<PAGE>
 
                       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, 1996

     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 October 7, 1996, 1,104,011 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock outstanding of The Aristotle
Corporation held by nonaffiliates was approximately $3,855,626.

                      Documents Incorporated by Reference

Portions of the Registrant's 1996 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                     4
 
Consolidated Financial Statements                       10
 
Form 10-K Cross Reference Index                         35
 
-----------------------------------------------------------
 
                                      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 and 1996. Aristotle formed ASI in 1993 and acquired (the
"Acquisition") Strouse in 1994. Accordingly, the selected consolidated data for
the fiscal years ended December 31, 1991 and 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 Years Ended             Six-Months Ended                Fiscal Years Ended
                                            December 31,                    June 30,                         June 30,  
                                                                         (unaudited)
                                   ------------------------------------------------------------------------------------------------ 

                                        1991         1992(1)         1992         1993(2)         1994         1995        1996
                                   ------------------------------------------------------------------------------------------------ 

<S>                                <C>             <C>           <C>            <C>          <C>          <C>         <C>
Consolidated statements of 
 operations data:
Net sales                          $     ---       $     ---     $     ---      $     ---    $   5,538    $  21,701   $  24,062
                                   ---------       ---------     ---------      ---------    ---------    ---------   --------- 
Costs and expenses:
 Costs of goods sold                     ---             ---           ---            ---        3,859       16,447      18,393
 Operating expenses                    1,729           1,484           444            651        1,977        5,481       5,043
 Reserve for subsidiary litigation     1,510       (   1,510)          ---            ---          ---          ---         ---
 Other income (expense)                  108           1,292         1,096            174          159    (     435)  (     553)
                                   ---------       ---------     ---------      ---------    ---------    ---------   ---------  
 Income (loss) from continuing
  operations before income        
  taxes and minority interest     (    3,131)          1,318           652      (     477)   (     139)   (     662)         73
                        
 Income tax expense (benefit)(3)         312       (   1,481)    (   1,609)         4,287    (      20)          25   (   1,626)
 Minority interest                       ---             ---           ---            ---    (      60)   (     211)  (     231)
                                   ---------       ---------     ---------      ---------    ---------    ---------   ---------   
 Income (loss) from continuing
  operations                       (   3,443)          2,799         2,261      (   4,764)   (     179)   (     898)  (   1,468)
                                                                                                               
 Loss from discontinued
  operations                       (  53,172)      (  59,727)    (  34,278)           ---          ---          ---         ---
                                   ---------       ---------     ---------      ---------    ---------    ---------   ---------     

 Net income (loss)                 ($ 56,615)      ($ 56,928)    ($ 32,017)     ($  4,764)   ($    179)   ($    898)  $   1,468
                                   =========       =========     =========      =========    =========    =========   =========  
 Net earnings (loss) per share:
 Continuing operations             ($   3.14)      $    2.55     $    2.06      ($   4.35)   ($   0.16)   ($   0.81)  $    1.30
 Discontinued operations           (   48.56)      (   54.51)    (   31.28)           ---          ---          ---         ---
                                   ---------       ---------     ---------      ---------    ---------    ---------   ---------     

 Net earnings (loss) per
  primary share                    ($  51.70)      ($  51.96)    ($  29.22)     ($   4.35)   ($   0.16)   ($    .81)  $    1.30
                                   =========       =========     =========      =========    =========    =========   ========= 
 Weighted average shares
  outstanding (4)                  1,095,072       1,095,643     1,095,652      1,096,017    1,087,039    1,113,250   1,130,727

Consolidated balance sheet data:
 Total assets                         69,925          11,371        37,618         10,545       23,162       26,820      23,795
 Stockholders' equity                 67,827          10,897        35,810          6,159        5,805        4,996       6,530
 Long-term debt                         --              --            --             --            251       10,274       2,097

 -------------------------
</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 Stockholder Litigation and the FDIC 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 FDIC'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>
 
                       SELECTED FINANCIAL DATA OF STROUSE
                             (Amounts in thousands)

     The following are selected financial data for Strouse presented on the
historical basis of accounting for the fiscal years ended August 31, 1992 and
June 30, 1993, 1994, 1995 and 1996. The selected financial data for the fiscal
years ended June 30, 1993 and 1994 have not been audited, but, in the opinion of
the management of Strouse, all adjustments necessary for a fair presentation
have been included. All such adjustments are of a normal, recurring nature. The
selected 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 
                                   August 31,                 Fiscal Years Ended June 30, 
                                                    (unaudited)  (unaudited)
                                  -----------     ---------------------------------------------------
                                     1992             1993        1994        1995(1)        1996
                                  -----------     ---------------------------------------------------
<S>                               <C>              <C>         <C>            <C>         <C>                       
Statements of operations data:
 Net sales                        $13,019          $14,966     $18,267        $21,701     $24,062
                                  -------          -------     -------        -------     -------
 Costs and expenses:
  Costs of goods sold (2)           8,515            9,996      12,831         16,403      18,050
  Product development                 375              378         433            485         523
  Selling, general and 
   administrative (3)               3,051            3,428       4,362          4,134       3,852
  Restructuring charge                 --               --          --            219          --
  Interest expense                    387              395         486            823         914
                                  -------          -------     -------        -------     -------
                                   12,328           14,197      18,112         22,064      23,339
                                  -------          -------     -------        -------     -------
 Income (loss) before provision
  for income taxes                    691              769         155        (   363)        723
 Income tax expense (benefit)          20              191     (    98)       (    45)        276
                                  -------          -------     -------        -------     -------
 Net income (loss)                $   671          $   578     $   253        ($  318)    $   447
                                  =======          =======     =======        =======     =======
 
Balance sheet data:
Working capital                   $ 5,360          $ 5,429     $ 1,924        $10,604     $ 2,751
Total assets                        7,107            7,977      12,945         16,571      12,887
Stockholders' equity                  937            1,417       2,400          2,083       2,529
Long-term debt                      4,863            4,551         251         10,274       2,097
</TABLE>

-----------------
(1)  Effective June 30, 1994, Strouse changed its fiscal year end from August 31
     to June 30.
(2)  Costs of goods sold for the fiscal year ended June 30, 1994 includes $89 in
     transaction costs incurred in connection with the Acquisition.
(3)  Selling, general and administrative expenses for the fiscal year ended 
     June 30, 1994 include $491 in transaction costs incurred in connection with
     the Acquisition.

                                       3
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.

Changes in the Business of Aristotle and the Methodology for Management's
Discussion and Analysis of Financial Condition and Results of Operations

     Aristotle's business has changed substantially over the last three fiscal
years. See "Item 1. Business-Background Regarding Aristotle." Aristotle has
been, and continues to be, a holding company for its subsidiaries. From 1986 to
1992, its sole subsidiary was the Bank. From the time the Bank was seized by the
FDIC in October 1992, until April 1994 when Aristotle acquired Strouse,
Aristotle had no operating subsidiaries. From April 1994 on, the assets of the
Company primarily consisted of the assets of Strouse, and the operations of the
Company were substantially comprised of the operations of Strouse.

     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, 1996, as compared to
the year ended June 30, 1995, and the fiscal year ended June 30, 1995, as
compared to June 30, 1994. It will also discuss and analyze the financial
condition of Strouse, on a stand alone basis, for the fiscal year ended June 30,
1995, as compared to the year ended June 30, 1994. 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.
Effective June 30, 1993, the Company changed its fiscal year end from 
December 31 to June 30.

Results of Operations of the Company

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 an escrow and pledge agreement
(the "Strouse Escrow Account") with the former Strouse stockholders (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 preferred stock of ASI (the "ASI Preferred Stock") issued to
the Former Strouse Stockholders in connection with the Acquisition.

Fiscal Year Ended June 30, 1995 as Compared to the Year Ended June 30, 1994

     The Company's net sales for the fiscal year ended June 30, 1995 were
$21,701,000, versus net sales of  $5,538,000 for the year ended June 30, 1994.
This $16,163,000 increase reflected the operations of the Company's main
subsidiary, Strouse, for the entire year ended June 30, 1995. The fiscal year
ended June 30, 1994 only included the operations of Strouse for the period from
the date following the Acquisition, April 12, 1994, to June 30, 1994.

     The Company's gross profit for the fiscal year ended June 30, 1995 was
$5,254,000, versus gross profit of $1,679,000 for the year ended June 30, 1994.
The increase reflected the operations of Strouse for the entire year ended June
30, 1995.

     Operating expenses included selling, general and administrative expenses,
product development expenses, and in fiscal 1995, restructuring charges.
Selling, general and administrative expenses for the fiscal year ended June 30,
1995 were $4,777,000, versus $1,875,000 for the year ended June 30, 1994.
Expenses incurred at Aristotle in fiscal 1995 were $643,000 for the year ended
June 30, 1995, versus $967,000 for the fiscal year ended June 30, 1994. Expenses
incurred at Aristotle were lower because of reductions in the compensation of
Aristotle's officers. Aristotle's expenses also included Board of Directors
fees, corporate insurance costs, stockholder expenses and professional fees.
Expenses incurred by Strouse for the fiscal year ended June 30, 1995 were
$4,134,000, versus $908,000 for the year ended June 30, 1994.  The increase at
Strouse reflects the operations for the entire year ended June 30, 1995.
 
     Product development costs for the Company for the fiscal year ended June
30, 1995 were $485,000, versus $102,000 for the year ended June 30, 1994.  The
increase reflects the operations of Strouse for the entire year ended June 30,
1995.

                                       5
<PAGE>
 
     Other income included investment and interest income and expense. 
Investment and interest income of $321,000 and $294,000 in fiscal year ended 
June 30, 1995 and 1994, respectively was principally generated by one of the 
FDIC Escrow Accounts and the Strouse Escrow Account with account balances 
totaling $4,682,000 and $4,638,000 in fiscal year ended June 30, 1995 and 1994, 
respectively.

     The Company's interest expense for the fiscal year ended June 30, 1995 was
$756,000, versus $135,000 for the year ended June 30, 1994. The increase
reflects the operations of Strouse for the entire year ended June 30, 1995.

     Minority interest expense was $211,000 for the fiscal year ended June 30,
1995, versus $60,000 for the year ended June 30, 1994. The minority interest
expense is mainly due to dividends paid and accrued during the 1995 fiscal year
on the ASI Preferred Stock for the entire year of fiscal 1995.


Results of Operations of Strouse

Year Ended June 30, 1995 as Compared to the Year Ended June 30, 1994
 
     Strouse's net sales for the year ended June 30, 1995 increased 19% to
$21,701,000, compared to net sales of $18,267,000 for the prior year. The
increase was generated by a $3,720,000 volume growth in shapewear products and a
$311,000 impact from increased prices, partially offset by a $581,000 volume
decrease in specialty brassiere products and increases in in-store markdowns and
discounts for sales events.

     Strouse's price increases during the year ended June 30, 1995, expressed as
a percentage of total price, were lower than the increase in the Consumer Price
Index for the corresponding period. Strouse's private label business,
represented 21.8% of revenues in the year ended June 30, 1995, compared to 0.4%
in 1991.
 
     Gross profit for the year ended June 30, 1995 decreased to $5,298,000 from
$5,436,000 for the prior year, and gross margin decreased to 24.4% from 29.8%.
The decrease in gross margin was principally due to increased subcontracting
costs, higher production scrap, growth in the private label business, costs
incurred relating to the resourcing of manufacturing operations, and extra costs
incurred in response to delayed deliveries from suppliers.

     Selling, general and administrative expenses for the fiscal year ended June
30, 1995 were $4,134,000, compared to $4,362,000 for the corresponding period in
1994. Selling, general, and administrative expenses were comprised mainly of
cooperative advertising, sales commissions, customer service, accounting,
personnel, data processing, and administration departments, and professional
fees. The $228,000 decrease principally reflects transaction costs of $491,000
incurred in connection with the Acquisition in 1994 and decreased advertising
costs in 1995, partially offset by increased selling expenses of $276,000,
resulting primarily from higher commissions and staffing for a fiscal 1995
merchandiser program.

     Product development costs for the fiscal year ended June 30, 1995 were
$485,000, compared to $433,000 for the corresponding period in 1994. Product
development costs primarily included compensation of Company personnel.

     Interest expense for 1995 increased to $823,000 from $486,000 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, 1995 was a
benefit of $45,000, compared to a benefit of $98,000 in the prior year. The
benefit in 1995 resulted from operating losses incurred by Strouse in 1995. The
benefit in 1994 was primarily due to the tax deduction of $620,000 generated by
the exercise by management of Strouse of certain options to purchase Strouse
common stock prior to the Acquisition and the payment of certain bonuses to
management of Strouse equal, in the aggregate, to the net tax savings realized
by Strouse and attributable to the disposition by such persons of certain
Strouse stock acquired pursuant to the exercise of such options and the payment
of such bonus.


                                       6
<PAGE>
 
Liquidity and Capital Resources of the Company

     During fiscal 1996, cash required to fund the working capital needs of
Strouse was supplied principally through a line-of-credit facility and two term
loan facilities with Fleet Bank, National Association ("Fleet"), trade credit,
and internally generated funds. On October 3, 1996, Strouse terminated its
credit agreement with Fleet and entered into a new credit agreement with Bank of
Boston Connecticut. See "Item 1. Business-Financing" and Note 4 of the Notes to
Consolidated Financial Statements.

     During fiscal 1996, cash required to fund the operations of Aristotle was
supplied primarily through earnings generated from the FDIC Escrow Accounts 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.

     In connection with the Acquisition, 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"). The Former Strouse Stockholders may
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. The Put Right is secured by the Strouse
Escrow Account.

     In June 1995, Aristotle and ASI entered into an agreement with the Former
Strouse Stockholders pursuant to which the Former Strouse Stockholders agreed
(i) to postpone the Put Right with respect to 52,691 shares of ASI Preferred
Stock from April 1996 to April 1997, and (ii) to permit ASI to borrow funds from
the Strouse Escrow Account to fund the Put Right. In exchange, ASI agreed to
continue to pay dividends on certain ASI Preferred Stock through April 1997. In
addition, ASI and Aristotle agreed that if Aristotle received a certain level of
proceeds in connection with the FDIC Claims and the Stockholder Litigation (i)
Aristotle would eliminate any deficit below $700,000 in the Strouse Escrow
Account, and (ii) ASI would reinstitute the Put Right with respect to the 52,691
shares of ASI Preferred Stock. See "Item 3. Legal Proceedings."

     In April and May of 1996, four of the Former Strouse Stockholders,
including three executive officers of the Company, exercised their Put Right and
received an aggregate cash payment of $207,171 in exchange for 20,715 shares of
ASI Preferred Stock and 20,715 shares of Aristotle Preferred Stock. In order to
satisfy these Put Rights, ASI borrowed $207,171 from the Strouse Escrow Account.

     In May 1996, the Company settled the FDIC Claims and the Stockholder
Litigation. In connection with the FDIC settlement, the Company retained
$2,000,000 of the $5,760,000 in the FDIC Escrow Accounts and the balance of the
FDIC Escrow Accounts was paid to the FDIC. After payment of its expenses,
Aristotle will retain $1,650,000 and will utilize $207,171 of such proceeds to
eliminate the deficit in the Strouse Escrow Account. ASI will also reinstitute
the Put Right with respect to 52,691 shares of ASI Preferred Stock.

     If the Former Strouse Stockholders exercise their Put Right with respect to
the remaining ASI Preferred Stock, then Aristotle would have to pay up to
$2,247,000 during the next four fiscal years to such Stockholders as part of the
Acquisition. It is not anticipated that current amounts of capital will be
sufficient to satisfy potential commitments related to the acquisition. Any
default in the payments due to the Former Strouse Stockholders could create a
partial unwinding of the Acquisition. See Note 1 of the Notes to Consolidated
Financial Statements.

     In order to meet its projected capital requirements and potential
commitments to the Former Strouse Stockholders, the Company believes that it
must either raise new equity capital or obtain additional financing or both.
There can, however, be no assurance that the Company will be able to raise new
equity capital or obtain additional financing.


                                       7
<PAGE>
 
Certain Factors That May Affect Future Results of Operations

     This report contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements 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, 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.

Income Taxes

     At June 30, 1996, the Company had federal and state tax carryforwards as
     follows:

          Federal net operating loss        $2,165,000
          Federal capital loss              $4,800,000
          State net operating loss          $2,600,000
          State capital loss                $9,800,000

     All federal net operating loss carryforwards expire by 2011 and all federal
capital loss carryforwards expire by 1999.  State of Connecticut net operating
loss and capital loss carryforwards expire from 1997 to 2001.

     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 $10,800,000 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
would be approximately $32,100,000.

     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, no reattribution to the Company of the
Bank's net operating losses will be permitted 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.

                                       8
<PAGE>
 
     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.

                                       9
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------
                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------
                          AS OF JUNE 30, 1996 AND 1995
                          ----------------------------
                 (dollars in thousands, except for share data)

<TABLE>
<CAPTION>

            ASSETS                                      1996        1995
            ------                                      ----        ----
<S>                                                   <C>          <C> 
Current assets:
 Cash and cash equivalents                             $    99     $   188
 Marketable securities held in escrow,
  at market value                                        6,253           -
 Accounts receivable, net of reserves of
  $242 and $171                                          2,834       4,498
 Inventories                                             9,478      11,782
 Other current assets                                      359         867
                                                       -------     -------
   Total current assets                                 19,023      17,335
                                                       -------     -------
Property and equipment, net                              1,684       1,517
                                                       -------     -------
Other assets:
 Marketable securities held in escrow, at
  market value                                               -       4,682
 Employee notes receivable                                 354         354
 Goodwill, net of amortization of $101 and $52           1,845       1,894
 Deferred tax asset                                        630         725
 Other noncurrent assets                                   259         313
                                                       -------     -------
                                                         3,088       7,968
                                                       -------     -------
                                                       $23,795     $26,820
                                                       =======     =======
</TABLE>


      LIABILITIES AND STOCKHOLDERS' EQUITY
      ------------------------------------
<TABLE>
<CAPTION>
 
Current liabilities:
<S>                                                      <C>           <C>
  Notes payable and current maturities
    of long-term debt                                    $   6,055     $     548
  FDIC tax refund claim payable                              3,760             -
  Accounts payable                                           1,372         2,367
  Accrued expenses                                             919         1,304
  Deferred tax liability                                       630           725
                                                         ---------     ---------
                  Total current liabilities                 12,736         4,944
                                                         ---------     ---------
 
Long-term debt, less current maturities                      2,097        10,274
Reserve for potential FDIC tax refund claim                      -         3,982
                                                         ---------     ---------
                                                             2,097        14,256
                                                         ---------     ---------
                  Total liabilities                         14,833        19,200
                                                         ---------     ---------
 
Minority interest in subsidiary's preferred stock            2,247         2,454
                                                         ---------     ---------
Minority interest in subsidiary's common stock                 182           167
                                                         ---------     ---------
Commitments and contingencies (Note 5)
 
Redeemable preferred stock, $.01 par value
  3,000,000 shares authorized; 101,976 and
  122,691 shares of Series A for 1996 and 1995,
  respectively, 61,345 shares Series B, 61,345
  shares Series C and 24,998 shares Series D
  issued and outstanding                                         3             3
                                                         ---------     ---------
Stockholders' equity:
  Common stock, $.01 par value, 3,000,000
    shares authorized, 1,105,801 shares
    issued and outstanding                                      11            11
  Additional paid-in capital                               159,762       159,843
  Retained earnings (deficit)                             (153,245)     (154,713)
  Treasury stock, at cost, 1,287 shares in
    1996 and 17,361 shares in 1995                              (8)         (151)
  Net unrealized investment gains                               10             6
                                                         ---------     ---------
                  Total stockholders' equity                 6,530         4,996
                                                         ---------     ---------
                                                         $  23,795     $  26,820
                                                         =========     =========
</TABLE>


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

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

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     -------------------------------------

                FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
                ------------------------------------------------
                 (dollars in thousands, except per share data)


 
<TABLE>
<CAPTION>
 
                                                    1996        1995       1994
                                                    ----        ----       ----
<S>                                               <C>         <C>         <C>
 
Net sales                                         $24,062     $21,701     $5,538
Cost of goods sold                                 18,393      16,447      3,859
                                                  -------     -------     ------
             Gross profit                           5,669       5,254      1,679
 
Operating expenses:
  Selling                                           2,660       2,826        704
  General and administrative                        1,860       1,951      1,171
  Product development                                 523         485        102
  Restructuring charges                                 -         219          -
                                                  -------     -------     ------
             Operating income (loss)                  626        (227)      (298)
                                                  -------     -------     ------
 
Other income (expense):
  Investment and interest
    income                                            312         321        294
  Interest expense                                   (865)       (756)      (135)
                                                  -------     -------     ------
                                                     (553)       (435)       159
                                                  -------     -------     ------
             Income (loss) before income
               taxes and minority interest             73        (662)      (139)
 
Income tax expense (benefit)                       (1,626)         25        (20)
                                                  -------     -------     ------
             Income (loss) before minority
               interest                             1,699        (687)      (119)
 
Minority interest                                    (231)       (211)       (60)
                                                  -------     -------     ------
 
Net income (loss)                                 $ 1,468     $  (898)    $ (179)
                                                  =======     =======     ======
 
Net income (loss) per share:
  Primary                                           $1.30       $(.81)     $(.16)
                                                  =======     =======     ======
  Fully-diluted                                     $1.17       $(.81)     $(.16)
                                                  =======     =======     ======
</TABLE>

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

                                       11
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------

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

                FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
                ------------------------------------------------
                             (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, June 30, 1993        $ 11,058       $149,633     $(153,636)    $   (896)    $        -     $6,159
 
Net loss                             -              -          (179)           -              -       (179)
 
Net unrealized
  investment loss                    -              -             -            -            (64)       (64)
 
Issuance of treasury
  stock to directors                 -           (854)            -          896              -         42
 
Purchase of treasury
  stock                              -              -             -         (143)             -       (143)
 
Ten to one reverse
  stock split and
  change in par value          (11,047)        11,037             -            -              -        (10)
                              --------     ----------     ---------     --------     ----------     ------
 
Balance, June 30, 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
                              ========     ==========     =========     ========     ==========     ======
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       12
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

                FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
                ------------------------------------------------
                             (dollars in thousands)
<TABLE>
<CAPTION>
 
 
                                                     1996        1995        1994
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
 
Cash flows from operating activities:
 Net income (loss)                                 $ 1,468     $  (898)    $  (179)
 Adjustments to reconcile net income (loss)
  to net cash provided by (used in)
  operating activities:
   Depreciation and amortization                       461         355          46
   Gain on settlement of FDIC claim                 (2,000)          -           -
   Loss on sale of investments held
    for sale                                             -           -          48
   Issuance of treasury stock for
    services                                            62          30          42
   Changes in assets and liabilities:
    Accounts receivable                              1,664        (934)       (687)
    Inventories                                      2,304      (1,711)         98
    Other assets                                       552         200          39
    Proceeds from tax carryback claim                1,778           -           -
    Accounts payable                                  (995)        464        (400)
    Accrued expenses                                  (385)        214        (420)
                                                   -------     -------     -------
     Net cash provided by (used
      in) operating activities                       4,909      (2,280)     (1,413)
                                                   -------     -------     -------
 
Cash flows from investing activities:
 Increase in notes from employees                        -           -        (354)
 Purchase of marketable securities held
  in escrow                                         (1,778)         26        (701)
 Sale of marketable securities                         207           -           -
 Repurchase of ASI Preferred Stock                    (207)          -           -
 Purchase of property and equipment                   (565)       (640)       (113)
 Purchase of subsidiary, net of acquired
  cash of $589                                           -        (184)     (2,617)
 Minority interest                                      15          29          12
                                                   -------     -------     -------
     Net cash provided by (used
      in) investing activities                      (2,328)       (769)     (3,773)
                                                   -------     -------     -------
 
Cash flows from financing activities:
 Net borrowings (payments) under
  line of credit                                    (2,412)        996        (479)
 Borrowings under term notes                             -       2,500           -
 Proceeds from issuance of debt                        140           -           -
 Principal debt payments                              (398)       (260)        (12)
 Purchase of treasury stock                              -         (11)       (143)
                                                   -------     -------     -------
     Net cash provided by (used
      in) financing activities                      (2,670)      3,225        (634)
                                                   -------     -------     -------
 
INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                                      (89)        176      (5,820)
 
CASH AND CASH EQUIVALENTS,
 BEGINNING OF PERIOD                                   188          12       5,832
                                                   -------     -------     -------
CASH AND CASH EQUIVALENTS,
 END OF PERIOD                                     $    99     $   188     $    12
                                                   =======     =======     =======
SUPPLEMENTAL DISCLOSURES:
 Cash paid during the year for:
  Interest                                         $   876     $   690     $   137
                                                   =======     =======     =======
  Income taxes                                     $    31     $  (216)    $   (72)
                                                   =======     =======     =======
 
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       13
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
                    ----------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                             JUNE 30, 1996 AND 1995
                             ----------------------



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, manufactures 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 operating results of Strouse are included in the consolidated financial
   statements since the date of the Acquisition.

   Operating results for the year ended June 30, 1994 on a pro forma basis as
   though Strouse was acquired as of July 1, 1993 are:

<TABLE> 
<CAPTION> 
                                                     (Dollars in Thousands
                                                       except share data)
                                                       ------------------
                                                           (Unaudited)
          <S>                                        <C> 
          Net sales                                          $18,267
          Net loss                                              (132)
          Net loss per share                                 $  (.12)
</TABLE> 

   The pro forma financial information is presented for informational purposes
   only and is not necessarily indicative of the operating results that would
   have occurred had the Acquisition been consummated as of the above dates, nor
   are they necessarily indicative of the future operating results. The pro
   forma adjustments include amortization of intangibles, decreased interest
   income and expense, minority share and preferred dividend costs and related
   income tax effects of the Acquisition.

                                       14
<PAGE>
 
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. Of each years
Additional EBIT Consideration, if any, 80% would be paid in cash and 20% would
be paid in ASI Common Stock, with such Common Stock convertible into Common
Stock of Aristotle (the "Aristotle Common Stock"). Additional EBIT Consideration
of $184,000 was paid to the Strouse Stockholders for the year ended August 31,
1994. In accordance with the Acquisition Agreements, $147,270 of the Additional
EBIT Consideration was paid in cash and $36,817 was paid through the issuance of
8,424 shares of ASI Common Stock. No Additional EBIT Consideration was earned
for the year ended August 31, 1995 and no additional EBIT Consideration has been
recognized during the current fiscal year as the EBIT target is not expected to
be met for the year ending August 31, 1996.

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, 1996) and ASI
Options to purchase 35,208 shares of ASI Common Stock (an additional 3% of the
outstanding shares of ASI Common Stock, if exercised, as of June 30, 1996).

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 (between April 11, 1996 and April
11, 2001); 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 exercise of Put Right (as defined below) the
Strouse Stockholders hold warrants that entitle them to purchase 362,508 shares
of Aristotle Common Stock, which, if exercised, would represent 24.7% of the
outstanding Aristotle Common Stock as of June 30, 1996. If the Strouse
Stockholders do not exercise their Warrants and exchange their ASI Preferred
Stock for Aristotle

                                       15
<PAGE>
 
Common Stock, they have the right to put such shares of ASI Preferred Stock back
to Aristotle (the "Put Right") for $2,454,000, plus any accrued and unpaid
dividends, beginning April 11, 1996. The Put Right is secured by an investment
account established in connection with the Acquisition and subject to an escrow
and pledge agreement with the Strouse Stockholders (the "Strouse Escrow
Account"), which as of June 30, 1996 had a balance of $493,000 (see Note 3). The
Strouse Escrow Account is contained within marketable securities held in escrow
at market value in the accompanying consolidated balance sheets.

In June 1995, Aristotle and ASI entered into an agreement with the Strouse
Stockholders pursuant to which the Strouse Stockholders agreed (i) to postpone
the Put Right with respect to 52,691 shares of ASI Preferred Stock from April
1996 to April 1997 (i.e., to limit the Put Right during April 11, 1996 to April
10, 1997 to $700,000), and (ii) to permit ASI to borrow funds from the Strouse
Escrow Account to fund the Put Right. In exchange, ASI agreed to continue to pay
dividends on certain ASI Preferred Stock through April 1997. In addition, as a
result of the FDIC Claims and Stockholder Litigation settlements (see Note 5)
ASI and Aristotle agreed that (i) Aristotle would eliminate any deficit below
$700,000 in the Strouse Escrow Account, and (ii) ASI would reinstitute the Put
Right with respect to the 52,691 shares of ASI Preferred Stock (see Note 5).

During fiscal 1996, four of the Strouse Stockholders, including three executive
officers of the Company, exercised their Put Right and received an aggregate
cash payment of $207,000 in exchange for 20,715 shares of ASI Preferred Stock
and 20,715 shares of Aristotle Preferred Stock (see below). In order to satisfy
these Put Rights, ASI borrowed $207,000 from the Strouse Escrow Account.

In connection with the Acquisition, Aristotle also issued 270,379 shares of
voting 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 or aggregate voting power of 19.65% of all of the issued
and outstanding capital stock of Aristotle, 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, 1996, or
upon the cessation of the voting rights of the Aristotle Preferred Stock. During
fiscal 1996, 20,715 shares of Aristotle Preferred Stock were redeemed in
connection with the fiscal 1996 Put Right (see above).

The Acquisition Agreements provide for loans from the Company at 8.9% interest
to the Strouse Stockholders aggregating $707,000, of which $354,000 was
outstanding at June 30, 1996 and 1995. 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.

                                       16
<PAGE>
 
   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, and require that the Additional EBIT Consideration be immediately paid
   in cash. 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.


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, 1996, the LIFO inventories reflected in the
   accompanying consolidated balance sheet are stated at an amount $1,688,000
   greater than LIFO inventories reported for federal income tax purposes.

   At June 30, 1996 and 1995, inventories consisted of the following (in
   thousands):

<TABLE>
<CAPTION>
                               1996      1995
                              ------    -------

       <S>                    <C>       <C>
       Raw materials          $2,173    $ 2,600
       Work-in-process         2,346      4,503
       Finished goods          4,159      3,472
                              ------    -------
                               8,678     10,575
       LIFO reserve              800      1,207
                              ------    -------
                              $9,478    $11,782
                              ======    =======
</TABLE>

                                       17
<PAGE>
 
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.

At June 30, 1996 and 1995, property and equipment consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                1996              1995
                                               -------           -------
      <S>                                      <C>               <C>
                                                  
      Machinery and equipment                  $1,536            $1,002
      Furniture and fixtures                       18                42
      Leasehold improvements                      269               213
      Equipment under capital lease               600               600
                                               ------            ------
                                                2,423             1,857
                                                  
      Less accumulated depreciation and                 
        amortization                             (739)             (340)
                                               ------            ------
                                               $1,684            $1,517
                                               ======            ======
</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 after giving retroactive effect to the 10 to 1 reverse stock split
(effected in May 1994) for all years presented.  For purposes of computing
primary net income (loss) per share, weighted average shares for fiscal 1996,
1995 and 1994 were 1,130,727, 1,113,250 and 1,087,039, respectively.  For
fiscal 1996, the weighted average shares for purposes of the fully-diluted
calculation was 1,441,383 and for fiscal 1995 and 1994, the effect of
conversion of the underlying securities would have been anti-dilutive.

                                      18
<PAGE>
 
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.

Principal supplier -
--------------------

In 1996, 1995 and 1994, approximately 95%, 85% and 81%, respectively, of the
Company's products were manufactured and sewn in the Caribbean, with
approximately 68%, 60% and 57%, 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 17%, 13% and 12% of
total net sales in 1996, two customers accounted for approximately 14% and 11%
of total net sales in 1995 and one customer accounted for approximately 11% of
total net sales in 1994.

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.

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.

                                       19
<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.

Reclassifications -
--------------------

Certain reclassifications have been made to the 1994 and 1995 financial
statements to make them consistent with the 1996 presentation.

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 March 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets" (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 Company is required
to adopt SFAS 121 no later than fiscal 1997, although earlier implementation is
permitted. SFAS 121 is required to be applied prospectively for assets to be
held and used. The Company does not believe the adoption of the new standard
will have a significant impact on the Company's results of operations or
financial position.

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 defines a fair value based method of
accounting for an employee stock option or similar equity instrument. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued for Employees" (Opinion 25).
Entities electing to remain with the accounting in Opinion 25 must make pro
forma disclosures of net income, as if the fair value based method of accounting
defined in SFAS 123 had been applied. The Company is required to adopt SFAS 123
during fiscal 1997. Based upon the Company's initial evaluation, adoption is not
expected to have a material impact on the Company's financial position or
results of operations because the Company intends to make pro forma disclosures
to comply with this statement.

                                       20
<PAGE>
 
3. Marketable Securities Held in Escrow:
   -------------------------------------

   To enable the Strouse Stockholders to effectuate the Partial Unwinding, and
   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, the Company has pledged 59% of the
   outstanding common stock of Strouse and the Strouse Escrow Account, which as
   of June 30, 1996 had a balance of $493,000 (see Note 1). 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 may 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. Subsequent to
   yearend, the Company entered into a settlement agreement whereby $3,760,000
   of the escrow amount will be remitted to the FDIC and $2,000,000 will be
   retained by the Company (see Note 5).

   The funds relating to the above mentioned escrow arrangements are 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, $6,000
   and ($64,000) is recorded as a component of stockholders' equity as of June
   30, 1996, 1995 and 1994, respectively. As these securities mature, the
   proceeds will be invested in United States Treasury Notes with a maturity of
   not more than 120 days.

   Investment securities available for sale relating to the above escrow
   arrangements are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
 
                                             June 30, 1996
                                ---------------------------------------
                                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                      156             -             156
Cash equivalents and
 interest receivable                  166             -             166
                                ---------    ----------    ------------
                                      493             -             493
                                ---------    ----------    ------------
</TABLE>

                                       21
<PAGE>
 
<TABLE> 
<CAPTION> 
                                               June 30, 1996
                                          ----------------------
                                           Amortized  Unrealized     Gross Market
                                                                  
                                              Cost        Gains          Value
                                              ----        -----          -----
FDIC Escrow Accounts:  tax claim:
<S>                                          <C>          <C>           <C>
  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
                                                ======    ==========    ======

<CAPTION>  
                                                 June 30, 1995
                                            ------------------------
                                                                        Gross
                                             Amortized    Unrealized    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>

                                       22
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                   June 30, 1994
                                         ----------------------------------
                                                                     Gross
                                         Amortized    Unrealized     Market
                                           Cost         Losses       Value
                                         ---------    -----------    ------
<S>                                      <C>          <C>            <C>
 
Company obligations:
 U.S. Treasuries maturing
  in 1 to 5 years                           $  355          $ (6)    $  349
 Corporate debt maturing
  in 1 to 5 years                              347            (4)       343
                                            ------          ----     ------
                                               702           (10)       692
                                            ------          ----     ------
 
FDIC Escrow Accounts:  tax claim:
 U.S. Treasuries maturing
  in 1 to 5 years                            1,838           (20)     1,818
 Corporate debt maturing
  in 1 to 5 years                            2,162           (34)     2,128
                                            ------          ----     ------
                                             4,000           (54)     3,946
                                            ------          ----     ------
   Total                                    $4,702          $(64)    $4,638
                                            ======          ====     ======
 
</TABLE>
4. Notes Payable and Long-Term Debt:
   ---------------------------------

   Line of credit and term notes -
   -------------------------------

   As of June 30, 1996, Strouse had outstanding borrowings of $7,613,000
   pursuant to a Bank debt facility (the Credit Agreement), of which $2,222,000
   related to a term loan, $116,000 related to a note payable and $5,275,000 was
   a revolving loan. The Credit Agreement as of June 30, 1996 required that
   Strouse meet various restrictive covenants and that all outstanding
   obligations be satisfied prior to October 31, 1997. In October 1996, Strouse
   entered into a new credit agreement (New Credit Agreement) with another bank
   which, among other things, adjusted the maturity date, the interest rate and
   the financial and nonfinancial covenants.

   Notes payable and long-term debt at June 30, 1996 and 1995, after
   consideration of the New Credit Agreement, consisted of the following (in
   thousands):
<TABLE>
<CAPTION>
                                             1996      1995
                                            ------    -------
<S>                                         <C>       <C>
 
Borrowings under bank line of credit        $5,613    $ 7,687
 
Term notes payable to bank                   2,000      2,389
 
Capital lease obligation                       374        495
 
Other                                          165        251
                                            ------    -------
Total                                        8,152     10,822
Less current maturities                      6,055        548
                                            ------    -------
                                            $2,097    $10,274
                                            ======    =======
</TABLE>

                                       23
<PAGE>
 
The New Credit Agreement provides for a Revolving Loan and a $2,000,000 Term
Loan. Borrowings of up to $8,000,000 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 New Credit Agreement will
permit advances to exceed the formula amounts (the seasonal "Overadvance") by up
to $750,000 during the first year 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 New
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
and requires principal payments to reduce the amount outstanding based on a ten
year amortization.

Under the provisions of the New 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 New 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, (c) a debt to net worth ratio, as
defined, of 6.0 to 1.0 at September 30, 1996 and decreasing thereafter to 4.0 to
1.0 in fiscal 1999 and (d) a profitability requirement, as defined.

Borrowings under the New 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. Aristotle will secure its guaranty with $500,000
to be held by and pledged to the Bank. In addition, the New Credit Agreement
restricts the amount of dividends that Strouse can pay to ASI or Aristotle.

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
$81,250, $87,500, and $93,750, for principal, interest and executor costs, for
calendar years 1995, 1996 and 1997, 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 $77,000 and $39,000 at June 30, 1996 and
1995, respectively, resulting from this lease commitment.

In connection with this lease, Strouse has the option to purchase the land,
building, machinery and equipment for $700,000.

                                       24
<PAGE>
 
   Aggregate maturities of all long-term debt and notes payable for each of the
   succeeding five years subsequent to June 30, 1996 and thereafter are as
   follows (in thousands):

<TABLE>
<CAPTION>
          Year Ending                  
            June 30,                                  Amount
         ---------------                              ------

         <S>                                          <C>   
         1997                                         $6,055
         1998                                            304
         1999                                            181
         2000                                            193
         2001                                            199
         Thereafter                                    1,220
                                                      ------
         Total                                        $8,152
                                                      ====== 
</TABLE>


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

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

   The Company is the lessee of 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 $454,000 and $474,000 for the
   years ended June 30, 1996 and 1995 and $118,000 for the period from the
   Acquisition to June 30, 1994.

   At June 30, 1996, 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>   
         1997                                           $512
         1998                                            523
         1999                                            549
         2000                                            577 
</TABLE>

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.

                                       25
<PAGE>
 
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.

Other commitments -
-------------------

In April 1994, the Company has entered into five-year employment agreements (the
"Employment Agreements") with four 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

                                       26
<PAGE>
 
   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, 1995 and there is no
   similar bonus accrued for as of June 30, 1996 as management does not expect
   to meet the EBIT target.


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

   In April 1994, Aristotle's stockholders and board of directors approved an
   amendment to Aristotle's certificate of incorporation which, among other
   things: (i) decreased the number of authorized shares of Aristotle's common
   stock from 20,000,000 shares to 3,000,000 shares; (ii) provided for a ten to
   one reverse stock split of Aristotle's common stock and (iii) reduced the par
   value of the Aristotle common stock and Aristotle preferred stock from $1.00
   per share to $.01 per share.

   The Company had the following common, treasury and preferred stock issued and
   outstanding at June 30, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
 
                                                      Redeemable
                                         Common       Preferred     Treasury
                                          Stock         Stock         Stock
                                       -----------    ---------    -----------

<S>                                    <C>            <C>          <C>
Outstanding, June 30, 1993             11,058,019             -        68,067
 
Issuance of treasury stock
 to directors                                   -             -       (67,172)
 
Purchases of treasury stock                     -             -       215,200
 
Issuance of preferred stock
 in connection with the
 Acquisition (Note 1)                           -       270,379             -
 
Ten to one reverse stock split         (9,952,218)            -      (194,485)
                                       ----------     ---------      --------
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
</TABLE>

                                       27
<PAGE>
 
<TABLE>
<CAPTION>
                                                  Redeemable                  
                                      Common      Preferred      Treasury     
                                       Stock        Stock          Stock      
                                     ---------    ----------    -----------   

<S>                                  <C>          <C>           <C>           
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    
                                     =========      =======     ==========    
<CAPTION>  
Aristotle common shares reserved for future issuance consist of the following:
 
                                                       1996         1995      
                                                       ----         ----      

<S>                                                 <C>           <C>         
Conversion of ASI Preferred Stock                     288,022      314,591    
Conversion of ASI Common Stock                         33,424       33,424    
Exercise of ASI Options                                35,208       35,208    
Exercise of stock options granted                                             
under the Plan (Note 8)                                44,435       55,037    
Options remaining to be granted                                               
under the Plan (Note 8)                                     -       51,453    
Exercise of stock options granted                                             
outside of the Plan (Note 8)                           20,000       20,000    
                                                    ---------      -------    
Total                                                 421,089      509,713    
                                                    =========      =======    
</TABLE>


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

   The Company has adopted 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, 1996 and 1995, the principal components of deferred tax assets,
   liabilities and the valuation allowance are as follows (in thousands):

                                       28
<PAGE>
 
<TABLE>
<CAPTION>
                                                               1996
                                                ------------------------------------
                                                 Current Asset      Long-term Asset
                                                  (Liability)         (Liability)
                                                ----------------    ----------------
<S>                                             <C>                 <C>
 
Federal net operating loss carryforwards                  $   -             $   736
Federal capital loss carryforwards                            -               1,648
State of Connecticut net operating
  loss carryforwards                                          -                 306
State of Connecticut capital loss
  carryforwards                                               -               1,133
Inventory purchase accounting basis
  difference                                               (675)                  -
Other                                                       215                 (63)
                                                          -----             -------
                                                           (460)              3,760
 
Valuation allowance                                        (170)             (3,130)
                                                          -----             -------
                                                          $(630)            $   630
                                                          =====             =======
<CAPTION>  
                                                               1995
                                                ------------------------------------
                                                 Current Asset      Long-term Asset
                                                  (Liability)         (Liability)
                                                ----------------    ---------------- 
<S>                                              <C>                 <C> 
Federal net operating loss carryforwards                  $ 250             $   440
Federal capital loss carryforwards                            -               1,648
State of Connecticut net operating
  loss carryforwards                                          -                 580
State of Connecticut capital loss
  carryforwards                                               -               1,133
Inventory purchase accounting basis
  difference                                               (812)                  -
Other                                                       191                 117
                                                          -----             -------
                                                           (371)              3,918
 
Valuation allowance                                        (354)             (3,193)
                                                          -----             -------
                                                          $(725)            $   725
                                                          =====             =======
</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.

                                       29
<PAGE>
 
Charges (benefits) for income taxes are comprised of the following for
the years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
 
                           (Dollars in Thousands)
                         ---------------------------
                           1996      1995      1994
                         --------    -----    ------
<S>                      <C>         <C>      <C>
        Current:
          Federal        $(1,650)    $   -    $  21
          State               24        25      (41)
                         -------     -----    -----
                         $(1,626)    $  25    $ (20)
                         =======     =====    =====
</TABLE>

The 1996 federal tax benefit relates to the settlement of the FDIC tax refund
complaint (See Note 5). The 1996 and 1995 state tax provisions relate
principally to minimum state and franchise taxes. The 1994 tax benefit relates
principally to a state tax refund of $86,000, a federal built in gains tax of
$21,000 for a LIFO decrement occurring subsequent to the business s combination
discussed in Note 1 and state taxes of $31,000.

At June 30, 1996, the Company had Federal net operating loss carryforwards of
approximately $2,165,000 (expiring by 2011) and capital loss carryforward of
approximately $4,800,000 (expiring by 1999). Connecticut net operating loss
carryforwards and capital loss carryforwards are approximately $2,600,000 and
$9,800,000, respectively, and expire from 1997 through 2001.

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.

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 $10,800,000 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 would be approximately $32,100,000 and no
reattribution to the Company of the Bank's net operating losses will be
permitted 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. 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 these remaining net operating loss carryforwards have been reflected
as tax assets in the accompanying consolidated financial statements.

                                       30
<PAGE>
 
   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:
   ------------------------------------------

   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.

   The activity for the Plan for each of the following periods as adjusted for
   the 10 to 1 reverse stock split in May 1994, is as follows:
<TABLE>
<CAPTION>
 
                                            Number          Option
                                          of Shares         Price
                                          ----------    --------------
<S>                                       <C>           <C>
 
Options outstanding, July 1, 1993            58,141     $10.00-$150.00
 
Options granted                               2,396               5.30
                                            -------     --------------
Options outstanding, June 30, 1994           60,537       5.30- 150.00
 
Options granted                               4,500               5.45
 
Options cancelled or expired                (10,000)     10.00-  15.00
                                            -------     --------------
Options outstanding, June 30, 1995           55,037       5.30- 150.00
 
Options cancelled or expired                (10,602)      5.45- 150.00
                                            -------     --------------
Options outstanding, June 30, 1996           44,435     $ 5.30-$150.00
                                            =======     ==============
</TABLE>

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

                                       31
<PAGE>
 
   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 $25,000 and $35,000 for the years ended June
   30, 1996 and 1995 and $9,300 for the period from the Acquisition to June 30,
   1994.


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

   During the years ended June 30, 1996, 1995 and 1994, the Company paid its
   directors $64,000, $62,000 and $76,000, respectively, in compensation for
   services as directors of the Company. Additionally, in 1996, 1995 and 1994,
   $62,000, $30,000 and $42,000, respectively, was paid in the form of shares of
   Aristotle Common Stock issued out of treasury stock.

                                       32
<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 (the "Company") and subsidiary as of June 30, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our 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, 1996 and 1995, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.



                                              ARTHUR ANDERSEN LLP


New Haven, Connecticut
October 3, 1996

                                       33
<PAGE>
 
        [LETTERHEAD OF RICHARD A. EISNER & COMPANY, INC. APPEARS HERE]


                        REPORT OF INDEPENDENT AUDITORS


Board of Directors and Stockholders
The Aristotle Corporation
New Haven, Connecticut


     We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows for the year ended June 30, 1994
of The Aristotle Corporation (the "Company") and subsidiaries.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

     In our opinion, the consolidated statements of operations, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the results of operations and cash flows of The Aristotle Corporation and
subsidiaries for the year ended June 30, 1994 in conformity with generally
accepted accounting principles.

     In 1990 the Company and certain of its former officers and directors were
named in litigation alleging certain securities law violations, amongst which
were filing false and misleading financial information, or omitting certain
information.  At the time that the litigation was initiated, the Company's
principal operation was banking.  In 1992, its bank operating subsidiary was
seized by the Federal Deposit Insurance Corporation (FDIC).  At the time of the
FDIC seizure the stockholder litigation was stayed.

     As of June 30, 1994, the Company cannot evaluate what claims, if any, could
be asserted as a result of its former subsidiary's banking activities (which, if
successful, could trigger a partial unwinding of the Company's major acquisition
consummated in April 1994).  This uncertainty raises substantial doubt about the
Company's ability to continue as a going concern.  The financial statements
enumerated above do not include adjustments, if any, which could result from
this uncertainty.


/s/ Richard A. Eisner & Company, LLP

New York, New York
August 26, 1994

<PAGE>
 
<TABLE> 

FORM 10-K CROSS REFERENCE INDEX
 
<S>                     <C>                                                                                      <C>
PART I
        Item 1.         Business                                                                                 36
        Item 2.         Properties                                                                               38
        Item 3.         Legal Proceedings                                                                        39
        Item 4.         Submission of Matters to a Vote of Security Holders                                      39
 
PART II
        Item 5.         Market for Registrant's Common Equity and Related Stockholder Matters                    40
        Item 6.         Selected Financial Data                                                                  40
        Item 7.         Management's Discussion and Analysis of Financial Condition and Results of Operations    40
        Item 8.         Financial Statements and Supplementary Data                                              40
        Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     40
 
PART III
        Item 10.        Directors and Executive Officers of the Registrant                                       41
        Item 11.        Executive Compensation                                                                   41
        Item 12.        Security Ownership of Certain Beneficial Owners and Management                           41
        Item 13.        Certain Relationships and Related Transactions                                           41
 
PART IV
        Item 14.        Exhibits, Financial Statement Schedules, and Reports on Form 8-K                         41
</TABLE>

                                       35
<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 1996, approximately
41% of the Company's total net sales were attributable to its lines of specialty
brassieres, and the remaining 59% of total net sales were attributable to its
lines of women's shapewear.

     The Company distributes its products under several brand names, including
Smoothie, Fleur de Lace, Smooth Advantage, Renaissance Rose, Sophistique, Waist
Eliminator and Does What Your Diet Doesn't. Its core brand names, Smoothie and
Fleur de Lace, are 41 and 19 years old, respectively. 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 commissions and other incentives
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.

     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 accounted for 42.4% of total net sales for fiscal 1996. 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.

                                       36
<PAGE>
 
     Manufacturing and Raw Materials. The Company conducts some manufacturing
operations, consisting primarily of cutting, sewing (approximately 4% 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 95% of the Company's products are manufactured and
sewn in the Caribbean, with approximately 68% 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 December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period. Management believes
that the lease agreement will help provide the capacity needed to support future
growth. Approximately 24% 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 Truform, Warners,
Maidenform, Playtex and Vanity Fair lines of specialty brassieres; with respect
to shapewear, the Company competes primarily with the Olga, Vanity Fair,
Truform, 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.

     Employees. As of September 2, 1996, the Company employed 144 full time
personnel. None of the Company's employees are members of a union.

     Bank Financing. On November 3, 1995, Strouse and Fleet Bank, National
Association ("Fleet") entered into a credit agreement which provided for a line-
of-credit facility and two term loan facilities. The line-of-credit facility
provided for maximum borrowings of $8,750,000. The principal amounts of the term
loans were $2,500,000 and $225,000, respectively.  The Fleet credit agreement
would have matured on October 31, 1996.

                                       37
<PAGE>
 
     On October 3, 1996, Strouse terminated its credit agreement with Fleet and
entered into a new credit agreement with Bank of Boston Connecticut ("Bank of
Boston"). The new credit agreement provides for a line-of-credit facility and a
term loan facility (the "Credit Facilities"). 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 $8,000,000 at any
one time. In addition, the line-of-credit facility permits advances to exceed
the borrowing base amount by up to $750,000 through September 1997, and $500,000
thereafter through September 1999 (so long as the total line-of-credit is not
more than the $8,000,000 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. To secure Aristotle's
guarantee of the Credit Facilities, Aristotle has pledged $500,000. 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 October 3, 1996, the balances outstanding on the line-of-credit was
$6,003,000 and the term loan was $2,000,000.  As of October 3, 1996, the
additional borrowing available on the overadvance was $677,000.

     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.

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 115,000 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. The leases for the New Haven Facility expire on
December 31, 1999 and provide for annual rent of approximately $3.75 per square
foot in fiscal 1996. One of such leases, involving 11,650 square feet, may be
canceled upon six months prior notice from either party. 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 December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period for $700,000. Under
the terms of the lease, Strouse makes quarterly payments of $81,250, $87,500,
and $93,750, for calendar years 1995, 1996 and 1997, respectively. 

                                       38
<PAGE>
 
Management believes that the lease agreement will help provide the capacity
needed to support future growth. Approximately 24% of the Company's products are
manufactured and sewn in Jamaica.

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 related to this
matter 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").
 
     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.

                                       39
<PAGE>
 
                                    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         
                                              ----------------------------
        <S>                                       <C>          <C> 
        Fiscal Year Ended June 30, 1996:           High         Low
        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

        Fiscal Year Ended June 30, 1995:
        June 30                                   5 3/4        3
        March 31                                  5 1/2        4
        December 31                               6 1/4        4
        September 30                              7            4 1/2
</TABLE> 
      The Common Stock is listed for trading on the NASDAQ SmallCap Market under
the symbol "ARTL." As of October 7, 1996, there were approximately 4,100 
stockholders of record and 3,000 additional beneficial stockholders 
(stockholders holding Common Stock in brokage 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 and selected financial
data of Strouse can be found on pages 2 to 3 of this report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATION

      "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" can be found on pages 4 to 9 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 
reports of independent auditors, can be found on pages 10 to 34 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.

                                       40
<PAGE>
 
                                   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" and "Executive Officers" in the Company's 1996
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 1996 definitive proxy 
statement 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
1996 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 1996 definitive proxy 
statement, and is incorporated herein by reference.

                                    PART IV

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

(a)  The following are filed as part of this report:

<TABLE>
 
      <S>                                                                   <C>
      (1) Financial Statements:
          Consolidated Balance Sheets                                       10
          Consolidated Statements of Operations                             11
          Consolidated Statements of Changes in Stockholders' Equity        12
          Consolidated Statements of Cash Flows                             13
          Notes to Consolidated Financial Statements                        14
          Reports of Independent Public Accountants                         33

      (2) Financial Statement Schedules:
          Reports 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").

                                       41
<PAGE>
 
          Exhibit 3.1- Restated Certificate of Incorporation of The Aristotle
          Corporation, Certificates of Amendments thereto, and Certificate of
          Correction thereto. Incorporated herein by reference to Exhibit 4.2 of
          the 1994 Current Report.

          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- Bylaws. Incorporated herein by reference to Exhibit 3.2
          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 4.1- Restated Certificate of Incorporation of The Aristotle
          Corporation, Certificates of Amendment thereto, and Certificate of
          Correction thereto. 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., and amendment thereto. Incorporated herein by
          reference to Exhibit 4.1 of the 1994 Current Report.

          Exhibit 4.4- Certificate of Amendment of Amended and Restated
          Certificate of Incorporation of Aristotle Sub, Inc. filed August 30,
          1995. Incorporated herein by reference to Exhibit 4.4 of The Aristotle
          Corporation's Annual Report on Form 10-K for the fiscal year ended
          June 30, 1995, filed on October 12, 1995 (the "1995 Form 10-K").

          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.

          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.

                                       42
<PAGE>
 
          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 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.

          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.

                                       43
<PAGE>
 
          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, 1996.

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

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

                                       44
<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: October 15, 1996

                                       45
<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,         October 15, 1996
---------------------          Chairman of the Board and Director
 John J. Crawford              (principal executive officer)


/s/ Paul McDonald              Chief Financial Officer and Secretary       October 15, 1996
---------------------          (principal financial and accounting
 Paul McDonald                 officer)

/s/ Robert L. Fiscus           Director                                    October 15, 1996
--------------------- 
 Robert L. Fiscus

/s/ Betsy Henley-Cohn          Director                                    October 15, 1996
--------------------- 
 Betsy Henley-Cohn

/s/ Daniel J. Miglio           Director                                    October 15, 1996
--------------------- 
 Daniel J. Miglio

/s/ Alfred A. Kniberg          Director                                    October 15, 1996
--------------------- 
 Alfred A. Kniberg

/s/ John C. Warfel             Director                                    October 15, 1996
--------------------- 
 John C. Warfel
</TABLE>

                                       46
<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 October 3, 1996.  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.



                                                        /s/ Arthur Andersen LLP
                                                            ARTHUR ANDERSEN LLP


New Haven, Connecticut
October 3, 1996


                                      S-1
<PAGE>
 
        [LETTERHEAD OF RICHARD A. EISNER & COMPANY, INC. APPEARS HERE]


                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Stockholders
The Aristotle Corporation
New Haven, Connecticut


     The audit referred to in our report dated August 26, 1994 included Schedule
II for the year ended June 30, 1994.

     In our opinion, such schedule presents fairly the information set forth
therein in compliance with the applicable accounting regulation of the
Securities and Exchange Commission.


/s/ Richard A. Eisner & Company, LLP

New York, New York
August 26, 1994

                                     S-1a
<PAGE>

                                                                      Schedule I
                      CONDENSED FINANCIAL INFORMATION OF
                           THE ARISTOTLE CORPORATION
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE SHEETS:
 ASSETS                                            June 30, 1996    June 30, 1995
 ------                                            -------------    -------------
<S>                                                <C>              <C>
  CURRENT ASSETS
     Cash                                                $    91           $  164
     Marketable securities held
        in escrow at market value                          6,253                -
     Other current assets                                    179              523
                                                         -------           ------
       Total current assets                                6,523              687
                                                         -------           ------
  ADVANCES TO AND
     INVESTMENT IN SUBSIDIARIES                            4,311            4,000
                                                         -------           ------
  OTHER ASSETS
     Marketable securities held
        in escrow at market value                              -            4,682
     Employee notes receivable                               354              354
                                                         -------           ------
                                                             354            5,036
                                                         -------           ------
                                                         $11,188           $9,723
                                                         =======           ======
 LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
 
  CURRENT LIABILITIES
     Notes payable                                       $    75           $    -
     FDIC tax refund payable                               3,760                -
     Accrued expenses and other liabilities                  641              578
                                                         -------           ------
       Total current liabilities                           4,476              578
 
  TAX REFUND CLAIM                                             -            3,982
                                                         -------           ------
       Total liabilities                                   4,476            4,560
                                                         -------           ------
  MINORITY INTEREST IN
      SUBSIDIARIES COMMON STOCK                              182              167
 
  COMMITMENT AND CONTINGENCIES
 
  STOCKHOLDERS' EQUITY                                     6,530            4,996
                                                         -------           ------
                                                         $11,188           $9,723
                                                         =======           ======
</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
 ASSETS                                      June 30, 1996     June 30, 1995     June 30, 1994
 ------                                      -------------     -------------     -------------
<S>                                          <C>               <C>               <C>
  INCOME
     Investment and interest income               $    353             $ 392           $   343
     Other expenses                                   (612)             (589)           (1,016)
                                                  --------             -----           -------
     Income (loss) from operations
      before provision for income tax
      and equity in undistributed
      earnings of subsidiary                          (259)             (197)             (673)
 
  EQUITY IN UNDISTRIBUTED
     EARNINGS OF SUBSIDIARY                           (175)             (626)              253
 
  INCOME TAX EXPENSE (BENEFIT)                     (1,902 )               75              (241)
                                                  --------             -----           -------
  NET INCOME (LOSS)                               $  1,468             $(898)          $  (179)
                                                  ========             =====           =======
 </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, 1996     June 30, 1995     June 30, 1994
--------------------                                      -------------     -------------     -------------
<S>                                                       <C>               <C>               <C>
  Net income (loss)                                             $ 1,468             $(898)          $  (179)
  Equity in undistributed
     earnings of subsidiary                                         175               626              (253)
  Loss on sale of investment
     securities                                                       -                 -                48
  Gain on settlement of FDIC claim                               (2,000)                -                 -
  Issuance of treasury stock for services                            62                30                42
  Proceeds from tax carryback claim                               1,778                 -                 -
  Other                                                             132               355            (1,680)
                                                                -------             -----           -------
  Total cash provided from
     (used in) operating activities                               1,615               113            (2,022)
 
 INVESTING ACTIVITIES:
 --------------------
  Increase in notes receivable from employees                         -                 -              (354)
  Sale of marketable securities                                     207                26             7,778
  Purchase of marketable securities held in escrow               (1,778)                -            (8,479)
  Repurchase of ASI preferred stock                                (207)                -                 -
  Purchase of subsidiary,
     net of acquired cash                                             -                 -            (2,617)
  Minority interest                                                  15                29                12
                                                                -------             -----           -------
  Total cash provided by
     (used in) investing activities                              (1,763)               55            (3,660)
 
 FINANCING ACTIVITIES:
 --------------------
  Purchase of treasury stock                                          -               (11)             (143)
  Proceed from the issuance of debt                                  75                 -                 -
                                                                -------             -----           -------
  Total cash used by financing activities                            75               (11)             (143)
 
 INCREASE (DECREASE) IN CASH
     AND CASH EQUIVALENTS
                                                                    (73)              157            (5,825)
 CASH AND CASH EQUIVALENTS
     AT BEGINNING OF PERIOD                                         164                 7             5,832
                                                                -------             -----           -------
 CASH AND CASH EQUIVALENTS
     AT END OF PERIOD                                           $    91             $ 164           $     7
                                                                =======             =====           =======
</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)          (2)
                                                       ------------------------- 
                                          Balance at    Charged to                               Balance at
                                         beginning of    costs and                  Deductions/    end of
                                            period       expenses     Other (A)     write-offs     period
-------------------------------------------------------------------------------------------------------------- 

FISCAL YEAR ENDED JUNE 30, 1996
-------------------------------
<S>                                      <C>             <C>         <C>            <C>           <C> 
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
                                                                                                
FISCAL YEAR ENDED JUNE 30, 1994                                                                 
-------------------------------                                                                 
                                                                                                
Accounts receivable reserve                   $  -           8        117             (17)          $108
                                                                                                
Co-op advertising reserve                     $  -         152         59            (142)          $ 69
                                                                                                
Accounts receivable - long term reserve       $  -           5         58               -           $ 63
 
(A) Acquired through business combination

</TABLE>
                                     S - 5
<PAGE>
 
                                 EXHIBIT INDEX


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

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

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

Exhibit 21.1 - Subsidiaries of The Aristotle Corporation

Exhibit 27 - Financial Data Schedule