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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                  FORM 10-K/A
 
(Mark One)
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
    FOR THE FISCAL YEAR ENDED JUNE 30, 1997
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934
 
  FOR THE TRANSITION PERIOD FROM       TO
 
                        COMMISSION FILE NUMBER 0-14669
 
                           THE ARISTOTLE CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                 DELAWARE                              06-1165854
     (STATE OR OTHER JURISDICTION OF      (I.R.S. EMPLOYER IDENTIFICATION NO.)
      INCORPORATION OR ORGANIZATION)
 
 
                                                          06511
 78 OLIVE STREET, NEW HAVEN, CONNECTICUT               (ZIP CODE)
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                (203) 867-4090
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                NOT APPLICABLE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                    COMMON STOCK, PAR VALUE $.01 PER SHARE
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
 
                             Yes [X]        No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  As of September 8, 1997, the aggregate market value of the Common Stock
outstanding of The Aristotle Corporation held by nonaffiliates (without
admitting that any person whose shares are not included in such calculation is
an affiliate) was approximately $3,882,664, based on the closing price as
reported by the Nasdaq Stock Market.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Registrant's 1997 definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the end of the Registrant's
fiscal year are incorporated by reference to Part III.
 
 
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<PAGE>
 
                           THE ARISTOTLE CORPORATION
 
                               TABLE OF CONTENTS
 
<TABLE>
<S>                                                                          <C>
Selected Consolidated Financial Data........................................   3
Management's Discussion and Analysis........................................   4
Consolidated Financial Statements...........................................  10
</TABLE>
 
                                       2
<PAGE>
 
              SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
  The following are selected consolidated financial data for The Aristotle
Corporation ("Aristotle"), Aristotle Sub, Inc. ("ASI"), and The Strouse, Adler
Company ("Strouse") on a consolidated basis for the fiscal years ended June
30, 1994, 1995, 1996 and 1997. Aristotle formed ASI in 1993 and acquired (the
"Acquisition") Strouse in 1994. Accordingly, the selected consolidated data
for the fiscal year ended December 31, 1992, and the six-month periods ended
June 30, 1992 and 1993 are for Aristotle only. All references herein to the
"Company" include Aristotle, ASI and Strouse. The selected consolidated
financial data presented below should be read in conjunction with the
Consolidated Financial Statements of the Company, together with the Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
 
<TABLE>
<CAPTION>
                             FISCAL
                              YEAR       SIX-MONTHS ENDED
                             ENDED           JUNE 30,
                          DECEMBER 31,      (UNAUDITED)                FISCAL YEARS ENDED JUNE 30,
                          ------------ ----------------------  ----------------------------------------------
                            1992(1)       1992      1993(2)       1994        1995        1996        1997
                          ------------ ----------  ----------  ----------  ----------  ----------  ----------
<S>                       <C>          <C>         <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
 DATA:
Net sales...............   $      --   $      --   $      --   $    5,538  $   21,701  $   24,062  $   21,847
                           ----------  ----------  ----------  ----------  ----------  ----------  ----------
Costs and expenses:
 Costs of goods sold....          --          --          --        3,859      16,447      18,393      15,826
 Operating expenses.....        1,484         444         651       1,977       5,481       5,043       5,245
 Reserve for subsidiary
  litigation............       (1,510)        --          --          --          --          --          --
 Other income
  (expense).............        1,292       1,096         174         159        (435)       (553)       (544)
                           ----------  ----------  ----------  ----------  ----------  ----------  ----------
 Income (loss) from
  continuing operations
  before income taxes
  and minority
  interest..............        1,318         652        (477)       (139)       (662)         73         232
 Income tax expense
  (benefit)(3)..........       (1,481)     (1,609)      4,287         (20)         25      (1,626)         32
 Minority interest......          --          --          --          (60)       (211)       (231)       (187)
                           ----------  ----------  ----------  ----------  ----------  ----------  ----------
 Income (loss) from
  continuing
  operations............        2,799       2,261      (4,764)       (179)       (898)      1,468          13
 Loss from discontinued
  operations............      (59,727)    (34,278)        --          --          --          --          --
                           ----------  ----------  ----------  ----------  ----------  ----------  ----------
 Net income (loss)......   $  (56,928) $  (32,017) $   (4,764) $     (179) $     (898) $    1,468  $       13
                           ==========  ==========  ==========  ==========  ==========  ==========  ==========
 NET EARNINGS (LOSS) PER
  SHARE:
 Continuing operations..   $     2.55  $     2.06  $    (4.35) $    (0.16) $    (0.81) $     1.30  $     0.01
 Discontinued
  operations............       (54.51)     (31.28)        --          --          --          --          --
                           ----------  ----------  ----------  ----------  ----------  ----------  ----------
 Net earnings (loss) per
  primary share.........   $   (51.96) $   (29.22) $    (4.35) $    (0.16) $    (0.81) $     1.30  $     0.01
                           ==========  ==========  ==========  ==========  ==========  ==========  ==========
 Weighted average shares
  outstanding(4)........    1,095,643   1,095,652   1,096,017   1,087,039   1,113,250   1,130,727   1,134,126
CONSOLIDATED BALANCE
 SHEET DATA:
Total assets............       11,371      37,618      10,454      23,162      26,820      23,795      20,381
Stockholders' equity....       10,897      35,810       6,159       5,805       4,996       6,530       6,511
Long-term debt..........          --          --          --          251      10,274       2,097       1,670
</TABLE>
--------
(1) In October 1992, the Federal Deposit Insurance Corporation (the "FDIC")
    was appointed receiver for Aristotle's former subsidiary, First
    Constitution Bank (the "Bank"). Substantially all the Bank's operations
    have been shown as discontinued. The Company's accountants for the fiscal
    year ended December 31, 1992, KPMG Peat Marwick, declined to express an
    opinion as to the financial statements for fiscal 1992 because of
    uncertainties with respect to the certain stockholder litigation and the
    Federal Deposit Insurance Corporation claims. The Company has settled
    these disputes. See "Item 3. Legal Proceedings."
(2) Effective June 30, 1993, Aristotle changed its fiscal year end from
    December 31 to June 30.
(3) Income tax expense for the six-months ended June 30, 1993 includes a
    reserve of $4,300 for a potential tax claim by the FDIC. Income tax
    benefit for the year ended June 30, 1996 reflects a $1,650 benefit related
    to the settlement of the Federal Deposit Insurance Corporation's claims.
    See "Item 3. Legal Proceedings."
(4) The number of shares outstanding has been adjusted to reflect the one for
    ten reverse stock split that was effective on May 11, 1994.
 
                                       3
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATION
 
GENERAL
 
  This discussion and analysis of financial condition and results of
operations will discuss and analyze the results of operations of the Company,
on a consolidated basis, for the fiscal year ended June 30, 1997, as compared
to the year ended June 30, 1996, and the fiscal year ended June 30, 1996, as
compared to the year ended June 30, 1995. This discussion and analysis of
financial condition and results of operations have been derived from, and
should be read in conjunction with, the Consolidated Financial Statements and
Notes to Consolidated Financial Statements contained elsewhere in this report.
 
RESULTS OF OPERATIONS OF THE COMPANY
 
 Fiscal Year Ended June 30, 1997 as Compared to the Year Ended June 30, 1996
 
  The Company's net sales for the year ended June 30, 1997 decreased 9% to
$21,847,000, compared to net sales of $24,062,000 for the prior year. The
decrease was primarily generated by a $2,758,000 volume decrease in specialty
brassiere products and a $276,000 volume decrease in shapewear products,
offset by a $819,000 impact from increased prices.
 
  The Company's gross profit for the year ended June 30, 1997 increased to
$6,021,000 from $5,669,000 for the prior year, and the gross margin percentage
increased to 27.6% from 23.6%. The increase in gross profit and gross margin
percentage was principally a result of lower per unit costs resulting from
increases in production levels primarily relating to the implementation of new
product lines, the stabilization of raw material costs, lower production costs
resulting from a reduction in production rates charged by the Company's
Dominican subcontractor and a consolidation of Strouse's production to
locations with lower costs. Raw material components, consisting primarily of
wide fabrics, lace, elastic and accessories, represent approximately 44% of
the Company's total product costs. Costs of raw materials decreased 0.2% in
fiscal 1997, increased 1.8% in fiscal 1996 and decreased 1.4% in fiscal 1995.
Although there can be no assurance, the Company does not believe that there is
any evidence indicating that the recent stabilization of raw material costs
may prove to be only temporary.
 
  Operating expenses include selling, general and administrative, and product
development expenses. Selling, general and administrative expenses for the
fiscal year ended June 30, 1997 were $4,661,000 versus $4,520,000 for the year
ended June 30, 1996. The $141,000, or 3%, increase was principally a result of
increases in advertising costs partially offset by decreases in administrative
personnel, sales commissions and shareholder expenses. Product development
costs for the Company for the fiscal year ended June 30, 1997 were $584,000,
compared to $523,000 for the corresponding period in 1996. Product development
costs primarily include compensation of Company personnel and were incurred by
Strouse. All products are designed internally in Strouse's New Haven and New
York design centers. The $61,000, or 12%, increase in costs reflects Strouse's
continued investment in the product development process through increases in
staffing in Strouse's design centers.
 
  Other income includes investment and interest income and interest expense.
Investment and interest income was $146,000 and $312,000 for the fiscal year
ended June 30, 1997 and 1996, respectively. Investment and interest income in
1997 was principally generated by an investment account (the "Strouse Escrow
Account") which was established in connection with the acquisition of Strouse
by Aristotle (the "Acquisition") and is subject to an escrow and pledge
agreement with the former Strouse stockholders (the "Former Strouse
Stockholders"), Aristotle's pledge of $500,000 (the "Account Pledged to the
Bank") to secure its guarantee of the line-of-credit facility and term loan
facility (the "Credit Facilities") with Bank of Boston Connecticut ("Bank of
Boston") and short-term cash investments. The $166,000 reduction in investment
and interest income was primarily a result of the fiscal 1997 payment to the
FDIC of approximately $3,760,000 from the FDIC Escrow Accounts in connection
with a settlement between the Company and the FDIC related to certain disputes
between the FDIC, the Company and others (the "FDIC Settlement").
 
                                       4
<PAGE>
 
  Interest expense for fiscal 1997 decreased to $690,000 from $865,000 in the
prior year. The decrease in interest expense primarily resulted from reduced
borrowing levels under the Credit Facilities due to lower average inventory
levels in 1997 versus 1996.
 
  The provisions for income taxes for the year ended June 30, 1997 was an
expense of $32,000, compared to a benefit of $1,626,000 in the prior year. The
$32,000 expense in fiscal 1997 represents minimum state taxes. The fiscal 1996
benefit included a net benefit of $1,650,000 related to the settlement of the
FDIC Claims, offset by a $24,000 expense for minimum state taxes. See "Item 3.
Legal Proceedings." The Company did not pay federal taxes in fiscal 1997 or
1996 because its federal tax obligations were offset by the utilization of net
operating loss carryforwards.
 
  Minority interest expense was $187,000 for the fiscal year ended June 30,
1997, versus $231,000 for the year ended June 30, 1996. The minority interest
expense is principally due to preferred dividends paid and accrued during the
year on outstanding preferred stock of ASI (the "ASI Preferred Stock") issued
to the Former Strouse Stockholders in connection with the Acquisition. The
preferred dividends decreased as a result of the exercise of the Put Right, as
defined in the Liquidity and Capital Resources section, which resulted in
fewer shares of ASI Preferred Stock being outstanding during 1997.
 
 Fiscal Year Ended June 30, 1996 as Compared to the Year Ended June 30, 1995
 
  The Company's net sales for the year ended June 30, 1996 increased 11% to
$24,062,000, compared to net sales of $21,701,000 for the prior year. The
increase was primarily generated by a $639,000 volume growth in shapewear
products, a $795,000 volume growth in specialty brassiere products and a
$927,000 impact from increased prices.
 
  The Company's gross profit for the year ended June 30, 1996 increased to
$5,669,000 from $5,254,000 for the prior year, and gross margin percentage
decreased to 23.6% from 24.2%. The increase in gross profit was mainly a
result of sales growth. The decrease in gross margin percentage was primarily
a result of higher manufacturing costs of $407,000, which reflected higher per
unit costs resulting from the reductions in production and inventory levels,
and the growth in the private label business (which contributes operating
income margins comparable to Strouse's branded business, but at lower gross
margins).
 
  Operating expenses included selling, general and administrative expenses,
product development expenses, and restructuring charges. Selling, general and
administrative expenses for the fiscal year ended June 30, 1996 were
$4,520,000, versus $4,777,000 for the year ended June 30, 1995. The $257,000
decrease was principally a result of a reduction in administrative personnel
and shareholder expenses, partially offset by increases in advertising costs
and professional fees. Product development costs for the Company for the
fiscal year ended June 30, 1996 were $523,000, compared to $485,000 for the
corresponding period in 1995. Product development costs primarily included
compensation of Company personnel and were incurred by Strouse. All products
are designed internally in Strouse's New Haven and New York design centers.
The increase in costs reflects Strouse's continued investment in the product
development process.
 
  Restructuring charges of $219,000 incurred for the year ended June 30, 1995
reflected costs related to Strouse's reduction in personnel at its New Haven,
Connecticut facility. No restructuring charges were incurred during the fiscal
year ended June 30, 1996.
 
  Other income included investment and interest income and expense. Investment
and interest income was $312,000 and $321,000 in fiscal year ended June 30,
1996 and 1995, respectively. This income was principally generated by (i) one
investment account related to the FDIC tax dispute and subject to an escrow
agreement with the FDIC or its affiliates, which as of June 30, 1996 had a
balance of $3,982,000, and (ii) one investment account established in
connection with the Acquisition and subject to the Strouse Escrow Account with
the Former Strouse Stockholders, which as of June 30, 1996 had a balance of
$493,000. The balance of the marketable security held in escrow is an IRS
refund and its related interest income totaling $1,778,000, which in January
1996 was placed in an escrow account pending the resolution of the FDIC tax
disputes. The two
 
                                       5
<PAGE>
 
investment escrow accounts relating to the FDIC tax dispute are collectively
referred to herein as the "FDIC Escrow Accounts."
 
  Interest expense for fiscal 1996 increased to $865,000 from $756,000 in the
prior year. The increase primarily reflected higher borrowing levels to
support working capital needs and business growth.
 
  The provisions for income taxes for the year ended June 30, 1996 was a
benefit of $1,626,000, compared to an expense of $25,000 in the prior year.
The fiscal 1996 benefit included a net benefit of $1,650,000 related to the
settlement of the FDIC Claims, offset by a $24,000 expense. See "Item 3. Legal
Proceedings." The $24,000 expense in fiscal 1996 and $25,000 in fiscal 1995
represented minimum state taxes. The Company did not pay federal taxes in
fiscal 1996 or 1995 because its federal tax obligations were offset by the
utilization of net operating loss carryforwards.
 
  Minority interest expense was $231,000 for the fiscal year ended June 30,
1996, versus $211,000 for the year ended June 30, 1995. The minority interest
expense was principally due to preferred dividends paid and accrued during the
year on outstanding ASI Preferred Stock issued to the Former Strouse
Stockholders in connection with the Acquisition.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  During fiscal 1997, cash required to fund the working capital needs of
Strouse was supplied principally through a line-of-credit facility and term
loan facility with Bank of Boston, trade credit, and internally generated
funds. In September 1997, Strouse obtained a commitment from Bank of Boston to
amend the Credit Facilities whereby the maximum borrowing under the line-of-
credit was increased to $10,000,000 from $8,000,000. The amendment also
adjusted the amount by which borrowings can exceed the formula amounts,
released the $500,000 pledge by Aristotle to secure the guarantee of the
Credit Facilities and waived the fiscal 1997 excess cash flow prepayment. See
"Item 1. Business-Financing" and Note 4 of the Notes to Consolidated Financial
Statements.
 
  During fiscal 1997, cash required to fund the operations of Aristotle was
supplied primarily through earnings generated from the FDIC Escrow Account and
the Strouse Escrow Account, amounts payable to Aristotle pursuant to certain
notes from certain officers of Strouse, and taxes received from Strouse in
connection with a tax sharing agreement between Aristotle and Strouse.
 
  The Company utilized cash of $459,000 for operations during the fiscal year
ended June 30, 1997 and generated cash of $4,909,000 from operations for the
fiscal year ended June 30, 1996. During fiscal 1997, the utilization of cash
from operations was principally the result of increases in accounts
receivables and inventories, partially offset by depreciation and amortization
and an increase in accounts payable. During fiscal 1996, the generation of
cash from operations was principally the result of net income from operations
and decreases in accounts receivables, inventories and other assets, partially
offset by decreases in accounts payable and accrued expenses.
 
  The Company generated $515,000 from investing activities for the fiscal year
ended June 30, 1997 and utilized $2,328,000 for investing activities for the
fiscal year ended June 30, 1996. During fiscal 1997, the primary generation of
cash from investing activities was the $5,760,000 sale of marketable
securities that were withdrawn from the FDIC Escrow Accounts in connection
with the FDIC Settlement, offset by the payment of $3,760,000 from the FDIC
Escrow Accounts in connection with the FDIC Settlement. The Company also used
$530,000 to fund the payment of the Put Right, as defined below. During 1997,
the Company also utilized $707,000 of its cash from investing activities to
purchase marketable securities to fund an Account Pledged to the Bank, which
secures Aristotle's guarantee of the Credit Facilities, and to restore the
Strouse Escrow Account. During fiscal 1997 and 1996, the Company used cash
from investing activities to purchase property and equipment.
 
  The Company utilized $16,000 and $2,670,000 for financing activities during
fiscal 1997 and 1996, respectively. Funds utilized during fiscal 1997 were
primarily a result of the Company drawing $799,000 from its line-of-credit,
offset by $792,000 payment of its notes payable. In addition, the Company
repurchased 6,000
 
                                       6
<PAGE>
 
shares of its Common Stock in the open market for approximately $22,000. The
Company intends to pay its directors' annual retainer with these treasury
shares.
 
  In connection with the Acquisition in April 1994, ASI issued to the Former
Strouse Stockholders 245,381 shares of ASI Preferred Stock and Aristotle
issued to the Former Strouse Stockholders 270,379 shares of voting preferred
stock of Aristotle (the "Aristotle Preferred Stock"). Under the charter
provisions in effect at the time of the Acquisition, the Former Strouse
Stockholders had the right to require that ASI repurchase each share of ASI
Preferred Stock at various dates beginning in April 1996 for $10.00 per share,
plus any accrued but unpaid dividends (the "Put Right"). Prior to the vesting
of the Put Right, the ASI Preferred Stock is entitled to quarterly dividends
of 8.9% per annum. Once the Put Right is exercisable, the dividends cease. In
order to exercise the Put Right, a Former Strouse Stockholder must sell an
equal number of shares of Aristotle Preferred Stock to Aristotle for $.001 per
share. The Put Right is secured by the Strouse Escrow Account.
 
  During fiscal 1997 and 1996, certain Former Strouse Stockholders, including
certain executive officers of the Company, exercised their Put Right and
received aggregate consideration of $530,000 and $207,000 in exchange for
52,989 and 20,715 shares of ASI Preferred Stock, respectively. Included in the
1997 aggregate consideration was the assignment of 4,617 shares of ASI
Preferred Stock by a former executive officer in satisfaction of $46,165 of
principal payment due to Aristotle on April 11, 1997 in connection with the
Acquisition. In addition, in October 1996, pursuant to terms of an employment
agreement between a former executive officer of Strouse and the Company, upon
the voluntary termination of such officer's employment, the former executive
officer was obligated to sell to the Company for nominal consideration 1,178
shares of ASI Preferred Stock. In connection with the Acquisition, a former
executive officer borrowed $92,330 from Aristotle. This employee note
receivable was secured by a pledge agreement between the former executive and
Aristotle. The loan provided that $46,165 in principal was due to Aristotle on
April 11, 1997. The principal payment was satisfied by the assignment of 4,617
shares of ASI Preferred Stock. Accordingly, at June 30,1997 there are 170,499
shares of ASI Preferred Stock outstanding.
 
  In September 1997, the Company and the holders of the ASI Preferred Stock
have agreed to delay the exercise of the remaining Put Right and to modify
certain other agreements entered into at the time of the Acquisition. Under
this proposal, certain Former Strouse Stockholders will surrender to ASI
10,000 shares of ASI Preferred Stock in exchange for the cancellation of an
aggregate of $100,000 owed by the Former Strouse Stockholders under their
respective loans (the "Acquisition Loans"). On January 1, 1998, the Company
will redeem 80,000 shares of ASI Preferred Stock for $10.00 per share. The Put
Right for the remaining 80,499 shares of ASI Preferred Stock have been
postponed such that the Put Right with respect to 40,249 shares will vest on
January 1, 1999 and the Put Right with respect to 40,250 shares will vest on
January 1, 2000.
 
  As part of this proposal, the maturity dates on the Acquisition Loans will
be extended such that one-half of the remaining $208,000 balance will be due
and payable on January 1, 1999, and the remaining one-half will be due and
payable on January 1, 2000. In addition, the holders of ASI Preferred Stock
have agreed to the release of $400,000 from the Strouse Escrow Account on
January 1, 1998 to be used to redeem ASI Preferred Stock on that date, and the
release of $200,000 and $100,000 as of January 1, 1999 and January 1, 2000,
respectively to satisfy the Company's Put Right obligations. In addition, in
consideration for the holders of ASI Preferred Stock agreeing to postpone
their Put Right, the number of shares of Aristotle Common Stock into which
each share of ASI Preferred Stock may be exchanged will be increased from
1.282 to 1.667 shares. Finally, the holders of ASI Preferred Stock will be
released from their obligations under a pension escrow agreement.
 
  The Company has obtained the required vote of the ASI shareholders to
approve the charter amendment postponing the Put Right, and has reached an
agreement as to the other terms of the proposal with the holders of the ASI
Preferred Stock, subject to negotiation and execution of definitive documents.
 
  The Company anticipates that as a result of the amended bank agreement and
amended Put Right agreement that there will be sufficient financial resources
to meet the Company's projected working capital and other cash requirements
for the next twelve months.
 
                                       7
<PAGE>
 
  On May 23, 1996, plaintiffs, Aristotle and individual defendants entered
into a Stipulation and Agreement of Settlement pursuant to which certain
stockholders 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.
 
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
 
  In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is not permitted. The Company does not believe that the adoption
of SFAS 128 will have a material impact on reported earnings per share.
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
 
  The Company believes that this report may contain forward-looking statements
within the meaning of the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements regarding the Company's liquidity and are based on management's
current expectations and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in
the forward-looking statements. The Company cautions investors that there can
be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: the availability of financing and additional capital to fund the
Company's business strategy on acceptable terms, if at all, market responses
to pricing actions, continued competitive factors and pricing pressures,
changes in product mix, the timely acceptance of new products, inventory risks
due to shifts in market demand, the dependence by the Company on key
customers, manufacturing subcontractors, and general economic conditions. As a
result, the Company's future development efforts involve a high degree of
risk. For further information, refer to the more specific risks and
uncertainties discussed throughout this report.
 
INCOME TAXES
 
  At June 30, 1997, the Company had federal and state tax carryforwards as
follows:
 
<TABLE>
     <S>                                                             <C>
     Federal net operating loss..................................... $6,400,000
     State net operating loss....................................... $6,300,000
</TABLE>
 
  All federal net operating loss carryforwards expire by 2012 and all state of
Connecticut net operating loss carryforwards expire by 2002.
 
  The Company has filed an amended Federal income tax return for the year
ending December 31, 1992 claiming a worthless stock deduction of approximately
$54,000,000 with respect to its stock in the Bank. As a result, it has also
claimed tax refunds of approximately $10,000,000 resulting from the carryback
of the Company's net operating loss from 1992 to prior years. On the basis of
these amended filings, the Company's remaining Federal net operating loss
carryforward related to the worthless stock deduction would be approximately
$32,000,000. In addition, the Company is filing an additional carryback claim
of approximately $1,400,000 resulting from the settlement of the FDIC claim
which, if allowed, would reduce the $6,400,000 Federal net operating loss
carryforward to $2,200,000.
 
 
                                       8
<PAGE>
 
  On its return for 1992 as originally filed, the Company made elections under
provisions set forth in regulations proposed by the Internal Revenue Service
in April 1992 as guidance for the application of Section 597 of the Internal
Revenue Code of 1986, as amended and under Section 1.1502-20(g)(1) of the
Federal Income Tax Regulations to (i) disaffiliate from the Bank for Federal
income tax purposes and (ii) reattribute net operating losses of the Bank in
excess of $81,000,000 to the Company. The application of the tax law with
respect to the Company's election to disaffiliate from the Bank and to
reattribute the Bank's net operating losses to the Company is not certain and,
therefore, there is no assurance that the Company could succeed to any of the
Bank's net operating losses. Moreover, the reattribution to the Company of the
Bank's net operating losses may be limited if the position taken by the
Company on its amended returns is allowed.
 
  The Company's refund claims have not yet been reviewed or allowed by the
Internal Revenue Service, and there is no assurance that they will be allowed.
In addition, there is no assurance that the Company will be entitled to any
net operating loss carryforward arising from, or with respect to its interest
in the Bank. Even if the Company is entitled to any net operating loss
carryforward arising from, or with respect to its interest in, the Bank, its
ability to utilize such carryforward is dependent upon many factors including
(1) the realization of taxable income by the Company, and (2) avoiding a fifty
percent "ownership change" as defined in Section 382 of the Internal Revenue
Code. If there is an "ownership change", the tax loss carryforwards available
to the Company would be significantly reduced or eliminated. Accordingly,
neither the refund claim nor the future benefit of these remaining net
operating loss carryforwards have been reflected as tax assets in the
accompanying consolidated financial statements.
 
  The Company believes, assuming that the former stockholders of Strouse
currently own the maximum number of shares of Common Stock of Aristotle (the
"Common Stock") they could acquire through the exercise of their various
rights and options in the Acquisition, that the Company has not undergone an
ownership change within the meaning of Section 382 of the Code. During the
period which the Company has an unutilized federal net operating loss
carryforward, which may be for many years into the future, particularly if the
Company does succeed to a significant portion of the Bank's net operating loss
carryforward, it will be necessary for the Company to determine whether an
ownership change has occurred each time a new or existing stockholder becomes
a 5% stockholder or an existing 5% stockholder increases its ownership
interest. Except with respect to the Former Strouse Stockholders, the Company
does not know of any stockholders who currently own or would own, upon the
exercise of options or warrants, five percent or more of the Common Stock. At
a special meeting of stockholders held on April 8, 1994, the stockholders
voted to restrict certain share transfers because they could affect the
Company's ability to use its net operating losses under Section 382.
 
  For state tax purposes the election to re-attribute the losses of the Bank
to the Company is not applicable and it is unlikely that the Company will
obtain any Connecticut tax loss carryforwards as a result of its disposition
of the Bank.
   
YEAR 2000 ISSUE     
   
  In 1997, the Company began, for all of its computer systems, a Year 2000
conversion project to address all necessary code changes, testing and
implementation. Project completion is planned for early 1999. The Company
expects its Year 2000 date conversion project to be completed on a timely
basis; however there can be no assurance that the Company will complete its
conversion project in a timely manner. An untimely or incomplete resolution of
the Year 2000 issue could have a material adverse effect on the operations of
the Company. Similarly, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems.     
 
                                       9
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
 
                          AS OF JUNE 30, 1997 AND 1996
                 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
 
<TABLE>
<CAPTION>
                                                           1997       1996
                                                         ---------  ---------
<S>                                                      <C>        <C>
                         ASSETS
Current assets:
  Cash and cash equivalents............................. $     139  $      99
  Marketable securities held in escrow, at market
   value................................................       900      6,253
  Accounts receivable, net of reserves of $172 and
   $242.................................................     3,519      2,834
  Current maturities of employee notes receivable.......       100        --
  Inventories...........................................    10,945      9,478
  Other current assets..................................       146        359
                                                         ---------  ---------
    Total current assets................................    15,749     19,023
                                                         ---------  ---------
Property and equipment, net.............................     1,475      1,684
                                                         ---------  ---------
Other assets:
  Marketable securities held in escrow, at market
   value................................................       300        --
  Employee notes receivable, less current maturities....       208        354
  Goodwill, net of amortization of $162 and $101........     1,784      1,845
  Deferred tax asset....................................       630        630
  Other noncurrent assets...............................       235        259
                                                         ---------  ---------
                                                             3,157      3,088
                                                         ---------  ---------
                                                         $  20,381  $  23,795
                                                         =========  =========
          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable and current maturities of long-term
   debt................................................. $   6,488  $   6,055
  Current maturities of minority interest in
   subsidiary's preferred stock.........................       900        --
  FDIC tax refund claim payable.........................       --       3,760
  Accounts payable......................................     2,663      1,372
  Accrued expenses......................................       517        919
  Deferred tax liability................................       630        630
                                                         ---------  ---------
    Total current liabilities...........................    11,198     12,736
  Long-term debt, less current maturities...............     1,670      2,097
                                                         ---------  ---------
    Total liabilities...................................    12,868     14,833
                                                         ---------  ---------
Minority interest in subsidiary's preferred stock, less
 current maturities.....................................       805      2,247
                                                         ---------  ---------
Minority interest in subsidiary's common stock..........       194        182
                                                         ---------  ---------
Commitments and contingencies
Voting redeemable preferred stock, $.01 par value,
 3,000,000 shares authorized; 75,678 and 101,976 shares
 of Series A for 1997 and 1996, respectively, 34,065 and
 61,345 shares of Series B, for 1997 and 1996,
 respectively, 60,756 and 61,345 shares of Series C for
 1997 and 1996, respectively, and 24,998 shares of
 Series D issued and outstanding........................         3          3
                                                         ---------  ---------
Stockholders' equity:
  Common stock, $.01 par value, 3,000,000 shares
   authorized, 1,105,801 shares issued..................        11         11
  Additional paid-in capital............................   159,762    159,762
  Retained earnings (deficit)...........................  (153,232)  (153,245)
  Treasury stock, at cost, 7,287 shares in 1997 and
   1,287 shares in 1996.................................       (30)        (8)
  Net unrealized investment gains.......................       --          10
                                                         ---------  ---------
    Total stockholders' equity..........................     6,511      6,530
                                                         ---------  ---------
                                                         $  20,381  $  23,795
                                                         =========  =========
</TABLE>
 
                 The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       10
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                      1997     1996     1995
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Net sales........................................... $21,847  $24,062  $21,701
Cost of goods sold..................................  15,826   18,393   16,447
                                                     -------  -------  -------
    Gross profit....................................   6,021    5,669    5,254
Operating expenses:
  Selling...........................................   2,830    2,660    2,826
  General and administrative........................   1,831    1,860    1,951
  Product development...............................     584      523      485
  Restructuring charges.............................     --       --       219
                                                     -------  -------  -------
    Operating income (loss).........................     776      626     (227)
                                                     -------  -------  -------
Other income (expense):
  Investment and interest income....................     146      312      321
  Interest expense..................................    (690)    (865)    (756)
                                                     -------  -------  -------
                                                        (544)    (553)    (435)
                                                     -------  -------  -------
    Income (loss) before income taxes and minority
     interest.......................................     232       73     (662)
Income tax (expense) benefit........................     (32)   1,626      (25)
                                                     -------  -------  -------
    Income (loss) before minority interest..........     200    1,699     (687)
Minority interest...................................    (187)    (231)    (211)
                                                     -------  -------  -------
    Net income (loss)............................... $    13  $ 1,468  $  (898)
                                                     =======  =======  =======
Net income (loss) per share:
  Primary........................................... $   .01  $  1.30  $  (.81)
                                                     =======  =======  =======
  Fully-diluted..................................... $   --   $  1.17  $   --
                                                     =======  =======  =======
</TABLE>
 
 
                 The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       11
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   NET
                                                                UNREALIZED
                                 ADDITIONAL RETAINED            INVESTMENT
                          COMMON  PAID-IN   EARNINGS   TREASURY   GAINS
                          STOCK   CAPITAL   (DEFICIT)   STOCK    (LOSSES)  TOTAL
                          ------ ---------- ---------  -------- ---------- ------
<S>                       <C>    <C>        <C>        <C>      <C>        <C>
Balance, July 1, 1994...   $11    $159,816  $(153,815)  $(143)    $ (64)   $5,805
Net loss................   --          --        (898)    --        --       (898)
Purchase of treasury
 stock..................   --          --         --      (11)      --        (11)
Issuance of treasury
 stock to directors.....   --           27        --        3       --         30
Net unrealized invest-
 ment 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 invest-
 ment gain..............   --          --         --      --          4         4
                           ---    --------  ---------   -----     -----    ------
Balance, June 30, 1996..    11     159,762   (153,245)     (8)       10     6,530
Net income..............   --          --          13     --        --         13
Net unrealized invest-
 ment loss..............   --          --         --      --        (10)      (10)
Purchase of treasury
 stock..................   --          --         --      (22)      --        (22)
                           ---    --------  ---------   -----     -----    ------
Balance, June 30, 1997..   $11    $159,762  $(153,232)  $ (30)    $ --     $6,511
                           ===    ========  =========   =====     =====    ======
</TABLE>
 
 
                  The accompanying notes are an integral part
                  of these consolidated financial statements.
 
                                       12
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                       1997     1996     1995
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Cash flows from operating activities:
  Net income (loss).................................. $    13  $ 1,468  $  (898)
  Adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating activities:
    Gain on settlement of FDIC claim.................     --    (2,000)     --
    Depreciation and amortization....................     528      461      355
    Issuance of treasury stock for services..........     --        62       30
    Changes in assets and liabilities:
      Accounts receivable............................    (685)   1,664     (934)
      Inventories....................................  (1,467)   2,304   (1,711)
      Other assets...................................     263      552      200
      Proceeds from tax carryback claim..............     --     1,778      --
      Accounts payable...............................   1,291     (995)     464
      Accrued expenses...............................    (402)    (385)     214
                                                      -------  -------  -------
        Net cash provided by (used in) operating
         activities..................................    (459)   4,909   (2,280)
                                                      -------  -------  -------
Cash flows from investing activities:
  Purchase of marketable securities held in escrow...    (707)  (1,778)      26
  Sale of marketable securities......................   5,760      207      --
  Settlement of FDIC claim...........................  (3,760)     --       --
  Repurchase of ASI Preferred Stock..................    (530)    (207)     --
  Purchase of property and equipment.................    (260)    (565)    (640)
  Purchase of subsidiary.............................     --       --      (184)
  Minority interest..................................      12       15       29
                                                      -------  -------  -------
        Net cash provided by (used in) investing
         activities..................................     515   (2,328)    (769)
                                                      -------  -------  -------
Cash flows from financing activities:
  Net borrowings (payments) under line of credit.....     799   (2,412)     996
  Borrowings under term notes........................     --       --     2,500
  Proceeds from issuance of debt.....................     --       140      --
  Principal debt payments............................    (793)    (398)    (260)
  Purchase of treasury stock.........................     (22)     --       (11)
                                                      -------  -------  -------
        Net cash provided by (used in) financing
         activities..................................     (16)  (2,670)   3,225
                                                      -------  -------  -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.....      40      (89)     176
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......      99      188       12
                                                      -------  -------  -------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $   139  $    99  $   188
                                                      =======  =======  =======
SUPPLEMENTAL DISCLOSURES:
  Cash paid during the year for:
    Interest......................................... $   637  $   876  $   690
                                                      =======  =======  =======
    Income taxes..................................... $    44  $    31  $  (216)
                                                      =======  =======  =======
</TABLE>
 
                 The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       13
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                            JUNE 30, 1997 AND 1996
 
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS:
 
  The Aristotle Corporation ("Aristotle" or the "Company"), through its
wholly-owned subsidiary Aristotle Sub., Inc. ("ASI"), owns approximately 97%
of The Strouse, Adler Company ("Strouse"). Strouse, which was acquired on
April 11, 1994 in a transaction accounted for as a purchase (the
"Acquisition"), designs, manufacturers and markets women's intimate apparel.
Prior to October 2, 1992, Aristotle was the holding company of First
Constitution Bank (the "Bank"). On October 2, 1992, the Federal Deposit
Insurance Corporation ("FDIC") was appointed as receiver of the Bank and
Aristotle wrote off its investment in the Bank.
 
  The total Acquisition cost of Strouse was $5,990,000 (including expenses of
the Acquisition of $610,000) of which: (i) $2,454,000 represented the issuance
of 122,691 shares of 8.9% Series A, 61,345 shares of 8.9% Series B and 61,345
shares of 8.9% Series C preferred stock of ASI (collectively referred to
herein as the "ASI Preferred Stock"), valued at its redemption value of $10
per share; (ii) $125,000 represented the value of 25,000 common shares of ASI
issued at the Acquisition (the "ASI Common Stock"); (iii) $2,617,000 was cash
paid at date of acquisition; and (iv) $184,000 represented the August 31, 1994
Additional EBIT Consideration (see below). The fair value of assets purchased
and liabilities assumed amounted to $14,934,000 and $10,890,000, respectively.
The excess of cost over the fair value of net assets acquired amounted to
$1,946,000, which is being amortized over forty years.
 
  The Acquisition agreements (the "Acquisition Agreements") provided that the
former stockholders of Strouse (the "Strouse Stockholders") could receive
additional consideration (the "Additional EBIT Consideration"), the amount of
which would be based upon the earnings before interest and income tax ("EBIT")
of Strouse, calculated on an August 31 fiscal year through August 31, 1996,
with the maximum amount of such consideration not to exceed $1,854,000.
Additional EBIT Consideration of $184,000 was paid to the Strouse Stockholders
for the year ended August 31, 1994. No Additional EBIT Consideration was
earned for the years ended August 31, 1996 and 1995.
 
  The 25,000 shares of ASI Common Stock issued at the date of Acquisition to
the Strouse Stockholders pursuant to the Acquisition represented 2.22% of the
outstanding ASI Common Stock. The Strouse Stockholders also received options
(the "ASI Options") to purchase 25,000 additional shares of ASI Common Stock
at $5.45 per share. The ASI Common Stock exercisable pursuant to the ASI
Options represented an additional 2.13% of the outstanding ASI Common Stock at
date of Acquisition, if exercised. After recognition of the fiscal 1994
Additional EBIT Consideration, and the bonuses paid pursuant to the Employment
Agreements (see Note 5), the Strouse Stockholders hold 33,424 shares of ASI
Common Stock (2.95% of the outstanding shares of ASI Common Stock as of June
30, 1997) and ASI Options to purchase 35,208 shares of ASI Common Stock (an
additional 3.10% of the outstanding shares of ASI Common Stock, if exercised,
as of June 30, 1997).
 
  The ASI Preferred Stock had an original liquidation preference of $2,454,000
in the aggregate, or $10 per share. Dividends at the rate of 8.9% per annum
are payable on the ASI Preferred Stock until the later of: (i) the dates on
which the Put Right (as defined below) is exercised and (ii) the first date
upon which Aristotle has sufficient audited financial statements in order to
satisfy the requirements for filing a registration statement under the federal
securities laws pursuant to which the shares of Aristotle's Common Stock
issued to the Strouse Stockholders can be registered for sale. Aristotle is
obligated to pay the costs of such registration under the Acquisition
Agreements. The ASI Preferred Stock is redeemable by ASI.
 
  Aristotle has issued to the Strouse Stockholders warrants (the "Warrants")
that permit the holders of the Warrants to exchange their ASI Preferred Stock
and/or ASI Common Stock for Aristotle Common Stock. After recognition of the
fiscal 1994 Additional EBIT Consideration, the bonuses paid pursuant to the
Employment
 
                                      14
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
Agreements (see Note 5), and exercises of Put Rights (as defined below) the
Strouse Stockholders hold warrants that entitle them to purchase 287,220
shares of Aristotle Common Stock, which, if exercised, would represent 20% of
the outstanding Aristotle Common Stock as of June 30, 1997.
 
  If the Strouse Stockholders do not exercise their Warrants, they have the
right to require that ASI repurchase each share of ASI Preferred Stock at
various dates beginning in April 1996 for $10.00 per share, plus any accrued
but unpaid dividends (the "Put Right"). In order to exercise the Put Right, a
former Strouse Stockholder must sell an equal number of shares of Aristotle
Preferred Stock to Aristotle for $.001 per share (see below).
 
  During fiscal 1997 and 1996, certain of the Strouse Stockholders, including
certain executive officers of the Company, exercised their Put Right and
received aggregate consideration of $530,000 and $207,000 in exchange for
52,989 and 20,715 shares of ASI Preferred Stock, respectively. In addition, in
October 1996, pursuant to terms of an employment agreement between a former
executive officer of Strouse and the Company, upon the voluntary termination
of such officer's employment, the former executive officer was obligated to
sell to the Company for nominal consideration 1,178 shares of ASI Preferred
Stock. Accordingly, at June 30, 1997 there are 170,499 shares of ASI Preferred
Stock outstanding.
 
  In September 1997, the Company and the Strouse Stockholders entered into an
amendment to delay the exercise of the remaining Put Rights and to modify
certain other agreements entered into at the time of the Acquisition. In
accordance with the terms of the amendment, during fiscal 1998 the Strouse
Stockholders will surrender to ASI 10,000 shares of ASI Preferred Stock, which
has an aggregate redemption value of $100,000, in exchange for the
cancellation of $100,000 of loans owed to the Company by the Strouse
Stockholders (see below). The Put Rights for the remaining 160,499 shares of
ASI Preferred Stock were also amended whereby 80,000 shares will be redeemed
on January 1, 1998 and 40,249 and 40,250 shares will be redeemable on January
1, 1999 and January 1, 2000, respectively. In consideration for the Strouse
Stockholders agreeing to postpone their Put Rights, the number of shares of
Aristotle Common Stock into which each share of ASI Preferred Stock may be
exchanged was increased from 1.282 to 1.667 shares. In addition, the amendment
provides that the Company may release from escrow (see Note 3) $400,000,
$200,000 and $100,000 on each of January 1, 1998, January 1, 1999 and January
1, 2000, respectively, to be used to satisfy the Put Rights.
 
  In connection with the Acquisition, Aristotle also issued 270,379 shares of
$.01 par value voting redeemable preferred stock, which shares will not have
the right to receive dividends and will not share in the proceeds from any
liquidation of the assets of Aristotle (the "Aristotle Preferred Stock"). The
Aristotle Preferred Stock has one vote per share, with respect to matters
other than the election of directors and auditors. As a condition to the
exercise of any Warrant, the exercise of the Put Right, or the redemption of
the ASI Preferred Stock, the Strouse Stockholders must redeem the Aristotle
Preferred Stock for $.001 per share. The Aristotle Preferred Stock will
automatically be redeemed, for $.001 per share, at various dates beginning on
and after April 11, 1997, or upon the cessation of the voting rights of the
Aristotle Preferred Stock. During fiscal 1997 and 1996, 54,167 and 20,715
shares, respectively, of Aristotle Preferred Stock were redeemed in connection
with the fiscal 1997 and 1996 Put Rights and a 1997 employment termination
(see above). At June 30, 1997, 195,497 shares of Aristotle Preferred Stock
were outstanding.
 
  The Acquisition Agreements provided for loans from the Company at 8.9%
interest to the Strouse Stockholders aggregating $707,000, of which $308,000
and $354,000 were outstanding at June 30, 1997 and 1996, respectively. In
connection with the Acquisition, a former executive officer borrowed $92,000
from Aristotle, with such note receivable secured by a pledge agreement
between the former executive officer and Aristotle. The loan provided that
$46,000 in principal was due to Aristotle in April 1997. This April 1997
obligation was satisfied by the executive officer by assignment of 4,617
shares of ASI Preferred Stock to Aristotle which had an aggregate redemption
value of $46,170 (see above). In connection with the September 1997
 
                                      15
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
amendment to the ASI Preferred Stock (see above), the Company and the Strouse
Stockholders amended the loans whereby $100,000 will be satisfied by the
fiscal 1998 assignment of 10,000 shares of ASI Preferred Stock (see above) and
$104,000 will mature on each of January 1, 1999 and January 1, 2000.
 
  The Acquisition Agreements also provide that the Strouse Stockholders have
the right to require a partial unwinding (the "Partial Unwinding") of the
Acquisition if the net worth of Aristotle, as defined in the Acquisition
Agreements, falls below $1,000,000 during a five-year period subsequent to
April 11, 1994. A Partial Unwinding would result in the return by ASI to the
Strouse Stockholders of 59% of the outstanding common stock of Strouse in
exchange for an amount of ASI Preferred Stock, Aristotle Common Stock and cash
that, taken together, have the aggregate value of $2,100,000.
 
  If, after April 11, 1994, an Acceleration Event occurs, then the Strouse
Stockholders may require that ASI immediately repurchase the ASI Preferred
Stock or immediately exchange the ASI Preferred Stock for Aristotle Common
Stock. An "Acceleration Event" includes the sale of all of the stock or assets
of Strouse, ASI or Aristotle; a merger or reorganization involving Strouse,
ASI or Aristotle in which Strouse, ASI or Aristotle is not the survivor; the
bankruptcy or insolvency of Strouse, ASI or Aristotle; or the breach by
Strouse, ASI or Aristotle of certain obligations to the Strouse Stockholders.
 
  Pursuant to the Acquisition Agreements, ASI and Strouse are bound by certain
standstill provisions until approximately April 11, 1999, including, without
limitation, limitations on the payment of dividends, the incurring of certain
indebtedness, the granting of any lien, the issuance of securities, and the
amendment of their certificates of incorporation and bylaws.
 
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS:
 
 Principles of consolidation--
 
  The consolidated financial statements include the accounts of Aristotle and
its majority owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
 
 Cash and cash equivalents--
 
  Cash and cash equivalents include cash and highly liquid investments with an
original maturity of three months or less.
 
 Inventories--
 
  Inventories are valued at the lower of cost, using the last-in, first-out
method (LIFO), or market.
 
  As a result of the application of purchase accounting to the Acquisition in
1994, the financial accounting basis of the Company's inventories changed,
while the basis for federal income tax reporting purposes did not.
Accordingly, as of June 30, 1997, the LIFO inventories reflected in the
accompanying consolidated balance sheet are stated at an amount $1,884,000
greater than LIFO inventories reported for federal income tax purposes.
 
  At June 30, 1997 and 1996, inventories consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                   1997    1996
                                                                  ------- ------
   <S>                                                            <C>     <C>
   Raw materials................................................. $ 2,123 $2,173
   Work-in-process...............................................   2,652  2,346
   Finished goods................................................   5,216  4,159
                                                                  ------- ------
                                                                    9,991  8,678
   LIFO reserve..................................................     954    800
                                                                  ------- ------
                                                                  $10,945 $9,478
                                                                  ======= ======
</TABLE>
 
 
                                      16
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
  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, 1997 and 1996, property and equipment consisted of the following
(in thousands):
 
<TABLE>
<CAPTION>
                                                                 1997     1996
                                                                -------  ------
   <S>                                                          <C>      <C>
   Machinery and equipment..................................... $ 1,782  $1,536
   Furniture and fixtures......................................      21      18
   Leasehold improvements......................................     280     269
   Equipment under capital lease...............................     600     600
                                                                -------  ------
                                                                  2,683   2,423
   Less accumulated depreciation and amortization..............  (1,208)   (739)
                                                                -------  ------
                                                                $ 1,475  $1,684
                                                                =======  ======
</TABLE>
 
  Expenditures for repairs and maintenance are charged against income as
incurred. Renewals and betterments are capitalized.
 
 Goodwill--
 
  The excess of cost over the fair value of net tangible and identifiable
intangible assets acquired resulted from the Acquisition and is being
amortized using the straight-line method over 40 years.
 
  The Company continually evaluates whether events and circumstances have
occurred which indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable.
 
 Income (loss) per share--
 
  Income (loss) per share is computed using the weighted average common
shares. For purposes of computing primary net income (loss) per share,
weighted average shares for fiscal 1997, 1996 and 1995 were 1,134,126,
1,130,727 and 1,113,250, respectively. For fiscal 1996, the weighted average
shares for purposes of the fully-diluted calculation was 1,441,383, and for
fiscal 1997 and 1995 the effect of conversion of the underlying securities
would have been anti-dilutive.
 
 Revenue recognition--
 
  The Company recognizes revenue as the product is shipped to its customers.
 
 Co-op advertising--
 
  The Company grants customers a co-op advertising credit relating to
qualified advertising and promotional costs incurred by the customer in
promoting the Company's products. These credits are recognized in the
Company's consolidated financial statements as the advertising costs are
incurred.
 
                                      17
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
 
 Principal supplier--
 
  In 1997, 1996 and 1995, approximately 98%, 95% and 85%, respectively, of the
Company's products were manufactured and sewn in the Caribbean, with
approximately 72%, 68% and 60%, respectively, of the Company's products
assembled in Santo Domingo, Dominican Republic.
 
 Restructuring charges--
 
  In 1995, the Company recognized a $219,000 restructuring charge related to
curtailing certain manufacturing operations at the New Haven facility and the
termination of employees.
 
 Concentration of sales and credit risk--
 
  Net sales to three customers accounted for approximately 15%, 15% and 10% of
total net sales in 1997, three customers accounted for approximately 17%, 13%
and 12% of total net sales in 1996 and two customers accounted for
approximately 14% and 11% of total net sales in 1995.
 
  Substantially all of the Company's accounts receivable reflected in the
accompanying consolidated balance sheets are from a diverse group of
retailers. At June 30, 1997 and 1996, two customers accounted for
approximately 17% and 14% of accounts receivable and one customer accounted
for approximately 19% of accounts receivable, respectively.
 
 Investments in debt and equity securities--
 
  During 1994, the Company adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115), which requires that, except for debt securities classified as
"held-to-maturity securities", investments in debt and equity securities be
reported at fair value. Implementation did not have a material effect on the
financial results of the Company.
 
 Long-lived assets--
 
  In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of" (SFAS 121). SFAS
121 requires a company to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of this standard did not have a
material impact on the Company's results of operations or financial position.
 
 Disclosures about fair value of financial instruments--
 
  The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
 
  Cash, accounts receivable, marketable securities, employee notes
  receivable, payables, accrued expenses and FDIC tax refund claim--
 
    For these short-term account balances, the carrying amount is a
  reasonable estimate of fair value.
 
  Notes payable and long-term debt--
 
    The carrying amount is a reasonable estimate of fair value as the debt is
  frequently repriced and there has been no significant change in credit
  risks and interest rates since the financing was obtained or repriced.
 
 Use of estimates--
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
 
                                      18
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Recently issued accounting standards--
 
  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128),
which establishes new standards for computing and presenting earnings per
share. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997 and earlier application is not permitted. The
Company does not believe that the adoption of SFAS 128 will have a material
impact on reported earnings per share.
 
3. MARKETABLE SECURITIES HELD IN ESCROW:
 
  At June 30, 1997 and 1996, the Company had placed in escrow $1,200,000 and
$6,253,000, respectively, of which the 1997 escrow funds were comprised of
$700,000 related to obligations to the Strouse Stockholders (see below) and
$500,000 related to the Company's financing arrangements (see Note 4). The
1996 escrow funds were comprised of $493,000 related to obligations to the
Strouse Stockholders and $5,760,000 related to a FDIC claim (see below).
 
  To enable the Strouse Stockholders to effectuate the Partial Unwinding, to
secure the obligations of the Company to pay dividends on the ASI Preferred
Stock and to repurchase the ASI Preferred Stock if the Strouse Stockholders
exercise their Put Rights (see Note 1), the Company has pledged 59% of the
outstanding common stock of Strouse and has placed funds in escrow. Strouse
also granted to the Strouse Stockholders a security interest in all of its
assets to secure such obligations.
 
  Under an agreement with the Office of Thrift Supervision and a court order
with the FDIC, as of June 30, 1996, the Company had placed $5,760,000 (the
"Principal Amount") in two escrow accounts (the "FDIC Escrow Accounts") that
were established to provide a vehicle to pay possible amounts arising from
disputed tax refunds based on a tax sharing agreement between Aristotle and
the Bank. The Company was allowed to withdraw interest and dividend income
earned on $3,982,000 of the Principal Amount. The potential amount of the full
loss arising from the disputed tax refunds was provided for in 1993. In August
1996, the Company entered into a settlement agreement whereby $3,760,000 of
the escrow was remitted to the FDIC and $2,000,000 was retained by the Company
(see Note 5).
 
  The funds relating to the above mentioned escrow arrangements have been
invested in U.S. Treasuries and high-grade corporate debentures which mature
at various dates through 1998. These securities have been classified as
available for sale and an unrealized holding gain (loss) of approximately
$10,000 and $6,000 is recorded as a component of stockholders' equity as of
June 30, 1996 and 1995, respectively.
 
                                      19
<PAGE>
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                             JUNE 30, 1997 AND 1996
 
 
  Investment securities available for sale relating to the above escrow
arrangements are summarized as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                 JUNE 30, 1997
                                              --------------------
                                              AMORTIZED UNREALIZED GROSS MARKET
                                                COST      GAINS       VALUE
                                              --------- ---------- ------------
   <S>                                        <C>       <C>        <C>
   Company obligations:
     U.S. Treasuries maturing in less than 1
      year..................................   $  150     $ --        $  150
     Cash equivalents and interest receiv-
      able..................................    1,050       --         1,050
                                               ------     -----       ------
       Total................................   $1,200     $ --        $1,200
                                               ======     =====       ======
<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 receiv-
      able..................................      166       --           166
                                               ------     -----       ------
                                                  493       --           493
                                               ------     -----       ------
   FDIC Escrow Accounts re: tax claim:
     U.S. Treasuries maturing in 1 to 5
      years.................................    1,793         5        1,798
     Corporate debt maturing in 1 to 5
      years.................................    1,885         5        1,890
     U.S. Treasury securities maturing 1 to
      5 years...............................    1,778       --         1,778
     Cash equivalents and interest receiv-
      able..................................      294       --           294
                                               ------     -----       ------
                                                5,750        10        5,760
                                               ------     -----       ------
       Total................................   $6,243     $  10       $6,253
                                               ======     =====       ======
<CAPTION>
                                                 JUNE 30, 1995
                                              --------------------
                                              AMORTIZED UNREALIZED GROSS MARKET
                                                COST      GAINS       VALUE
                                              --------- ---------- ------------
   <S>                                        <C>       <C>        <C>
   Company obligations:
     U.S. Treasuries maturing in 1 to 5
      years.................................   $  171     $ --        $  171
     Corporate debt maturing in 1 to 5
      years.................................      157       --           157
     Cash equivalents and interest receiv-
      able..................................      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 receiv-
      able..................................      143       --           143
                                               ------     -----       ------
                                                3,976         6        3,982
                                               ------     -----       ------
       Total................................   $4,676     $   6       $4,682
                                               ======     =====       ======
</TABLE>
 
                                       20
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
 
4. NOTES PAYABLE AND LONG-TERM DEBT:
 
  Notes payable and long-term debt at June 30, 1997 and 1996, consisted of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                1997     1996
                                                               -------  -------
   <S>                                                         <C>      <C>
   Borrowings under bank line of credit....................... $ 6,075  $ 5,613
   Term notes payable to bank.................................   1,867    2,000
   Aristotle bank line of credit..............................      75      --
   Capital lease obligation...................................     141      374
   Other......................................................     --       165
                                                               -------  -------
     Total....................................................   8,158    8,152
   Less current maturities....................................  (6,488)  (6,055)
                                                               -------  -------
                                                               $ 1,670  $ 2,097
                                                               =======  =======
</TABLE>
 
 Line of credit and term notes--
 
  As of June 30, 1997, Strouse had outstanding borrowings of $7,942,000
pursuant to a Bank debt facility (the Credit Agreement). In September 1997,
Strouse obtained a commitment from its bank to amend the Credit Agreement
whereby the maximum borrowings under the Revolving Loan was increased from
$8,000,000 to $10,000,000, the Overadvance was adjusted, the fiscal 1997
excess cash flow prepayment was waived and the $500,000 pledge held in escrow
(see Note 3) was released.
 
  The Credit Agreement provides for a Revolving Loan and a $2,000,000 Term
Loan. Borrowings of up to $10,000,000 are available under the Revolving Loan,
with such borrowings limited to 80% of eligible accounts receivable, 50% of
eligible raw material inventory and 60% of eligible finished goods inventory,
as defined. In addition to the primary borrowings, the Credit Agreement will
permit advances to exceed the formula amounts (the seasonal "Overadvance") by
up to $1,000,000 through December 1997, $1,250,000 from January 1998 through
March 1998, $1,000,000 during April 1998 and reducing to $500,000 thereafter
(so long as the total line-of-credit is not more than the maximum borrowings
allowed and the Overadvance reduces to zero for 30 consecutive days per
annum). The Credit Agreement matures in September 1999.
 
  The interest rate on the Revolving Loan will vary from prime to prime plus
1.0% or Eurodollar plus 1.75% to Eurodollar plus 3% per annum based on the
level of total liabilities to total net worth, as defined. In addition, the
amended credit agreement provides for a .35% per annum commitment fee on the
unused portion of the Revolving Loan.
 
  The Term Loan will bear interest at prime plus .75%, Eurodollar plus 2.5% or
at a fixed rate of cost of funds plus 2.25%. The Term Loan has a three year
term expiring in September 1999 and requires principal payments to reduce the
amount outstanding based on a ten year amortization.
 
  Under the provisions of the Credit Agreement, Strouse would be required to
prepay its Term Loan by an amount, if any, equal to 25% of its excess cash
flow, as defined, for a fiscal year.
 
  The Credit Agreement requires that Strouse maintain certain financial ratios
in connection with these loans. These covenants, which use the first-in,
first-out (FIFO) inventory costing methodology, requires that Strouse maintain
(a) an interest coverage ratio, as defined, of 1.75 to 1.0, (b) a debt service
coverage ratio, as defined, of 1.10 to 1.0 through June 30, 1998 and 1.20 to
1.0 thereafter, (c) a debt to net worth ratio, as defined, of 5.0 to 1.0 at
September 30, 1997 and decreasing thereafter to 4.0 to 1.0 in fiscal 1999 and
(d) a profitability requirement, as defined.
 
                                      21
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
 
  Borrowings under the Credit Agreement are collateralized by substantially
all of the assets of Strouse and are guaranteed by Aristotle and ASI, with
each guaranty limited to $2,000,000. As of June 30, 1997, Aristotle has
secured its guaranty with $500,000 held by and pledged to the Bank (see Note
3). In addition, the Credit Agreement restricts the amount of dividends that
Strouse can pay to ASI or Aristotle.
 
 Aristotle bank line of credit--
 
  During 1997, Aristotle entered into a $300,000 line of credit agreement that
bears interest at prime and which has an August 31, 1998 maturity. At June 30,
1997, $75,000 was outstanding under this agreement. The line of credit is
secured by the collateral assignment of a demand promissory note executed by
Strouse.
 
 Capital lease obligation--
 
  During fiscal 1995, Strouse entered into a capital lease obligation with one
of their principal suppliers to lease the supplier's land, building, machinery
and equipment. Under the terms of the lease, Strouse makes quarterly payments
of $87,500, $93,750, and $66,250, for principal, interest and executor costs,
for calendar years 1996, 1997 and 1998, respectively. The imputed interest
rate on the obligation is 9.0% per annum. Included in the accompanying
consolidated balance sheet is $600,000 of land, building and equipment under
capital lease, net of accumulated depreciation of $193,000 and $116,000 at
June 30, 1997 and 1996, respectively, resulting from this lease commitment.
Through May 1, 1998, Strouse has the option to purchase the land, building,
machinery and equipment for $784,000.
 
  Aggregate maturities of all long-term debt and notes payable for each of the
succeeding five years subsequent to June 30, 1997 and thereafter are as
follows (in thousands):
 
<TABLE>
<CAPTION>
            YEAR ENDING
            JUNE 30,                                 AMOUNT
            -----------                              ------
            <S>                                      <C>
            1998.................................... $6,488
            1999....................................  1,670
                                                     ------
                Total............................... $8,158
                                                     ======
</TABLE>
 
5. COMMITMENTS AND CONTINGENCIES:
 
 Lease commitments--
 
  The Company leases space in its New Haven facility from a related party. The
agreement provides that the Company will pay for its prorated portion of
operating expenses associated with the building. In addition, Strouse leases
showroom space in New York City. Rent expense under these operating leases
amounted to approximately $462,000, $454,000 and $474,000 for the years ended
June 30, 1997, 1996 and 1995, respectively.
 
  At June 30, 1997, approximate future minimum payments including current
escalations for operating expenses under these operating leases are as follows
(in thousands):
 
<TABLE>
<CAPTION>
            YEAR ENDING
             JUNE 30,                                AMOUNT
            -----------                              ------
            <S>                                      <C>
            1998....................................  $452
            1999....................................   433
            2000....................................   384
            2001....................................   332
            2002 and thereafter.....................   528
</TABLE>
 
 
                                      22
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
 
 Guarantee--
 
  Strouse has guaranteed annuity payments to the participants of a terminated
Company pension plan. The payments are currently being satisfied under an
annuity contract with an insurance company.
 
 Contingencies--
 
  In April 1995, the FDIC filed a complaint related to the matter captioned
Federal Deposit Insurance Corporation vs. The Aristotle Corporation, in the
United States District Court for the District of Connecticut. The FDIC claimed
that it was entitled to income tax refunds previously received and yet to be
received by Aristotle.
 
  In addition, the Company was aware that the FDIC was preparing claims
against certain former officers and directors of the Bank based on alleged
negligence in approving certain loans that the Bank made and subsequently lost
money on when borrowers defaulted. Under Delaware law and under Aristotle's
bylaws, Aristotle may have had an obligation to indemnify these officers and
directors for expenses and liabilities incurred by them in connection with any
action the FDIC brought to enforce its claims.
 
  The Company, the FDIC and certain other interested parties entered into a
settlement agreement dated May 29, 1996 regarding the foregoing asserted
claims and potential claims (the "FDIC Claims"). Under the settlement
agreement, the Company retained $2,000,000 of the disputed $5,760,000 in tax
refunds. Accordingly, the Company has recorded an income tax benefit, net of
legal costs, as a result of the above agreement (see Note 7). The FDIC
received the balance of the tax refunds. The FDIC and Aristotle each dismissed
the above-captioned action, as it related to the other party. As part of the
settlement agreement, the FDIC released Aristotle, certain of Aristotle's
former officers and directors, and certain officers and directors of the Bank
from any claims pertaining to the operations or failure of the Bank. Aristotle
released the FDIC from all claims relating to the Bank.
 
  During 1990, two separate purported stockholder class actions were commenced
in the United States District Court for the District of Connecticut and a
consolidated complaint, captioned In Re: First Constitution Stockholders
Litigation, was filed on August 3, 1990 (the "Stockholder Litigation"). The
consolidated complaint alleged, among other things, that during the purported
class period (January 25, 1989 to April 5, 1990), the Company, a former
director and certain former officers acted to inflate the price of the
Aristotle Common Stock by issuing materially false and misleading statements
on omissions. The consolidated complaint also alleged claims based on common
law fraud and misrepresentation, and sought unspecified damages, as well as
recovery of attorneys' fees.
 
  On May 23, 1996, the plaintiffs, Aristotle and the individual defendants
entered into a Stipulation and Agreement of Settlement pursuant to which,
among other things, the Stockholder Litigation would be settled for
$2,300,000, which, following the payment of attorneys' fees and costs, would
be distributed to class members who timely submitted valid proofs of claim.
Aristotle's directors and officers liability insurance carrier has funded the
entire settlement amount. By order and judgment dated August 2, 1996, the
Court approved the settlement and dismissed the Stockholder Litigation with
prejudice.
 
 Other commitments--
 
  In April 1994, the Company entered into five-year employment agreements (the
"Employment Agreements") with three officers. In addition to providing for
base salaries, the Employment Agreements provide for (a) 6% annual increases
if certain levels of EBIT are achieved, and (b) an annual cash bonus and the
annual
 
                                      23
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
grant of stock options to purchase ASI Common Stock, if certain other levels
of EBIT are achieved. The annual bonus increases proportionately from 20% of
salary for achieving the minimum level of EBIT to 100% of salary for achieving
EBIT of more than double the minimum level of EBIT. The annual stock options
increase proportionately from 10,000 shares of ASI Common Stock for achieving
the minimum level of EBIT to 20,000 shares for achieving EBIT of more than
double the minimum level of EBIT. The stock options will be exercisable at the
market price on the date that they are granted. The number of stock options
granted to each employee will be based on the amount of his or her salary in
relation to the amounts of the salaries of the other employees who are parties
to such Employment Agreements. During 1994, approximately $93,000 of bonuses
were accrued of which approximately $75,000 was recorded in the Acquisition
discussed in Note 1. In conjunction therewith, the Strouse Stockholders were
issued options to purchase 10,208 shares of ASI Common Stock, with such
options immediately exercisable at date of grant. There was no bonus earned
for the fiscal year ended August 31, 1996 and there is no similar bonus
accrued for as of June 30, 1997 as management does not expect to meet the EBIT
target.
 
6. STOCKHOLDERS' EQUITY:
 
  The Company had the following common, treasury and preferred stock issued
and outstanding at June 30, 1997, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                           ARISTOTLE
                                                           REDEEMABLE
                                                  COMMON   PREFERRED  TREASURY
                                                   STOCK     STOCK     STOCK
                                                 --------- ---------- --------
   <S>                                           <C>       <C>        <C>
   Outstanding, June 30, 1994................... 1,105,801  270,379    21,610
   Issuance of treasury stock to directors......       --       --     (5,417)
   Redemption of fractional shares..............       --       --      1,168
                                                 ---------  -------   -------
   Outstanding, June 30, 1995................... 1,105,801  270,379    17,361
   Issuance of treasury stock to directors......       --       --    (16,074)
   Exercise of Put Right (Note 1)...............       --   (20,715)      --
                                                 ---------  -------   -------
   Outstanding, June 30, 1996................... 1,105,801  249,664     1,287
   Purchases of treasury stock..................       --       --      6,000
   Exercise of Put Right (Note 1)...............       --   (52,989)      --
   Forfeiture of Put Right (Note 1).............       --    (1,178)      --
                                                 ---------  -------   -------
   Outstanding, June 30, 1997................... 1,105,801  195,497     7,287
                                                 =========  =======   =======
</TABLE>
 
  Aristotle common shares reserved for future issuance consist of the
following:
 
<TABLE>
<CAPTION>
                                                                 1997    1996
                                                                ------- -------
   <S>                                                          <C>     <C>
   Conversion of ASI Preferred Stock..........................  218,588 288,022
   Conversion of ASI Common Stock (Note 1)....................   33,424  33,424
   Exercise of ASI Options (Note 1)...........................   35,208  35,208
   Exercise of stock options granted under the Plan (Note 8)..   43,935  44,435
   Exercise of stock options granted outside of the Plan (Note
    8)........................................................   20,000  20,000
                                                                ------- -------
       Total..................................................  351,155 421,089
                                                                ======= =======
</TABLE>
 
                                      24
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
 
7. INCOME TAXES:
 
  The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 utilizes the liability method and deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of
enacted tax laws.
 
  At June 30, 1997 and 1996, the principal components of deferred tax assets,
liabilities and the valuation allowance are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               1997
                                                     -------------------------
                                                                    LONG-TERM
                                                     CURRENT ASSET    ASSET
                                                      (LIABILITY)  (LIABILITY)
                                                     ------------- -----------
   <S>                                               <C>           <C>
   Federal net operating loss carryforwards.........     $ --        $ 2,200
   State of Connecticut net operating loss
    carryforwards...................................       --            666
   Inventory purchase accounting basis difference...      (754)          --
   Other............................................       218           (87)
                                                         -----       -------
                                                          (536)        2,779
   Valuation allowance..............................       (94)       (2,149)
                                                         -----       -------
                                                         $(630)      $   630
                                                         =====       =======
<CAPTION>
                                                               1996
                                                     -------------------------
                                                                    LONG-TERM
                                                     CURRENT ASSET    ASSET
                                                      (LIABILITY)  (LIABILITY)
                                                     ------------- -----------
   <S>                                               <C>           <C>
   Federal net operating loss carryforwards.........     $ --        $   736
   State of Connecticut net operating loss
    carryforwards...................................       --            306
   Inventory purchase accounting basis difference...      (675)          --
   Other............................................       215           (63)
                                                         -----       -------
                                                          (460)          979
   Valuation allowance..............................      (170)         (349)
                                                         -----       -------
                                                         $(630)      $   630
                                                         =====       =======
</TABLE>
 
  A valuation allowance has been recorded for the deferred tax assets as a
result of uncertainties regarding the realization of the asset, including the
lack of profitability to date and the variability of operating results.
 
  (Charges) benefits for income taxes are comprised of the following for the
years ended June 30, 1997, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                        1997     1996     1995
                                                       ------- --------  -------
                                                       (DOLLARS IN THOUSANDS)
   <S>                                                 <C>     <C>       <C>
   Current:
     Federal.......................................... $  --   $  1,650  $  --
     State............................................    (32)      (24)    (25)
                                                       ------  --------  ------
                                                       $  (32) $  1,626  $  (25)
                                                       ======  ========  ======
</TABLE>
 
  The 1996 federal tax benefit relates to the settlement of the FDIC tax
refund complaint (See Note 5). The state tax provisions relate principally to
minimum state and franchise taxes.
 
                                      25
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
 
  At June 30, 1997, the Company had Federal net operating loss carryforwards
of approximately $6,400,000 (expiring by 2012) and Connecticut net operating
loss carryforwards of approximately $6,300,000 (expiring by 2002).
 
  On its return for 1992 as originally filed, the Company made elections under
provisions set forth in regulations proposed by the Internal Revenue Service
in April 1992 as guidance for the application of Section 597 of the Internal
Revenue Code of 1986, as amended and under Section 1.1502.20(g)(1) of the
Federal Income Tax Regulations to (i) disaffiliate from the Bank for Federal
income tax purposes and (ii) reattribute net operating losses of the Bank in
excess of $81,000,000 to the Company. The application of the tax law with
respect to the Company's election to disaffiliate from the Bank and to
reattribute the Bank's net operating losses to the Company is not certain and,
therefore, there is no assurance that the Company could succeed to any of the
Bank's net operating losses.
 
  In September, 1996, the Company filed amended Federal and state income tax
returns for the year ending December 31, 1992 claiming a worthless stock
deduction of approximately $54,000,000 with respect to its stock in the Bank.
As a result, it has also claimed tax refunds of approximately $10,000,000
resulting from the carryback of the Company's net operating loss to prior
years. On the basis of these amended filings, the Company's remaining Federal
net operating loss carryforward related to the worthless stock deduction would
be approximately $32,000,000 and the reattribution to the Company of the
Bank's net operating losses may be limited if the position taken by the
Company on its amended returns is allowed. The amended state tax return did
not result in a claim for refund. Rather, it increased the Company's net
operating loss carryforward by approximately $54,000,000. In addition, the
Company will be filing an additional carryback claim of approximately
$1,400,000 resulting from the settlement of the FDIC claim (see Note 5) which,
if allowed, would reduce the $6,400,000 Federal net operating loss
carryforward (see above) to $2,200,000. The Company's refund claims have not
yet been reviewed or allowed by the Internal Revenue Service, and there is no
assurance that they will be allowed. Accordingly, neither the refund claim nor
the future benefit of the worthless stock deduction have been reflected as tax
assets in the accompanying consolidated financial statements.
 
  The Company's ability to utilize tax carryforwards is dependent upon many
factors including, (1) the acquisition by the Company of profitable
investments, and (2) avoiding a fifty percent "ownership change" as defined in
Section 382 of the Internal Revenue Code. If there is an "ownership change",
the tax loss carryforwards available to the Company would be significantly
reduced or eliminated. At a special stockholders meeting held on April 8, 1994
the stockholders voted to restrict certain stockholder transfers.
 
8. STOCK OPTION PLAN AND PROFIT SHARING PLAN:
 
  In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 requires the measurement of the fair value
of stock options or warrants to be included in the statement of income or
disclosed in the notes to financial statements. The Company has determined
that it will continue to account for stock-based compensation for employees
under Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS 123.
 
  The Company established a Stock Option Plan (the "Plan") in 1986, which
provided for the granting of nonincentive and incentive stock options to
directors and officers of the Company for the purchase of Aristotle common
stock. Nonincentive stock options and certain incentive stock options granted
under the Plan are generally exercisable after one year but within ten years
as of the date of the grant. Additionally, certain nonincentive stock options
granted under the Plan may be accompanied by stock appreciation rights
("SAR").
 
                                      26
<PAGE>
 
                   THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                            JUNE 30, 1997 AND 1996
 
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 is as follows:
 
<TABLE>
<CAPTION>
                                                                        WEIGHTED
                                                                        AVERAGE
                                                               NUMBER   EXERCISE
                                                              OF SHARES  PRICE
                                                              --------- --------
   <S>                                                        <C>       <C>
   Options outstanding, July 1, 1994.........................   60,537  $ 44.48
   Options granted...........................................    4,500     5.45
   Options cancelled or expired..............................  (10,000)   12.50
                                                               -------  -------
   Options outstanding, June 30, 1995........................   55,037    47.10
   Options cancelled or expired..............................  (10,602)  129.55
                                                               -------  -------
   Options outstanding, June 30, 1996........................   44,435  $ 27.42
   Options cancelled or expired..............................     (500)    5.45
                                                               -------  -------
   Options outstanding, June 30, 1997........................   43,935  $ 27.67
                                                               =======  =======
</TABLE>
 
  All outstanding options were exercisable at June 30, 1997. As of June 30,
1996, the Company elected not to grant any additional future options under the
Plan.
 
  In addition to the options outstanding under the foregoing Plans, the
Company has granted a director of the Company stock options to purchase 20,000
common stock shares at $5.40 per share, with 10,000 of such options vesting on
each of August 5, 1995 and 1996 and exercisable through August 5, 2004.
 
  Strouse has a deferred profit sharing plan (the "Profit Plan"). Under the
Profit Plan, Strouse will match 25% of employee contributions not to exceed 4%
of participants' annual compensation. Eligibility is based on attaining
twenty-one years of age and completing one year of service, as defined within
the Profit Plan. Strouse contributions will vest 20% in year 3 and an
additional 20% per year thereafter until full vesting is achieved. Strouse
contributions were approximately $28,000, $25,000 and $35,000 for the years
ended June 30, 1997, 1996 and 1995, respectively.
 
9. RELATED PARTY TRANSACTIONS:
 
  During the years ended June 30, 1997, 1996 and 1995, the Company paid its
directors $58,000, $64,000 and $62,000, respectively, in compensation for
services as directors of the Company.
 
                                      27
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholders of
 The Aristotle Corporation:
 
  We have audited the accompanying consolidated balance sheets of The
Aristotle Corporation (a Delaware corporation) and subsidiary as of June 30,
1997 and 1996, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the three years ended June
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Aristotle Corporation
and subsidiary as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended June 30,
1997 in conformity with generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Hartford, Connecticut
September 23, 1997
 
                                      28
<PAGE>
 
                        FORM 10-K CROSS REFERENCE INDEX
 
<TABLE>   
 <C>         <S>                                                            <C>
 PART I
    Item 1.  Business....................................................    30
    Item 2.  Properties..................................................    33
    Item 3.  Legal Proceedings...........................................    33
    Item 4.  Submission of Matters to a Vote of Security Holders.........    34
 PART II
    Item 5.  Market for Registrant's Common Equity and Related
             Stockholder Matters.........................................    35
    Item 6.  Selected Financial Data.....................................    35
    Item 7.  Management's Discussion and Analysis of Financial Condition
             and Results of Operations...................................    35
    Item 8.  Financial Statements and Supplementary Data.................    35
    Item 9.  Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure....................................    35
 PART III
    Item 10. Directors and Executive Officers of the Registrant..........    36
    Item 11. Executive Compensation......................................    40
    Item 12. Security Ownership of Certain Beneficial Owners and
             Management..................................................    42
    Item 13. Certain Relationships and Related Transactions..............    43
 PART IV
    Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
             8-K.........................................................    45
</TABLE>    
 
                                       29
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
  General. Aristotle is a holding company for its subsidiary, ASI. ASI is a
holding company for Strouse. Strouse designs, manufactures and markets women's
intimate apparel. Unless the context indicates otherwise, all references
herein to the "Company" include Aristotle, ASI and Strouse.
 
  Products. The Company designs, manufactures and markets two specific
categories of women's intimate apparel: specialty brassieres and women's
shapewear. Specialty brassieres are specifically designed to provide support
and figure enhancement for women who are wearing apparel with backless,
strapless or halter features, such as strapless and/or low back line dresses
and gowns, halter tops and wedding gowns. The Company maintains a strong
market position in three particular categories of specialty brassieres:
strapless, backless strapless, and backless convertible/halter. Women's
shapewear products provide support and control for a woman's abdominal area in
the same manner as the traditional girdle. Such shapewear products include so-
called "body briefers," and light, medium and firm control shapers that may
extend from the bottom of a woman's brassiere to just above her knee. For
fiscal year 1997, approximately 34% of the Company's total net sales were
attributable to its lines of specialty brassieres, and the remaining 66% of
total net sales were attributable to its lines of women's shapewear.
 
  The Company has three product lines: SA, Smoothie, and Slimlook. Each of the
three businesses has its own strategy for product, consumer, and position in
the marketplace. The SA (Sophisticated Alternatives) consumer is very
contemporary with design and fabric driving the purchase decision. These
products are targeted at the more upscale department stores (i.e., Nordstroms,
Neiman Marcus, and Saks Fifth Avenue). The Smoothie consumer is fashionable
with function, design, and value driving her purchase decisions. These
products are targeted at both the traditional (i.e., Macy's, Lord & Taylor,
Foley's) and upscale department stores. The Slimlook consumer is more
traditional with function and value driving the purchase decision. These
products are targeted at the traditional department stores.
 
  The Company distributes its products under several brand names, including
Smoothie, Slimlook, Fleur de Lace, Smooth Advantage, Sophistique, Waist
Eliminator and Does What Your Diet Doesn't. Its core brand name, Smoothie, is
42 years old. See the Consolidated Financial Statements contained elsewhere in
this report for financial information relating to the Company's business.
 
  Business Strategy. Aristotle's strategy is to acquire other companies,
including companies within the women's specialty intimate apparel field with
manufacturing processes and distribution channels which complement Strouse's
operations. Although Aristotle is not currently engaged in a search for an
acquisition target, Aristotle intends to review any acquisition opportunities
which come to its attention. Strouse's strategy is to build on the strength of
its brand names with consumer-oriented marketing programs in its existing
department and specialty store channels of distribution and to expand its
distribution on a selective basis in the private label segment with specific
product lines in catalogs and national chains. Strouse attributes the strength
of its private label and brand names to the quality, price, fit and design of
its products.
 
  Marketing and Distribution. The Company's products are marketed and
distributed throughout the United States to retailers. A network of 13 sales
executives, who are full-time employees of the Company, are responsible for
marketing the Company's products in the continental United States. These sales
executives are compensated by a combination of salary and commissions based
upon net sales. Alfred A. Kniberg, President and Chief Operating Officer of
Strouse, oversees the sales executives and takes an active role in supervising
the marketing and distribution process.
 
  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
 
                                      30
<PAGE>
 
Company has sold private label goods to accounts such as Victoria's Secret,
Dillard's and J.C. Penney. Three of the Company's corporate customers,
Federated Department Stores, Inc., May Company and Victoria's Secret,
individually accounted for more than 10% of total net sales for fiscal 1997
and in total accounted for 40% of total net sales for fiscal 1997. If any one
of these three customers substantially reduced the amount of products it
purchased from the Company, the Company's financial condition could be
adversely affected.
 
  The Company believes that there has been a consolidation of retailers into
larger entities during the past few years. In addition, retailers have
attempted to consolidate the purchases of their products by reducing their
number of suppliers. The Company cannot predict what effect, if any, these
trends will have on its business.
 
  The Company's sales are not substantially affected by seasonal consumption.
However, the Company generally experiences reduced sales during the months of
December and January.
   
  Manufacturing and Raw Materials. The Company conducts some manufacturing
operations, consisting primarily of cutting, sewing (approximately 2% of
sewing) and packaging, at its facility located in New Haven, Connecticut. All
other manufacturing of the Company's products is subcontracted to
manufacturers in the Caribbean (primarily the Dominican Republic and Jamaica)
and the continental United States. Approximately 98% of the Company's products
are manufactured and sewn in the Caribbean, with approximately 72% of the
Company's products manufactured and sewn in the Dominican Republic. The
Company subcontracts to two facilities in the Dominican Republic, one facility
in Jamaica and one facility in Columbia. 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, though it does not
affect the Company's ability to obtain raw materials. Strouse continues to
seek to develop multiple sources of manufacturing.     
 
  On September 17, 1997, Strouse signed an amended agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., regarding the lease of its
manufacturing facility in Jamaica. The lease began January 1, 1995 and has
been extended for an additional twelve months until January 1, 1999 and
provides for an option to purchase the facility during the lease period. The
amended lease also provides for a reduction of the quarterly payments made to
Maggie Manufacturing Company, Ltd. for calendar year 1998. Management believes
that the lease agreement will help provide the capacity needed to support
future growth. Approximately 25% of the Company's products are manufactured
and sewn in Jamaica.
 
  The design and manufacture of specialty brassieres and women's shapewear are
complex; requiring specialized and sophisticated machinery and tools. The
complex design and manufacturing process results in a higher per unit cost and
a lower volume of units being produced, as compared to the design and
manufacture of simpler garments.
   
  The Company uses various synthetic fibers and natural materials, such as
cotton, in the manufacture of its products. These raw materials are generally
available from multiple sources and the Company currently obtains raw
materials from approximately 90 sources; the Company purchases the majority of
its raw materials from sources within the United States. In the event that a
supplier would no longer be able to supply certain raw materials to the
Company, the Company would have access to substitute raw materials. However,
there can be no assurance that the Company would have immediate access to
these substitute raw materials on a timely basis. Any delays in obtaining raw
materials could cause the Company to experience delays in production.     
 
  Competition. The women's intimate apparel industry is highly competitive.
The Company's products compete for customers with numerous manufacturers of
well-known brands of women's intimate apparel. With respect to specialty
brassieres, the Company's primary competition is from the True Form, Warners,
Carnival, Playtex and Vanity Fair lines of specialty brassieres; with respect
to shapewear, the Company competes primarily with the Olga, Vanity Fair, True
Form, Playtex and Bali lines of shapewear.
 
  The principal competitive factors in the intimate apparel market are
quality, price, fit and design of products, engineering, customer and brand
loyalty, and customer service (including maintenance of sufficient inventories
for timely delivery). Many of the Company's competitors have greater financial
and other resources and are, therefore, able to expend more resources and
effort than the Company in areas such as marketing and product development.
 
                                      31
<PAGE>
 
  Employees. As of September 19, 1997, the Company employed 158 full time
personnel. None of the Company's employees are members of a union.
 
  Bank Financing. In September 1997, Strouse obtained a commitment from Bank
of Boston Connecticut ("Bank of Boston") to amend its existing credit
agreement whereby the maximum borrowing under the line-of-credit was increased
to $10,000,000 from $8,000,000. The amendment adjusted the overadvance,
released the $500,000 pledge by Aristotle to secure the guarantee of the line-
of-credit facility and term loan facility (the "Credit Facilities") and waived
the fiscal 1997 excess cash flow prepayment.
 
  Borrowing under the line-of-credit is determined by a borrowing base which
is equal to the sum of 80% of eligible accounts receivable, plus 50% of
eligible raw material inventory, plus 60% of eligible finished goods inventory
with a maximum borrowing of $10,000,000 at any one time. In addition, the
line-of-credit facility permits advances to exceed the borrowing base amount
by up to $1,000,000 through December 1997, $1,250,000 from January 1998
through March 1998, $1,000,000 during April 1998 and reducing to $500,000
thereafter through September 1999 (so long as the total line-of-credit is not
more than the $10,000,000 and the overadvance is reduced to zero for 30
consecutive days per annum). The principal amount of the term loan is
$2,000,000. The credit agreement matures in September 1999. Strouse uses the
Credit Facilities for working capital and other general corporate purposes.
 
  The interest on the line-of-credit will vary from prime to prime plus 1.0%
or Eurodollar plus 1.75% to Eurodollar plus 3.0% per annum based on the
financial performance of Strouse. The term loan bears interest at the option
of the Company at a rate per annum equal to prime plus .75%, Eurodollar plus
2.5% or at a fixed rate of Bank of Boston's cost of funds plus 2.25%. The term
loan has a three-year term and requires principal payments to reduce the
amount outstanding based on a ten-year amortization.
 
  The Credit Facilities are secured by a lien on all assets of Strouse.
Aristotle and ASI have unconditionally guaranteed the Credit Facilities.
Recourse under each guaranty is limited to $2,000,000. The Credit Agreement
further provides that Strouse may not pay dividends to ASI or Aristotle
without Bank of Boston's prior written consent. Strouse must maintain certain
financial ratios and satisfy various other covenants in connection with the
Credit Facilities (See Note 4 of Notes to Consolidated Financial Statements).
 
  As of September 3, 1997, the balance outstanding on the line-of-credit was
$7,140,000 and the balance outstanding on the term loan was $1,833,000. As of
September 3, 1997, the additional borrowing available on the overadvance was
$750,000.
 
  During 1997, Aristotle entered into a line-of-credit agreement with Citizens
Bank for $300,000. The line-of-credit bears interest at prime and matures on
August 31, 1998. The line-of-credit is secured by the collateral assignment of
a demand promissory note executed by Strouse. As of September 3, 1997, the
balance outstanding on the line-of-credit was $75,000.
 
  Background Regarding Aristotle. Aristotle is the former holding company of
First Constitution Bank (the "Bank"), which was Aristotle's only subsidiary
and which, on October 2, 1992, was seized by the FDIC. On April 11, 1994,
Aristotle acquired (the "Acquisition") Strouse pursuant to the terms of a
Capital Contribution Agreement and certain other agreements. As a result of
the Acquisition, Aristotle currently owns approximately 97% of the issued and
outstanding common stock of ASI, which in turn owns all of the outstanding
capital stock of Strouse. Aristotle therefore currently indirectly owns 97% of
the issued and outstanding capital stock of Strouse and Aristotle's business
is the business of Strouse. In May 1994, the Company effectuated a one for ten
reverse stock split.
 
  Aristotle was organized in 1986 and is chartered in the State of Delaware.
On April 14, 1993, the Company changed its name from First Constitution
Financial Corporation to The Aristotle Corporation.
 
                                      32
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company's principal facility is located in New Haven, Connecticut (the
"New Haven Facility"). Such facility is leased from New England Resources
Limited Partnership ("NERLP"), consists of approximately 117,500 square feet
which provides for annual rent of approximately $3.76 per square foot, and
houses Strouse's general administrative offices. In addition, the New Haven
Facility is used for manufacturing, packaging, storage, quality control,
receiving and distribution. Effective September 1, 1997, the lease for the New
Haven Facility was amended. Under the terms of the new lease, an additional
5,500 square feet was added for a total of 123,000 square feet without any
additional increase in the aggregate annual net rent payable. The term of the
lease was extended an additional three years and will expire on December 31,
2002. The new lease provides for the annual net rent payable in calendar years
1998 and 1999 to be reduced by $90,000 in the aggregate ($3,000 per month in
calendar year 1998 and $4,500 per month in calendar year 1999) and the net
rent payable in the year 2000 to be reduced to $2.76 per square foot. Each
subsequent year the net rent shall be increased annually by the lesser of 5%
or the increase in the CPI for the prior twelve-month period. In addition,
NERLP may not exercise its right to terminate the lease prior to December 31,
1999 and must give Strouse two years notice. NERLP is affiliated with David S.
Howell, a former director of the Company and the former Chairman and Chief
Executive Officer of Strouse, and Ann-Marie Howell, a former Vice President
and the former Secretary of Strouse.
 
  On September 17, 1997, Strouse signed an amended agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., regarding the lease of its
manufacturing facility in Jamaica. The lease began January 1, 1995 and has
been extended for an additional twelve months until January 1, 1999 and
provides for an option to purchase the facility during the lease period for
$784,000. Under the terms of the lease, Strouse makes quarterly payments of
$87,500, $93,750, and $66,250, for calendar years 1996, 1997 and 1998,
respectively.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is a party to the following material legal proceedings:
 
  The Stockholders Litigation. During 1990, two separate purported stockholder
class actions were commenced in the United States District Court for the
District of Connecticut and a consolidated complaint, captioned In Re: First
Constitution Stockholders Litigation, was filed on August 3, 1990 (the
"Stockholder Litigation"). The consolidated complaint alleged, among other
things, that during the purported class period (January 25, 1989 to April 5,
1990), the Company, a former director and certain former officers acted to
inflate the price of Common Stock of Aristotle (the "Common Stock") by issuing
materially false and misleading statements or omissions. The consolidated
complaint also alleged claims based on common law fraud and misrepresentation,
and sought unspecified damages, as well as recovery of attorneys' fees.
 
  On May 23, 1996, plaintiffs, Aristotle and the individual defendants entered
into a Stipulation and Agreement of Settlement pursuant to which, among other
things, the Stockholder Litigation would be settled for $2,300,000 which,
following the payment of attorney's fees and costs, would be distributed to
class members who timely submitted valid proofs of claim. Aristotle's
directors and officers liability insurance carrier has funded the entire
settlement amount. By order and judgment dated August 2, 1996, the Court
approved the settlement and dismissed the Stockholder Litigation with
prejudice.
 
  FDIC Claims. In April 1995, the FDIC filed a complaint captioned Federal
Deposit Insurance Corporation vs. The Aristotle Corporation, in the United
States District Court for the District of Connecticut (Civil No.
395CV00684TFGD). The FDIC claimed that it was entitled to income tax refunds
for certain tax years that were received or were about to be received by
Aristotle. Aristotle established a reserve of $3,982,000 for this potential
claim as of June 30, 1993. Approximately $5,740,000 in tax refunds were
deposited in special escrow accounts (the "FDIC Escrow Accounts").
 
  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
 
                                      33
<PAGE>
 
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.
 
                                      34
<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
                                                                 -------------
                                                                  HIGH   LOW
                                                                 ------ ------
   <S>                                                           <C>    <C>
   FISCAL YEAR ENDED JUNE 30, 1997:
   June 30...................................................... 4      2
   March 31..................................................... 3 1/8  1 7/8
   December 31.................................................. 4 3/8  2 1/8
   September 30................................................. 4 3/4  3
   FISCAL YEAR ENDED JUNE 30, 1996:
   June 30...................................................... 4 1/4  2 1/8
   March 31..................................................... 6      2 1/8
   December 31.................................................. 5 1/4  2
   September 30................................................. 5      2 3/4
</TABLE>
 
  The Common Stock is listed for trading on the NASDAQ SmallCap Market under
the symbol "ARTL." As of September 8, 1997, there were approximately 4,000
stockholders of record and 2,500 additional beneficial stockholders
(stockholders holding Common Stock in brokerage accounts). Pursuant to the
Acquisition Agreement, the Company may not pay any dividends with respect to
its Common Stock. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and Note 1 of the Notes to Consolidated
Financial Statements.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  Selected consolidated financial data of the Company can be found on page 2
of this report.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
 
  "Management's Discussion and Analysis of Financial Condition and Results of
Operations" can be found on pages 3 to 8 of this report.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The Consolidated Financial Statements of the Company and its subsidiary,
together with the related Notes to Consolidated Financial Statements and the
report of independent auditors, can be found on pages 9 to 30 of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  On October 3, 1994, the Board of Directors appointed Arthur Andersen LLP to
serve as independent accountants for the Company, subject to ratification of
such appointment by the stockholders. The information required by this Item 9
has been previously reported in the Company's current report on Form 8-K filed
with the Securities and Exchange Commission on October 21, 1994, as amended.
 
                                      35
<PAGE>
 
       
                                   PART III
       
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   
  The Amended Bylaws of the Company provide that the number of directors shall
not be less than eight nor more than 15, as fixed by the Board of Directors.
The Amended and Restated Certificate of Incorporation and the Amended and
Restated Bylaws (the "Amended Bylaws") of the Company provide that the
directors are divided into three classes, as equal in number as possible, with
terms expiring in successive years. Directors are elected for terms of three
years and until their successors are elected and qualified. At the Annual
Meeting, three directors will be elected for three-year terms.     
   
  As of the date of the last annual meeting, there were eight (8)
directorships.     
   
  Pursuant to a Capital Contribution Agreement (the "Capital Contribution
Agreement") dated November 19, 1993 between the Company, Aristotle Sub, Inc.
("ASI"), The Strouse, Adler Company ("Strouse") and the former shareholders of
Strouse, in which the Company acquired indirect ownership of Strouse (the
"Acquisition"), the Company agreed to appoint Alfred A. Kniberg and John C.
Warfel to the Board of Directors.     
   
INFORMATION AS TO NOMINEES AND CONTINUING DIRECTORS     
   
  It is the intention of the persons named in the proxy to vote the shares
represented by each properly executed proxy for the election as director of
all of the persons named below as nominees, unless contrary instructions are
given on the proxy. The Board of Directors believes that all of the nominees
will stand for election and will serve if elected. However, if any of the
persons nominated by the Board of Directors fails to stand for election or
becomes unable to accept election, the proxies will be voted for the election
of such other person or persons as a majority of the Board of Directors may
recommend.     
   
  The following table sets forth the names of the Board of Directors' three
nominees for election as directors. Also shown is certain other information,
some of which has been obtained from the Company's records and some of which
has been supplied by the nominees and continuing directors, with respect to
each nominee's or director's principal occupation or employment during the
past five years, his or her age at October 1, 1997, the periods during which
he or she has served as a director of the Company and the positions currently
held with the Company.     
 
<TABLE>   
<CAPTION>
                                             DIRECTOR OF THE POSITIONS HELD WITH
NOMINEES                                 AGE  COMPANY SINCE      THE COMPANY
--------                                 --- --------------- -------------------
<S>                                      <C> <C>             <C>
Robert L. Fiscus........................  60      1991            Director
Betsy Henley-Cohn.......................  44      1993            Director
John C. Warfel..........................  45      1994            Director
</TABLE>    
   
  ROBERT L. FISCUS is President and Chief Financial Officer of The United
Illuminating Company, a publicly-held electric utility company, where he
previously served as Executive Vice President and Chief Financial Officer. Mr.
Fiscus has been employed by The United Illuminating Company since 1972. Mr.
Fiscus is also a member of the Board of Directors of The United Illuminating
Company.     
   
  BETSY HENLEY-COHN is Chairperson of Birmingham Utilities, Inc., a water
utility in Ansonia, Connecticut, and Joseph Cohn & Son, Inc., in New Haven,
Connecticut. Ms. Henley-Cohn has been employed by Birmingham Utilities, Inc.
since 1993 and by Joseph Cohn & Son, Inc. since 1978. She also serves as a
director of The United Illuminating Company and Citizens Bank of Connecticut.
    
                                      36
<PAGE>
 
   
  JOHN C. WARFEL has been the Senior Vice President, Administration and
Finance of Starter Corporation, a leading sports apparel manufacturer since
March 1995. He has been employed by Starter Corporation since 1988 and has
previously served as its Chief Financial Officer.     
 
<TABLE>   
<CAPTION>
                                              DIRECTOR OF
                                              THE COMPANY  POSITIONS HELD WITH
CONTINUING DIRECTORS                      AGE    SINCE         THE COMPANY
--------------------                      --- -----------  -------------------
<S>                                       <C> <C>         <C>
Directors with terms expiring in 1998:
John J. Crawford......................... 52     1989     Director, President,
                                                          Chief Executive
                                                          Officer and Chairman
                                                          of the Board
Alfred A. Kniberg........................ 54     1994     Director and
                                                          President and Chief
                                                          Operating Officer of
                                                          Strouse
Sharon M. Oster.......................... 49     1992     Director
Directors with terms expiring in 1999:
Barry R. Banducci........................ 61     1993     Director
Daniel J. Miglio......................... 57     1990     Director
</TABLE>    
   
  BARRY R. BANDUCCI has been self-employed as an investor/consultant since
February 1994, having retired from The Equion Corporation, a manufacturer of
automotive/industrial-related products, in January 1994. Mr. Banducci served
as the President, the Chief Executive Officer and a director of The Equion
Corporation prior to his retirement in 1994. Mr. Banducci serves as the
Chairman of the Board of Directors of TransPro, Inc., a publicly-held
manufacturer of automotive-related products.     
   
  JOHN J. CRAWFORD has been President and Chief Executive Officer of the
Company since April 2, 1990 and Chairman of the Board since April 1993. Since
July 1994, Mr. Crawford has served the Company in a part-time capacity. Mr.
Crawford is also the Chief Executive Officer of the Regional Water Authority,
a utility located in New Haven, Connecticut. Mr. Crawford is also a member of
the Board of Directors of Webster Financial Corporation.     
   
  ALFRED A. KNIBERG has been the President and Chief Operating Officer of
Strouse since 1989. Prior to joining Strouse, Mr. Kniberg spent 23 years with
Playtex Apparel, Inc. ("Playtex"), serving in various general management,
marketing and sales positions. Immediately prior to joining Strouse, Mr.
Kniberg held positions as Vice President/General Manager of Playtex Westfar
International Division and for U.S. Private Label. In addition to appointing
Mr. Kniberg as a director pursuant to the Capital Contribution Agreement,
pursuant to the terms of an Employment Agreement between Mr. Kniberg and the
Company, the Company has agreed to nominate Mr. Kniberg to the Board of
Directors through the term of his Employment Agreement, currently expiring on
December 31, 1998.     
   
  DANIEL J. MIGLIO is the Chairman and Chief Executive Officer of Southern New
England Telecommunications Corporation ("SNET"), a publicly-held
telecommunications company. He has been employed by SNET since 1962 and has
previously served as its President and the Senior Vice President of Finance
and Planning. Mr. Miglio is the Chairman and Chief Executive Officer of
Southern New England Telephone Company, a subsidiary of SNET.     
   
  SHARON M. OSTER has been a Professor of Economics at the School of
Organization and Management, Yale University since 1982. Ms. Oster is a
director of two publicly-held companies, Health Care REIT, a real estate
investment company, and TransPro, Inc., a manufacturer of
automotive/industrial-related products.     
 
                                      37
<PAGE>
 
   
BOARD OF DIRECTORS' COMMITTEES AND NOMINATIONS BY STOCKHOLDERS     
   
   To select nominees for election as directors, the Board of Directors of the
Company has appointed a Nominating Committee which, on August 28, 1997, made
its nominations for the Annual Meeting. The Nominating Committee did not meet
during the year ended June 30, 1997. The members of this committee were
Messrs. Crawford and Kniberg and Ms. Oster. The Company's Amended Bylaws
provide that to be eligible for nomination as a director of the Company, a
person must be a resident of the State of Connecticut or have been previously
a resident for at least three years. The Amended Bylaws further provide that
nominations of persons for election to the Board of Directors may be made by
the Board of Directors, or by any stockholder entitled to vote for the
election of directors at the meeting who provides timely notice in writing to
the Secretary of the Company and who complies with the requirement to set
forth certain information specified in Article III, Section 13 of the Amended
Bylaws concerning each person the stockholder proposes to nominate for
election and the nominating stockholder. To be timely, notice must be
delivered to, or mailed to and received at, the principal executive offices of
the Company not less than 30 days nor more than 90 days prior to the date of
the meeting, provided that at least 45 days' notice or prior public disclosure
of the date of the meeting is given or made to stockholders. Public disclosure
of the date of the Annual Meeting was made by issuance of a press release on
September 16, 1997. No stockholder nominations for directors have been
submitted in connection with the Annual Meeting.     
   
  The Board of Directors has appointed a standing Audit Committee, which
during the year ended June 30, 1997 conducted two (2) meetings. The members of
the Audit Committee were Mr. Fiscus, Mr. Warfel and Ms. Oster. The duties of
the Audit Committee include reviewing the financial statements of the Company
and the scope of the independent annual audit and internal audits. It also
reviews the independent accountants' letter to management concerning the
effectiveness of the Company's internal financial and accounting controls, and
reviews and recommends to the Board of Directors the firm to be engaged as the
Company's independent accountants. The Audit Committee may also examine and
consider such other matters relating to the financial affairs and operations
of the Company as it determines to be appropriate.     
   
  The Board of Directors of the Company also has appointed a Human Resources
and Stock Option Committee comprised of three directors, which during the year
ended June 30, 1997 conducted one (1) meeting. The Human Resources and Stock
Option Committee reviews the salary structure and policies of the Company,
administers the Company's stock option plan, selects the eligible persons to
whom stock options or stock appreciation rights will be granted, and
prescribes the terms and provisions of each such option or right. The members
of the Human Resources and Option Committee during the year ended June 30,
1997 were Ms. Henley-Cohn and Messrs. Fiscus and Miglio.     
   
   During the year ended June 30, 1997, the Board of Directors of the Company
held eight (8) meetings. During fiscal 1997, none of the directors attended
less than 75% of the total number of meetings of the Board of Directors and
committees of which they were members, except for Ms. Oster who attended 70%
of such meetings and Mr. Banducci who attended 69% of such meetings.     
   
COMPENSATION OF DIRECTORS     
   
  During each fiscal year, directors of the Company, other than officers, each
receive a retainer of $6,000, payable in Common Stock. The Common Stock is
payable in six month intervals and is valued based on its average market value
during the ten days preceding the payment date. In addition to the retainer,
the Chairman and the members of board committees receive $350 or $300,
respectively, for each committee meeting attended. During the year ended June
30, 1997, the Company did not pay the retainer. Accordingly, the Company has
accrued a $6,000 retainer for each non-employee director, or an aggregate of
$40,000.     
   
  Non-employee directors are eligible to receive grants of stock options under
the Company's 1997 Employee and Director Stock Plan (the "1997 Stock Plan").
The 1997 Stock Plan provides for the automatic grant of non-qualified options
to non-employee directors of the Company. Each non-employee director, upon
first being
    
                                      38
<PAGE>
 
   
elected to the Board of Directors, will receive an option to purchase 2,500
shares, which will vest after completion of one year of service on the Board
of Directors, and each non-employee director serving on the Board of Directors
on October 30, 1997 will receive an immediately exercisable option to purchase
2,500 shares. Additionally, the 1997 Stock Plan provides for a grant to each
non-employee director on the date of his or her reelection (provided that the
director has served as a director since his or her initial election) of an
option to purchase 1,000 shares, which vests upon completion of one year of
service on the Board of Directors. See "--Material Features of the 1997 Stock
Plan."     
                               
                            EXECUTIVE OFFICERS     
   
  The following table sets forth, as of October 1, 1997, the names of the
Company's current executive officers who are not directors, their ages, and
all positions held with the Company. All executive officers serve at the
discretion of the Board of Directors, subject to Employment Agreements that
the Company has entered into with each of the executive officers other than
Mr. Topf. See "Executive Compensation--Employment Agreements."     
 
<TABLE>   
<CAPTION>
                  NAME                  AGE        POSITION WITH COMPANY
                  ----                  ---        ---------------------
 <C>                                    <C> <S>
 Joyce I. Baran........................  50 Vice President of Merchandising
                                             and Design--Strouse
 Paul M. McDonald......................  44 Chief Financial Officer and Secre-
                                             tary--the Company;
                                             Chief Financial Officer and Sec-
                                             retary--Strouse
 Barry Topf............................  59 Vice President of Manufacturing--
                                             Strouse
</TABLE>    
   
  The principal occupations of the executive officers for the last five years
are set forth below.     
   
  JOYCE I. BARAN has served as Vice President of Merchandising and Design of
Strouse since 1990. Prior to joining Strouse, Ms. Baran was the Director of
Design and Merchandising for Ithaca Industries, Inc., an intimate apparel
manufacturer, and prior to that spent 20 years with Warnaco Group, Inc., an
apparel manufacturer, in design and other product-related positions.     
   
  PAUL M. MCDONALD has been the Chief Financial Officer of the Company since
November 1994. Mr. McDonald has been the Secretary of the Company since April
1994. In addition, Mr. McDonald has been the Chief Financial Officer and a
Director of Strouse since 1989 and the Secretary of Strouse since September
1995. Prior to joining Strouse, Mr. McDonald was the Controller for Playtex's
European operations.     
   
  BARRY TOPF has been the Vice President of Manufacturing of Strouse since
October 1996. From April 1994 to October 1996, Mr. Topf was a consultant and
worked on operating and planning projects related to manufacturing for various
companies, including Nantucket ("Guess") Industries and Natori. From September
1991 to April 1994, Mr. Topf was the Senior Vice President of Operations of
Warners, a division of Warnaco, Inc.     
 
                                      39
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION
          
  The following table sets forth certain information for the periods indicated
regarding cash and other compensation paid to, earned by, or awarded to the
Company's Chief Executive Officer and certain other executive officers of the
Company (collectively, the "Named Officers") whose salary and bonus exceeded
$100,000 during the fiscal year ended June 30, 1997.     
                         
                      SUMMARY COMPENSATION TABLE (1)     
 
<TABLE>   
<CAPTION>
                                                             LONG TERM
                                  ANNUAL COMPENSATION      COMPENSATION
                                  -----------------------  -------------
                                                              OPTIONS        ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR SALARY $    BONUS $ (2)  AWARDED (3) # COMPENSATION $ (4)
---------------------------  ---- --------    -----------  ------------- ------------------
<S>                          <C>  <C>         <C>          <C>           <C>
John J. Crawford........     1997 $ 60,000(5)   $     0            0           $    0
 President, Chief            1996   60,000(5)         0            0                0
 Executive Officer and       1995   60,000(5)         0       20,000                0
 Chairman of the Board--
 the Company
Alfred A. Kniberg.......     1997  162,816            0            0            2,225
 President and Chief         1996  162,816            0            0            2,077
 Operating Officer--         1995  162,816        5,634        2,545            1,810
 Strouse
Joyce Baran.............     1997  160,000            0            0            2,001
 Vice President              1996  131,900            0            0            1,660
 Merchandising and           1995  127,952        4,219        1,905            1,775
 Design-- Strouse
Paul McDonald...........     1997  108,947       20,000(6)         0            1,408
 Chief Financial Officer     1996  108,947            0            0            1,520
 and Secretary--the          1995  108,947        3,770        1,703            1,284
 Company; Chief
 Financial Officer and
 Secretary--Strouse
</TABLE>    
--------
   
(1) The Capital Contribution Agreement provides that Messrs. Kniberg and
    McDonald and Ms. Baran, as former stockholders of Strouse (together with
    others, the "Former Strouse Stockholders"), are entitled to additional
    consideration, the amount of which is based upon the future net income
    before interest, dividends and income taxes of Strouse ("EBIT") for the
    twelve-month periods ended August 31, 1994, August 31, 1995 and August 31,
    1996. The Summary Compensation Table does not include such additional
    consideration paid in the fiscal year ended June 30, 1995 to the Former
    Strouse Stockholders as former stockholders of Strouse. No such additional
    consideration was paid to the Former Strouse Stockholders for the twelve-
    month periods ended August 31, 1995 and August 31, 1996 because Strouse
    did not achieve the EBIT targets for such twelve-month periods.     
   
(2) Pursuant to the terms of the Employment Agreements, if a specified level
    of Strouse Pre-Tax Income (as defined below) was achieved in fiscal 1997,
    the Named Officers, excluding Mr. Crawford, could have received bonuses
    for fiscal 1997. However, Strouse did not achieve the Strouse Pre-Tax
    Income target and such bonuses were not paid. Amounts of bonuses for the
    fiscal year ended June 30, 1995 for Messrs. Kniberg and McDonald and for
    Ms. Baran reflect bonuses earned for the months of July and August 1994.
    See "Executive Compensation--Employment Agreements."     
   
(3) Options awarded to Mr. Crawford are options to purchase Common Stock.
    Options awarded to all other Named Officers are options (the "ASI
    Options") to purchase common stock of ASI (the "ASI Common Stock").
    Contemporaneously with the award of any ASI Option, the Named Officers are
    issued an identical number of warrants by the Company that enable the
    Named Officers, after the exercise of the ASI Options, to convert each
    share of ASI Common Stock into one share of Common Stock after January 1,
    1999 for no additional consideration. ASI Options are awarded in each
    fiscal year pursuant to the terms of the Employment Agreements. See
    "Executive Compensation--Employment Agreements."     
   
(4) Other compensation for the Named Officers, excluding Mr. Crawford, is
    comprised of the following: in fiscal 1997, $650, $120 and $471 paid for
    term life insurance premiums and an estimated $1,575, $1,288 and $1,530 to
    be paid as a matching contribution pursuant to the Strouse Cash or
    Deferral Profit Sharing Plan (the "Plan") for Messrs. Kniberg and McDonald
    and Ms. Baran, respectively.     
   
(5) In fiscal 1997, salary includes $20,000 in shares of Common Stock to be
    issued to Mr. Crawford. In fiscal 1996, salary includes $20,000 in shares
    of Common Stock to be issued to Mr. Crawford. In fiscal 1995, salary
    includes 4,405 treasury shares of Common Stock issued to Mr. Crawford as
    salary. The fair market value of the 4,405 shares on the date of grant was
    $20,000.     
   
(6) In fiscal 1997, the Company paid Mr. McDonald a $20,000 bonus in
    recognition of certain additional services rendered to the Company by Mr.
    McDonald. The payment of this bonus was not pursuant to the terms of Mr.
    McDonald's Employment Agreement.     
 
                                      40
<PAGE>
 
                       
                    OPTION GRANTS IN LAST FISCAL YEAR     
   
  There were no stock options granted to the Named Officers during the
Company's last fiscal year.     
     
  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
                                  VALUES     
   
  The following table sets forth certain information regarding unexercised
stock options held as of June 30, 1997, by the Named Officers. No stock
options were exercised by the Named Officers during the past fiscal year.     
 
<TABLE>   
<CAPTION>
                               NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                              UNDERLYING UNEXERCISED     IN-THE-MONEY OPTIONS
                             OPTIONS AT FY-END (1) (#)     AT FY-END (2) ($)
                             ------------------------- -------------------------
            NAME             EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
            ----             ----------- ------------- ----------- -------------
<S>                          <C>         <C>           <C>         <C>
John J. Crawford............   32,500           0            0            0
Alfred A. Kniberg...........    2,545           0            0            0
Joyce Baran.................    1,905           0            0            0
Paul McDonald...............    1,703           0            0            0
</TABLE>    
--------
   
(1) Options awarded to Mr. Crawford are options to purchase Common Stock.
    Options awarded to all other Named Officers are ASI Options to purchase
    ASI Common Stock. Contemporaneously with the award of any ASI Option, the
    Named Officers are issued an identical number of warrants by the Company
    that enable the Named Officers, after the exercise of the ASI Options, to
    convert each share of ASI Common Stock into one share of Common Stock
    after April 12, 1996 for no additional consideration. ASI Options are
    awarded in each fiscal year pursuant to the terms of the Employment
    Agreements. See "Executive Compensation--Employment Agreements."     
   
(2) All of the options held by the Named Officers have exercise prices that
    are greater than the fair market value of the Common Stock as of June 30,
    1997, which was $3.125 per share. Such options are not "in-the-money" and
    their value is, therefore, zero. Since the ASI Common Stock is convertible
    into Common Stock for no additional consideration, the closing bid price
    per share of the Common Stock on June 30, 1997 has been used as the market
    price of the ASI Common Stock on June 30, 1997.     
   
EMPLOYMENT AGREEMENTS     
   
  In connection with the Acquisition, the Company entered into Employment
Agreements (the "Employment Agreements") in 1994 with Messrs. Kniberg and
McDonald and Ms. Baran. In 1995 and 1996, the Company agreed to amend Ms.
Baran's Employment Agreement and in 1997 the Company agreed to amend all of
the Employment Agreements. Pursuant to the Employment Agreements, such
officers currently receive base salaries of $172,816, $149,000 and $168,000,
respectively. The Employment Agreements are for five year terms ending in
1999. In addition to providing for base annual salaries, such agreements
provide for an annual cash bonus and stock option to purchase Common Stock of
ASI (the "ASI Common Stock"), if certain levels of pre-tax income for Strouse
("Strouse Pre-Tax Income") are achieved. In fiscal 1997, the minimum and
maximum levels of Strouse Pre-Tax Income required in order for the employees
to receive the minimum and maximum cash bonus and stock option under the
Employment Agreements was $867,487 and $1,156,650, respectively. The annual
bonus increases proportionately from 20% of salary for achieving the minimum
level of Strouse Pre-Tax Income to 50% of salary for achieving the maximum
level of Strouse Pre-Tax Income. The annual stock option increases
proportionately from 4,000 shares of ASI Common Stock for achieving the
minimum level of Strouse Pre-Tax Income to 10,000 shares for achieving the
maximum level of Strouse Pre-Tax Income. The stock options will be exercisable
at the market price on the date that they are granted. The stock options will
be distributed equally among the three employees. Strouse did not achieve the
minimum level of Strouse Pre-Tax Income in fiscal 1997. The Employment
Agreements also provide that if an employee's employment is terminated without
cause, then the Company will pay the employee a severance pay equal to one
year's salary and bonus, payable in twelve monthly installments.     
 
                                      41
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              
           STOCK OWNED BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS     
   
  The following table sets forth, as of September 24, 1997, certain
information regarding beneficial ownership of the Common Stock and the
Preferred Stock by: (i) each person who is known to the Company to own
beneficially more than 5% of the outstanding shares of either the Common Stock
or the Preferred Stock; (ii) each director of the Company; (iii) each
executive officer of the Company who is a Named Officer; and (iv) all
executive officers and directors of the Company as a group. Unless otherwise
indicated, all persons listed below have sole voting and investment power with
respect to their shares and the address for each such person is The Aristotle
Corporation, 78 Olive Street, New Haven, Connecticut. In preparing the
following table, the Company has relied on information furnished by such
persons.     
 
<TABLE>   
<CAPTION>
                               NUMBER OF SHARES
                               OF CAPITAL STOCK              PERCENT OF CLASS AND
                            BENEFICIALLY OWNED (1)             VOTING POWER (2)
                            ----------------------------    ------------------------
5% STOCKHOLDERS, DIRECTORS    COMMON         PREFERRED      COMMON  PREFERRED VOTING
  AND EXECUTIVE OFFICERS      STOCK            STOCK        STOCK     STOCK   POWER
--------------------------  -----------     ------------    ------  --------- ------
<S>                         <C>             <C>             <C>     <C>       <C>
5% Stockholders:
 Howell Resource
   Partners (3)..........             0          82,237       *  %    42.07%   6.36%
 David S. Howell.........         1,075 (4)      82,237(5)    *       42.07    6.44
 Ann-Marie Howell........         1,075 (6)      82,237(5)    *       42.07    6.44
 Alfred A. Kniberg.......             0          58,274       *       29.81    4.51
 Paul McDonald...........             0          19,532(7)    *        9.99    1.51
Directors:
 John J. Crawford........        78,929 (8)           0      6.98         *    5.95
 Barry R. Banducci.......         7,260 (9)           0       *           *       *
 Robert L. Fiscus........         8,560(10)           0       *           *       *
 Betsy Henley-Cohn.......        29,600(11)           0      2.69         *    2.29
 Daniel J. Miglio........         8,360(12)           0       *           *       *
 Sharon M. Oster.........        33,080(13)           0      3.01         *    2.55
 John C. Warfel..........         5,653(14)           0       *           *       *
Named Officers (excluding
  Messrs. Crawford,
  Kniberg and McDonald):
 Joyce Baran.............             0           4,797       *        2.45       *
                            -----------      ----------     -----     -----   -----
 All Executive Officers
   and Directors as a
   group (15) (10
   persons)..............       166,442          82,603     14.64     42.25   18.69
                            ===========      ==========     =====     =====   =====
</TABLE>    
--------
   
 * Less than 1%     
   
(1) The table does not include warrants (the "Warrants") issued by the Company
    to Howell Resource Partners ("HRP"), Alfred A. Kniberg, Paul McDonald, and
    Joyce Baran as former stockholders of Strouse in connection with the
    Acquisition. The Warrants permit HRP, Messrs. Kniberg and McDonald and Ms.
    Baran to exchange the ASI Common Stock and preferred stock of ASI held by
    them for an aggregate of 172,382 shares of Common Stock at times between
    January 1, 1999 and January 1, 2003. The table includes the $6,000
    retainer that is payable in Common Stock to each of the six (6) non-
    employee directors for fiscal 1997. If the retainer for fiscal 1997 were
    paid on September 8, 1997, each non-employee director would have received
    1,883 shares of Common Stock, or .15% of the total voting power of the
    Company's capital stock.     
   
(2) Percentages are calculated by including as part of the total number of
    issued and outstanding shares of Common Stock those stock options which
    are currently exercisable by the individual whose share ownership
    percentage is being calculated, in accordance with the applicable
    securities regulations.     
 
                                      42
<PAGE>
 
   
(3) HRP is a general partnership whose general partners are David S. Howell
    and Ann-Marie Howell. HRP is the direct beneficial owner of such 82,237
    shares. The address of HRP and Mr. and Mrs. Howell is 151 River Road,
    Essex, Connecticut.     
   
(4) Includes 1,000 shares held by Mr. Howell jointly with his wife, Ann-Marie
    Howell; and 75 shares held by Mr. Howell's step-son, Eric M. Hines. Mr.
    Howell disclaims beneficial ownership of the 75 shares held by his step-
    son.     
   
(5) Mr. Howell and Mrs. Howell are the general partners of HRP (discussed in
    footnote 3 above), and have the power to vote the 82,237 shares. Mr.
    Howell and Mrs. Howell therefore share voting and dispositive power with
    respect to the 82,237 shares and are indirect beneficial owners of such
    shares.     
   
(6) Includes 1,000 shares held by Mrs. Howell jointly with her husband, David
    S. Howell; and 75 shares held by Mrs. Howell's son, Eric M. Hines. Mrs.
    Howell disclaims beneficial ownership of the 75 shares held by her son.
           
(7) Includes 16,659 shares held by Mr. McDonald directly and 2,873 shares held
    by Janney Montgomery Scott, Inc. under a custodial agreement for Mr.
    McDonald's benefit. Mr. McDonald disclaims beneficial ownership of the
    2,873 shares held by Janney Montgomery Scott, Inc.     
   
(8) Includes 36,799 shares held by Mr. Crawford directly; 5,000 shares held in
    trust for which Mr. Crawford serves as custodian with power to vote the
    shares; 4,580 shares held in his wife's name; 50 shares held in the name
    of his daughter; and stock options, which are currently exercisable, to
    purchase 32,500 shares.     
   
(9) Includes 6,302 shares held by Mr. Banducci directly; and stock options,
    which are currently exercisable, to purchase 958 shares.     
   
(10 Includes 7,123 shares held by Mr. Fiscus directly; and stock options,
    which are currently exercisable, to purchase 1,437 shares.     
   
(11) Includes 6,302 shares held by Ms. Henley-Cohn directly; 14,340 shares
     held in trusts in which Mrs. Henley-Cohn has the power to vote the
     shares; 8,000 shares held equally by Ms. Henley-Cohn's son and daughter,
     5,000 of which are disclosed in footnote 8 above as part of Mr.
     Crawford's shares held in trust for which Mr. Crawford serves as
     custodian with power to vote the shares; and stock options, which are
     currently exercisable, to purchase 958 shares.     
   
(12) Includes 6,923 shares held by Mr. Miglio directly; and stock options,
     which are currently exercisable, to purchase 1,437 shares.     
   
(13) Includes 8,743 shares held by Ms. Oster directly and 22,900 held by Ms.
     Oster's husband; and stock options, which are currently exercisable, to
     purchase 1,437 shares.     
   
(14) Includes 5,174 shares held by Mr. Warfel directly; and stock options,
     which are currently exercisable, to purchase 479 shares.     
   
(15) In addition to the foregoing capital stock of the Company, HRP, Messrs.
     Kniberg and McDonald and Ms. Baran own 24,446, 18,832, 7,397 and 3,302
     shares of ASI Common Stock, respectively (assuming that all of the ASI
     Options held by such individuals are exercised). HRP and Mr. Kniberg own
     2.1% and 1.6%, respectively, of the ASI Common Stock. None of the other
     stockholders owns more than 1% of the ASI Common Stock. HRP, Messrs.
     Kniberg and McDonald and Ms. Baran also own 72,784, 45,599, 13,565 and
     3,436 shares of preferred stock of ASI, respectively, representing 45.3%,
     28.4%, 8.5%, and 2.1%, respectively, of the issued and outstanding
     preferred stock of ASI. Pursuant to the Warrants described in footnote 1,
     the ASI Common Stock and the ASI Preferred Stock may be exchanged for
     Common Stock at various times between January 1, 1999 and January 1,
     2003. Assuming that all of the ASI Preferred Stock and the ASI Common
     Stock were converted to Common Stock, as of September 24, 1997 (even
     though all of such ASI stock is not currently convertible), HRP, Mr.
     Howell, Mrs. Howell, Mr. Kniberg, Mr. McDonald and Ms. Baran would own
     10.22%, 10.29%, 10.29%, 5.92%, 2.13%, and .64% of the total voting power
     of the Company's capital stock.     
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  In September 1997, Aristotle and the holders of the ASI Preferred Stock
agreed to delay the exercise of the remaining Put Right and to modify certain
other agreements entered into at the time of the Acquisition. Under this
proposal, Former Strouse Stockholders Alfred Kniberg, Paul McDonald and Joyce
Baran will surrender to
 
                                      43
<PAGE>
 
ASI 5,706 shares, 3,531 shares and 763 shares, respectively, of ASI Preferred
Stock in exchange for the cancellation of $57,060, $35,310 and $7,630 owned by
Messrs. Kniberg and McDonald and Ms. Baran under their respective loans (the
"Acquisition Loans"). On January 1, 1998, the Company will redeem 80,000
shares of ASI Preferred Stock for $10.00 per share. The Put Right for the
remaining 80,499 shares of ASI Preferred Stock, including 13,617 shares owned
by Mr. Kniberg, 5,702 shares owned by Mr. McDonald and 1,724 shares owned by
Ms. Baran, has been postponed such that the Put Right with respect to 40,249
shares, including 6,809 shares owned by Mr. Kniberg, 2,851 shares owned by Mr.
McDonald and 862 shares owned by Ms. Baran, will vest on January 1, 1999 and
the Put Right with respect to 40,250 shares, including 6,808 shares owned by
Mr. Kniberg, 2,851 shares owned by Mr. McDonald and 862 shares owned by Ms.
Baran, will vest on January 1, 2000.
 
  As part of this proposal, the maturity dates on the remaining Acquisition
Loans, after consideration of the cancellation of certain Acquisition Loans in
connection with the surrender of ASI Shares (see above), will be extended such
that one-half of the remaining balance ($92,119 remaining balance for Mr.
Kniberg, $57,020 remaining balance for Mr. McDonald and $12,338 remaining
balance for Ms. Baran) will be due and payable on January 1, 1999, and the
remaining one-half will be due and payable on January 1, 2000. In addition,
the holders of ASI Preferred Stock have agreed to the release of $400,000 from
the Strouse Escrow Account on January 1, 1998 to be used to redeem ASI
Preferred Stock on that date, and the release of $200,000 and $100,000 as of
January 1, 1999 and January 1, 2000, respectively to satisfy the Company's Put
Right obligations. In addition, in consideration for the holders of ASI
Preferred Stock agreeing to postpone their Put Right, the number of shares of
Aristotle Common Stock into which each share of ASI Preferred Stock may be
exchanged will be increased from 1.282 to 1.667 shares. Finally, the holders
of ASI Preferred Stock will be released from their obligations under a pension
escrow agreement.
 
  Aristotle has obtained the required vote of the ASI shareholders to approve
the charter amendment postponing the Put Right, and has reached an agreement
as to the other terms of the proposal with the holders of the ASI Preferred
Stock, subject to negotiation and execution of definitive documents.
 
                                      44
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) The following are filed as part of this report:
 
  (1) Financial Statements:
      Consolidated Balance Sheets...........................................   9
      Consolidated Statements of Operations.................................  10
      Consolidated Statements of Changes in Stockholders' Equity............  11
      Consolidated Statements of Cash Flows.................................  12
      Notes to Consolidated Financial Statements............................  13
      Report of Independent Public Accountants..............................  30
 
  (2) Financial Statement Schedules:
      Report of Independent Public Accountants on Schedules................. S-1
      Schedule I--Condensed Financial Information of the Registrant......... S-2
      Schedule II--Valuation and Qualifying Accounts........................ S-5
 
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
 
  (3) Exhibits:
 
    Exhibit 2.1--Capital Contribution Agreement dated as of November 19,
    1993 by and among The Aristotle Corporation, Aristotle Sub, Inc., The
    Strouse, Adler Company and the Stockholders of Strouse. Incorporated
    herein by reference to Exhibit 2.1 of The Aristotle Corporation's
    Current Report on Form 8-K dated April 14, 1994, as amended (the "1994
    Current Report").
 
    Exhibit 3.1--Restated Certificate of Incorporation of The Aristotle
    Corporation. Incorporated herein by reference to Exhibit 3.1 of The
    Aristotle Corporation's Quarterly Report on Form 10-Q for the quarter
    ended March 31, 1997.
 
    Exhibit 3.2--Certificate of Designation, Preferences and Right of
    Series A, B, C and D Preferred Stock of The Aristotle Corporation.
    Incorporated herein by reference to Exhibit 4.3 of the 1994 Current
    Report.
 
    Exhibit 3.3--Amended and Restated Bylaws. Incorporated herein by
    reference to Exhibit 3.2 of The Aristotle Corporation's Annual Report
    on Form 10-Q for the fiscal quarter ended March 31, 1997.
 
    Exhibit 4.1--Restated Certificate of Incorporation of The Aristotle
    Corporation., See Exhibit 3.1 hereof.
 
    Exhibit 4.2--Certificate of Designation, Preferences and Right of
    Series A, B, C and D Preferred Stock of The Aristotle Corporation. See
    Exhibit 3.2 hereof.
 
    Exhibit 4.3--Amended and Restated Certificate of Incorporation of
    Aristotle Sub, Inc. Incorporated herein by reference to Exhibit 4.1 of
    The Aristotle Corporation's Quarterly Report on Form 10-Q for the
    fiscal quarter ended December 31, 1996.
 
    Exhibit 4.5--Form of Stock Purchase Warrant Series A of The Aristotle
    Corporation dated as of April 11, 1994. Incorporated herein by
    reference to Exhibit 2.10 of the 1994 Current Report.
 
    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.
 
                                      45
<PAGE>
 
    Exhibit 10.3--Letter Agreement by and among The Aristotle Corporation,
    Aristotle Sub, Inc., Alfred Kniberg and David Howell dated June 27,
    1995. Incorporated herein by reference to Exhibit 10.3 of the 1995 Form
    10-K.
 
    Exhibit 10.4--Security Agreement dated as of April 11, 1994 by and
    among The Strouse, Adler Company and certain other parties.
    Incorporated herein by reference to Exhibit 2.9 of the 1994 Current
    Report.
 
    Exhibit 10.5--Term Promissory Notes dated April 11, 1994 payable to The
    Aristotle Corporation. Incorporated herein by reference to Exhibit 2.12
    of the 1994 Current Report.
 
    Exhibit 10.6--Employment Agreement dated as of April 11, 1994 by and
    among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
    Adler Company and David Howell. Incorporated herein by reference to
    Exhibit 2.3 of the 1994 Current Report.
 
    Exhibit 10.7--Employment Agreement dated as of April 11, 1994 by and
    among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
    Adler Company and Alfred Kniberg. Incorporated herein by reference to
    Exhibit 2.4 of the 1994 Current Report.
 
    Exhibit 10.8--Employment Agreement dated as of April 11, 1994 by and
    among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
    Adler Company and Joyce Baran. Incorporated herein by reference to
    Exhibit 2.5 of the 1994 Current Report.
 
    Exhibit 10.9--Employment Agreement dated as of April 11, 1994 by and
    among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
    Adler Company and Paul McDonald. Incorporated herein by reference to
    Exhibit 2.6 of the 1994 Current Report.
 
    Exhibit 10.10--Shareholder Loan Pledge Agreements dated as of April 11,
    1994 by and between certain parties and The Aristotle Corporation.
    Incorporated herein by reference to Exhibit 2.13 of the 1994 Current
    Report.
 
    Exhibit 10.11--Stock Option Plan of The Aristotle Corporation, as
    amended. Incorporated herein by reference to Exhibit 10.2 of the
    Aristotle Corporation's Annual Report on Form 10-K for the fiscal year
    ended December 31, 1992, filed on March 31, 1993 (the "1992 Form 10-
    K").
 
    Exhibit 10.12--Form of Stock Option Agreement (for non-employee
    directors). Incorporated herein by reference to Exhibit 10.3 of the
    1992 Form 10-K.
 
    Exhibit 10.13--Form of Incentive Stock Option Agreement (for
    employees). Incorporated herein by reference to Exhibit 10.4 of the
    1992 Form 10-K.
 
    Exhibit 10.14--Lease dated October 4, 1991 by and between The Strouse,
    Adler Company and New England Resources Limited Partnership.
    Incorporated herein by reference to Exhibit 10.15 of the 1995 Form 10-
    K.
 
    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.
    Incorporated herein by reference to Exhibit 10.17 of The Aristotle
    Corporation's Annual Report on Form 10-K for the fiscal year ended June
    30, 1996, filed October 15, 1996 (the "1996 Form 10-K").
 
    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.
 
                                      46
<PAGE>
 
    Exhibit 10.20--Restrictive Covenant Agreement dated as of December 22,
    1994 by and among The Strouse, Adler Company, PBS Enterprises Ltd.,
    Davedan Properties Ltd., Maggie Manufacturing Company Ltd., Peter Blair
    Shalleck and Sandy Shalleck. Incorporated herein by reference to
    Exhibit 10.22 of the 1995 Form 10-K.
 
    Exhibit 10.21--Specific Performance Agreement dated as of December 22,
    1994 by and among The Strouse, Adler Company, Peter Blair Shalleck and
    Sandy Shalleck. Incorporated herein by reference to Exhibit 10.23 of
    the 1995 Form 10-K.
 
    Exhibit 10.22--Settlement and Release Agreement dated as of May 29,
    1996 among The Aristotle Corporation, the Federal Deposit Insurance
    Corporation and certain other interested parties. Incorporated herein
    by reference to Exhibit 10.22 of the 1996 Form 10-K.
 
    Exhibit 10.23--Stipulation and Agreement of Settlement dated as of May
    28, 1996 Re: In Re First Constitution Shareholders Litigation.
    Incorporated herein by reference to Exhibit 10.23 of the 1996 Form 10-
    K.
 
    Exhibit 10.24--Letter Agreement dated October 27, 1995 Re: Amended Put
    Rights. Incorporated herein by reference to Exhibit 10.1 of The
    Aristotle Corporation's Quarterly Report for the quarterly period ended
    December 31, 1995, filed on January 31, 1996.
 
    Exhibit 21.1--Subsidiaries of The Aristotle Corporation is attached
    hereto as Exhibit 21.1.
 
    Exhibit 27--Financial Data Schedule is attached hereto as Exhibit 27.
 
  (b) Reports on Form 8-K:
 
  There were no reports on Form 8-K filed in the fourth quarter of the
Company's fiscal year ended June 30, 1997.
 
  (c) See (a)(3) above.
 
  (d) See (a)(2) above.
 
                                      47
<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: May 12, 1998     
 
                                                    /s/ Paul McDonald
                                          -------------------------------------
                                                      Paul McDonald
                                             Its Chief Financial Officer and
                                                        Secretary
                                             (principal financial and chief
                                                   accounting officer)
                                                    
                                                 Date: May 12, 1998     
 
  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.
 
              SIGNATURE                        TITLE                 DATE
 
        /s/ John J. Crawford           President, Chief         September 29,
-------------------------------------   Executive Officer,           1997
          JOHN J. CRAWFORD              Chairman of the
                                        Board and Director
                                        (principal
                                        executive officer)
 
          /s/ Paul McDonald            Chief Financial          September 29,
-------------------------------------   Officer and                  1997
            PAUL MCDONALD               Secretary
                                        (principal
                                        financial and
                                        accounting officer)
 
        /s/ Barry R. Banducci          Director                 September 29,
-------------------------------------                                1997
          BARRY R. BANDUCCI
 
        /s/ Robert L. Fiscus           Director                 September 29,
-------------------------------------                                1997
          ROBERT L. FISCUS
 
        /s/ Betsy Henley-Cohn          Director                 September 29,
-------------------------------------                                1997
          BETSY HENLEY-COHN
 
        /s/ Daniel J. Miglio           Director                 September 29,
-------------------------------------                                1997
          DANIEL J. MIGLIO
 
         /s/ Sharon M. Oster           Director                 September 29,
-------------------------------------                                1997
           SHARON M. OSTER
 
        /s/ Alfred A. Kniberg          Director                 September 29,
-------------------------------------                                1997
          ALFRED A. KNIBERG
 
         /s/ John C. Warfel            Director                 September 29,
-------------------------------------                                1997
           JOHN C. WARFEL
 
                                      48
<PAGE>
 
                      FINANCIAL STATEMENT SCHEDULES INDEX
 
Schedule I--Condensed Financial Information of the Registrant
Schedule II--Valuation and Qualifying Accounts
 
                                       49
<PAGE>
 
             REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
 
To the Board of Directors and
 Stockholders of The Aristotle
 Corporation:
 
  We have audited in accordance with generally accepted auditing standards,
the financial statements included in The Aristotle Corporation's Form 10-K,
and have issued our report thereon dated September 23, 1997. Our audit was
made for the purpose of forming an opinion on those statements taken as a
whole. The schedules listed in the index of financial statements are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
 
                                          Arthur Andersen LLP
 
Hartford, Connecticut
September 23, 1997
 
 
                                      S-1
<PAGE>
 
                                                                      SCHEDULE I
 
                       CONDENSED FINANCIAL INFORMATION OF
 
                           THE ARISTOTLE CORPORATION
                             (DOLLARS IN THOUSANDS)
 
                                BALANCE SHEETS:
 
<TABLE>
<CAPTION>
                                                    JUNE 30, 1997 JUNE 30, 1996
                                                    ------------- -------------
<S>                                                 <C>           <C>
                      ASSETS
Current Assets
  Cash.............................................    $  133        $    91
  Marketable securities held in escrow, at market
   value...........................................       900          6,253
  Current maturities of employee notes receivable..       100            --
  Other current assets.............................       134            179
                                                       ------        -------
    Total current assets...........................     1,267          6,523
                                                       ------        -------
Advances to and Investment in Subsidiaries.........     5,230          4,311
                                                       ------        -------
Other Assets
  Marketable securities held in escrow, at market
   value...........................................       300            --
  Employee notes receivable, less current maturi-
   ties............................................       207            354
                                                       ------        -------
                                                          507            354
                                                       ------        -------
                                                       $7,004        $11,188
                                                       ======        =======
       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Notes payable....................................    $   75        $    75
  FDIC tax refund payable..........................       --           3,760
  Accrued expenses and other liabilities...........       224            641
                                                       ------        -------
    Total liabilities..............................       299          4,476
Minority interest in subsidiaries common stock.....       194            182
Commitment and contingencies.......................
Stockholders' equity...............................     6,511          6,530
                                                       ------        -------
                                                       $7,004        $11,188
                                                       ======        =======
</TABLE>
 
                                      S-2
<PAGE>
 
                       CONDENSED FINANCIAL INFORMATION OF
 
                           THE ARISTOTLE CORPORATION
                             (DOLLARS IN THOUSANDS)
 
                            STATEMENT OF OPERATIONS:
 
<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED
                                                     ---------------------------
                                                     JUNE 30, JUNE 30,  JUNE 30,
                                                       1997     1996      1995
                                                     -------- --------  --------
<S>                                                  <C>      <C>       <C>
Investment and interest income......................  $ 206   $   353    $ 392
Other expenses......................................   (651)     (612)    (589)
                                                      -----   -------    -----
  Loss from operations before provision (benefit)
   for income tax and equity in undistributed earn-
   ings of subsidiary...............................   (445)     (259)    (197)
Equity in undistributed earnings of subsidiary......    282      (175)    (626)
Income tax expense (benefit)........................   (176)   (1,902)      75
                                                      -----   -------    -----
  Net income (loss).................................  $  13   $ 1,468    $(898)
                                                      =====   =======    =====
</TABLE>
 
                                      S-3
<PAGE>
 
                       CONDENSED FINANCIAL INFORMATION OF
 
                           THE ARISTOTLE CORPORATION
                             (DOLLARS IN THOUSANDS)
 
                            STATEMENT OF CASH FLOWS:
 
<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED
                                                     ----------------------------
                                                     JUNE 30,  JUNE 30,  JUNE 30,
                                                       1997      1996      1995
                                                     --------  --------  --------
<S>                                                  <C>       <C>       <C>
Operating Activities:
  Net income (loss)................................. $    13   $ 1,468    $(898)
  Equity in undistributed earnings of subsidiary....    (282)      175      626
  Gain on settlement of FDIC claim..................     --     (2,000)     --
  Issuance of treasury stock for services...........     --         62       30
  Proceeds from tax carryback claim.................     --      1,778      --
  Other.............................................    (489)      132      355
                                                     -------   -------    -----
    Total cash provided by (used in) operating
     activities.....................................    (758)    1,615      113
Investing Activities:
  Proceeds from notes receivable from employees.....      47       --       --
  Purchase of marketable securities held in escrow..    (707)   (1,778)     --
  Sale of marketable securities.....................   5,760       207       26
  Settlement of FDIC claim..........................  (3,760)      --       --
  Repurchase of ASI preferred stock.................    (530)     (207)     --
  Minority interest.................................      12        15       29
                                                     -------   -------    -----
    Total cash provided by (used in) investing
     activities.....................................     822    (1,763)      55
Financing Activities:
  Purchase of treasury stock........................     (22)      --       (11)
  Proceed from the issuance of debt.................     --         75      --
                                                     -------   -------    -----
    Total cash used by financing activities.........     (22)       75      (11)
Increase (decrease) in cash and cash equivalents....      42       (73)     157
Cash and cash equivalents at beginning of period....      91       164        7
                                                     -------   -------    -----
Cash and cash equivalents at end of period.......... $   133   $    91    $ 164
                                                     =======   =======    =====
</TABLE>
 
                                      S-4
<PAGE>
 
                                                                     SCHEDULE II
 
                    THE ARISTOTLE CORPORATION AND SUBSIDIARY
 
                               VALUATION ACCOUNTS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
           COLUMN A               COLUMN B    COLUMN C    COLUMN D    COLUMN E
           --------              ---------- ------------ ----------- ----------
                                            ADDITIONS(1)
                                 BALANCE AT  CHARGED TO              BALANCE AT
                                 BEGINNING   COSTS AND   DEDUCTIONS/   END OF
                                 OF PERIOD    EXPENSES   WRITE-OFFS    PERIOD
                                 ---------- ------------ ----------- ----------
<S>                              <C>        <C>          <C>         <C>
FISCAL YEAR ENDED JUNE 30, 1997
Accounts receivable reserve....     $125         26          (29)       $122
Co-op advertising reserve......     $117        150         (217)       $ 50
Accounts receivable--long term
 reserve.......................     $ 11          0           (2)       $  9
FISCAL YEAR ENDED JUNE 30, 1996
Accounts receivable reserve....     $100         59          (34)       $125
Co-op advertising reserve......     $ 71        270         (224)       $117
Accounts receivable--long term
 reserve.......................     $ 36         25          (50)       $ 11
FISCAL YEAR ENDED JUNE 30, 1995
Accounts receivable reserve....     $108        --            (8)       $100
Co-op advertising reserve......     $ 69        183         (181)       $ 71
Accounts receivable--long term
 reserve.......................     $ 63         15          (42)       $ 36
</TABLE>
 
                                      S-5
<PAGE>
 
                                 EXHIBIT INDEX
 
Exhibit 21.1--Subsidiaries of The Aristotle Corporation
 
Exhibit 27--Financial Data Schedule