<PAGE>
 
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

(Mark One)
 X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
---      EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 1997

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
---      EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

                         Commission file number 0-14669
                                                -------

                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------
             (Exact name of registrant as specified in its charter)

DELAWARE                                                              06-1165854
--------------------------------------------------------------------------------
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or  organization)                              Identification No.)

78 Olive Street, New Haven, Connecticut                                    06511
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code: (203) 867-4090

Securities registered pursuant to Section 12(b) of the Act: Not Applicable

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par 
value $.01 per share

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

                            Yes  x                   No
                                ---                     ---

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

As of September 8, 1997, the aggregate market value of the Common Stock
outstanding of The Aristotle Corporation held by nonaffiliates (without
admitting that any person whose shares are not included in such calculation is
an affiliate) was approximately $3,882,664, based on the closing price as
reported by the Nasdaq Stock Market.

                       Documents Incorporated by Reference

Portions of the Registrant's 1997 definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the end of the Registrant's
fiscal year are incorporated by reference to Part III.
<PAGE>
 
                                                       THE ARISTOTLE CORPORATION


TABLE OF CONTENTS
----------------------------------------------------------------------------- 

Selected Consolidated Financial Data                                        2

Management's Discussion and Analysis                                        3

Consolidated Financial Statements                                           9

Form 10-K Cross Reference Index                                            31

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

                                       1
<PAGE>
 
               SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
             (Amounts in thousands, except share and per share data)

     The following are selected consolidated financial data for The Aristotle
Corporation ("Aristotle"), Aristotle Sub, Inc. ("ASI"), and The Strouse, Adler
Company ("Strouse") on a consolidated basis for the fiscal years ended June 30,
1994, 1995, 1996 and 1997. Aristotle formed ASI in 1993 and acquired (the
"Acquisition") Strouse in 1994. Accordingly, the selected consolidated data for
the fiscal year ended December 31, 1992, and the six-month periods ended June
30, 1992 and 1993 are for Aristotle only. All references herein to the "Company"
include Aristotle, ASI and Strouse. The selected consolidated financial data
presented below should be read in conjunction with the Consolidated Financial
Statements of the Company, together with the Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.

<TABLE> 
<CAPTION> 
                                               Fiscal
                                                Year
                                               Ended       Six-Months Ended
                                              December         June 30,                     Fiscal Years Ended
                                                31,           (unaudited)                        June 30,
                                            ---------------------------------------------------------------------------------
                                              1992 (1)     1992      1993 (2)     1994       1995        1996       1997
                                            ---------------------------------------------------------------------------------
<S>                                         <C>         <C>        <C>         <C>        <C>        <C>         <C> 
Consolidated statements of operations data:
Net sales                                   $    ---    $    ---   $    ---    $  5,538   $  21,701  $  24,062   $  21,847
                                            --------    --------   --------    --------   ---------  ---------   ---------
Costs and expenses:
  Costs of goods sold                            ---         ---        ---       3,859      16,447     18,393      15,826
  Operating expenses                           1,484         444        651       1,977       5,481      5,043       5,245
  Reserve for subsidiary litigation         (  1,510)        ---        ---         ---         ---        ---         ---
  Other income (expense)                       1,292       1,096        174         159   (     435) (     553)  (     544)
                                            --------    --------   --------    --------   ---------  ---------   ---------
  Income (loss) from continuing operations
    before income taxes and minority           
    interest                                   1,318         652   (    477)   (    139)  (     662)        73         232  
  Income tax expense (benefit) (3)          (  1,481)   (  1,609)     4,287    (     20)         25  (   1,626)         32
  Minority interest                              ---         ---        ---    (     60)  (     211) (     231)  (     187)
                                            --------    --------   --------    --------   ---------  ---------   ---------
  Income (loss) from continuing operations     2,799       2,261   (  4,764)   (    179)  (     898)     1,468          13
  Loss from discontinued operations         ( 59,727)   ( 34,278)       ---         ---         ---        ---         ---
                                            --------    --------   --------    --------   ---------  ---------   ---------
    Net income (loss)                       ($56,928)   ($32,017)  ($ 4,764)   ($   179)  ($    898) $   1,468   $      13
                                            ========    ========   ========    ========   =========  =========   =========

  Net earnings (loss) per share:
  Continuing operations                      $  2.55     $  2.06   ($  4.35)   ($  0.16)  ($   0.81) $    1.30   $    0.01
  Discontinued operations                   (  54.51)   (  31.28)       ---         ---         ---        ---         ---
                                            --------    --------   --------    --------   ---------  ---------   ---------
  Net earnings (loss) per primary share     ($ 51.96)   ($ 29.22)  ($  4.35)   ($  0.16)  ($   0.81) $    1.30   $    0.01
                                            ========    ========   ========    ========   =========  =========   =========

  Weighted average shares outstanding (4)   1,095,643   1,095,652  1,096,017   1,087,039  1,113,250  1,130,727   1,134,126
Consolidated balance sheet data:
Total assets                                   11,371      37,618     10,454      23,162     26,820     23,795      20,381
Stockholders' equity                           10,897      35,810      6,159       5,805      4,996      6,530       6,511
Long-term debt                                    ---         ---        ---         251     10,274      2,097       1,670
</TABLE> 
-------------------------
(1)  In October 1992, the Federal Deposit Insurance Corporation (the "FDIC") was
     appointed receiver for Aristotle's former subsidiary, First Constitution
     Bank (the "Bank"). Substantially all the Bank's operations have been shown
     as discontinued. The Company's accountants for the fiscal year ended
     December 31, 1992, KPMG Peat Marwick, declined to express an opinion as to
     the financial statements for fiscal 1992 because of uncertainties with
     respect to the certain stockholder litigation and the Federal Deposit
     Insurance Corporation claims. The Company has settled these disputes. See
     "Item 3. Legal Proceedings."
(2)  Effective June 30, 1993, Aristotle changed its fiscal year end from 
     December 31 to June 30.
(3)  Income tax expense for the six-months ended June 30, 1993 includes a
     reserve of $4,300 for a potential tax claim by the FDIC. Income tax benefit
     for the year ended June 30, 1996 reflects a $1,650 benefit related to the
     settlement of the Federal Deposit Insurance Corporation's claims. See "Item
     3. Legal Proceedings."
(4)  The number of shares outstanding has been adjusted to reflect the one for 
     ten reverse stock split that was effective on May 11, 1994.

                                       2
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATION.

General

     This discussion and analysis of financial condition and results of
operations will discuss and analyze the results of operations of the Company, on
a consolidated basis, for the fiscal year ended June 30, 1997, as compared to
the year ended June 30, 1996, and the fiscal year ended June 30, 1996, as
compared to the year ended June 30, 1995. This discussion and analysis of
financial condition and results of operations have been derived from, and should
be read in conjunction with, the Consolidated Financial Statements and Notes to
Consolidated Financial Statements contained elsewhere in this report.

Results of Operations of the Company

Fiscal Year Ended June 30, 1997 as Compared to the Year Ended June 30, 1996

     The Company's net sales for the year ended June 30, 1997 decreased 9% to
$21,847,000, compared to net sales of $24,062,000 for the prior year. The
decrease was primarily generated by a $2,758,000 volume decrease in specialty
brassiere products and a $276,000 volume decrease in shapewear products, offset
by a $819,000 impact from increased prices.

     The Company's gross profit for the year ended June 30, 1997 increased to
$6,021,000 from $5,669,000 for the prior year, and the gross margin percentage
increased to 27.6% from 23.6%. The increase in gross profit and gross margin
percentage was principally a result of lower per unit costs resulting from
increases in production levels primarily relating to the implementation of new
product lines, the stabilization of raw material costs, lower production costs
resulting from a reduction in production rates charged by the Company's
Dominican subcontractor and a consolidation of Strouse's production to locations
with lower costs.

     Operating expenses include selling, general and administrative, and product
development expenses. Selling, general and administrative expenses for the
fiscal year ended June 30, 1997 were $4,661,000 versus $4,520,000 for the year
ended June 30, 1996. The $141,000, or 3%, increase was principally a result of
increases in advertising costs partially offset by decreases in administrative
personnel, sales commissions and shareholder expenses. Product development costs
for the Company for the fiscal year ended June 30, 1997 were $584,000, compared
to $523,000 for the corresponding period in 1996. Product development costs
primarily include compensation of Company personnel and were incurred by
Strouse. All products are designed internally in Strouse's New Haven and New
York design centers. The $61,000, or 12%, increase in costs reflects Strouse's
continued investment in the product development process through increases in
staffing in Strouse's design centers.

     Other income includes investment and interest income and interest expense.
Investment and interest income was $146,000 and $312,000 for the fiscal year
ended June 30, 1997 and 1996, respectively. Investment and interest income in
1997 was principally generated by an investment account (the "Strouse Escrow
Account") which was established in connection with the acquisition of Strouse by
Aristotle (the "Acquisition") and is subject to an escrow and pledge agreement
with the former Strouse stockholders (the "Former Strouse Stockholders"),
Aristotle's pledge of $500,000 (the "Account Pledged to the Bank") to secure its
guarantee of the line-of-credit facility and term loan facility (the "Credit
Facilities") with Bank of Boston Connecticut ("Bank of Boston") and short-term
cash investments. The $166,000 reduction in investment and interest income was
primarily a result of the fiscal 1997 payment to the FDIC of approximately
$3,760,000 from the FDIC Escrow Accounts in connection with a settlement between
the Company and the FDIC related to certain disputes between the FDIC, the
Company and others (the "FDIC Settlement").

                                       3
<PAGE>
 
     Interest expense for fiscal 1997 decreased to $690,000 from $865,000 in the
prior year. The decrease in interest expense primarily resulted from reduced
borrowing levels under the Credit Facilities due to lower average inventory
levels in 1997 versus 1996.

     The provisions for income taxes for the year ended June 30, 1997 was an
expense of $32,000, compared to a benefit of $1,626,000 in the prior year. The
$32,000 expense in fiscal 1997 represents minimum state taxes. The fiscal 1996
benefit included a net benefit of $1,650,000 related to the settlement of the
FDIC Claims, offset by a $24,000 expense for minimum state taxes. See "Item 3.
Legal Proceedings." The Company did not pay federal taxes in fiscal 1997 or 1996
because its federal tax obligations were offset by the utilization of net
operating loss carryforwards.

     Minority interest expense was $187,000 for the fiscal year ended June 30,
1997, versus $231,000 for the year ended June 30, 1996. The minority interest
expense is principally due to preferred dividends paid and accrued during the
year on outstanding preferred stock of ASI (the "ASI Preferred Stock") issued to
the Former Strouse Stockholders in connection with the Acquisition. The
preferred dividends decreased as a result of the exercise of the Put Right, as
defined in the Liquidity and Capital Resources section, which resulted in fewer
shares of ASI Preferred Stock being outstanding during 1997.


Fiscal Year Ended June 30, 1996 as Compared to the Year Ended June 30, 1995

     The Company's net sales for the year ended June 30, 1996 increased 11% to
$24,062,000, compared to net sales of $21,701,000 for the prior year. The
increase was primarily generated by a $639,000 volume growth in shapewear
products, a $795,000 volume growth in specialty brassiere products and a
$927,000 impact from increased prices.

     The Company's gross profit for the year ended June 30, 1996 increased to
$5,669,000 from $5,254,000 for the prior year, and gross margin percentage
decreased to 23.6% from 24.2%. The increase in gross profit was mainly a result
of sales growth. The decrease in gross margin percentage was primarily a result
of higher manufacturing costs of $407,000, which reflected higher per unit costs
resulting from the reductions in production and inventory levels, and the growth
in the private label business (which contributes operating income margins
comparable to Strouse's branded business, but at lower gross margins).

     Operating expenses included selling, general and administrative expenses,
product development expenses, and restructuring charges. Selling, general and
administrative expenses for the fiscal year ended June 30, 1996 were $4,520,000,
versus $4,777,000 for the year ended June 30, 1995. The $257,000 decrease was
principally a result of a reduction in administrative personnel and shareholder
expenses, partially offset by increases in advertising costs and professional
fees. Product development costs for the Company for the fiscal year ended June
30, 1996 were $523,000, compared to $485,000 for the corresponding period in
1995. Product development costs primarily included compensation of Company
personnel and were incurred by Strouse. All products are designed internally in
Strouse's New Haven and New York design centers. The increase in costs reflects
Strouse's continued investment in the product development process.

     Restructuring charges of $219,000 incurred for the year ended June 30, 1995
reflected costs related to Strouse's reduction in personnel at its New Haven,
Connecticut facility. No restructuring charges were incurred during the fiscal
year ended June 30, 1996.

                                       4
<PAGE>
 
     Other income included investment and interest income and expense.
Investment and interest income was $312,000 and $321,000 in fiscal year ended
June 30, 1996 and 1995, respectively. This income was principally generated by
(i) one investment account related to the FDIC tax dispute and subject to an
escrow agreement with the FDIC or its affiliates, which as of June 30, 1996 had
a balance of $3,982,000, and (ii) one investment account established in
connection with the Acquisition and subject to the Strouse Escrow Account with
the Former Strouse Stockholders, which as of June 30, 1996 had a balance of
$493,000. The balance of the marketable security held in escrow is an IRS refund
and its related interest income totaling $1,778,000, which in January 1996 was
placed in an escrow account pending the resolution of the FDIC tax disputes. The
two investment escrow accounts relating to the FDIC tax dispute are collectively
referred to herein as the "FDIC Escrow Accounts."

     Interest expense for fiscal 1996 increased to $865,000 from $756,000 in the
prior year. The increase primarily reflected higher borrowing levels to support
working capital needs and business growth.

     The provisions for income taxes for the year ended June 30, 1996 was a
benefit of $1,626,000, compared to an expense of $25,000 in the prior year. The
fiscal 1996 benefit included a net benefit of $1,650,000 related to the
settlement of the FDIC Claims, offset by a $24,000 expense. See "Item 3. Legal
Proceedings." The $24,000 expense in fiscal 1996 and $25,000 in fiscal 1995
represented minimum state taxes. The Company did not pay federal taxes in fiscal
1996 or 1995 because its federal tax obligations were offset by the utilization
of net operating loss carryforwards.

     Minority interest expense was $231,000 for the fiscal year ended June 30,
1996, versus $211,000 for the year ended June 30, 1995. The minority interest
expense was principally due to preferred dividends paid and accrued during the
year on outstanding ASI Preferred Stock issued to the Former Strouse
Stockholders in connection with the Acquisition.


Liquidity and Capital Resources

     During fiscal 1997, cash required to fund the working capital needs of
Strouse was supplied principally through a line-of-credit facility and term loan
facility with Bank of Boston, trade credit, and internally generated funds. In
September 1997, Strouse obtained a commitment from Bank of Boston to amend the
Credit Facilities whereby the maximum borrowing under the line-of-credit was
increased to $10,000,000 from $8,000,000. The amendment also adjusted the amount
by which borrowings can exceed the formula amounts, released the $500,000 pledge
by Aristotle to secure the guarantee of the Credit Facilities and waived the
fiscal 1997 excess cash flow prepayment. See "Item 1. Business-Financing" and
Note 4 of the Notes to Consolidated Financial Statements.

     During fiscal 1997, cash required to fund the operations of Aristotle was
supplied primarily through earnings generated from the FDIC Escrow Account and
the Strouse Escrow Account, amounts payable to Aristotle pursuant to certain
notes from certain officers of Strouse, and taxes received from Strouse in
connection with a tax sharing agreement between Aristotle and Strouse.

     The Company utilized cash of $459,000 for operations during the fiscal year
ended June 30, 1997 and generated cash of $4,909,000 from operations for the
fiscal year ended June 30, 1996. During fiscal 1997, the utilization of cash
from operations was principally the result of increases in accounts receivables
and inventories, partially offset by depreciation and amortization and an
increase in accounts payable. During fiscal 1996, the generation of cash from
operations was principally the result of net income from operations and
decreases in accounts receivables, inventories and other assets, partially
offset by decreases in accounts payable and accrued expenses.

                                       5
<PAGE>
 
     The Company generated $515,000 from investing activities for the fiscal
year ended June 30, 1997 and utilized $2,328,000 for investing activities for
the fiscal year ended June 30, 1996. During fiscal 1997, the primary generation
of cash from investing activities was the $5,760,000 sale of marketable
securities that were withdrawn from the FDIC Escrow Accounts in connection with
the FDIC Settlement, offset by the payment of $3,760,000 from the FDIC Escrow
Accounts in connection with the FDIC Settlement. The Company also used $530,000
to fund the payment of the Put Right, as defined below. During 1997, the Company
also utilized $707,000 of its cash from investing activities to purchase
marketable securities to fund an Account Pledged to the Bank, which secures
Aristotle's guarantee of the Credit Facilities, and to restore the Strouse
Escrow Account. During fiscal 1997 and 1996, the Company used cash from
investing activities to purchase property and equipment.

     The Company utilized $16,000 and $2,670,000 for financing activities during
fiscal 1997 and 1996, respectively. Funds utilized during fiscal 1997 were
primarily a result of the Company drawing $799,000 from its line-of-credit,
offset by $792,000 payment of its notes payable. In addition, the Company
repurchased 6,000 shares of its Common Stock in the open market for
approximately $22,000. The Company intends to pay its directors' annual retainer
with these treasury shares.

     In connection with the Acquisition in April 1994, ASI issued to the Former
Strouse Stockholders 245,381 shares of ASI Preferred Stock and Aristotle issued
to the Former Strouse Stockholders 270,379 shares of voting preferred stock of
Aristotle (the "Aristotle Preferred Stock"). Under the charter provisions in
effect at the time of the Acquisition, the Former Strouse Stockholders had the
right to require that ASI repurchase each share of ASI Preferred Stock at
various dates beginning in April 1996 for $10.00 per share, plus any accrued but
unpaid dividends (the "Put Right"). Prior to the vesting of the Put Right, the
ASI Preferred Stock is entitled to quarterly dividends of 8.9% per annum. Once
the Put Right is exercisable, the dividends cease. In order to exercise the Put
Right, a Former Strouse Stockholder must sell an equal number of shares of
Aristotle Preferred Stock to Aristotle for $.001 per share. The Put Right is
secured by the Strouse Escrow Account.

     During fiscal 1997 and 1996, certain Former Strouse Stockholders, including
certain executive officers of the Company, exercised their Put Right and
received aggregate consideration of $530,000 and $207,000 in exchange for 52,989
and 20,715 shares of ASI Preferred Stock, respectively. Included in the 1997
aggregate consideration was the assignment of 4,617 shares of ASI Preferred
Stock by a former executive officer in satisfaction of $46,165 of principal
payment due to Aristotle on April 11, 1997 in connection with the Acquisition.
In addition, in October 1996, pursuant to terms of an employment agreement
between a former executive officer of Strouse and the Company, upon the
voluntary termination of such officer's employment, the former executive officer
was obligated to sell to the Company for nominal consideration 1,178 shares of
ASI Preferred Stock. In connection with the Acquisition, a former executive
officer borrowed $92,330 from Aristotle. This employee note receivable was
secured by a pledge agreement between the former executive and Aristotle. The
loan provided that $46,165 in principal was due to Aristotle on April 11, 1997.
The principal payment was satisfied by the assignment of 4,617 shares of ASI
Preferred Stock. Accordingly, at June 30,1997 there are 170,499 share of ASI
Preferred Stock outstanding.

     In September 1997, the Company and the holders of the ASI Preferred Stock
have agreed to delay the exercise of the remaining Put Right and to modify
certain other agreements entered into at the time of the Acquisition. Under this
proposal, certain Former Strouse Stockholders will surrender to ASI 10,000
shares of ASI Preferred Stock in exchange for the cancellation of an aggregate
of $100,000 owed by the Former Strouse Stockholders under their respective loans
(the "Acquisition Loans"). On January 1, 1998, the Company will redeem 80,000
shares of ASI Preferred Stock for $10.00 per share. The Put Right for the
remaining 80,499 shares of ASI Preferred Stock have been postponed such that the
Put Right with respect to 40,249 shares will vest on January 1, 1999 and the Put
Right with respect to 40,250 shares will vest on January 1, 2000.

                                       6
<PAGE>
 
     As part of this proposal, the maturity dates on the Acquisition Loans will
be extended such that one-half of the remaining $208,000 balance will be due and
payable on January 1, 1999, and the remaining one-half will be due and payable
on January 1, 2000. In addition, the holders of ASI Preferred Stock have agreed
to the release of $400,000 from the Strouse Escrow Account on January 1, 1998 to
be used to redeem ASI Preferred Stock on that date, and the release of $200,000
and $100,000 as of January 1, 1999 and January 1, 2000, respectively to satisfy
the Company's Put Right obligations. In addition, in consideration for the
holders of ASI Preferred Stock agreeing to postpone their Put Right, the number
of shares of Aristotle Common Stock into which each share of ASI Preferred Stock
may be exchanged will be increased from 1.282 to 1.667 shares. Finally, the
holders of ASI Preferred Stock will be released from their obligations under a
pension escrow agreement.

     The Company has obtained the required vote of the ASI shareholders to
approve the charter amendment postponing the Put Right, and has reached an
agreement as to the other terms of the proposal with the holders of the ASI
Preferred Stock, subject to negotiation and execution of definitive documents.

     The Company anticipates that as a result of the amended bank agreement and
amended Put Right agreement that there will be sufficient financial resources to
meet the Company's projected working capital and other cash requirements for the
next twelve months.


Effect of Recent Accounting Pronouncements

     In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is not permitted. The Company does not believe that the adoption of
SFAS 128 will have a material impact on reported earnings per share.


Certain Factors That May Affect Future Results of Operations

     The Company believes that this report may contain forward-looking
statements within the meaning of the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include statements regarding the Company's liquidity and are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. The Company cautions investors that
there can be no assurance that actual results or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: the availability of financing and additional capital to fund the
Company's business strategy on acceptable terms, if at all, market responses to
pricing actions, continued competitive factors and pricing pressures, changes in
product mix, the timely acceptance of new products, inventory risks due to
shifts in market demand, the dependence by the Company on key customers,
manufacturing subcontractors, and general economic conditions. As a result, the
Company's future development efforts involve a high degree of risk. For further
information, refer to the more specific risks and uncertainties discussed
throughout this report.

                                       7
<PAGE>
 
Income Taxes

     At June 30, 1997, the Company had federal and state tax carryforwards as
follows:

         Federal net operating loss                           $6,400,000
         State net operating loss                             $6,300,000

     All federal net operating loss carryforwards expire by 2012 and all state
of Connecticut net operating loss carryforwards expire by 2002.

     The Company has filed an amended Federal income tax return for the year
ending December 31, 1992 claiming a worthless stock deduction of approximately
$54,000,000 with respect to its stock in the Bank. As a result, it has also
claimed tax refunds of approximately $10,000,000 resulting from the carryback of
the Company's net operating loss from 1992 to prior years. On the basis of these
amended filings, the Company's remaining Federal net operating loss carryforward
related to the worthless stock deduction would be approximately $32,000,000. In
addition, the Company is filing an additional carryback claim of approximately
$1,400,000 resulting from the settlement of the FDIC claim which, if allowed,
would reduce the $6,400,000 Federal net operating loss carryforward to
$2,200,000.

     On its return for 1992 as originally filed, the Company made elections
under provisions set forth in regulations proposed by the Internal Revenue
Service in April 1992 as guidance for the application of Section 597 of the
Internal Revenue Code of 1986, as amended and under Section 1.1502-20(g)(1) of
the Federal Income Tax Regulations to (i) disaffiliate from the Bank for Federal
income tax purposes and (ii) reattribute net operating losses of the Bank in
excess of $81,000,000 to the Company. The application of the tax law with
respect to the Company's election to disaffiliate from the Bank and to
reattribute the Bank's net operating losses to the Company is not certain and,
therefore, there is no assurance that the Company could succeed to any of the
Bank's net operating losses. Moreover, the reattribution to the Company of the
Bank's net operating losses may be limited if the position taken by the Company
on its amended returns is allowed.

     The Company's refund claims have not yet been reviewed or allowed by the
Internal Revenue Service, and there is no assurance that they will be allowed.
In addition, there is no assurance that the Company will be entitled to any net
operating loss carryforward arising from, or with respect to its interest in the
Bank. Even if the Company is entitled to any net operating loss carryforward
arising from, or with respect to its interest in, the Bank, its ability to
utilize such carryforward is dependent upon many factors including (1) the
realization of taxable income by the Company, and (2) avoiding a fifty percent
"ownership change" as defined in Section 382 of the Internal Revenue Code. If
there is an "ownership change", the tax loss carryforwards available to the
Company would be significantly reduced or eliminated. Accordingly, neither the
refund claim nor the future benefit of these remaining net operating loss
carryforwards have been reflected as tax assets in the accompanying consolidated
financial statements.

     The Company believes, assuming that the former stockholders of Strouse
currently own the maximum number of shares of Common Stock of Aristotle (the
"Common Stock") they could acquire through the exercise of their various rights
and options in the Acquisition, that the Company has not undergone an ownership
change within the meaning of Section 382 of the Code. During the period which
the Company has an unutilized federal net operating loss carryforward, which may
be for many years into the future, particularly if the Company does succeed to a
significant portion of the Bank's net operating loss carryforward, it will be
necessary for the Company to determine whether an ownership change has occurred
each time a new or existing stockholder becomes a 5% stockholder or an existing
5% stockholder increases its ownership interest. Except with respect to the
Former Strouse Stockholders, the Company does not know of any stockholders who
currently own or would own, upon the exercise of options or warrants, five
percent or more of the Common Stock. At a special meeting of stockholders held
on April 8, 1994, the stockholders voted to restrict certain share transfers
because they could affect the Company's ability to use its net operating losses
under Section 382.

     For state tax purposes the election to re-attribute the losses of the Bank
to the Company is not applicable and it is unlikely that the Company will obtain
any Connecticut tax loss carryforwards as a result of its disposition of the
Bank.

                                       8
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------
                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------
                          AS OF JUNE 30, 1997 AND 1996
                          ----------------------------
                 (dollars in thousands, except for share data)
<TABLE>
<CAPTION>
                                                                                       1997                  1996
                                                                                       ----                  ----
<S>                                                                                 <C>                    <C>
             ASSETS
             ------
Current assets:
  Cash and cash equivalents                                                         $   139                $    99
  Marketable securities held in escrow,
    at market value                                                                     900                  6,253
  Accounts receivable, net of reserves of
    $172 and $242                                                                     3,519                  2,834
  Current maturities of employee notes receivable                                       100                   --
  Inventories                                                                        10,945                  9,478
  Other current assets                                                                  146                    359
                                                                                    -------                -------
          Total current assets                                                       15,749                 19,023
                                                                                    -------                -------
Property and equipment, net                                                           1,475                  1,684
                                                                                    -------                -------
Other assets:
  Marketable securities held in escrow, at market
    value                                                                               300                   --
  Employee notes receivable, less current maturities                                    208                    354
  Goodwill, net of amortization of $162 and $101                                      1,784                  1,845
  Deferred tax asset                                                                    630                    630
  Other noncurrent assets                                                               235                    259
                                                                                    -------                -------
                                                                                      3,157                  3,088
                                                                                    -------                -------
                                                                                    $20,381                $23,795
                                                                                    =======                =======

          LIABILITIES AND STOCKHOLDERS' EQUITY
          ------------------------------------
Current liabilities:
  Notes payable and current maturities
    of long-term debt                                                               $ 6,488                $ 6,055
  Current maturities of minority interest in
    subsidiary's preferred stock                                                        900                   --
  FDIC tax refund claim payable                                                        --                    3,760
  Accounts payable                                                                    2,663                  1,372
  Accrued expenses                                                                      517                    919
  Deferred tax liability                                                                630                    630
                                                                                    -------                -------
          Total current liabilities                                                  11,198                 12,736

  Long-term debt, less current maturities                                             1,670                  2,097
                                                                                    -------                -------
          Total liabilities                                                          12,868                 14,833
                                                                                    -------                -------

Minority interest in subsidiary's preferred stock,
  less current maturities                                                               805                  2,247
                                                                                    -------                -------
Minority interest in subsidiary's common stock                                          194                    182
                                                                                    -------                -------
Commitments and contingencies

Voting redeemable preferred stock, $.01 par value, 3,000,000 shares authorized;
  75,678 and 101,976 shares of Series A for 1997 and 1996, respectively, 34,065
  and 61,345 shares of Series B, for 1997 and 1996, respectively, 60,756 and
  61,345 shares of Series C for 1997 and 1996, respectively, and 24,998 shares
  of Series D  issued and outstanding                                                     3                      3
                                                                                    -------                -------
Stockholders' equity:
  Common stock, $.01 par value, 3,000,000 shares
    authorized, 1,105,801 shares issued                                                  11                     11
  Additional paid-in capital                                                        159,762                159,762
  Retained earnings (deficit)                                                      (153,232)              (153,245)
  Treasury stock, at cost, 7,287 shares in
    1997 and 1,287 shares in 1996                                                       (30)                    (8)
  Net unrealized investment gains                                                        --                     10
                                                                                    -------                -------
          Total stockholders' equity                                                  6,511                  6,530
                                                                                    -------                -------
                                                                                    $20,381                $23,795
                                                                                    =======                =======
</TABLE>

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

                                      -9-
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     -------------------------------------
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                ------------------------------------------------
                 (dollars in thousands, except per share data)

<TABLE>
<CAPTION>

                                             1997      1996      1995
                                             ----      ----      ----
<S>                                        <C>       <C>       <C>
Net sales                                  $21,847   $24,062   $21,701
Cost of goods sold                          15,826    18,393    16,447
                                           -------   -------   -------
          Gross profit                       6,021     5,669     5,254

Operating expenses:
  Selling                                    2,830     2,660     2,826
  General and administrative                 1,831     1,860     1,951
  Product development                          584       523       485
  Restructuring charges                          -         -       219
                                           -------   -------   -------
          Operating income (loss)              776       626      (227)
                                           -------   -------   -------

Other income (expense):
  Investment and interest income               146       312       321
  Interest expense                            (690)     (865)     (756)
                                           -------   -------   -------
                                              (544)     (553)     (435)
                                           -------   -------   -------
          Income (loss) before income
            taxes and minority interest        232        73      (662)

Income tax (expense) benefit                   (32)    1,626       (25)
                                           -------   -------   -------
          Income (loss) before minority
            interest                           200     1,699      (687)

Minority interest                             (187)     (231)     (211)
                                           -------   -------   -------

          Net income (loss)                $    13   $ 1,468   $  (898)
                                           =======   =======   =======

Net income (loss) per share:
  Primary                                  $   .01   $  1.30   $  (.81)
                                           =======   =======   =======
  Fully-diluted                            $     -   $  1.17   $     -
                                           =======   =======   =======
</TABLE>

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

                                      -10-
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
                   ----------------------------------------

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
          ----------------------------------------------------------

               FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
               ------------------------------------------------

                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                       Net  
                                                                                    Unrealized                                
                                           Additional      Retained                 Investment
                                 Common     Paid-in        Earnings      Treasury      Gains
                                 Stock      Capital        (Deficit)       Stock      (Losses)      Total
                                 -----      -------        ---------       -----       ------       -----
<S>                              <C>      <C>             <C>            <C>        <C>            <C>
Balance, July 1, 1994              $11      $159,816      $(153,815)       $(143)       $(64)      $5,805

Net loss                             -          -              (898)          -           -          (898)
                                                                                                 
Purchase of treasury                                                                             
  stock                              -          -              -             (11)         -           (11)
                                                                                                 
Issuance of treasury                                                                             
  stock to directors                 -            27           -               3          -            30
                                                                                                 
Net unrealized                                                                                   
  investment gain                    -          -              -               -          70           70
                                   ---      --------      ---------        -----        ----       ------
Balance, June 30, 1995              11       159,843       (154,713)        (151)          6        4,996
                                                                                                 
Net income                          -           -             1,468           -           -         1,468
                                                                                                 
Issuance of treasury                                                                             
  stock to directors                -            (81)          -             143          -            62
                                                                                                 
Net unrealized                                                                                   
  investment gain                   -           -              -              -            4            4
                                   ---      --------      ---------        -----        ----       ------
Balance, June 30, 1996              11       159,762       (153,245)          (8)         10        6,530
                                                                                                 
Net income                          -           -                13          -            -            13
                                                                                                 
Net unrealized                                                                                   
  investment loss                   -           -              -             -           (10)         (10)
                                                                                                 
Purchase of treasury                                                                             
  stock                             -           -              -             (22)         -           (22)
                                   ---      --------      ---------        -----        ----       ------
Balance, June 30, 1997             $11      $159,762      $(153,232)       $ (30)       $ -        $6,511
                                   ===      ========      =========        =====        ====       ======
</TABLE>

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

                                      -11-
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                ------------------------------------------------
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                     1997                1996                1995
                                                                     ----                ----                ----
<S>                                                                 <C>                 <C>                 <C>
Cash flows from operating activities:
  Net income (loss)                                                 $    13             $ 1,468             $  (898)
  Adjustments to reconcile net income (loss)
    to net cash provided by (used in)
    operating activities:
      Gain on settlement of FDIC claim                                  -                (2,000)                -
      Depreciation and amortization                                     528                 461                 355
      Issuance of treasury stock for
        services                                                        -                    62                  30
      Changes in assets and liabilities:
        Accounts receivable                                            (685)              1,664                (934)
        Inventories                                                  (1,467)              2,304              (1,711)
        Other assets                                                    263                 552                 200
        Proceeds from tax carryback claim                               -                 1,778                 -
        Accounts payable                                              1,291                (995)                464
        Accrued expenses                                               (402)               (385)                214
                                                                    -------             -------             -------
          Net cash provided by (used
            in) operating activities                                   (459)              4,909              (2,280)
                                                                    -------             -------             -------

Cash flows from investing activities:
  Purchase of marketable securities held
    in escrow                                                          (707)             (1,778)                 26
  Sale of marketable securities                                       5,760                 207                 -
  Settlement of FDIC claim                                           (3,760)                -                   -
  Repurchase of ASI Preferred Stock                                    (530)               (207)                -
  Purchase of property and equipment                                   (260)               (565)               (640)
  Purchase of subsidiary                                                -                   -                  (184)
  Minority interest                                                      12                  15                  29
                                                                    -------             -------             -------
          Net cash provided by (used
            in) investing activities                                    515              (2,328)               (769)
                                                                    -------             -------             -------

Cash flows from financing activities:
  Net borrowings (payments) under
    line of credit                                                      799              (2,412)                996
  Borrowings under term notes                                           -                   -                 2,500
  Proceeds from issuance of debt                                        -                   140                 -
  Principal debt payments                                              (793)               (398)               (260)
  Purchase of treasury stock                                            (22)                -                   (11)
                                                                    -------             -------             -------
           Net cash provided by (used
            in) financing activities                                    (16)             (2,670)              3,225
                                                                    -------             -------             -------

INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                       40                 (89)                176

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                    99                 188                  12
                                                                    -------             -------             -------
CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                                     $   139             $    99             $   188
                                                                    =======             =======             =======
SUPPLEMENTAL DISCLOSURES:
  Cash paid during the year for:
    Interest                                                        $   637             $   876             $   690
                                                                    =======             =======             =======
    Income taxes                                                    $    44             $    31             $  (216)
                                                                    =======             =======             =======
</TABLE>

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

                                      -12-
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
                   ----------------------------------------
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------
                             JUNE 30, 1997 AND 1996
                             ----------------------



1.     Basis of Presentation and Nature of Business:
       --------------------------------------------

       The Aristotle Corporation ("Aristotle" or the "Company"), through its
       wholly-owned subsidiary Aristotle Sub., Inc. ("ASI"), owns approximately
       97% of The Strouse, Adler Company ("Strouse"). Strouse, which was
       acquired on April 11, 1994 in a transaction accounted for as a purchase
       (the "Acquisition"), designs, manufacturers and markets women's intimate
       apparel. Prior to October 2, 1992, Aristotle was the holding company of
       First Constitution Bank (the "Bank"). On October 2, 1992, the Federal
       Deposit Insurance Corporation ("FDIC") was appointed as receiver of the
       Bank and Aristotle wrote off its investment in the Bank.

       The total Acquisition cost of Strouse was $5,990,000 (including expenses
       of the Acquisition of $610,000) of which: (i) $2,454,000 represented the
       issuance of 122,691 shares of 8.9% Series A, 61,345 shares of 8.9% Series
       B and 61,345 shares of 8.9% Series C preferred stock of ASI (collectively
       referred to herein as the "ASI Preferred Stock"), valued at its
       redemption value of $10 per share; (ii) $125,000 represented the value of
       25,000 common shares of ASI issued at the Acquisition (the "ASI Common
       Stock"); (iii) $2,617,000 was cash paid at date of acquisition; and (iv)
       $184,000 represented the August 31, 1994 Additional EBIT Consideration
       (see below). The fair value of assets purchased and liabilities assumed
       amounted to $14,934,000 and $10,890,000, respectively. The excess of cost
       over the fair value of net assets acquired amounted to $1,946,000, which
       is being amortized over forty years.

       The Acquisition agreements (the "Acquisition Agreements") provided that
       the former stockholders of Strouse (the "Strouse Stockholders") could
       receive additional consideration (the "Additional EBIT Consideration"),
       the amount of which would be based upon the earnings before interest and
       income tax ("EBIT") of Strouse, calculated on an August 31 fiscal year
       through August 31, 1996, with the maximum amount of such consideration
       not to exceed $1,854,000. Additional EBIT Consideration of $184,000 was
       paid to the Strouse Stockholders for the year ended August 31, 1994. No
       Additional EBIT Consideration was earned for the years ended August 31,
       1996 and 1995.

       The 25,000 shares of ASI Common Stock issued at the date of Acquisition
       to the Strouse Stockholders pursuant to the Acquisition represented 2.22%
       of the outstanding ASI Common Stock. The Strouse Stockholders also
       received options (the "ASI Options") to purchase 25,000 additional shares
       of ASI Common Stock at $5.45 per share. The ASI Common Stock exercisable
       pursuant to the ASI Options represented an additional 2.13% of the
       outstanding ASI Common Stock at date of Acquisition, if exercised. After
       recognition of the fiscal 1994 Additional EBIT Consideration, and the
       bonuses paid pursuant to the Employment Agreements (see Note 5), the
       Strouse Stockholders hold 33,424 shares of ASI Common Stock (2.95% of the
       outstanding shares of ASI Common Stock as of June 30, 1997) and ASI
       Options to purchase 35,208 shares of ASI Common Stock (an additional
       3.10% of the outstanding shares of ASI Common Stock, if exercised, as of
       June 30, 1997).

                                      -13-
<PAGE>
 
       The ASI Preferred Stock had an original liquidation preference of
       $2,454,000 in the aggregate, or $10 per share. Dividends at the rate of
       8.9% per annum are payable on the ASI Preferred Stock until the later of:
       (i) the dates on which the Put Right (as defined below) is exercised and
       (ii) the first date upon which Aristotle has sufficient audited financial
       statements in order to satisfy the requirements for filing a registration
       statement under the federal securities laws pursuant to which the shares
       of Aristotle's Common Stock issued to the Strouse Stockholders can be
       registered for sale. Aristotle is obligated to pay the costs of such
       registration under the Acquisition Agreements. The ASI Preferred Stock is
       redeemable by ASI.

       Aristotle has issued to the Strouse Stockholders warrants (the
       "Warrants") that permit the holders of the Warrants to exchange their ASI
       Preferred Stock and/or ASI Common Stock for Aristotle Common Stock. After
       recognition of the fiscal 1994 Additional EBIT Consideration, the bonuses
       paid pursuant to the Employment Agreements (see Note 5), and exercises of
       Put Rights (as defined below) the Strouse Stockholders hold warrants that
       entitle them to purchase 287,220 shares of Aristotle Common Stock, which,
       if exercised, would represent 20% of the outstanding Aristotle Common
       Stock as of June 30, 1997.

       If the Strouse Stockholders do not exercise their Warrants, they have the
       right to require that ASI repurchase each share of ASI Preferred Stock at
       various dates beginning in April 1996 for $10.00 per share, plus any
       accrued but unpaid dividends (the "Put Right"). In order to exercise the
       Put Right, a former Strouse Stockholder must sell an equal number of
       shares of Aristotle Preferred Stock to Aristotle for $.001 per share (see
       below).

       During fiscal 1997 and 1996, certain of the Strouse Stockholders,
       including certain executive officers of the Company, exercised their Put
       Right and received aggregate consideration of $530,000 and $207,000 in
       exchange for 52,989 and 20,715 shares of ASI Preferred Stock,
       respectively. In addition, in October 1996, pursuant to terms of an
       employment agreement between a former executive officer of Strouse and
       the Company, upon the voluntary termination of such officer's employment,
       the former executive officer was obligated to sell to the Company for
       nominal consideration 1,178 shares of ASI Preferred Stock. Accordingly,
       at June 30, 1997 there are 170,499 shares of ASI Preferred Stock
       outstanding.

       In September 1997, the Company and the Strouse Stockholders entered into
       an amendment to delay the exercise of the remaining Put Rights and to
       modify certain other agreements entered into at the time of the
       Acquisition. In accordance with the terms of the amendment, during fiscal
       1998 the Strouse Stockholders will surrender to ASI 10,000 shares of ASI
       Preferred Stock in exchange for the cancellation of $100,000 of loans
       owed to the Company by the Strouse Stockholders (see below). The Put
       Rights for the remaining 160,499 shares of ASI Preferred Stock were also
       amended whereby 80,000 shares will be redeemed on January 1, 1998 and
       40,249 and 40,250 shares will be redeemable on January 1, 1999 and
       January 1, 2000, respectively. In consideration for the Strouse
       Stockholders agreeing to postpone their Put Rights, the number of shares
       of Aristotle Common Stock into which each share of ASI Preferred Stock
       may be exchanged was increased from 1.282 to 1.667 shares. In addition,
       the amendment provides that the Company may release from escrow (see Note
       3) $400,000, $200,000 and $100,000 on each of January 1, 1998, January 1,
       1999 and January 1, 2000, respectively, to be used to satisfy the Put
       Rights.

                                      -14-
<PAGE>
 
       In connection with the Acquisition, Aristotle also issued 270,379 shares
       of $.01 par value voting redeemable preferred stock, which shares will
       not have the right to receive dividends and will not share in the
       proceeds from any liquidation of the assets of Aristotle (the "Aristotle
       Preferred Stock"). The Aristotle Preferred Stock has one vote
       per share, with respect to matters other than the election of directors
       and auditors. As a condition to the exercise of any Warrant, the exercise
       of the Put Right, or the redemption of the ASI Preferred Stock, the
       Strouse Stockholders must redeem the Aristotle Preferred Stock for $.001
       per share. The Aristotle Preferred Stock will automatically be redeemed,
       for $.001 per share, at various dates beginning on and after April 11,
       1997, or upon the cessation of the voting rights of the Aristotle
       Preferred Stock. During fiscal 1997 and 1996, 54,167 and 20,715 shares,
       respectively, of Aristotle Preferred Stock were redeemed in connection
       with the fiscal 1997 and 1996 Put Rights and a 1997 employment
       termination (see above). At June 30, 1997, 195,497 shares of Aristotle
       Preferred Stock were outstanding.

       The Acquisition Agreements provided for loans from the Company at 8.9%
       interest to the Strouse Stockholders aggregating $707,000, of which
       $308,000 and $354,000 were outstanding at June 30, 1997 and 1996,
       respectively. In connection with the Acquisition, a former executive
       officer borrowed $92,000 from Aristotle, with such note receivable
       secured by a pledge agreement between the former executive officer and
       Aristotle. The loan provided that $46,000 in principal was due to
       Aristotle in April 1997. This April 1997 obligation was satisfied by the
       assignment of 4,617 shares of ASI Preferred Stock (see above). In
       connection with the September 1997 amendment to the ASI Preferred Stock
       (see above), the Company and the Strouse Stockholders amended the loans
       whereby $100,000 will be satisfied by the fiscal 1998 assignment of
       10,000 shares of ASI Preferred Stock (see above) and $104,000 will mature
       on each of January 1, 1999 and January 1, 2000.

       The Acquisition Agreements also provide that the Strouse Stockholders
       have the right to require a partial unwinding (the "Partial Unwinding")
       of the Acquisition if the net worth of Aristotle, as defined in the
       Acquisition Agreements, falls below $1,000,000 during a five-year period
       subsequent to April 11, 1994. A Partial Unwinding would result in the
       return by ASI to the Strouse Stockholders of 59% of the outstanding
       common stock of Strouse in exchange for an amount of ASI Preferred Stock,
       Aristotle Common Stock and cash that, taken together, have the aggregate
       value of $2,100,000.

       If, after April 11, 1994, an Acceleration Event occurs, then the Strouse
       Stockholders may require that ASI immediately repurchase the ASI
       Preferred Stock or immediately exchange the ASI Preferred Stock for
       Aristotle Common Stock. An "Acceleration Event" includes the sale of all
       of the stock or assets of Strouse, ASI or Aristotle; a merger or
       reorganization involving Strouse, ASI or Aristotle in which Strouse, ASI
       or Aristotle is not the survivor; the bankruptcy or insolvency of
       Strouse, ASI or Aristotle; or the breach by Strouse, ASI or Aristotle of
       certain obligations to the Strouse Stockholders.

       Pursuant to the Acquisition Agreements, ASI and Strouse are bound by
       certain standstill provisions until approximately April 11, 1999,
       including, without limitation, limitations on the payment of dividends,
       the incurring of certain indebtedness, the granting of any lien, the
       issuance of securities, and the amendment of their certificates of
       incorporation and bylaws.

                                      -15-
<PAGE>
 
2.     Significant Accounting Policies and Other Matters:
       ------------------------------------------------- 

       Principles of consolidation -
       ---------------------------
 
       The consolidated financial statements include the accounts of Aristotle
       and its majority owned subsidiary. All significant intercompany accounts
       and transactions have been eliminated in consolidation.

       Cash and cash equivalents -
       -------------------------
 
       Cash and cash equivalents include cash and highly liquid investments with
       an original maturity of three months or less.

       Inventories -
       -----------

       Inventories are valued at the lower of cost, using the last-in, first-out
       method (LIFO), or market.

       As a result of the application of purchase accounting to the Acquisition
       in 1994, the financial accounting basis of the Company's inventories
       changed, while the basis for federal income tax reporting purposes did
       not. Accordingly, as of June 30, 1997, the LIFO inventories reflected in
       the accompanying consolidated balance sheet are stated at an amount
       $1,884,000 greater than LIFO inventories reported for federal income tax
       purposes.

       At June 30, 1997 and 1996, inventories consisted of the following (in
       thousands):

<TABLE> 
<CAPTION> 
                                               1997            1996
                                               ----            ----
              <S>                            <C>              <C> 
              Raw materials                  $ 2,123          $2,173
              Work-in-process                  2,652           2,346
              Finished goods                   5,216           4,159
                                             -------          ------
                                               9,991           8,678
              LIFO reserve                       954             800
                                             -------          ------
                                             $10,945          $9,478
                                             =======          ======
</TABLE> 

       During fiscal 1996, the Company liquidated certain LIFO inventories that
       were carried at higher costs than those prevailing in the current year.
       The effect of this liquidation was to decrease operating profit by
       approximately $407,000.

       Property and equipment -
       ----------------------
 
       Property and equipment are recorded at cost and are depreciated or
       amortized, using the straight-line method, over their estimated useful
       lives of five to ten years.

                                      -16-
<PAGE>
 
At June 30, 1997 and 1996, property and equipment consisted of the following (in
thousands):

<TABLE> 
<CAPTION> 
                                                1997           1996
                                                ----           ----
      <S>                                     <C>            <C> 
      Machinery and equipment                 $ 1,782         $1,536
      Furniture and fixtures                       21             18
      Leasehold improvements                      280            269
      Equipment under capital lease               600            600
                                              -------         ------
                                                2,683          2,423
                                                             
      Less accumulated depreciation and                      
        amortization                           (1,208)          (739)
                                              -------         ------
                                              $ 1,475         $1,684
                                              =======         ======
</TABLE> 

       Expenditures for repairs and maintenance are charged against income as
       incurred. Renewals and betterments are capitalized.

       Goodwill -
       --------
 
       The excess of cost over the fair value of net tangible and identifiable
       intangible assets acquired resulted from the Acquisition and is being
       amortized using the straight-line method over 40 years.

       The Company continually evaluates whether events and circumstances have
       occurred which indicate that the remaining estimated useful life of
       goodwill may warrant revision or that the remaining balance of goodwill
       may not be recoverable.

       Income (loss) per share -
       -----------------------
 
       Income (loss) per share is computed using the weighted average common
       shares. For purposes of computing primary net income (loss) per share,
       weighted average shares for fiscal 1997, 1996 and 1995 were 1,134,126,
       1,130,727 and 1,113,250, respectively. For fiscal 1996, the weighted
       average shares for purposes of the fully-diluted calculation was
       1,441,383, and for fiscal 1997 and 1995 the effect of conversion of the
       underlying securities would have been anti-dilutive.

       Revenue recognition -
       -------------------
 
       The Company recognizes revenue as the product is shipped to its
       customers.

       Co-op advertising -
       -----------------
 
       The Company grants customers a co-op advertising credit relating to
       qualified advertising and promotional costs incurred by the customer in
       promoting the Company's products. These credits are recognized in the
       Company's consolidated financial statements as the advertising costs are
       incurred.

                                      -17-
<PAGE>
 
       Principal supplier -
       ------------------
 
       In 1997, 1996 and 1995, approximately 98%, 95% and 85%, respectively, of
       the Company's products were manufactured and sewn in the Caribbean, with
       approximately 72%, 68% and 60%, respectively, of the Company's products
       assembled in Santo Domingo, Dominican Republic.

       Restructuring charges -
       ---------------------
 
       In 1995, the Company recognized a $219,000 restructuring charge related
       to curtailing certain manufacturing operations at the New Haven facility
       and the termination of employees.

       Concentration of sales and credit risk -
       --------------------------------------
 
       Substantially all of the Company's accounts receivable reflected in the
       accompanying consolidated balance sheets are from a diverse group of
       retailers. Net sales to three customers accounted for approximately 15%,
       15% and 10% of total net sales in 1997, three customers accounted for
       approximately 17%, 13% and 12% of total net sales in 1996 and two
       customers accounted for approximately 14% and 11% of total net sales in
       1995.

       Investments in debt and equity securities -
       -----------------------------------------
 
       During 1994, the Company adopted Statement of Financial Accounting
       Standards No. 115, "Accounting for Certain Investments in Debt and Equity
       Securities" (SFAS 115), which requires that, except for debt securities
       classified as "held-to-maturity securities", investments in debt and
       equity securities be reported at fair value. Implementation did not have
       a material effect on the financial results of the Company.

       Long-lived assets -
       -----------------
 
       In March 1995, the Financial Accounting Standards Board issued Statement
       of Financial Accounting Standards No. 121, "Accounting for the Impairment
       of Long-Lived Assets and Long-Lived Assets to be Disposed of" (SFAS 121).
       SFAS 121 requires a company to review long-lived assets for impairment
       whenever events or changes in circumstances indicate that the carrying
       amount of an asset may not be recoverable. The adoption of this standard
       did not have a material impact on the Company's results of operations or
       financial position.

       Disclosures about fair value of financial instruments -
       -----------------------------------------------------
 
       The following methods and assumptions were used to estimate the fair
       value of each class of financial instruments for which it is practicable
       to estimate that value:

              Cash, accounts receivable, marketable securities, employee notes
              -----------------------------------------------------------------
              receivable, payables, accrued expenses and FDIC tax refund claim -
              -----------------------------------------------------------------

              For these short-term account balances, the carrying amount is a
              reasonable estimate of fair value.

                                      -18-
<PAGE>
 
              Notes payable and long-term debt -
              --------------------------------  

              The carrying amount is a reasonable estimate of fair value as the
              debt is frequently repriced and there has been no significant
              change in credit risks and interest rates since the financing was
              obtained or repriced.

       Use of estimates -
       ---------------- 

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

       Recently issued accounting standards -
       ------------------------------------ 

       In February 1997, the Financial Accounting Standards Board issued
       Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
       (SFAS 128), which establishes new standards for computing and presenting
       earnings per share. SFAS 128 is effective for financial statements issued
       for periods ending after December 15, 1997 and earlier application is not
       permitted. The Company does not believe that the adoption of SFAS 128
       will have a material impact on reported earnings per share.


3.     Marketable Securities Held in Escrow:
       ------------------------------------
 
       At June 30, 1997 and 1996, the Company had placed in escrow $1,200,000
       and $6,253,000, respectively, of which the 1997 escrow funds were
       comprised of $700,000 related to obligations to the Strouse Stockholders
       (see below) and $500,000 related to the Company's financing arrangements
       (see Note 4). The 1996 escrow funds were comprised of $493,000 related to
       obligations to the Strouse Stockholders and $5,760,000 related to a FDIC
       claim (see below).

       To enable the Strouse Stockholders to effectuate the Partial Unwinding,
       to secure the obligations of the Company to pay dividends on the ASI
       Preferred Stock and to repurchase the ASI Preferred Stock if the Strouse
       Stockholders exercise their Put Rights (see Note 1), the Company has
       pledged 59% of the outstanding common stock of Strouse and has placed
       funds in escrow. Strouse also granted to the Strouse Stockholders a
       security interest in all of its assets to secure such obligations.

       Under an agreement with the Office of Thrift Supervision and a court
       order with the FDIC, as of June 30, 1996, the Company had placed
       $5,760,000 (the "Principal Amount") in two escrow accounts (the "FDIC
       Escrow Accounts") that were established to provide a vehicle to pay
       possible amounts arising from disputed tax refunds based on a tax sharing
       agreement between Aristotle and the Bank. The Company was allowed to
       withdraw interest and dividend income earned on $3,982,000 of the
       Principal Amount. The potential amount of the full loss arising from the
       disputed tax refunds was provided for in 1993. In August 1996, the
       Company entered into a settlement agreement whereby $3,760,000 of the
       escrow was remitted to the FDIC and $2,000,000 was retained by the
       Company (see Note 5).

                                      -19-
<PAGE>
 
       The funds relating to the above mentioned escrow arrangements have been
       invested in U.S. Treasuries and high-grade corporate debentures which
       mature at various dates through 1998. These securities have been
       classified as available for sale and an unrealized holding gain (loss) of
       approximately $10,000 and $6,000 is recorded as a component of
       stockholders' equity as of June 30, 1996 and 1995, respectively.

       Investment securities available for sale relating to the above escrow
       arrangements are summarized as follows (dollars in thousands):

<TABLE> 
<CAPTION> 
                                                        June 30, 1997
                                                 ----------------------------
                                                 Amortized         Unrealized    Gross Market
                                                   Cost               Gains          Value
                                                   ----               -----          -----                              
<S>                                              <C>               <C>           <C> 
       Company obligations:                                                      
         U.S. Treasuries maturing                                                
           in less than 1 year                     $  150            $ -             $  150
         Cash equivalents and                                                    
           interest receivable                      1,050              -              1,050
                                                   ------            ------          ------
               Total                               $1,200            $ -             $1,200
                                                   ======            ======          ======
                                                                                 
                                                         June 30, 1996           
                                                 ----------------------------                                
                                                 Amortized         Unrealized    Gross Market
                                                   Cost               Gains          Value
                                                   ----               -----          -----                                
       Company obligations:                                                      
         U.S. Treasuries maturing                                                
           in 1 to 5 years                         $  171            $ -             $  171
         Corporate debt maturing                                                 
           in 1 to 5 years                            156              -                156
         Cash equivalents and                                                    
           interest receivable                        166              -                166
                                                   ------            ------          ------
                                                      493              -                493
                                                   ------            ------          ------
                                                                                 
       FDIC Escrow Accounts re:  tax claim:                                      
         U.S. Treasuries maturing                                                
           in 1 to 5 years                          1,793                 5           1,798
         Corporate debt maturing                                                 
           in 1 to 5 years                          1,885                 5           1,890
         U.S. Treasury securities                                                
           maturing 1 to 5 years                    1,778              -              1,778
         Cash equivalents and                                                    
           interest receivable                        294              -                294
                                                   ------            ------          ------
                                                    5,750                10           5,760
                                                   ------            ------          ------
               Total                               $6,243            $   10          $6,253
                                                   ======            ======          ======
</TABLE> 

                                      -20-
<PAGE>
 
<TABLE> 
<CAPTION> 




                                                                June 30, 1995
                                                         ----------------------------       
                                                         Amortized         Unrealized             Gross Market
                                                           Cost               Gains                   Value
                                                           ----               -----                   -----  
<S>                                                      <C>               <C>                    <C>        
       Company obligations:
         U.S. Treasuries maturing
           in 1 to 5 years                                 $  171              $ -                    $  171
         Corporate debt maturing
           in 1 to 5 years                                    157                -                       157
         Cash equivalents and
           interest receivable                                372                -                       372
                                                           ------              ----                   ------
                                                              700                -                       700
                                                           ------              ----                   ------

       FDIC Escrow Accounts re:  tax claim:
         U.S. Treasuries maturing
           in 1 to 5 years                                  1,804                 6                    1,810
         Corporate debt maturing
           in 1 to 5 years                                  2,029                -                     2,029
         Cash equivalents and
           interest receivable                                143                -                       143
                                                           ------              ----                   ------
                                                            3,976                 6                    3,982
                                                           ------              ----                   ------
              Total                                        $4,676              $  6                   $4,682
                                                           ======              ====                   ======

</TABLE> 
 
4.     Notes Payable and Long-Term Debt:
       --------------------------------
 
       Notes payable and long-term debt at June 30, 1997 and 1996, consisted of
       the following (in thousands):

<TABLE> 
<CAPTION> 

                                                                    1997                 1996
                                                                    ----                 -----   
  <S>                                                             <C>                  <C>         
              Borrowings under bank line of credit                $ 6,075              $ 5,613
                                                            
              Term notes payable to bank                            1,867                2,000
                                                            
              Aristotle bank line of credit                            75                 -
                                                            
              Capital lease obligation                                141                  374
                                                            
              Other                                                  -                     165
                                                                  -------              -------
                      Total                                         8,158                8,152
                                                            
              Less current maturities                              (6,488)              (6,055)
                                                                  -------              -------
                                                                  $ 1,670              $ 2,097
                                                                  =======              =======

</TABLE> 

                                      -21-
<PAGE>
 
       Line of credit and term notes -
       -----------------------------

       As of June 30, 1997, Strouse had outstanding borrowings of $7,942,000
       pursuant to a Bank debt facility (the Credit Agreement). In September
       1997, Strouse obtained a commitment from its bank to amend the Credit
       Agreement whereby the maximum borrowings under the Revolving Loan was
       increased from $8,000,000 to $10,000,000, the Overadvance was adjusted,
       the fiscal 1997 excess cash flow prepayment was waived and the $500,000
       pledge held in escrow (see Note 3) was released.

       The Credit Agreement provides for a Revolving Loan and a $2,000,000 Term
       Loan. Borrowings of up to $10,000,000 are available under the Revolving
       Loan, with such borrowings limited to 80% of eligible accounts
       receivable, 50% of eligible raw material inventory and 60% of eligible
       finished goods inventory, as defined. In addition to the primary
       borrowings, the Credit Agreement will permit advances to exceed the
       formula amounts (the seasonal "Overadvance") by up to $1,000,000 through
       December 1997, $1,250,000 from January 1998 through March 1998,
       $1,000,000 during April 1998 and reducing to $500,000 thereafter (so long
       as the total line-of-credit is not more than the maximum borrowings
       allowed and the Overadvance reduces to zero for 30 consecutive days per
       annum). The Credit Agreement matures in September 1999.

       The interest rate on the Revolving Loan will vary from prime to prime
       plus 1.0% or Eurodollar plus 1.75% to Eurodollar plus 3% per annum based
       on the level of total liabilities to total net worth, as defined. In
       addition, the amended credit agreement provides for a .35% per annum
       commitment fee on the unused portion of the Revolving Loan.

       The Term Loan will bear interest at prime plus .75%, Eurodollar plus 2.5%
       or at a fixed rate of cost of funds plus 2.25%. The Term Loan has a three
       year term expiring in September 1999 and requires principal payments to
       reduce the amount outstanding based on a ten year amortization.

       Under the provisions of the Credit Agreement, Strouse would be required
       to prepay its Term Loan by an amount, if any, equal to 25% of its excess
       cash flow, as defined, for a fiscal year.

       The Credit Agreement requires that Strouse maintain certain financial
       ratios in connection with these loans. These covenants, which use the
       first-in, first-out (FIFO) inventory costing methodology, requires that
       Strouse maintain (a) an interest coverage ratio, as defined, of 1.75 to
       1.0, (b) a debt service coverage ratio, as defined, of 1.10 to 1.0
       through June 30, 1998 and 1.20 to 1.0 thereafter, (c) a debt to net worth
       ratio, as defined, of 5.0 to 1.0 at September 30, 1997 and decreasing
       thereafter to 4.0 to 1.0 in fiscal 1999 and (d) a profitability
       requirement, as defined.

       Borrowings under the Credit Agreement are collateralized by substantially
       all of the assets of Strouse and are guaranteed by Aristotle and ASI,
       with each guaranty limited to $2,000,000. As of June 30, 1997, Aristotle
       has secured its guaranty with $500,000 held by and pledged to the Bank
       (see Note 3). In addition, the Credit Agreement restricts the amount of
       dividends that Strouse can pay to ASI or Aristotle.

                                      -22-
<PAGE>
 
       Aristotle bank line of credit -
       -----------------------------

       During 1997, Aristotle entered into a $300,000 line of credit agreement
       that bears interest at prime and which has an August 31, 1998 maturity.
       At June 30, 1997, $75,000 was outstanding under this agreement. The line
       of credit is secured by the collateral assignment of a demand promissory
       note executed by Strouse.

       Capital lease obligation -
       ------------------------

       During fiscal 1995, Strouse entered into a capital lease obligation with
       one of their principal suppliers to lease the supplier's land, building,
       machinery and equipment. Under the terms of the lease, Strouse makes
       quarterly payments of $87,500, $93,750, and $66,250, for principal,
       interest and executor costs, for calendar years 1996, 1997 and 1998,
       respectively. The imputed interest rate on the obligation is 9.0% per
       annum. Included in the accompanying consolidated balance sheet is
       $600,000 of land, building and equipment under capital lease, net of
       accumulated depreciation of $193,000 and $116,000 at June 30, 1997 and
       1996, respectively, resulting from this lease commitment. Through May 1,
       1998, Strouse has the option to purchase the land, building, machinery
       and equipment for $784,000.

       Aggregate maturities of all long-term debt and notes payable for each of
       the succeeding five years subsequent to June 30, 1997 and thereafter are
       as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                          Year Ending
                     June 30,                               Amount
                     --------                               ------
                     <S>                                  <C> 
                       1998                                 $6,488
                       1999                                  1,670
                                                            ------
                     Total                                  $8,158
                                                            ======
</TABLE> 

5.     Commitments and Contingencies:
       -----------------------------

       Lease commitments -
       -----------------

       The Company leases space in its New Haven facility from a related party.
       The agreement provides that the Company will pay for its prorated portion
       of operating expenses associated with the building. In addition, Strouse
       leases showroom space in New York City. Rent expense under these
       operating leases amounted to approximately $462,000, $454,000 and
       $474,000 for the years ended June 30, 1997, 1996 and 1995, respectively.

       At June 30, 1997, approximate future minimum payments including current
       escalations for operating expenses under these operating leases are as
       follows (in thousands):

<TABLE> 
<CAPTION> 
                Year Ending
                  June 30,                                    Amount
                  --------                                    ------
                <S>                                           <C> 
                  1998                                         $452
                  1999                                          433
                  2000                                          384
                  2001                                          332
                  2002 and thereafter                           528
</TABLE> 

                                      -23-
<PAGE>
 
       Guarantee -
       ---------

       Strouse has guaranteed annuity payments to the participants of a
       terminated Company pension plan. The payments are currently being
       satisfied under an annuity contract with an insurance company.

       Contingencies -
       -------------

       In April 1995, the FDIC filed a complaint related to the matter captioned
       Federal Deposit Insurance Corporation vs. The Aristotle Corporation, in
       the United States District Court for the District of Connecticut. The
       FDIC claimed that it was entitled to income tax refunds previously
       received and yet to be received by Aristotle.

       In addition, the Company was aware that the FDIC was preparing claims
       against certain former officers and directors of the Bank based on
       alleged negligence in approving certain loans that the Bank made and
       subsequently lost money on when borrowers defaulted. Under Delaware law
       and under Aristotle's bylaws, Aristotle may have had an obligation to
       indemnify these officers and directors for expenses and liabilities
       incurred by them in connection with any action the FDIC brought to
       enforce its claims.

       The Company, the FDIC and certain other interested parties entered into a
       settlement agreement dated May 29, 1996 regarding the foregoing asserted
       claims and potential claims (the "FDIC Claims"). Under the settlement
       agreement, the Company retained $2,000,000 of the disputed $5,760,000 in
       tax refunds. Accordingly, the Company has recorded an income tax benefit,
       net of legal costs, as a result of the above agreement (see Note 7). The
       FDIC received the balance of the tax refunds. The FDIC and Aristotle each
       dismissed the above-captioned action, as it related to the other party.
       As part of the settlement agreement, the FDIC released Aristotle, certain
       of Aristotle's former officers and directors, and certain officers and
       directors of the Bank from any claims pertaining to the operations or
       failure of the Bank. Aristotle released the FDIC from all claims relating
       to the Bank.

       During 1990, two separate purported stockholder class actions were
       commenced in the United States District Court for the District of
       Connecticut and a consolidated complaint, captioned In Re: First
       Constitution Stockholders Litigation, was filed on August 3, 1990 (the
       "Stockholder Litigation"). The consolidated complaint alleged, among
       other things, that during the purported class period (January 25, 1989 to
       April 5, 1990), the Company, a former director and certain former
       officers acted to inflate the price of the Aristotle Common Stock by
       issuing materially false and misleading statements on omissions. The
       consolidated complaint also alleged claims based on common law fraud and
       misrepresentation, and sought unspecified damages, as well as recovery of
       attorneys' fees.

       On May 23, 1996, the plaintiffs, Aristotle and the individual defendants
       entered into a Stipulation and Agreement of Settlement pursuant to which,
       among other things, the Stockholder Litigation would be settled for
       $2,300,000, which, following the payment of attorneys' fees and costs,
       would be distributed to class members who timely submitted valid proofs
       of claim. Aristotle's directors and officers liability insurance carrier
       has funded the entire settlement amount. By order and judgment dated
       August 2, 1996, the Court approved the settlement and dismissed the
       Stockholder Litigation with prejudice.

                                      -24-
<PAGE>
 
       Other commitments -
       -----------------

       In April 1994, the Company entered into five-year employment agreements
       (the "Employment Agreements") with three officers. In addition to
       providing for base salaries, the Employment Agreements provide for (a) 6%
       annual increases if certain levels of EBIT are achieved, and (b) an
       annual cash bonus and the annual grant of stock options to purchase

       ASI Common Stock, if certain other levels of EBIT are achieved. The
       annual bonus increases proportionately from 20% of salary for achieving
       the minimum level of EBIT to 100% of salary for achieving EBIT of more
       than double the minimum level of EBIT. The annual stock options increase
       proportionately from 10,000 shares of ASI Common Stock for achieving the
       minimum level of EBIT to 20,000 shares for achieving EBIT of more than
       double the minimum level of EBIT. The stock options will be exercisable
       at the market price on the date that they are granted. The number of
       stock options granted to each employee will be based on the amount of his
       or her salary in relation to the amounts of the salaries of the other
       employees who are parties to such Employment Agreements. During 1994,
       approximately $93,000 of bonuses were accrued of which approximately
       $75,000 was recorded in the Acquisition discussed in Note 1. In
       conjunction therewith, the Strouse Stockholders were issued options to
       purchase 10,208 shares of ASI Common Stock, with such options immediately
       exercisable at date of grant. There was no bonus earned for the fiscal
       year ended August 31, 1996 and there is no similar bonus accrued for as
       of June 30, 1997 as management does not expect to meet the EBIT target.


6.     Stockholders' Equity:
       --------------------

       The Company had the following common, treasury and preferred stock issued
       and outstanding at June 30, 1997, 1996 and 1995:

<TABLE> 
<CAPTION> 
                                                                                    Aristotle                    
                                                                                   Redeemable                     
                                                                Common              Preferred           Treasury  
                                                                 Stock                Stock               Stock   
                                                                 -----                -----               -----    
       <S>                                                     <C>                 <C>                  <C> 
       Outstanding, June 30, 1994                              1,105,801             270,379              21,610

       Issuance of treasury stock
         to directors                                               -                   -                 (5,417)

       Redemption of fractional shares                              -                   -                  1,168
                                                               ---------             -------             -------
       Outstanding, June 30, 1995                              1,105,801             270,379              17,361

       Issuance of treasury stock
         to directors                                               -                   -                (16,074)

       Exercise of Put Right (Note 1)                               -                (20,715)               -
                                                               ---------             -------             -------
       Outstanding, June 30, 1996                              1,105,801             249,664               1,287

       Purchases of treasury stock                                  -                   -                  6,000

       Exercise of Put Right (Note 1)                               -                (52,989)               -

       Forfeiture of Put Right (Note 1)                             -                 (1,178)               -
                                                               ---------             -------             -------
       Outstanding, June 30, 1997                              1,105,801             195,497               7,287
                                                               =========             =======             =======
</TABLE> 

                                      -25-
<PAGE>
 
       Aristotle common shares reserved for future issuance consist of the
following:

<TABLE> 
<CAPTION> 
                                                                                    1997                  1996
                                                                                    ----                  ----
                <S>                                                                <C>                   <C> 
                Conversion of ASI Preferred Stock                                  218,588               288,022
                Conversion of ASI Common Stock (Note 1)                             33,424                33,424
                Exercise of ASI Options (Note 1)                                    35,208                35,208
                Exercise of stock options granted
                  under the Plan (Note 8)                                           43,935                44,435
                Exercise of stock options granted
                  outside of the Plan (Note 8)                                      20,000                20,000
                                                                                   -------               -------
                      Total                                                        351,155               421,089
                                                                                   =======               =======
</TABLE> 

7.     Income Taxes:
       ------------

       The Company accounts for income taxes under the provisions of Statement
       of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
       (SFAS 109). SFAS 109 utilizes the liability method and deferred taxes are
       determined based on the estimated future tax effects of differences
       between the financial statement and tax basis of assets and liabilities
       given the provisions of enacted tax laws.

       At June 30, 1997 and 1996, the principal components of deferred tax
       assets, liabilities and the valuation allowance are as follows (in
       thousands):
<TABLE> 
<CAPTION> 
                                                                                      1997
                                                                      -------------------------------------
                                                                      Current Asset         Long-term Asset
                                                                       (Liability)            (Liability)
                                                                      -------------         ---------------
       <S>                                                            <C>                   <C> 
       Federal net operating loss carryforwards                            $ -                  $  2,200
       State of Connecticut net operating
         loss carryforwards                                                  -                       666
       Inventory purchase accounting basis
         difference                                                          (754)                  -
       Other                                                                  218                    (87)
                                                                           ------               --------
                                                                             (536)                 2,779
       Valuation allowance                                                    (94)                (2,149)
                                                                           ------               --------
                                                                           $ (630)              $    630
                                                                           ======               ========
</TABLE> 

                                      -26-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                      1996
                                                                      -------------------------------------
                                                                      Current Asset         Long-term Asset
                                                                       (Liability)            (Liability)
                                                                      -------------         ---------------
       <S>                                                            <C>                   <C> 
       Federal net operating loss carryforwards                             $  -                 $   736
       State of Connecticut net operating
         loss carryforwards                                                    -                     306
       Inventory purchase accounting basis
         difference                                                          (675)                  -
       Other                                                                  215                    (63)
                                                                            -----                -------
                                                                             (460)                   979

       Valuation allowance                                                   (170)                  (349)
                                                                            -----                -------
                                                                            $(630)               $   630
                                                                            =====                =======
</TABLE> 

       A valuation allowance has been recorded for the deferred tax assets as a
       result of uncertainties regarding the realization of the asset, including
       the lack of profitability to date and the variability of operating
       results.

       (Charges) benefits for income taxes are comprised of the following for
       the years ended June 30, 1997, 1996 and 1995:

<TABLE> 
<CAPTION> 
                                                    (Dollars in Thousands)
                                      ------------------------------------------
                                      1997                1996              1995
                                      ----                ----              ----
          <S>                         <C>                <C>                <C> 
          Current:
              Federal                 $ -                $1,650             $  -
              State                      (32)               (24)             (25)
                                      ------             ------             ----
                                      $  (32)            $1,626             $(25)
                                      ======             ======             ====
</TABLE> 

       The 1996 federal tax benefit relates to the settlement of the FDIC tax
       refund complaint (See Note 5). The state tax provisions relate
       principally to minimum state and franchise taxes.

       At June 30, 1997, the Company had Federal net operating loss
       carryforwards of approximately $6,400,000 (expiring by 2012) and
       Connecticut net operating loss carryforwards of approximately $6,300,000
       (expiring by 2002).

       On its return for 1992 as originally filed, the Company made elections
       under provisions set forth in regulations proposed by the Internal
       Revenue Service in April 1992 as guidance for the application of Section
       597 of the Internal Revenue Code of 1986, as amended and under Section
       1.1502.20(g)(1) of the Federal Income Tax Regulations to (i) disaffiliate
       from the Bank for Federal income tax purposes and (ii) reattribute net
       operating losses of the Bank in excess of $81,000,000 to the Company. The
       application of the tax law with respect to the Company's election to
       disaffiliate from the Bank and to reattribute the Bank's net operating
       losses to the Company is not certain and, therefore, there is no
       assurance that the Company could succeed to any of the Bank's net
       operating losses.

                                      -27-
<PAGE>
 
       In September, 1996, the Company filed amended Federal and state income
       tax returns for the year ending December 31, 1992 claiming a worthless
       stock deduction of approximately $54,000,000 with respect to its stock in
       the Bank. As a result, it has also claimed tax refunds of approximately
       $10,000,000 resulting from the carryback of the Company's net operating
       loss to prior years. On the basis of these amended filings, the Company's
       remaining Federal net operating loss carryforward related to the
       worthless stock deduction would be approximately $32,000,000 and the
       reattribution to the Company of the Bank's net operating losses may be
       limited if the position taken by the Company on its amended returns is
       allowed. The amended state tax return did not result in a claim for
       refund. Rather, it increased the Company's net operating loss
       carryforward by approximately $54,000,000. In addition, the Company will
       be filing an additional carryback claim of approximately $1,400,000
       resulting from the settlement of the FDIC claim (see Note 5) which, if
       allowed, would reduce the $6,400,000 Federal net operating loss
       carryforward (see above) to $2,200,000. The Company's refund claims have
       not yet been reviewed or allowed by the Internal Revenue Service, and
       there is no assurance that they will be allowed. Accordingly, neither the
       refund claim nor the future benefit of the worthless stock deduction have
       been reflected as tax assets in the accompanying consolidated financial
       statements.

       The Company's ability to utilize tax carryforwards is dependent upon many
       factors including, (1) the acquisition by the Company of profitable
       investments, and (2) avoiding a fifty percent "ownership change" as
       defined in Section 382 of the Internal Revenue Code. If there is an
       "ownership change", the tax loss carryforwards available to the Company
       would be significantly reduced or eliminated. At a special stockholders
       meeting held on April 8, 1994 the stockholders voted to restrict certain
       stockholder transfers.


8.     Stock Option Plan and Profit Sharing Plan:
       -----------------------------------------

       In October 1995, the Financial Accounting Standards Board issued
       Statement of Financial Accounting Standards No. 123, "Accounting for
       Stock-Based Compensation" (SFAS 123). SFAS 123 requires the measurement
       of the fair value of stock options or warrants to be included in the
       statement of income or disclosed in the notes to financial statements.
       The Company has determined that it will continue to account for
       stock-based compensation for employees under Accounting Principles Board
       Opinion No. 25 and elect the disclosure-only alternative under SFAS 123.

       The Company established a Stock Option Plan (the "Plan") in 1986, which
       provided for the granting of nonincentive and incentive stock options to
       directors and officers of the Company for the purchase of Aristotle
       common stock. Nonincentive stock options and certain incentive stock
       options granted under the Plan are generally exercisable after one year
       but within ten years as of the date of the grant. Additionally, certain
       nonincentive stock options granted under the Plan may be accompanied by
       stock appreciation rights ("SAR"). The granting of such stock options
       (SAR's) entitle the holder to surrender an option and receive cash equal
       to the increase in the fair market value of the common stock from the
       date of grant to the date of exercise.

                                      -28-
<PAGE>
 
       The activity for the Plan for each of the following periods is as
       follows:
<TABLE> 
<CAPTION> 

                                                                                                Weighted
                                                                                                 Average   
                                                                               Number           Exercise   
                                                                              of Shares           Price   
                                                                              ---------         --------   
              <S>                                                             <C>               <C> 
              Options outstanding, July 1, 1994                               60,537            $ 44.48

              Options granted                                                  4,500               5.45

              Options cancelled or expired                                   (10,000)             12.50
                                                                             -------            -------
              Options outstanding, June 30, 1995                              55,037              47.10

              Options cancelled or expired                                   (10,602)            129.55
                                                                             -------            -------
              Options outstanding, June 30, 1996                              44,435            $ 27.42

              Options cancelled or expired                                      (500)              5.45
                                                                             -------            -------
              Options outstanding, June 30, 1997                              43,935            $ 27.67
                                                                             =======            =======
</TABLE> 

       All outstanding options were exercisable at June 30, 1997. As of June 30,
       1996, the Company elected not to grant any additional future options
       under the Plan.

       In addition to the options outstanding under the foregoing Plans, the
       Company has granted a director of the Company stock options to purchase
       20,000 common stock shares at $5.40 per share, with 10,000 of such
       options vesting on each of August 5, 1995 and 1996 and exercisable
       through August 5, 2004.

       Strouse has a deferred profit sharing plan (the "Profit Plan"). Under the
       Profit Plan, Strouse will match 25% of employee contributions not to
       exceed 4% of participants' annual compensation. Eligibility is based on
       attaining twenty-one years of age and completing one year of service, as
       defined within the Profit Plan. Strouse contributions will vest 20% in
       year 3 and an additional 20% per year thereafter until full vesting is
       achieved. Strouse contributions were approximately $28,000, $25,000 and
       $35,000 for the years ended June 30, 1997, 1996 and 1995, respectively.


9.     Related Party Transactions:
       --------------------------

       During the years ended June 30, 1997, 1996 and 1995, the Company paid its
       directors $58,000, $64,000 and $62,000, respectively, in compensation for
       services as directors of the Company.

                                      -29-
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                    ----------------------------------------


To the Board of Directors and Stockholders of

                  The Aristotle Corporation:


We have audited the accompanying consolidated balance sheets of The Aristotle
Corporation (a Delaware corporation) and subsidiary as of June 30, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years ended June 30,
1997. 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 The Aristotle Corporation and
subsidiary as of June 30, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years ended June 30, 1997 in conformity
with generally accepted accounting principles.


                                                       ARTHUR ANDERSEN LLP



Hartford, Connecticut
September 23, 1997

                                      -30-
<PAGE>
 
<TABLE> 
<CAPTION> 

FORM 10-K CROSS REFERENCE INDEX

<S>       <C>                                                                                                   <C> 
PART I
          Item 1.  Business                                                                                      32
          Item 2.  Properties                                                                                    35
          Item 3.  Legal Proceedings                                                                             35
          Item 4.  Submission of Matters to a Vote of Security Holders                                           36

PART II
          Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters                         36
          Item 6.  Selected Financial Data                                                                       36
          Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations         37
          Item 8.  Financial Statements and Supplementary Data                                                   37
          Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          37

PART III
          Item 10. Directors and Executive Officers of the Registrant                                            37
          Item 11. Executive Compensation                                                                        37
          Item 12. Security Ownership of Certain Beneficial Owners and Management                                37
          Item 13. Certain Relationships and Related Transactions                                                37

PART IV
          Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              38
</TABLE> 



                                      31
<PAGE>
 
                                    PART I

ITEM 1. BUSINESS

     General. Aristotle is a holding company for its subsidiary, ASI. ASI is a
holding company for Strouse. Strouse designs, manufactures and markets women's
intimate apparel. Unless the context indicates otherwise, all references herein
to the "Company" include Aristotle, ASI and Strouse.

     Products. The Company designs, manufactures and markets two specific
categories of women's intimate apparel: specialty brassieres and women's
shapewear. Specialty brassieres are specifically designed to provide support and
figure enhancement for women who are wearing apparel with backless, strapless or
halter features, such as strapless and/or low back line dresses and gowns,
halter tops and wedding gowns. The Company maintains a strong market position in
three particular categories of specialty brassieres: strapless, backless
strapless, and backless convertible/halter. Women's shapewear products provide
support and control for a woman's abdominal area in the same manner as the
traditional girdle. Such shapewear products include so-called "body briefers,"
and light, medium and firm control shapers that may extend from the bottom of a
woman's brassiere to just above her knee. For fiscal year 1997, approximately
34% of the Company's total net sales were attributable to its lines of specialty
brassieres, and the remaining 66% of total net sales were attributable to its
lines of women's shapewear.

     The Company has three product lines: SA, Smoothie, and Slimlook. Each of
the three businesses has its own strategy for product, consumer, and position in
the marketplace. The SA (Sophisticated Alternatives) consumer is very
contemporary with design and fabric driving the purchase decision. These
products are targeted at the more upscale department stores (i.e., Nordstroms,
Neiman Marcus, and Saks Fifth Avenue). The Smoothie consumer is fashionable with
function, design, and value driving her purchase decisions. These products are
targeted at both the traditional (i.e., Macy's, Lord & Taylor, Foley's) and
upscale department stores. The Slimlook consumer is more traditional with
function and value driving the purchase decision. These products are targeted at
the traditional department stores.

     The Company distributes its products under several brand names, including
Smoothie, Slimlook, Fleur de Lace, Smooth Advantage, Sophistique, Waist
Eliminator and Does What Your Diet Doesn't. Its core brand name, Smoothie, is 42
years old. See the Consolidated Financial Statements contained elsewhere in this
report for financial information relating to the Company's business.

     Business Strategy. Aristotle's strategy is to acquire other companies,
including companies within the women's specialty intimate apparel field with
manufacturing processes and distribution channels which complement Strouse's
operations. Although Aristotle is not currently engaged in a search for an
acquisition target, Aristotle intends to review any acquisition opportunities
which come to its attention. Strouse's strategy is to build on the strength of
its brand names with consumer-oriented marketing programs in its existing
department and specialty store channels of distribution and to expand its
distribution on a selective basis in the private label segment with specific
product lines in catalogs and national chains. Strouse attributes the strength
of its private label and brand names to the quality, price, fit and design of
its products.

     Marketing and Distribution. The Company's products are marketed and
distributed throughout the United States to retailers. A network of 13 sales
executives, who are full-time employees of the Company, are responsible for
marketing the Company's products in the continental United States. These sales
executives are compensated by a combination of salary and commissions based upon
net sales. Alfred A. Kniberg, President and Chief Operating Officer of Strouse,
oversees the sales executives and takes an active role in supervising the
marketing and distribution process.


                                      32
<PAGE>
 
     The Company currently sells products under its brand names to the largest
department stores in the United States, including Macy's, May Company,
Dillard's, Bloomingdales, Dayton Hudson, Nordstroms, Nieman Marcus and Lord &
Taylor, as well as to catalogs and other leading retailers such as Spiegel.
Since 1991, the Company has sold private label goods to accounts such as
Victoria's Secret, Dillard's and J.C. Penney. Three of the Company's corporate
customers, Federated Department Stores, Inc., May Company and Victoria's Secret,
individually accounted for more than 10% of total net sales for fiscal 1997 and
in total accounted for 40% of total net sales for fiscal 1997. If any one of
these three customers substantially reduced the amount of products it purchased
from the Company, the Company's financial condition could be adversely affected.

     The Company believes that there has been a consolidation of retailers into
larger entities during the past few years. In addition, retailers have attempted
to consolidate the purchases of their products by reducing their number of
suppliers. The Company cannot predict what effect, if any, these trends will
have on its business.

     The Company's sales are not substantially affected by seasonal consumption.
However, the Company generally experiences reduced sales during the months of
December and January.

     Manufacturing and Raw Materials. The Company conducts some manufacturing
operations, consisting primarily of cutting, sewing (approximately 2% of sewing)
and packaging, at its facility located in New Haven, Connecticut. All other
manufacturing of the Company's products is subcontracted to manufacturers in the
Caribbean (primarily the Dominican Republic and Jamaica) and the continental
United States. Approximately 98% of the Company's products are manufactured and
sewn in the Caribbean, with approximately 72% of the Company's products
manufactured and sewn in the Dominican Republic. Accordingly, the Company's
operations may be adversely affected by political instability or other factors
which may occur from time to time in the Dominican Republic or elsewhere in the
Caribbean. This concentration of subcontractors in the Caribbean can also expose
Strouse to abnormal production cost increases. Strouse continues to seek to
develop multiple sources of manufacturing.

     On September 17, 1997, Strouse signed an amended agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., regarding the lease of its
manufacturing facility in Jamaica. The lease began January 1, 1995 and has been
extended for an additional twelve months until January 1, 1999 and provides for
an option to purchase the facility during the lease period. The amended lease
also provides for a reduction of the quarterly payments made to Maggie
Manufacturing Company, Ltd. for calendar year 1998. Management believes that the
lease agreement will help provide the capacity needed to support future growth.
Approximately 25% of the Company's products are manufactured and sewn in
Jamaica.

     The design and manufacture of specialty brassieres and women's shapewear
are complex; requiring specialized and sophisticated machinery and tools. The
complex design and manufacturing process results in a higher per unit cost and a
lower volume of units being produced, as compared to the design and manufacture
of simpler garments.

     The Company uses various synthetic fibers and natural materials, such as
cotton, in the manufacture of its products. These raw materials are generally
available from multiple sources; the Company purchases the majority of its raw
materials from sources within the United States.

     Competition. The women's intimate apparel industry is highly competitive.
The Company's products compete for customers with numerous manufacturers of
well-known brands of women's intimate apparel. With respect to specialty
brassieres, the Company's primary competition is from the True Form, Warners,
Carnival, Playtex and Vanity Fair lines of specialty brassieres; with respect to
shapewear, the Company competes primarily with the Olga, Vanity Fair, True Form,
Playtex and Bali lines of shapewear.

     The principal competitive factors in the intimate apparel market are
quality, price, fit and design of products, engineering, customer and brand
loyalty, and customer service (including maintenance of sufficient inventories
for timely delivery). Many of the Company's competitors have greater financial
and other resources and are, therefore, able to expend more resources and effort
than the Company in areas such as marketing and product development.


                                      33
<PAGE>
 
     Employees. As of September 19, 1997, the Company employed 158 full time
personnel. None of the Company's employees are members of a union.

     Bank Financing. In September 1997, Strouse obtained a commitment from Bank
of Boston Connecticut ("Bank of Boston") to amend its existing credit agreement
whereby the maximum borrowing under the line-of-credit was increased to
$10,000,000 from $8,000,000. The amendment adjusted the overadvance, released
the $500,000 pledge by Aristotle to secure the guarantee of the line-of-credit
facility and term loan facility (the "Credit Facilities") and waived the fiscal
1997 excess cash flow prepayment.

     Borrowing under the line-of-credit is determined by a borrowing base which
is equal to the sum of 80% of eligible accounts receivable, plus 50% of eligible
raw material inventory, plus 60% of eligible finished goods inventory with a
maximum borrowing of $10,000,000 at any one time. In addition, the
line-of-credit facility permits advances to exceed the borrowing base amount by
up to $1,000,000 through December 1997, $1,250,000 from January 1998 through
March 1998, $1,000,000 during April 1998 and reducing to $500,000 thereafter
through September 1999 (so long as the total line-of-credit is not more than the
$10,000,000 and the overadvance is reduced to zero for 30 consecutive days per
annum). The principal amount of the term loan is $2,000,000. The credit
agreement matures in September 1999. Strouse uses the Credit Facilities for
working capital and other general corporate purposes.

     The interest on the line-of-credit will vary from prime to prime plus 1.0%
or Eurodollar plus 1.75% to Eurodollar plus 3.0% per annum based on the
financial performance of Strouse. The term loan bears interest at the option of
the Company at a rate per annum equal to prime plus .75%, Eurodollar plus 2.5%
or at a fixed rate of Bank of Boston's cost of funds plus 2.25%. The term loan
has a three-year term and requires principal payments to reduce the amount
outstanding based on a ten-year amortization.

     The Credit Facilities are secured by a lien on all assets of Strouse.
Aristotle and ASI have unconditionally guaranteed the Credit Facilities.
Recourse under each guaranty is limited to $2,000,000. The Credit Agreement
further provides that Strouse may not pay dividends to ASI or Aristotle without
Bank of Boston's prior written consent. Strouse must maintain certain financial
ratios and satisfy various other covenants in connection with the Credit
Facilities (See Note 4 of Notes to Consolidated Financial Statements).

     As of September 3, 1997, the balance outstanding on the line-of-credit was
$7,140,000 and the balance outstanding on the term loan was $1,833,000. As of
September 3, 1997, the additional borrowing available on the overadvance was
$750,000.

     During 1997, Aristotle entered into a line-of-credit agreement with
Citizens Bank for $300,000. The line-of-credit bears interest at prime and
matures on August 31, 1998. The line-of-credit is secured by the collateral
assignment of a demand promissory note executed by Strouse. As of September 3,
1997, the balance outstanding on the line-of-credit was $75,000.

     Background Regarding Aristotle. Aristotle is the former holding company of
First Constitution Bank (the "Bank"), which was Aristotle's only subsidiary and
which, on October 2, 1992, was seized by the FDIC. On April 11, 1994, Aristotle
acquired (the "Acquisition") Strouse pursuant to the terms of a Capital
Contribution Agreement and certain other agreements. As a result of the
Acquisition, Aristotle currently owns approximately 97% of the issued and
outstanding common stock of ASI, which in turn owns all of the outstanding
capital stock of Strouse. Aristotle therefore currently indirectly owns 97% of
the issued and outstanding capital stock of Strouse and Aristotle's business is
the business of Strouse. In May 1994, the Company effectuated a one for ten
reverse stock split.

     Aristotle was organized in 1986 and is chartered in the State of Delaware.
On April 14, 1993, the Company changed its name from First Constitution
Financial Corporation to The Aristotle Corporation.


                                      34
<PAGE>
 
ITEM 2. PROPERTIES

     The Company's principal facility is located in New Haven, Connecticut (the
"New Haven Facility"). Such facility is leased from New England Resources
Limited Partnership ("NERLP"), consists of approximately 117,500 square feet
which provides for annual rent of approximately $3.76 per square feet, and
houses Strouse's general administrative offices. In addition, the New Haven
Facility is used for manufacturing, packaging, storage, quality control,
receiving and distribution. Effective September 1, 1997, the lease for the New
Haven Facility was amended. Under the terms of the new lease, an additional
5,500 square feet was added for a total of 123,000 square feet without any
additional increase in the aggregate annual net rent payable. The term of the
lease was extended an additional three years and will expire on December 31,
2002. The new lease provides for the annual net rent payable in calendar years
1998 and 1999 to be reduced by $90,000 in the aggregate ($3,000 per month in
calendar year 1998 and $4,500 per month in calendar year 1999) and the net rent
payable in the year 2000 to be reduced to $2.76 per square foot. Each subsequent
year the net rent shall be increased annually by the lesser of 5% or the
increase in the CPI for the prior twelve-month period. In addition, NERLP may
not exercise its right to terminate the lease prior to December 31, 1999 and
must give Strouse two years notice. NERLP is affiliated with David S. Howell, a
former director of the Company and the former Chairman and Chief Executive
Officer of Strouse, and Ann-Marie Howell, a former Vice President and the former
Secretary of Strouse.

     On September 17, 1997, Strouse signed an amended agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., regarding the lease of its
manufacturing facility in Jamaica. The lease began January 1, 1995 and has been
extended for an additional twelve months until January 1, 1999 and provides for
an option to purchase the facility during the lease period for $784,000. Under
the terms of the lease, Strouse makes quarterly payments of $87,500, $93,750,
and $66,250, for calendar years 1996, 1997 and 1998, respectively.


ITEM 3. LEGAL PROCEEDINGS

     The Company is a party to the following material legal proceedings:

     The Stockholders Litigation. During 1990, two separate purported
stockholder class actions were commenced in the United States District Court for
the District of Connecticut and a consolidated complaint, captioned In Re: First
Constitution Stockholders Litigation, was filed on August 3, 1990 (the
"Stockholder Litigation"). The consolidated complaint alleged, among other
things, that during the purported class period (January 25, 1989 to April 5,
1990), the Company, a former director and certain former officers acted to
inflate the price of Common Stock of Aristotle (the "Common Stock") by issuing
materially false and misleading statements or omissions. The consolidated
complaint also alleged claims based on common law fraud and misrepresentation,
and sought unspecified damages, as well as recovery of attorneys' fees.

     On May 23, 1996, plaintiffs, Aristotle and the individual defendants
entered into a Stipulation and Agreement of Settlement pursuant to which, among
other things, the Stockholder Litigation would be settled for $2,300,000 which,
following the payment of attorney's fees and costs, would be distributed to
class members who timely submitted valid proofs of claim. Aristotle's directors
and officers liability insurance carrier has funded the entire settlement
amount. By order and judgment dated August 2, 1996, the Court approved the
settlement and dismissed the Stockholder Litigation with prejudice.

     FDIC Claims. In April 1995, the FDIC filed a complaint captioned Federal
Deposit Insurance Corporation vs. The Aristotle Corporation, in the United
States District Court for the District of Connecticut (Civil No.
395CV00684TFGD). The FDIC claimed that it was entitled to income tax refunds for
certain tax years that were received or were about to be received by Aristotle.
Aristotle established a reserve of $3,982,000 for this potential claim as of
June 30, 1993. Approximately $5,740,000 in tax refunds were deposited in special
escrow accounts (the "FDIC Escrow Accounts").


                                      35
<PAGE>
 
     In addition, the FDIC reported to the Company that it was investigating
potential claims against certain former officers and directors of the Bank based
on alleged negligence in approving certain loans that the Bank made and
subsequently lost money on when borrowers defaulted. Under Delaware law and
under Aristotle's bylaws, Aristotle may have had an obligation to indemnify
these officers and directors for expenses and liabilities incurred by them in
connection with any action the FDIC brought to enforce its claims.

     The Company, the FDIC and certain other interested parties entered into a
settlement agreement dated May 29, 1996 regarding the foregoing asserted claims
and potential claims (the "FDIC Claims"). Under the settlement agreement, the
Company retained $2,000,000 of the disputed $5,740,000 in tax refunds, plus the
accrued interest on the refunds. The FDIC received the balance of the tax
refunds. The FDIC and Aristotle each dismissed the above-captioned action, as it
related to the other party. As part of the settlement agreement, the FDIC
released Aristotle, certain of Aristotle's former officers and directors and
certain officers and directors of the Bank from any claims pertaining to the
operations or failure of the Bank. Aristotle released the FDIC from all claims
relating to the Bank.

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

     None.

                                    PART II

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

     The table below sets forth the high and low prices per share of Common
Stock for the periods indicated.

<TABLE> 
<CAPTION> 
                                                                   Market Price
                                                       ----------------------------------
       Fiscal Year Ended June 30, 1997:                      High                Low
       <S>                                                  <C>                 <C> 
       June 30                                              4                   2
       March 31                                             3  1/8              1  7/8
       December 31                                          4  3/8              2  1/8
       September 30                                         4  3/4              3
                                                
                                                
       Fiscal Year Ended June 30, 1996:         
       June 30                                              4  1/4              2  1/8
       March 31                                             6                   2  1/8
       December 31                                          5  1/4              2
       September 30                                         5                   2  3/4
</TABLE> 


     The Common Stock is listed for trading on the NASDAQ SmallCap Market under
the symbol "ARTL." As of September 8, 1997, there were approximately 4,000
stockholders of record and 2,500 additional beneficial stockholders
(stockholders holding Common Stock in brokerage accounts). It is unlikely that
the Company will pay any dividends with respect to its Common Stock in the
foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

     Selected consolidated financial data of the Company can be found on
page 2 of this report.


                                      36
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

     "Management's Discussion and Analysis of Financial Condition and Results of
Operations" can be found on pages 3 to 8 of this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Consolidated Financial Statements of the Company and its subsidiary,
together with the related Notes to Consolidated Financial Statements and the
report of independent auditors, can be found on pages 9 to 30 of this report.

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

     On October 3, 1994, the Board of Directors appointed Arthur Andersen LLP to
serve as independent accountants for the Company, subject to ratification of
such appointment by the stockholders. The information required by this Item 9
has been previously reported in the Company's current report on Form 8-K filed
with the Securities and Exchange Commission on October 21, 1994, as amended.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required by this item will be set forth under the section
entitled "Election of Directors," "Executive Officers" and "Section 16 (a)
Beneficial Ownership Reporting Compliance" in the Company's 1997 definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
end of the Company's fiscal year, and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     Information required by this item will be set forth under the section
entitled "Executive Compensation" in the Company's 1997 definitive proxy
statement, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this item will be set forth under the section
entitled "Stock Owned by Management and Principal Stockholders" in the Company's
1997 definitive proxy statement, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this item will be set forth under the section
entitled "Certain Transactions" in the Company's 1997 definitive proxy
statement, and is incorporated herein by reference.


                                      37
<PAGE>
 
                                    PART IV

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

<TABLE> 
<CAPTION> 

(a)  The following are filed as part of this report:
     <C>   <S>                                                                           <C> 
     (1)   Financial Statements:
           Consolidated Balance Sheets                                                     9
           Consolidated Statements of Operations                                          10
           Consolidated Statements of Changes in Stockholders' Equity                     11
           Consolidated Statements of Cash Flows                                          12
           Notes to Consolidated Financial Statements                                     13
           Report of Independent Public Accountants                                       30
                                                                             
     (2)   Financial Statement Schedules:                                    
           Report of Independent Public Accountants on Schedules                         S-1
           Schedule I - Condensed Financial Information of the Registrant                S-2
           Schedule II - Valuation and Qualifying Accounts                               S-5
</TABLE> 

All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.

     (3)   Exhibits:

           Exhibit 2.1- Capital Contribution Agreement dated as of November 19,
           1993 by and among The Aristotle Corporation, Aristotle Sub, Inc., The
           Strouse, Adler Company and the Stockholders of Strouse. Incorporated
           herein by reference to Exhibit 2.1 of The Aristotle Corporation's
           Current Report on Form 8-K dated April 14, 1994, as amended (the
           "1994 Current Report").

           Exhibit 3.1- Restated Certificate of Incorporation of The Aristotle
           Corporation. Incorporated herein by reference to Exhibit 3.1 of The
           Aristotle Corporation's Quarterly Report on Form 10-Q for the quarter
           ended March 31, 1997.

           Exhibit 3.2- Certificate of Designation, Preferences and Right of
           Series A, B, C and D Preferred Stock of The Aristotle Corporation.
           Incorporated herein by reference to Exhibit 4.3 of the 1994 Current
           Report.

           Exhibit 3.3- Amended and Restated Bylaws. Incorporated herein by
           reference to Exhibit 3.2 of The Aristotle Corporation's Annual Report
           on Form 10-Q for the fiscal quarter ended March 31, 1997.

           Exhibit 4.1- Restated Certificate of Incorporation of The Aristotle
           Corporation., See Exhibit 3.1 hereof.

           Exhibit 4.2- Certificate of Designation, Preferences and Right of
           Series A, B, C and D Preferred Stock of The Aristotle Corporation.
           See Exhibit 3.2 hereof.

           Exhibit 4.3- Amended and Restated Certificate of Incorporation of
           Aristotle Sub, Inc. Incorporated herein by reference to Exhibit 4.1
           of The Aristotle Corporation's Quarterly Report on Form 10-Q for the
           fiscal quarter ended December 31, 1996.

           Exhibit 4.5- Form of Stock Purchase Warrant Series A of The Aristotle
           Corporation dated as of April 11, 1994. Incorporated herein by
           reference to Exhibit 2.10 of the 1994 Current Report.




                                      38
<PAGE>
 
           Exhibit 4.6- Form of Stock Purchase Warrant Series B of The Aristotle
           Corporation dated as of April 11, 1994. Incorporated herein by
           reference to Exhibit 2.11 of the 1994 Current Report.

           Exhibit 10.1- Form of Option Agreement between Aristotle Sub, Inc.
           and optionees dated as of April 11, 1994. Incorporated herein by
           reference to Exhibit 2.2 of the 1994 Current Report.

           Exhibit 10.2- Pledge and Escrow Agreement dated as of April 11, 1994
           by and among Aristotle Sub, Inc. and certain other parties.
           Incorporated herein by reference to Exhibit 2.8 of the 1994 Current
           Report.

           Exhibit 10.3- Letter Agreement by and among The Aristotle
           Corporation, Aristotle Sub, Inc., Alfred Kniberg and David Howell
           dated June 27, 1995. Incorporated herein by reference to Exhibit 10.3
           of the 1995 Form 10-K.

           Exhibit 10.4- Security Agreement dated as of April 11, 1994 by and
           among The Strouse, Adler Company and certain other parties.
           Incorporated herein by reference to Exhibit 2.9 of the 1994 Current
           Report.

           Exhibit 10.5- Term Promissory Notes dated April 11, 1994 payable to
           The Aristotle Corporation. Incorporated herein by reference to
           Exhibit 2.12 of the 1994 Current Report.

           Exhibit 10.6- Employment Agreement dated as of April 11, 1994 by and
           among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
           Adler Company and David Howell. Incorporated herein by reference to
           Exhibit 2.3 of the 1994 Current Report.

           Exhibit 10.7- Employment Agreement dated as of April 11, 1994 by and
           among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
           Adler Company and Alfred Kniberg. Incorporated herein by reference to
           Exhibit 2.4 of the 1994 Current Report.

           Exhibit 10.8- Employment Agreement dated as of April 11, 1994 by and
           among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
           Adler Company and Joyce Baran. Incorporated herein by reference to
           Exhibit 2.5 of the 1994 Current Report.

           Exhibit 10.9- Employment Agreement dated as of April 11, 1994 by and
           among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
           Adler Company and Paul McDonald. Incorporated herein by reference to
           Exhibit 2.6 of the 1994 Current Report.

           Exhibit 10.10- Shareholder Loan Pledge Agreements dated as of April
           11, 1994 by and between certain parties and The Aristotle
           Corporation. Incorporated herein by reference to Exhibit 2.13 of the
           1994 Current Report.

           Exhibit 10.11- Stock Option Plan of The Aristotle Corporation, as
           amended. Incorporated herein by reference to Exhibit 10.2 of the
           Aristotle Corporation's Annual Report on Form 10-K for the fiscal
           year ended December 31,1992, filed on March 31, 1993 (the "1992 Form
           10-K").

           Exhibit 10.12- Form of Stock Option Agreement (for non-employee
           directors). Incorporated herein by reference to Exhibit 10.3 of the
           1992 Form 10-K.

           Exhibit 10.13- Form of Incentive Stock Option Agreement (for
           employees). Incorporated herein by reference to Exhibit 10.4 of the
           1992 Form 10-K.

           Exhibit 10.14- Lease dated October 4, 1991 by and between The
           Strouse, Adler Company and New England Resources Limited Partnership.
           Incorporated herein by reference to Exhibit 10.15 of the 1995 Form
           10-K.


                                      39
<PAGE>
 
           Exhibit 10.15- First Amendment to Lease dated April 11, 1994 by and
           between New England Resources Limited Partnership. Incorporated
           herein by reference to Exhibit 10.16 of the 1995 Form 10-K.

           Exhibit 10.16- Second Amendment to Lease dated December 14, 1994 by
           and between New England Resources Limited Partnership. Incorporated
           herein by reference to Exhibit 10.17 of the 1995 Form 10-K.

           Exhibit 10.17- Master Credit Agreement dated as of October 3, 1996 by
           and between The Strouse, Adler Company and Bank of Boston Connecticut
           is attached hereto as Exhibit 10.17.

           Exhibit 10.18- Option Agreement dated as of December 22, 1994 by and
           among The Strouse, Adler Company, PBS Enterprises Ltd., Davedan
           Properties Ltd. and Maggie Manufacturing Company Ltd. Incorporated
           herein by reference to Exhibit 10.20 of the 1995 Form 10-K.

           Exhibit 10.19- Exclusive Subcontracting Agreement dated as of
           December 22, 1994 by and among The Strouse, Adler Company, PBS
           Enterprises Ltd., Davedan Properties Ltd. and Maggie Manufacturing
           Company Ltd. Incorporated herein by reference to Exhibit 10.21 of the
           1995 Form 10-K.

           Exhibit 10.20- Restrictive Covenant Agreement dated as of December
           22, 1994 by and among The Strouse, Adler Company, PBS Enterprises
           Ltd., Davedan Properties Ltd., Maggie Manufacturing Company Ltd.,
           Peter Blair Shalleck and Sandy Shalleck. Incorporated herein by
           reference to Exhibit 10.22 of the 1995 Form 10-K.

           Exhibit 10.21- Specific Performance Agreement dated as of December
           22, 1994 by and among The Strouse, Adler Company, Peter Blair
           Shalleck and Sandy Shalleck. Incorporated herein by reference to
           Exhibit 10.23 of the 1995 Form 10-K.

           Exhibit 10.22- Settlement and Release Agreement dated as of May 29,
           1996 among The Aristotle Corporation, the Federal Deposit Insurance
           Corporation and certain other interested parties is attached hereto
           as Exhibit 10.22.

           Exhibit 10.23- Stipulation and Agreement of Settlement dated as of
           May 28, 1996 Re: In Re First Constitution Shareholders Litigation is
           attached hereto as Exhibit 10.23.

           Exhibit 10.24- Letter Agreement dated October 27, 1995 Re: Amended
           Put Rights. Incorporated herein by reference to Exhibit 10.1 of The
           Aristotle Corporation's Quarterly Report for the quarterly period
           ended December 31, 1995, filed on January 31, 1996.

           Exhibit 21.1- Subsidiaries of The Aristotle Corporation is attached
           hereto as Exhibit 21.1.

           Exhibit 27- Financial Data Schedule is attached hereto as Exhibit 27.

(b)  Reports on Form 8-K:

     There were no reports on Form 8-K filed in the fourth quarter of the
Company's fiscal year ended June 30, 1997.

(c)  See (a)(3) above.

(d)  See (a)(2) above.


                                      40
<PAGE>
 
                                  SIGNATURES



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

                                       THE ARISTOTLE CORPORATION



                                       /s/ John J. Crawford
                                       --------------------------------
                                       John J. Crawford
                                       Its President, Chief Executive Officer
                                       and Chairman of the Board
                                       Date:  September 29, 1997



                                       /s/ Paul McDonald
                                       --------------------------------
                                       Paul McDonald
                                       Its Chief Financial Officer
                                       and Secretary
                                       (principal financial and chief
                                        accounting officer)
                                       Date:  September 29, 1997

                                       41
<PAGE>
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE> 
<CAPTION> 

       Signature                Title                                 Date
       ---------                -----                                 ----
<S>                      <C>                                    <C> 
 /s/ John J. Crawford    President, Chief Executive Officer,    September 29, 1997
-----------------------  Chairman of the Board and Director
 John J. Crawford        (principal executive officer)

 /s/ Paul McDonald       Chief Financial Officer and Secretary  September 29, 1997
-----------------------  (principal financial and accounting
 Paul McDonald           officer)

 /s/ Barry R. Banducci   Director                               September 29, 1997
-----------------------
 Barry R. Banducci

 /s/ Robert L. Fiscus    Director                               September 29, 1997
-----------------------
 Robert L. Fiscus

 /s/ Betsy Henley-Cohn   Director                               September 29, 1997
-----------------------
 Betsy Henley-Cohn

 /s/ Daniel J. Miglio    Director                               September 29, 1997
-----------------------       
 Daniel J. Miglio

 /s/ Sharon M. Oster     Director                               September 29, 1997
-----------------------
 Sharon M. Oster

 /s/ Alfred A. Kniberg   Director                               September 29, 1997
-----------------------
 Alfred A. Kniberg

 /s/ John C. Warfel      Director                               September 29, 1997
-----------------------
 John C. Warfel
</TABLE> 

                                       42
<PAGE>
 
                      FINANCIAL STATEMENT SCHEDULES INDEX



Schedule I - Condensed Financial Information of the Registrant

Schedule II - Valuation and Qualifying Accounts
<PAGE>
 
             REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
             -----------------------------------------------------


To the Board of Directors and Stockholders of
   The Aristotle Corporation:



We have audited in accordance with generally accepted auditing standards, the
financial statements included in The Aristotle Corporation's Form 10-K, and have
issued our report thereon dated September 23, 1997. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedules listed in the index of financial statements are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. These schedules have been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.



                                                      ARTHUR ANDERSEN LLP

Hartford, Connecticut
September 23, 1997

                                      S-1
<PAGE>
 
                                  SCHEDULE I
                      CONDENSED FINANCIAL INFORMATION OF
                           THE ARISTOTLE CORPORATION
                            (DOLLARS IN THOUSANDS)

<TABLE> 
<CAPTION> 

BALANCE SHEETS:

 ASSETS                                          June 30, 1997    June 30, 1996
 ------                                          -------------    -------------
<S>                                              <C>              <C>  
   CURRENT ASSETS
       Cash                                           $  133          $    91
       Marketable securities held
          in escrow, at market value                     900            6,253
       Current maturities of employee
          notes receivable                               100                -
       Other current assets                              134              179
                                                      ------          -------
            Total current assets                       1,267            6,523
                                                      ------          -------
   ADVANCES TO AND
      INVESTMENT IN SUBSIDIARIES                       5,230            4,311
                                                      ------          -------
   OTHER ASSETS
       Marketable securities held
          in escrow, at market value                     300                -
       Employee notes receivable, less current
          maturities                                     207              354
                                                      ------          -------
                                                         507              354
                                                      ------          -------
                                                      $7,004          $11,188
                                                      ======          =======
 LIABILITIES AND STOCKHOLDERS' EQUITY
 ------------------------------------

   CURRENT LIABILITIES
       Notes payable                                  $   75          $    75
       FDIC tax refund payable                             -            3,760
       Accrued expenses and other liabilities            224              641
                                                      ------          -------
            Total liabilities                            299            4,476

   MINORITY INTEREST IN
       SUBSIDIARIES COMMON STOCK                         194              182

   COMMITMENT AND CONTINGENCIES

   STOCKHOLDERS' EQUITY                                6,511            6,530
                                                      ------          -------
                                                      $7,004          $11,188
                                                      ======          =======
</TABLE> 

                                      S-2
<PAGE>
 
                                                              SCHEDULE I (cont.)
                      CONDENSED FINANCIAL INFORMATION OF
                           THE ARISTOTLE CORPORATION
                            (DOLLARS IN THOUSANDS)

<TABLE> 
<CAPTION> 

STATEMENT OF OPERATIONS:
                                                               FOR THE YEARS ENDED

                                                  June 30, 1997    June 30, 1996   June 30, 1995
                                                  -------------    -------------   -------------
<S>                                               <C>              <C>             <C> 
Investment and interest income                        $ 206          $  353           $ 392
Other expenses                                         (651)           (612)           (589)
                                                      -----          ------           -----
    Loss from operations before provision
      (benefit) for income tax and equity
      in undistributed earnings of subsidiary          (445)           (259)           (197)

EQUITY IN UNDISTRIBUTED
   EARNINGS OF SUBSIDIARY                               282            (175)           (626)

INCOME TAX EXPENSE (BENEFIT)                           (176)         (1,902)             75
                                                      -----          ------           -----
NET INCOME (LOSS)                                     $  13          $1,468           $(898)
                                                      =====          ======           =====
</TABLE> 

                                      S-3
<PAGE>
 
                                                              SCHEDULE I (cont.)
                      CONDENSED FINANCIAL INFORMATION OF
                           THE ARISTOTLE CORPORATION
                            (DOLLARS IN THOUSANDS)

<TABLE> 
<CAPTION> 

STATEMENT OF CASH FLOWS:
                                                                       FOR THE YEARS ENDED
   OPERATING ACTIVITIES:                                 June 30, 1997    June 30, 1996   June 30, 1995
   --------------------                                  -------------    -------------   -------------
   <S>                                                   <C>              <C>             <C> 
     Net income (loss)                                       $  13          $1,468           $(898)
     Equity in undistributed
        earnings of subsidiary                                (282)            175             626
     Gain on settlement of FDIC claim                            -          (2,000)              -
     Issuance of treasury stock for services                     -              62              30
     Proceeds from tax carryback claim                           -           1,778               -
     Other                                                    (489)            132             355
                                                             -----          ------           -----
     Total cash provided by
        (used in) operating activities                        (758)          1,615             113

   INVESTING ACTIVITIES:
   --------------------
     Proceeds from notes receivable from employees              47               -               -
     Purchase of marketable securities held in escrow         (707)         (1,778)              -
     Sale of marketable securities                           5,760             207              26
     Settlement of FDIC claim                               (3,760)              -               -
     Repurchase of ASI preferred stock                        (530)           (207)              -
     Minority interest                                          12              15              29
                                                             -----          ------           -----
     Total cash provided by
        (used in) investing activities                         822          (1,763)             55

   FINANCING ACTIVITIES:
   --------------------
     Purchase of treasury stock                                (22)              -             (11)
     Proceed from the issuance of debt                           -              75               -
                                                             -----          ------           -----
     Total cash used by financing activities                   (22)             75             (11)

   INCREASE (DECREASE) IN CASH
        AND CASH EQUIVALENTS
                                                                42             (73)            157
   CASH AND CASH EQUIVALENTS
        AT BEGINNING OF PERIOD                                  91             164               7
                                                             -----          ------           -----
   CASH AND CASH EQUIVALENTS
        AT END OF PERIOD                                     $ 133          $   91           $ 164
                                                             =====          ======           =====
</TABLE> 

                                      S-4
<PAGE>
 
                                                                   SCHEDULE II
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
                              VALUATION ACCOUNTS
                            (DOLLARS IN THOUSANDS)

<TABLE> 
<CAPTION> 

              COLUMN A                          COLUMN B          COLUMN C       COLUMN D       COLUMN E
--------------------------------------------------------------------------------------------------------------
                                                                  Additions
                                                                ------------
                                                                    (1)
                                                                ------------
                                                Balance at       Charged to                    Balance at
                                           beginning of period    costs and   Deductions/        end of
                                                                  expenses     write-offs        period
---------------------------------------------------------------------------------------------------------------
<S>                                        <C>                   <C>          <C>              <C> 
FISCAL YEAR ENDED JUNE 30, 1997
-------------------------------

Accounts receivable reserve                      $ 125                26          (29)           $122

Co-op advertising reserve                        $ 117               150         (217)           $ 50

Accounts receivable - long term reserve          $  11                 0           (2)           $  9


FISCAL YEAR ENDED JUNE 30, 1996
-------------------------------

Accounts receivable reserve                       $100                59          (34)           $125

Co-op advertising reserve                         $ 71               270         (224)           $117

Accounts receivable - long term reserve           $ 36                25          (50)           $ 11

FISCAL YEAR ENDED JUNE 30, 1995
-------------------------------

Accounts receivable reserve                       $108                 -           (8)           $100

Co-op advertising reserve                         $ 69               183         (181)           $ 71

Accounts receivable - long term reserve           $ 63                15          (42)           $ 36
</TABLE> 


                                      S-5
<PAGE>
 
                                 EXHIBIT INDEX




Exhibit 21.1- Subsidiaries of The Aristotle Corporation

Exhibit 27- Financial Data Schedule