage of sales (23.8%
in 1998) will decline in 1999. As a result of the new expansion, an improvement
in labor efficiency is expected in 1999 due to new equipment and the possibility
for more efficient production scheduling. The Company also expects that product
margins will improve in 1999 with increased sales of new higher margin product
lines, particularly the scented candle product line.

            OPERATING EXPENSES. Operating expenses increased in 1998 by 45.5%
and increased as percentage of net sales; $2,539,000 or 27.5% of net sales in
1998, as compared to $1,745,000 or 19.0% of net sales in 1997. Operating
expenses increased as a percentage of net sales primarily due to increased sales
and marketing expenses and to increased general and administrative expenses.

            A major component of the increase in sales and marketing expenses
was salaries related to the five sales positions added in 1998. Sales and
marketing related salaries increased to $360,000, or 3.9% of net sales in 1998,
over $68,000 or .7% of net sales in 1997. Also, travel expenses due to the
increased sales and marketing efforts increased to $119,000 or 1.2% of net sales
in 1998 over $55,000 or .6% of net sales in 1997. The Company expects that these
additional investment costs will begin to be recovered in 1999 as revenue
increases due to the sales efforts begun in 1998.

            General and administrative expenses increased to $1,552,000 in 1998
from $1,101,000 in 1997, and increased as a percentage of net sales to 16.8% in
1998 from 12.0% in 1997. This increase was due to higher legal and professional
expenses incurred by the Company in order to fulfill its expanded duties and
obligations as a public company and higher insurance costs due to larger
payrolls and expanded property and equipment coverage.

            INTEREST EXPENSE. Interest expense decreased to $230,000 in 1998
from $278,000 in 1997, and decreased as a percentage of net sales to 2.5% of net
sales in 1998 from 3.0% in 1997. This decrease in interest expense is due to the
payoff of the Company's short-term working capital loan due to Norwest Bank
Texas, South Central prior to establishing a new banking relationship.

            PROVISION (BENEFIT) FOR INCOME TAXES. As a result of the Company's
loss before income taxes in 1998, the Company recognized a benefit for income
taxes of $485,000 in 1998 compared to a provision for income taxes of $147,000
in 1997 and recorded a net deferred tax asset of $360,000 in 1998 compared to a
net deferred tax liability of $11,000 in 1997. The Company expects to utilize
approximately $138,000 of the 1998 deferred tax asset as a carry-back against
income taxes previously paid, and believes it is more likely than not that the
Company will generate sufficient taxable income in the future to realize the
remainder of the deferred tax asset, primarily because of the additional $6
million of revenues expected in 1998 from the Bath & Body Works letter of
commitment.


                                      -13-
<PAGE>


YEARS ENDED DECEMBER 31, 1997 AND 1996

            NET SALES. Net sales increased significantly to $9,185,000 in 1997
from $7,336,000 in 1996, an increase of 25.2%. Such an increase was attributed
primarily to the new marketing strategy begun in 1996 toward higher margin
products and the Company's introduction of its Soap Making Kits.
Substantial sales increases were recognized during 1997 as new accounts and
product lines were added.

            GROSS PROFIT. Gross profit increased in 1997 to $2,362,000 from
$1,851,000 for 1996. This was a 27.6% increase in 1997 over 1996. Gross profit
margin also increased slightly from 25.2% in 1996 to 25.7% in 1997. The Company
attributed the increase in gross profit and gross profit margin to its
continuing strategy of changing its product mix toward higher margin products.

            OPERATING EXPENSES. Operating expenses increased in 1997 by 13.4%,
but decreased as a percentage of net sales; $1,715,000 or 18.7% of net sales in
1997, as compared to $1,512,000 in 1996 or 20.6% of net sales in 1996. Operating
expenses decreased as a percentage of net sales primarily due to aggressive
Company cost controls. Sales and marketing expenses decreased slightly to
$490,000 in 1997 from $507,000 in 1996. The decrease was due to a more focused
and cost effective sales plan and the continuation of marketing plans begun in
1996 to achieve higher sales and profit margins at a lower cost per sales
dollar. Operating expenses increased overall because of higher professional fees
paid and an increase in compensation paid to officers and other employees.

            General and administrative expenses increased to $1,225,000 in 1997
from $1,005,000 in 1996, but decreased slightly as a percentage of net sales to
13.3% in 1997 from 13.7% in 1996. This slight decrease was primarily due to the
increase in sales volume out pacing the increase in general and administrative
expenses.

            INTEREST EXPENSES. Interest expense increased to $278,000 or 3.0 %
of net sales in 1997 from $226,000 or 3.1% of net sales in 1996. The increase in
interest expense was due primarily to the fact that substantial amounts remained
outstanding under the Company's revolving loans with Norwest Bank Texas, South
Central for most of 1997 to fund working capital. See Notes to Financial
Statements.

LIQUIDITY AND CAPITAL RESOURCES

            The Company's primary sources of liquidity, other than proceeds of
the Company's 1997 initial public offering ("IPO"), are cash flow from
operations, bank borrowings, and lease financing.

            In April 1998, the Company entered into a loan agreement ("Loan
Agreement") with Chase Bank of Texas, National Association ("Lender") to provide
(a) a construction/term loan in the principal amount of $2,300,000 ("Term Loan")
with a final maturity in April 2005, and (b) a revolving line of credit to be
used for working capital purposes in the amount of the lesser of 80% of eligible
accounts receivable or $1,000,000 ("Revolving Note") which would allow the
Company to borrow, repay, and reborrow until its final maturity in April 2000.
As of December 31, 1998, the entire Term Loan had been drawn.

            On January 25, 1999, the Company and the Lender amended the Loan
Agreement to provide for an additional term loan of $400,000 with a maturity of
February 2004 ("Additional Term Loan"). Such amendment also provided for an
increase in the amount available under the Revolving Note


                                      -14-
<PAGE>


to include the lesser of 80% of eligible accounts receivable or $2,000,000. As
of March 1, 1999, the Company had no remaining excess borrowing capacity under
the Revolving Note and had fully drawn down the Additional Term Loan. See "Item
1. Description of Business - Bath & Body Works Purchase Order."

            The interest on each of the Term Loan, the Additional Term Loan and
the Revolving Note will, at the Company's option, float at either the lender's
Prime Rate or the LIBOR Rate (London Interbank Offering Rate) plus the LIBOR
margin, which will range from 1.75% to 2.25% depending on the Company's debt to
tangible net worth ratio. Currently, the Company has elected to pay interest at
the LIBOR Rate plus LIBOR margin on the Term Loan, which interest rate was
9.0625% as of March 1, 1999. The Company elected to pay interest at the Prime
Rate on the Revolving Note and the Additional Term Loan, which interest rate was
7.75% as of March 1, 1999. The Company and Lender have also entered into an
interest rate risk management program for the term loans, pursuant to which the
Company and Lender entered into an ISDA Agreement (International Swap Dealers
Association) intended to hedge the interest rate fluctuations on the Term Loan
and Additional Term Loan. Overdue amounts on the loans are payable at a past due
rate of interest. The loans are secured by a lien on the Company's plant,
equipment, inventory, and accounts receivable.

            Interest on each of the Term Loan, the Additional Term Loan and the
Revolving Note is payable monthly. The Company is required to twice prepay the
Revolving Note and maintain a zero balance for 30 consecutive days during each
year the Revolving Note is outstanding, once before April 8, 1999 and once after
April 9, 1999 but prior to maturity. The Lender waived the Company's requirement
to prepay the Revolving Note and maintain a zero balance for 30 consecutive days
before April 8, 1999. Principal on the Term Loan is payable in monthly
installments which began on January 8, 1999 of approximately $9,500 per month,
increasing to approximately $12,700 per month after April 2001.

            Among other requirements, the Loan Agreement, as amended, currently
contains the following covenants, which are tested quarterly: the Company must
maintain (a) a current ratio of not less than 1.50 to 1.00; (b) a debt to
tangible net worth ratio not greater than 1.50 to 1.00; and (c) a debt service
coverage ratio of not less than 1.75 to 1.00. Prior to the January 25, 1999
amendment of the Loan Agreement, there was a requirement that the Company
maintain a fixed charge coverage ratio of not less than 1.20 to 1.00 rather than
the ratio required in (c) above. At December 31, 1998, the Company was not in
compliance with the debt to tangible net worth ratio or the prior fixed charge
coverage ratio, and the Company has received a waiver from the Lender through
December 31, 1998 for both of these events of non-compliance.

            For both of these events of non-compliance, management believes that
based upon current financial projections the Company may not comply with certain
financial ratio covenants currently specified during the year ending December
31, 1999. Management is working with the Lender and anticipates resetting the
specified financial ratios defined in the Loan Agreement, as amended, in the
first quarter of fiscal 1999. Management has already received proposed covenant
changes from the Lender and is not aware of any events or circumstances that
would preclude the Company from successfully resetting the financial covenants
in fiscal 1999.

            The Loan Agreement, as amended, also limits indebtedness by the
Company, restricts borrowing under certain equipment leases to $2,000,000,
restricts the Company from making or incurring capital expenditures exceeding
$2,000,000 in any 12 month period, restricts indebtedness in connection with
acquisition of equipment to $200,000 and limits sales of assets. The Loan


                                      -15-
<PAGE>


Agreement also restricts the Company from making any dividends or distributions
on its capital stock unless net income equals or exceeds $2,000,000,
repurchasing or redeeming any capital stock (other than pursuant to the terms of
the Company's Warrants, provided no default would occur under the bank loans),
paying any bonus or other non-salary compensation, replacing its President or
Chief Financial Officer, or entering into certain related party transactions
without prior written consent of Lender.

            The Company used approximately $1,191,000 of the aggregate Term Loan
proceeds to repay loans to Norwest Bank of Texas, and the Company used
approximately $1,109,000 to finance the expansion of its plant and facility. The
Company used approximately $1,200,000 of the Revolving Note for working capital,
including payment of vendors and payroll expense. In addition, the Company used
approximately $300,000 for down payments on manufacturing and production
equipment. The Company has used the proceeds of the Additional Term Loan to
finance the 1999 facility expansion, remodel approximately 5,000 square feet of
existing space into a soap curing area and for reimbursement of expenses
relating to the construction of a candle room. The Company currently anticipates
that it will make periodic payments on all such loans out of future cash flows
generated by the Company.

            The Company leases certain pieces of its manufacturing equipment
pursuant to capital leases. Payments for 1998 aggregated $208,000 under short
term capital leases and $376,000 under long term capital leases. The leases
currently in effect have maturity dates ranging from 1999 to 2002. Such leases,
some of which are personally guaranteed by the current and former Chief
Executive Officers of the Company, provide that if no event of default exists
thereunder the Company may purchase the equipment subject to the lease at the
expiration of the lease or may renew the lease.

            The Company and KCCI entered into the KCCI Lease Line of Credit,
which allows for a $1,562,000 leasing line of credit. The equipment currently
leased under this agreement includes two poured soap lines dedicated to
manufacturing glycerin soap, four high speed wrapping machines and one candle
making line. The Company began drawing on the KCCI Lease Line of Credit in
August 1998 and had drawn $1,562,000 by December 31, 1998. The Chief Executive
Officer of the Company has personally guaranteed the KCCI Lease Line of Credit.
Payments under the KCCI Lease Line of Credit are approximately $288,400 per year
or $24,000 per month.

            The Company relied on the Winthrop January 1999 Lease Line of Credit
in the amount of $477,000 to finance one traditional soap making line. The
Company has fully utilized this line of credit. Payments under the Winthrop
January 1999 Lease Line of Credit are approximately $180,000 per year or $15,000
per month.

            The Company has recently purchased and is in the process of
installing four 10,000 gallon storage containers to store the Company's key raw
materials. To finance the purchase of the bulk storage containers and related
construction, the Company drew on a Winthrop Resources, Inc. Capital Lease Line
of Credit in the amount of approximately $300,000 ("Winthrop March 1999 Lease
Line of Credit"). Annual and monthly payments under the Winthrop March 1999
Lease Line of Credit have not yet been fixed.

            In addition, the Company has receive a commitment to enter into a
lease line of credit from Amembal Capital Corporation in the total amount of
approximately $416,000 to finance three poured soap lines dedicated to
manufacturing glycerin soap and required to complete the 1999 expansion. As of
March 1, 1999, the Company had not negotiated or signed any final agreements
with Amembal


                                      -16-
<PAGE>


Capital Corporation with respect to such lease line of credit. Under the current
commitment letter, the payments would be approximately $70,900 per year or
$5,900 per month.

            The Company believes that its current cash balances, cash expected
to be provided by future operations and its current bank loans and financing
leases will be sufficient to meet its working capital and anticipated capital
expenditure requirements at least over the next 12 months. However, the Company
may seek additional working capital financing if net sales increase more than
currently anticipated.

FORWARD LOOKING INFORMATION

            Statements contained in this report regarding the Company's future
operations, growth strategy, future performance and results, and the Company's
ability to meet its working capital and capital expenditure needs and the
anticipated liquidity, the effect of the Company's 1998 and 1999 expansions, the
Bath & Body Works letter of commitment, utilization of the Company's deferred
tax asset, amendments to the financial ratio loan covenants, the reduction of
labor costs as a percentage of net sales are forward-looking and therefore are
subject to certain risks and uncertainties. Any forward-looking information
regarding the operations of the Company will be affected by the Company's
ability to successfully complete its expansion in a timely and cost effective
fashion, to efficiently manage and operate its facility as expanded, to manage
effectively its costs of operation, the Company's ability to successfully
increase its marketing and sales efforts in order to take advantage of its
increased production facilities, successfully and efficiently manufacturing and
delivering product under to Bath & Body Works, the continued receipt of large
orders from the Company's significant customers including Bath & Body Works, and
the ability of the Company and Lender to agree on amended financial covenants.
Any forward looking information regarding an increase of the Company's gross
profit margin will be affected by the Company's ability to implement its
strategy of focusing on the sales of higher margin products as well as the
Company's ability to efficiently utilize its expanded facilities. There can be
no assurance that the Company will be successful in completing its proposed
expansion, or, if completed, that it will be successful in efficiently managing
its growth in order to maximize potential production.


                                      -17-
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS.

            The following financial statements are included on the pages
indicated:

INDEX TO FINANCIAL STATEMENTS                                               PAGE
-----------------------------                                               ----

Report of Independent Auditors.............................................  F-1

Balance Sheets as of December 31, 1997 and 1998............................  F-2

Statements of Operations for the years
ended December 31, 1997 and 1998...........................................  F-3

Statements of Shareholders' Equity for the
years ended December 31, 1997 and 1998.....................................  F-4

Statements of Cash Flows for the years
ended December 31, 1997 and 1998...........................................  F-5

Notes to Financial Statements..............................................  F-6


                                      -18-

<PAGE>


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

            N/A.


                                    PART III


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

            Information regarding directors and executive officers of the
company is set forth under "Information concerning Directors, Nominees and
Executive Officers" and under "Section 16(a) Beneficial Ownership Reporting
Requirements" in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders to be held April 13, 1998, and is incorporated herein by
reference.


ITEM 10.  EXECUTIVE COMPENSATION.

            Information regarding executive compensation is set forth under
"Executive Compensation" in the Company's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders, to be held April 13, 1998, and is
incorporated herein by reference.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

            Information regarding security ownership of certain beneficial
owners and management is set forth under "Beneficial Ownership of Common Stock"
in the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders, to be held April 13, 1998, and is incorporated herein by
reference.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

            Information regarding certain relationships and related transactions
is set forth under "Information Concerning Directors, Nominees and Executive
Officers" in the Company's definitive Proxy Statement for 1998 Annual Meeting of
Shareholders to be held April 13, 1998, and is incorporated herein by reference.


                                      -19-
<PAGE>


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

Number      Description
------      -----------

 * 3.1      Articles of Incorporation, as amended to date

 * 3.2      Amended and Restated By-laws

 + 4.2      Form of Warrant Agreement and Warrant Certificate

o*10.1      1997 Long-Term Incentive Plan

o*10.2      1997 Non-Employee Directors' Stock Option Plan

o*10.3      Employment Agreement, effective December 1997, between Surrey, Inc.
            and John van der Hagen

o*10.4      Employment Agreement, effective December 1997, between Surrey, Inc.
            and Martin van der Hagen

o*10.5      Form of Consulting Agreement between the Company and Stuart, Coleman
            & Co., Inc.

**10.6      Loan Agreement, April 8, 1998, between Company and Chase Bank of
            Texas, National Association ("Lender")

**10.7      Construction Loan Agreement, April 8, 1998, between Company and
            Lender

**10.8      Security Agreement between Company and Lender securing all
            obligations of the Company to Lender under the Loan Agreement.

**10.9      Promissory Note, in the face amount of $2,300,000.00, due to Lender
            April 8, 2005

**10.10     Master Equipment Lease between the Company and Key Corporate
            Capital, Inc.

  10.11     Second Amended Loan Agreement, January 25, 1999, between Company and
            Lender

  10.12     Construction Loan Agreement, January 25, 1999, between Company and
            Lender

  10.13     Promissory Note, in the face amount of $400,000.00, due to Lender
            February 8, 2004

  10.14     Promissory Note, in the face amount of $2,000,000.00, due to Lender
            April 8, 2000

  27        Financial Data Schedule

--------------------
    *   incorporated by reference to the Company's registration statement on
        Form SB-2 dated September 16, 1997 (Reg. No. 333-35757).

    +   incorporated by reference to the Company's Amendment No. 1 to the
        registration statement on Form SB-2 dated November 12, 1997 (Reg. No.
        333-35757).

    **  incorporated by reference to the Company's quarterly report on Form
        10-QSB dated May 15, 1998

    ++  incorporated by reference to the Company's quarterly report on Form
        10-QSB dated November 16, 1998

    o   Items that are management contracts or compensation plans or arrangement
        required to be filed as an exhibit to the Form 10-KSB and incorporated
        by reference to the Company's registration statement on Form SB-2 dated
        September 16, 1997.

(b)     REPORTS ON FORM 8-K

        On November 25, 1998, the Company filed a Form 8-K disclosing that the
        Company had received a major letter of commitment from Bath & Body
        Works, a wholly owned subsidiary of The Limited, Inc., to purchase its
        products. At that time, management estimated the commitment would result
        in additional revenues of approximately $6,000,000. See "Item 1.
        Description of Business--Bath & Body Works."


                                      -20-
<PAGE>


                                   SIGNATURES

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




                                          SURREY, INC.

Date:   March 18, 1999                    By   /s/ John B. van der Hagen
                                            ------------------------------------
                                               John B. van der Hagen
                                               Chief Executive Officer


Pursuant to the requirements of the Exchange Act, this 10-KSB has been signed
below by the following persons on behalf of the Issuer on March 18, 1999 in the
capacities indicated.


/s/ John B. van der Hagen                 Chairman of the Board of Directors and
------------------------------            Chief Executive Officer
John B. van der Hagen


/s/ Martin van der Hagen                  President and Director
------------------------------
Martin van der Hagen


/s/ Mary van der Hagen                    Secretary and Director
------------------------------
Mary van der Hagen


/s/ Bruce A. Masucci                      Director
------------------------------
Bruce A. Masucci


/s/ G. Thomas MacIntosh                   Director
------------------------------
G. Thomas MacIntosh


/s/ Mark J. van der Hagen                 Vice President - Finance and Treasurer
------------------------------
Mark J. van der Hagen


                                      -21-
<PAGE>


                         Report of Independent Auditors



Board of Directors and Shareholders
Surrey, Inc.


We have audited the accompanying balance sheets of Surrey, Inc. as of December
31, 1997 and 1998, and the related statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Surrey, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

                                         /s/ Ernst & Young LLP


Austin, Texas
February 9, 1999 except for
  Notes 7 and 14, as to which
  the date is March 15, 1999


                                       F-1
<PAGE>


                                  Surrey, Inc.

                                 Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                           DECEMBER 31
                                                                      1997            1998
                                                                  -----------------------------
<S>                                                                 <C>             <C>      
ASSETS
Current assets:
   Cash and cash equivalents                                        $   3,066       $      77
   Accounts receivable, net of allowance for doubtful accounts
      of $27 and $106 in 1997 and 1998, respectively                    1,427           1,713
   Inventories, net                                                     1,252           2,232
   Prepaid expenses and other current assets                               39             315
   Deferred income taxes                                                   38             182
   Income taxes receivable                                                 42             156
                                                                  -----------------------------
Total current assets                                                    5,864           4,675

Property and equipment, net                                             1,510           3,710
Deferred income taxes                                                      --             178
                                                                  -----------------------------
Total assets                                                        $   7,374       $   8,563
                                                                  =============================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Trade accounts payable                                           $     630       $   1,159
   Accrued expenses                                                       239             204
   Notes payable                                                          895              --
   Current maturities of long-term debt                                    96             134
   Current maturities of capital lease obligations                         66             208
                                                                  -----------------------------
Total current liabilities                                               1,926           1,705

Long-term debt, less current maturities                                 1,153           3,192
Capital lease obligations, less current maturities                         85             376
Deferred income taxes                                                      49              --

Commitments and contingencies

Shareholders' equity:
   Common stock; no par value; 10,000,000 shares authorized;
      2,472,727 shares issued and outstanding                           4,120           4,099

   Common stock warrants; 737,500 authorized; 675,000
      issued and outstanding                                               65              64
   Accumulated deficit                                                    (24)           (873)
                                                                  -----------------------------
Total shareholders' equity                                              4,161           3,290
                                                                  -----------------------------
Total liabilities and shareholders' equity                          $   7,374       $   8,563
                                                                  =============================
</TABLE>

SEE ACCOMPANYING NOTES.


                                       F-2
<PAGE>


                                  Surrey, Inc.

                            Statements of Operations
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                            1997            1998
                                                       -----------------------------
<S>                                                      <C>             <C>      
Net sales                                                $   9,185       $   9,247
Cost of sales                                                6,793           7,856
                                                       -----------------------------
Gross profit                                                 2,392           1,391

Operating expenses:
   Research and development                                    154             166
   Sales and marketing                                         490             821
   General and administrative                                1,101           1,552
                                                       -----------------------------
Total operating expenses                                     1,745           2,539
                                                       -----------------------------

Income (loss) from operations                                  647          (1,148)

Other:
   Interest expense                                           (278)           (230)
   Other income                                                  6              44
                                                       -----------------------------
Income (loss) before income taxes                              375          (1,334)

Provision (benefit) for income taxes                           147            (485)
                                                       -----------------------------

Net income (loss)                                        $     228       $    (849)
                                                       =============================


Basic and diluted earnings (loss) per share              $    0.12       $   (0.34)
                                                       =============================

Shares used in computing earnings (loss) per share:
   Basic                                                     1,921           2,473
                                                       =============================
   Diluted                                                   1,921           2,473
                                                       =============================
</TABLE>

SEE ACCOMPANYING NOTES.


                                      F-3
<PAGE>



                                       F-4
                                  Surrey, Inc.

                       Statements of Shareholders' Equity
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                     COMMON STOCK          COMMON STOCK WARRANTS
                                            ----------------------------  -----------------------
                                                                                                      RETAINED
                                                                                                      EARNINGS        TOTAL
                                                 SHARES                    WARRANTS                 (ACCUMULATED  SHAREHOLDERS'
                                              OUTSTANDING      AMOUNT     OUTSTANDING    AMOUNT       DEFICIT)        EQUITY
                                            -----------------------------------------------------------------------------------
<S>                                            <C>          <C>              <C>       <C>           <C>           <C>       
Balance at December 31, 1996                   2,245,454    $      393            --   $       --    $      605    $      998
   Repurchase of common stock                 (1,122,727)         (393)           --           --          (857)       (1,250)
   Issuance of common stock and warrants
     net of issuance costs of $1,300           1,350,000         4,120       675,000           65            --         4,185
   Net income                                         --            --            --           --           228           228
                                            -----------------------------------------------------------------------------------
Balance at December 31, 1997                   2,472,727         4,120       675,000           65           (24)        4,161
   Payment of issuance costs                          --           (21)           --           (1)           --           (22)
   Net loss                                           --            --            --           --          (849)         (849)
                                            -----------------------------------------------------------------------------------
Balance at December 31, 1998                   2,472,727    $    4,099       675,000   $       64    $     (873)   $    3,290
                                            ===================================================================================
</TABLE>

SEE ACCOMPANYING NOTES.


                                      F-4
<PAGE>


                                  Surrey, Inc.

                            Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                        1997            1998
                                                                   -----------------------------
<S>                                                                  <C>             <C>       
OPERATING ACTIVITIES
Net income (loss)                                                    $     228       $    (849)
Adjustments to reconcile net income (loss) to net cash provided
   by (used in) operating activities:
      Gain on disposal of property and equipment                            --              (2)
      Depreciation                                                         236             279
      Changes in operating assets and liabilities:
         Accounts receivable                                              (115)           (286)
         Inventories                                                       (80)           (980)
         Prepaid expenses and other current assets                          (8)           (276)
         Deferred income taxes                                              15            (371)
         Trade accounts payable                                            (30)            529
         Accrued expenses                                                  149             (35)
         Income taxes receivable/payable                                   (50)           (114)
                                                                   -----------------------------
Net cash provided by (used in) operating activities                        345          (2,105)

INVESTING ACTIVITIES
Proceeds from sale of property and equipment                                --              10
Acquisition of property and equipment                                     (181)         (1,954)
                                                                   -----------------------------
Net cash used in investing activities                                     (181)         (1,944)

FINANCING ACTIVITIES
Proceeds from issuance of notes payable                                    713              --
Payment of notes payable                                                (1,797)           (895)
Payment of notes payable to shareholders                                  (182)             --
Proceeds from issuance of long-term debt                                    --           3,300
Payment of long-term debt                                                  (77)         (1,234)
Principal payments on capital lease obligations                            (99)            (89)
Proceeds from issuance of Common Stock and Warrants, net                 4,185              --
Payment of issuance costs                                                   --             (22)
                                                                   -----------------------------
Net cash provided by financing activities                                2,743           1,060

Net change in cash                                                       2,907          (2,989)
Cash and cash equivalents, beginning of period                             159           3,066
                                                                   -----------------------------
Cash and cash equivalents, end of period                             $   3,066       $      77
                                                                   =============================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
   Interest                                                          $     278       $     248
   Income taxes                                                      $     185       $      --

Acquisition of property and equipment via issuance of capital
   leases                                                            $      67       $     522

Acquisition of property and equipment via issuance of long-term
   debt                                                              $      --       $      11

Repurchase of common stock via issuance of a note payable            $   1,250       $      --
</TABLE>

SEE ACCOMPANYING NOTES.


                                       F-5
<PAGE>


                                  Surrey, Inc.

                          Notes to Financial Statements

                                December 31, 1998


1. THE COMPANY

Surrey, Inc. (the "Company") specializes in the development and manufacture of
high quality transparent glycerin and specialty soap products, as well as the
production of certain personal care and home fragrance products for major drug,
grocery and discount retailers and distributes its products on a nationwide
basis. The Company also manufactures and sells home fragrance products and a
full line of potpourri products as part of its crafts market product line. The
Company recently began manufacturing a line of high-end scented candles that
compliments its line of home fragrance products. In addition, the Company
recently began manufacturing a small amount of traditional bar soap. The Company
conducts its business within one industry segment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECOGNITION OF REVENUE

Revenue is recognized at the date of shipment. Provision is made for estimated
product returns.

CASH AND CASH EQUIVALENTS

The Company considers all investments with maturities of ninety days or less
when purchased to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Cost includes expenditures for major
renewals and improvements and interest costs associated with significant capital
additions. For the year ended December 31, 1998, the Company capitalized
interest of approximately $23,000 and none in 1997. Equipment includes amounts
recorded under capital leases. Depreciation is recorded using the straight-line
method over estimated useful lives ranging from three to forty years.


                                       F-6
<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Assets recorded under capital leases are amortized using the straight-line
method over the lesser of the estimated useful lives of the assets or the term
of the related leases, and such amortization is included in depreciation
expense. Repairs and maintenance are charged to expense when incurred.

LONG-LIVED ASSETS

Impairment losses are recognized when indicators of impairment are present and
the estimated future undiscounted cash flows are not sufficient to recover the
assets' carrying value or estimated fair value, less costs to sell. At December
31, 1998 there were no events or circumstances which indicated that long-lived
assets of the Company might be impaired.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.

ADVERTISING

Advertising costs are expensed as incurred. Advertising expense was
approximately $59,000 and $106,000 for the years ended December 31, 1997 and
1998, respectively.

EARNINGS PER SHARE

In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, EARNINGS PER SHARE. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented in accordance with, and where appropriate, restated to conform to the
Statement No. 128 requirements.


                                      F-7

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

In October 1995, the FASB issued Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options. As allowed by
Statement No. 123, the Company has elected to account for its employee
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25).

COMPREHENSIVE INCOME

In 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE INCOME which
establishes standards for reporting comprehensive income and its components in a
full set of financial statements. The adoption of SFAS No. 130 did not have a
significant effect on the current financial statement presentation income as the
Company has no items of comprehensive income.

SEGMENTS

In 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION which establishes reporting standards for a
company's operating segments in annual financial statements and the reporting of
selected information about operating segments in financial statements. The
adoption of Statement No. 131 had no effect on the disclosure of segment
information as the Company continues to consider its business activities as a
single segment.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, accounts receivable, trade accounts payable and accrued expenses are
stated at cost which approximates fair value due to the short-term maturity of
these instruments. All significant debt instruments carry variable interest
rates and their carrying value is considered to approximate fair value.


                                      F-8

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATION

Certain prior year financial statement balances have been reclassified to
conform with the 1998 presentation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement
of Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES. The SOP
requires the costs of start-up activities and organization costs to be expensed
as incurred. The SOP is effective for fiscal years beginning after December 15,
1998. The Company's existing accounting policies are consistent with those of
the SOP, and as such, the Company does not expect the SOP to have a significant
impact on future operating results.

3. INVENTORIES

The Company's inventories consist of the following (in thousands):

                                                  DECEMBER 31
                                           1997                1998
                                       -------------------------------

       Raw materials                      $  863              $1,307
       Work in progress                      159                 447
       Finished goods                        230                 478
                                       -------------------------------
                                          $1,252              $2,232
                                       ===============================


                                      F-9
<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

                                                            DECEMBER 31
                                                      1997              1998
                                                  ------------------------------

        Equipment                                   $ 1,892           $ 2,659
        Building                                        899             2,325
        Automobiles                                      94                93
        Furniture and fixtures                           34                96
        Construction in process                          23                --
                                                  ------------------------------
                                                      2,942             5,173
        Accumulated depreciation and amortization    (1,499)           (1,744)
                                                  ------------------------------
                                                      1,443             3,429
        Land                                             67               281
                                                  ------------------------------
        Property and equipment, net                 $ 1,510           $ 3,710
                                                  ==============================

The Company is expanding its production facility. The construction project is
expected to be completed in the second quarter of 1999. Estimated cost to
complete the construction is approximately $500,000 as of December 31, 1998.


                                      F-10
<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


5. NOTES PAYABLE

Notes payable consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                              DECEMBER 31
                                                                       1997                 1998
                                                                   --------------------------------
<S>                                                                  <C>                 <C>     
Borrowings under a $800,000 revolving line of credit, bearing
 interest at the bank's prime rate plus 1.5% (10% at December
 31, 1997), with interest due monthly and all principal due in
 April 1998. The line is collateralized by accounts receivable,
 inventory and property and equipment, and is guaranteed by a
 shareholder of the Company.                                         $    700            $     --

Notepayable to a bank, bearing interest at the bank's prime rate
 plus 2% (10.5% at December 31, 1997), due in monthly
 installments of $5,664 in principal and interest through May
 1998, at which time all outstanding principal and interest are
 due. The note is collateralized by accounts receivable,
 inventory and property and equipment, and is guaranteed by a
 shareholder of the Company.                                              195                  --
                                                                   --------------------------------
                                                                     $    895            $     --
                                                                   ================================
</TABLE>

6. NOTES PAYABLE TO SHAREHOLDERS

In March 1996, the Company issued notes payable totaling $200,000, bearing
interest at 12% per annum, to shareholders of the Company. During 1997, the
Company made interest payments of approximately $20,000 on such notes. The
outstanding balance of $182,000 was paid in December 1997.


                                      F-11
<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


7. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                             DECEMBER 31
                                                                      1997                 1998
                                                                   --------------------------------
<S>                                                                  <C>                 <C>     
Notepayable to a bank, bearing interest at the bank's prime rate
 plus 1.75% (10.25% at December 31, 1997), due in monthly
 installments of approximately $16,000 in principal and
 interest through November 2006, at which time all
 outstanding principal and interest is due. The note is
 collateralized by accounts receivable, inventory and property
 and equipment. The note is guaranteed by a shareholder of the
 Company and by the United States Small Business
 Administration. This note was refinanced during 1998.               $1,215              $     --


Borrowings under a $1,000,000 revolving line of credit (the
 "Line"), bearing interest at the bank's prime rate (7.75% at
 December 31, 1998), with interest due monthly and all
 principal due in April 2000. The Line is collateralized by
 accounts receivable, inventory and property and equipment.
 Amounts available under the Line are subject to certain
 borrowing base limitations. The Line was fully drawn as of
 December 31, 1998.                                                      --                 1,000
</TABLE>


                                      F-12

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

<TABLE>
<CAPTION>
                                                                             DECEMBER 31
                                                                      1997                 1998
                                                                   --------------------------------
<S>                                                                  <C>                  <C>   
Notes payable to a bank under a $2,300,000 construction
 advance (the "Notes") converting to a single term note in
 January 1999, approximately $1,939,000 bearing interest at
 the London Interbank Offered Rate (LIBOR) plus 1.75% 
 (8.94% at December 31, 1998) and approximately $361,000
 bearing interest at the bank's prime rate (7.75% at December
 31, 1998), principal payments of approximately $10,000 due
 monthly from January 2000 through April 2000, then
 increasing to approximately $13,000 due monthly through
 April 2005, the maturity date of the Notes. The Notes are
 collateralized by accounts receivable, inventory and property
 and equipment.                                                          --                2,300

Notes payable to various banks for automobiles, bearing interest
 at rates ranging from 7.75% to 8.75%, due in monthly
 installments of principal and interest of approximately $1,000,
 maturing at various dates through January 2003. The notes are
 collateralized by the automobiles financed by the notes.                34                   26
                                                                   --------------------------------
                                                                      1,249                3,326
Less current maturities                                                 (96)                (134)
                                                                   --------------------------------
Long-term debt, less current maturities                              $1,153               $3,192
                                                                   ================================
</TABLE>

The Line and the Notes contain restrictive covenants which require the Company
to maintain certain financial ratios. At December 31, 1998, the Company was in
violation of the debt to tangible net worth ratio and the fixed charge coverage
ratio. The Company has obtained a waiver from the lender for these violations.


                                      F-13

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

Management believes that based upon current financial projections the Company
may not comply with certain financial ratio covenants currently specified during
the year ending December 31, 1999. Management is working with the pertinent
lender and anticipates resetting the specified financial ratios defined in the
agreement in the first quarter of fiscal 1999 whereby no violation will occur or
exist. Management has already received proposed covenant changes from its lender
and is not aware of any events or circumstances that would preclude the Company
from successfully resetting the financial covenants in fiscal 1999.

Maturities of long-term debt are as follows for the periods ending December 31
(in thousands):

                    1999                    $  134
                    2000                     1,117
                    2001                       143
                    2002                       156
                    2003                       153
                    Thereafter               1,623
                                          ----------
                    Total                   $3,326
                                          ==========


                                      F-14

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


8. LEASES

The Company leases certain equipment under capital and operating leases.
Commitments for minimum rentals under non-cancelable leases as of December 31,
1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                      YEAR ENDING DECEMBER 31,      CAPITAL LEASES         OPERATING LEASES
       ----------------------------------------------------------------------------------
<S>                                                    <C>                    <C>  
                                1999                   $   254                $    166
                                2000                       204                     166
                                2001                       172                     166
                                2002                         5                     166
                                2003                        --                     166
                                Thereafter                  --                     291
                                                     -----------------------------------
       Total minimum lease payments                        635                   1,121
                                                                           =============
       Less amount representing interest                   (51)
                                                     --------------
       Present value of minimum lease payments             584
       Less current maturities                            (208)
                                                     --------------
                                                       $   376
                                                     ==============
</TABLE>

Rent expense was approximately $11,000 and $43,000 in 1997 and 1998,
respectively.

Property and equipment include the following amounts for capitalized leases at
December 31, 1997 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                       1997                 1998
                                                   -------------------------------

<S>                                                  <C>                  <C>   
Equipment                                            $  277               $  748
Less accumulated amortization                        $ (111)                (117)
                                                   -------------------------------
                                                     $  166               $  631
                                                   ===============================
</TABLE>


                                      F-15

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


9. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows (in thousands):

                                                      DECEMBER 31
                                               1997               1998
                                            -----------------------------

Deferred tax liabilities:
   Tax over book depreciation                 $(49)               $(59)
                                            -----------------------------
Total deferred tax liabilities                 (49)                (59)

Deferred tax assets:
   Net operating losses                         --                 237
   Allowance for doubtful accounts              11                  39
   Reserves for inventory and other             27                 143
                                            -----------------------------
Total deferred tax assets                       38                 419
                                            -----------------------------
Net deferred tax assets (liabilities)         $(11)               $360
                                            =============================

The Company has net tax operating losses of approximately $640,000 which will
expire in 2018, if not utilized.


                                      F-16

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


9. INCOME TAXES (CONTINUED)

Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows (in thousands):

                                                 YEAR ENDED DECEMBER 31 
                                                   1997          1998
                                                ---------     ----------

         Current:
            Federal                               $119          $(105)
            State                                   11             (9)
                                                ---------     ----------
         Total current                             130           (114)

         Deferred:
            Federal                                 15           (341)
            State                                    2            (30)
                                                ---------     ----------
         Total deferred                             17           (371)
                                                ---------     ----------
                                                  $147          $(485)
                                                =========     ==========

The reconciliation of income tax at the U.S. federal statutory tax rate to
income tax expense is:

                                                 YEAR ENDED DECEMBER 31
                                                   1997          1998
                                                ---------     ----------

         Tax at federal statutory rate              34%          (34)%
         State taxes (net of federal benefit)        3            (3)
         Permanent items and other                   2             1
                                                ---------     ----------
                                                    39%          (36)%
                                                =========     ==========


                                      F-17

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


10. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                       1997           1998
                                                                  -----------------------------
<S>                                                                 <C>            <C>        
Numerator:
   Net income (loss)                                                $      228     $     (849)
                                                                  -----------------------------
   Numerator for basic and diluted earnings (loss) per share -
      income (loss) available to common shareholders                $      228     $     (849)
                                                                  =============================

Denominator:
   Denominator for basic earnings (loss) per share - weighted-
      average shares                                                     1,921          2,473
   Effect of dilutive securities:
      Employee stock options                                                --             --
      Non-employee directors' stock options                                 --             --
                                                                  -----------------------------
   Dilutive potential common shares                                         --             --
                                                                  -----------------------------
   Denominator for diluted earnings (loss) per share - adjusted
      weighted-average shares and assumed conversions                    1,921          2,473
                                                                  =============================

Basic and diluted earnings (loss) per share                         $     0.12     $    (0.34)
                                                                  =============================
</TABLE>

Options to purchase 305,500 shares of common stock at exercise prices ranging
from $4.00 to $4.40 per share, warrants to purchase 675,000 shares of common
stock at $4.80 per share and a warrant to purchase 62,500 Units (consisting of
two shares of common stock and one redeemable common stock purchase warrant) at
$9.75 per Unit were outstanding during 1998 but were not included in the
computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares; therefore, the
effect would be antidilutive.


                                      F-18

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


11. SHAREHOLDERS' EQUITY

STOCK REPURCHASE

On August 15, 1997, the Company entered into a Stock Purchase Agreement to
purchase 50% of the then outstanding capital stock of the Company (1,122,727
shares) for $1,250,000 from a shareholder. The purchase price was payable in the
form of a non-interest bearing promissory note. The promissory note was paid in
December 1997. The shares repurchased by the Company were canceled.

STOCK SPLIT

Effective September 3, 1997, the Shareholders and the Board of Directors
approved a 11.22727-for-1 stock split of the then outstanding common stock. All
share amounts presented in these financial statements have been restated to
retroactively reflect the stock split.

INITIAL PUBLIC OFFERING

On December 3, 1997, the Company completed its initial public offering of
625,000 Units. Net proceeds to the Company from the offering and a 50,000 Unit
over-allotment option exercised December 19, 1997 aggregated approximately
$4,185,000.

WARRANTS

As of December 31, 1998, the Company had outstanding 675,000 warrants to
purchase common stock. Each warrant entitles the holder thereof to purchase one
share of common stock at $4.80 per share. The warrants expire on December 9,
2002. The warrants have a call provision whereby the Company may call the
warrants at a price of $0.01 per warrant at any time that the market value of
the common stock exceeds $5.00 per share for a period of twenty consecutive
trading days. The warrants trade on the Nasdaq SmallCap Market.

Also outstanding as of December 31, 1998, were warrants with which the
Underwriter of the Company's initial public offering could purchase from the
Company an aggregate of 62,500 Units at $9.75 per Unit. The warrants expire on
December 2, 2002.


                                      F-19

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


11. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS

In September 1997, the Board of Directors adopted the Surrey, Inc. 1997
Long-Term Incentive Plan to provide for the grant of incentive and nonqualified
stock options, stock appreciation rights, restricted stock, performance awards
or any combination thereof to employees, under which 350,000 shares of common
stock are reserved for issuance. The exercise price of each option shall equal
the fair market value of the Company's common stock on the date of grant (110%
of the fair market value in the case of options granted to a person possessing
10% or more of the combined voting power of the Company as of the date of
grant). The stock options generally vest over a four to five year period. The
term of each option shall not exceed 10 years from the date of grant (five years
in the case of options granted to a person possessing 10% or more of the
combined voting power of the Company as of the date of grant).

Stock appreciation rights may be granted by themselves or in tandem with a stock
option. Stock appreciation rights granted in tandem with an option shall become
nonexercisable upon the exercise of the option and an option granted in tandem
with stock appreciation rights shall become nonexercisable upon the exercise of
the rights. The term of stock appreciation rights shall not exceed 10 years from
the date of grant. No grants of stock appreciation rights had been made as of
December 31, 1998.

Restricted stock shall be subject to a restricted period as determined by the
Board of Directors. The Board of Directors may provide for the lapse of
restrictions in installments, upon the occurrence of certain events, or upon
other terms and conditions as the Board of Directors deems appropriate. No
grants of restricted stock had been made as of December 31, 1998.

Performance awards shall be awarded to individuals specified by the Board of
Directors based upon the achievement of long-term performance goals. The Board
of Directors shall define performance objectives with a performance period of
not less than five years, and establish a fixed or variable value for each
performance award (which may be expressed in terms of specified dollar amounts
or a specified number of shares) at the date of the award. Payments related to
performance awards may be made in lump sum or in installments, and shall be
subject to such vesting, deferral or other terms and conditions as the Board of
Directors may determine. No grants of performance awards had been made as of
December 31, 1998.


                                      F-20

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


11. SHAREHOLDERS' EQUITY (CONTINUED)

In September 1997, the Board of Directors adopted the Surrey, Inc. 1997
Non-Employee Directors' Stock Option Plan (the "Directors' Plan") under which
100,000 shares of common stock are reserved for issuance. This Directors' Plan
allows for two types of stock option grants; an initial grant of 6,000 options
effective on the Company's public offering, with options vesting one third upon
the first anniversary of the grant date, and one third on each of the next two
anniversaries of the grant date; and an annual grant of 2,000 shares upon
reelection to the Board for a fourth or subsequent term, with options vesting
immediately. The exercise price of each option shall equal the fair market value
of the Company's common stock on the date of grant. All options expire ten years
from the date of grant. The Company began issuing options in 1997.

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
                                                            WEIGHTED-
                                                             AVERAGE       RANGE OF
                                                            EXERCISE       EXERCISE
                                             SHARES          PRICES        PRICES
                                          ---------------------------------------------
<S>                                          <C>          <C>            <C>  
Options outstanding December 31, 1996             --      $       --     $         --
   Granted                                   305,500            4.07      4.00 - 4.40
   Exercised                                      --              --               --
   Canceled                                       --              --               --
                                          ---------------------------------------------
Options outstanding December 31, 1997        305,500            4.07      4.00 - 4.40
   Granted                                    30,000            4.00               --
   Exercised                                      --              --               --
   Canceled                                  (30,000)           4.00               --
                                          ---------------------------------------------
Options outstanding December 31, 1998        305,500      $     4.07     $4.00 - 4.40
                                          =============================================
</TABLE>


                                      F-21

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


11. SHAREHOLDERS' EQUITY (CONTINUED)

The following is additional information relating to options outstanding at
December 31, 1998:

       Exercisable                                                64,000
       Weighted-average exercise prices of options exercisable     $4.08
       Weighted-average remaining contractual life of options
         outstanding at December 31, 1998                        8.12 years

The Company has elected to account for its employee stock options under APB 25.
As a result, pro forma information regarding net income and income per share is
required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which
requires that the information be determined as if the Company had accounted for
its employee stock options under the fair value method prescribed by SFAS No.
123. The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:

                                                        1997            1998
                                                   -----------------------------

Risk-free interest rate                                6%             6%
Dividend yield                                         0%             0%
Expected life                                          5 years        5 years
Volatility factor                                      0.215          0.260

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


                                      F-22

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


11. SHAREHOLDERS' EQUITY (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

                                                               DECEMBER 31
                                                           1997           1998
                                                         -----------------------

Pro forma net income (loss) (in thousands)                 $ 219         $ (971)
Pro forma basic and diluted earnings (loss) per share      $0.11         $(0.39)

The exercise price of some options differed from the market price of the stock
on the grant date. The following is a summary of the weighted-average fair
values and exercise prices for such options:

                                                      DECEMBER 31
                                               1997                 1998
                                      ------------------------------------------
                                         FAIR    EXERCISE      FAIR    EXERCISE
                                        VALUE     PRICE       VALUE     PRICE
                                      ------------------------------------------

Stock price equal to exercise price     $2.45      $4.00      $   --     $  --
Stock price less than exercise price    $2.37      $4.40      $ 0.77     $4.00

SHARES RESERVED

Common stock reserved at December 31, 1998 consists of the following:

         For exercise of stock options                 450,000
         For exercise of common stock warrants         675,000
         For exercise of Unit warrants                 187,500
                                                   -------------
                                                     1,312,500
                                                   =============


                                      F-23

<PAGE>


                                  Surrey, Inc.

                    Notes to Financial Statements (continued)


12. CONCENTRATIONS OF CREDIT RISK AND SALES TO MAJOR CUSTOMERS

The Company is engaged in the manufacturing and distribution of personal and
home care products within the United States. Consequently, the Company's ability
to collect the amounts due from customers may be affected by economic
fluctuations within the United States and the major drug, grocery and discount
retailer industry. Credit losses relating to such economic fluctuations have
been within management's expectations.

For the years ended December 31, 1997 and 1998, sales to one customer amounted
to approximately $3,158,000 and $2,443,000, respectively, representing 34% and
26% of net sales, respectively.

13. CONTINGENCIES

The Company is involved in certain claims arising in the normal course of
business. An estimate of the possible loss resulting from these matters cannot
be made; however, the Company believes that the ultimate resolution of these
matters will not have a material adverse effect on its financial position or
results of operations.

14. SUBSEQUENT EVENTS

In January 1999, the Company amended its existing line of credit and
construction advance loan agreements to increase borrowing capacity under such
agreements by $1,000,000 and $400,000, respectively. Additional credit available
under the line of credit will be used for working capital purposes.
Additional credit available under the construction advance loan will be used for
plant expansion.

In addition, between January 1, 1999 and March 15, 1999, the Company entered
into capital leases for equipment in the amount of $777,000 and entered into
operating leases for additional equipment valued at $981,000.


                                      F-24