================================================================================

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K
<TABLE>
<CAPTION>
<S>                                                                                 <C>
 [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED MARCH 31, 2000

                                       OR

 [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
         FOR THE TRANSITION PERIOD FROM _______________ TO _____________
</TABLE>
                           Commission file no. 1-10340

                        ALLOU HEALTH & BEAUTY CARE, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

                      DELAWARE                                    11-2953972
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or               (I.R.S. Employer
                 organization)                               Identification No.)

           50 EMJAY BOULEVARD, BRENTWOOD, NEW YORK                11717
--------------------------------------------------------------------------------
           (Address of principal executive offices)            (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-4000

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

                              Name of Each Exchange

                     Title of Each Class On Which Registered
                     ---------------------------------------

     Class A Common Stock, par value $.001 per share American Stock Exchange

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

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_. No ___.

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  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. /__/

         The aggregate  market value of the Common Stock of the Registrant  held
by  non-affiliates  of the  Registrant  on June 28, 2000 was  $33,675,417.  Such
aggregate  market value is computed by  reference to the closing  sales price of
the Class A common  stock on such date.  For purposes of this  calculation,  the
Registrant  has excluded the Class B common  stock,  which is held  primarily by
affiliates and is not publicly-traded.

         The number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest  practicable  date:  5,567,632  shares of Class A
common  stock and  1,200,000  shares of Class B common  stock as of the close of
business on June 28, 2000.


                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain  portions of the Registrant's  Proxy Statement  relating to the
Registrant's  2000 Annual Meeting of Stockholders  are incorporated by reference
into Part III of this Form 10-K.


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<PAGE>

                                     PART I

ITEM 1.  BUSINESS


GENERAL

         We are a leading  distributor  of prestige  brand name  fragrances  and
cosmetics, and health and beauty aid products in metropolitan New York City, New
Jersey,  Connecticut,  Philadelphia and Miami. We also manufacture  upscale hair
and  skin  care   products  for  sale  under  private   labels.   We  distribute
approximately 22,000 SKUs of branded consumer products to over 140 national mass
merchandisers  including:  Sears Roebuck & Co., Wal-Mart,  J.C. Penney,  Target,
CVS, and Rite-Aid, and to approximately 4,200 independent retailers.  We believe
that  products  distributed  by us are  sold in a total  of over  15,000  retail
stores. Since our current principal  stockholders  acquired Allou, we have grown
through  internal  growth and strategic  acquisitions,  which have enabled us to
expand  our  product  offerings,  enter  into new  geographic  markets,  add new
customers  and  cross-sell  existing  and new product  lines to our  diversified
customer base.

PRODUCTS

         We distribute four general categories of products:

          o    fragrances and cosmetics;

          o    name  brand  health and  beauty  aids and health and beauty  aids
               under our Allou brand;

          o    prescription pharmaceuticals; and

          o    non-perishable food items.

         In addition, we manufacture upscale hair and skin care products.

         Fragrances and Cosmetics

         We distribute prestige designer fragrances of many large manufacturers,
which   include:   Ralph  Lauren,   Calvin  Klein,   Lancome  and  Chanel.   See
"Manufacturers  and  Suppliers."  Fragrance  and cosmetic  sales  accounted  for
approximately  39% of our revenues  during the fiscal year ended March 31, 1998,
40% of our  revenues  during the fiscal year ended March 31, 1999 and 36% of our
revenues  during the fiscal year ended  March 31,  2000.  Our profit  margins on
fragrance  and  cosmetic  sales are  typically  greater than those on name brand
health and beauty aids and,  accordingly,  we have sought to increase  our sales
and  marketing  efforts in this area. We have entered into a services and supply
agreement  with  ibeauty.com  to  provide  fragrances  and  cosmetics  and other
services until October 2000 for sales on the Internet. On April 23, 1999 we sold
69% of our interest in The Fragrance Counter, Inc. our Internet subsidiary to an
investment  group  for  $11,296,584  in cash and  $8,900,000  in  notes  bearing
interest at prime plus .375%.

         Some fragrance and cosmetic brands that we distribute are:


                  o Polo                                         o Revlon

                  o Eternity                                     o Maybelline

                  o Hugo                                         o Lancome

                                      -2-
<PAGE>

         Some fragrance and cosmetic products that we distribute are:


                  o Perfume                                      o Eyeshadow

                  o Cologne                                      o Lipstick

                  o Nail Polish                                  o Mascara

         Health and Beauty Aids


         We  distribute  approximately  8,000  brand name  health and beauty aid
products by such manufacturers as Colgate-Palmolive,  Clairol, Procter & Gamble,
Johnson & Johnson and  Gillette.  See  "Manufacturers  and  Suppliers."  We also
distribute nail polish, toothpaste,  petroleum jelly and other health and beauty
aid products manufactured by others and sold under our Allou brand label. Health
& Beauty Aids accounted for  approximately 36% of our revenues during the fiscal
year ended  March 31,  1998,  37% of our  revenues  during the fiscal year ended
March 31,  1999 and 30% of our  revenues  during the fiscal year ended March 31,
2000. Sales of Allou brand are not material.


       Some health and beauty aid brands that we distribute are:

              o Pantene Pro-V shampoo           o Colgate toothpaste

              o Johnson's Baby Lotion           o Rave hairspray

              o Gillette Mach 3 razors          o Vaseline Intensive Care lotion

       Some health and beauty aid products that we distribute are:

              o Antacids                        o Oral Antiseptics and Sprays

              o Baby Care                       o Deodorants

              o Cough and Cold Remedies         o Shampoos

         Prescription Pharmaceuticals

         During fiscal 1994, we acquired the capital stock of M. Sobol,  Inc., a
manufacturers'  distributor of branded prescription  pharmaceuticals.  M. Sobol,
Inc.  was  founded  in  1928  and  currently   distributes   pharmaceuticals  to
approximately  700  independent   pharmacies  in  the  Northeast.   We  purchase
approximately 4,000 branded  pharmaceuticals  from such manufacturers as Pfizer,
Eli  Lilly,  Merck  and  Glaxo.   Additionally,   we  distribute  3,000  generic
prescription pharmaceutical products which are purchased from manufacturers such
as Schein Pharmaceuticals,  Inc., Barre National, Inc., and Sidmak Laboratories,
Inc.  During  fiscal 2000,  we acquired  the assets of Tri-State  Pharmaceutical
Consultants,   Corp.,   a   national   distributor   of  branded   and   generic
pharmaceuticals.  Tri-State  was  founded  in  1995  and  currently  distributes
pharmaceuticals  to  national  chains such as Rite Aid and  wholesalers  such as
McKesson. Pharmaceuticals accounted for approximately 15% of our revenues during
the fiscal year ended March 31, 1998, 14% of our revenues during the fiscal year
ended March 31, 1999 and 26% of our revenues  during the fiscal year ended March
31, 2000.

                                      -3-
<PAGE>

         Food

         We sell  non-perishable  packaged  food items which we purchase  almost
exclusively  at discount  prices from major food  companies.  This  product line
requires little  additional  operating costs to us since sales of non-perishable
food are pre-sold and  drop-shipped  directly to our customers from the vendors.
Non-perishable  food items accounted for approximately 9% of our revenues during
the fiscal year ended March 31, 1998, 10% of our revenues during the fiscal year
ended March 31, 1999 and 6.1% of our revenues during the fiscal year ended March
31, 2000.

         Hair and Skin Care Product Manufacturing

         During fiscal 1996, we purchased  selected assets of Russ Kalvin,  Inc.
This acquisition has enabled us to manufacture and distribute salon quality hair
and skin care products to national mass merchandisers and independent retailers.
Since 1998,  we have  manufactured  upscale hair and skin care products for J.C.
Penney, Bath and Body Works, Sears Roebuck & Co., and other specialty retailers.
This  business  generates  substantially  higher gross  profit  margins than our
distribution  business.  Hair and skin care products accounted for approximately
1.7% of our revenues during the fiscal year ended March 31, 2000.  Revenues from
pior years were not material.

         We  acquired  a 50% stake in  Discreet  Medical  Solutions,  LLC during
fiscal 2000.  Discreet  Medical d/b/a Ostomey  Village.com is a company recently
formed to create an Internet portal which provides  on-line  delivery of medical
products and content to chronically ill patients  suffering for Crohn's disease,
diabetes,   respiratory   diseases  and  those  patients  requiring  wound  care
treatment.  Discreet  Medical  has a  patent  pending  methodology  that  allows
Discreet  Medical  to offer  the  highest  level of  personal  and  professional
attention to this community of patients in complete privacy and with discretion.
Discreet  Medical  recognizes  revenues  and profits  from the sale of specialty
medical devices.  Discreet Medical expects to commence operations during our
second quarter.

MANUFACTURERS AND SUPPLIERS

         The products we distribute are manufactured and supplied by independent
foreign and domestic  companies.  Many of these  companies also  manufacture and
supply health and beauty aid products,  fragrances and cosmetics for many of our
competitors.  We purchase  approximately  8,000 brand name health and beauty aid
products  from such  manufacturers  as Procter & Gamble,  Johnson & Johnson  and
Gillette and  approximately  7,000 fragrance and cosmetic products directly from
manufacturers  such as Coty, a division of Pfizer,  and Revlon,  as well as from
secondary sources. We purchase  approximately 4,000 branded  pharmaceuticals and
3,000 generic  prescription  pharmaceuticals  from such manufacturers as Pfizer,
Eli Lilly, Schein Pharmaceuticals, and Barre National. Additionally, we purchase
non-perishable  packaged  food items which we  purchase  almost  exclusively  at
discount  prices from  manufacturers  such as General  Mills,  General Foods and
Nabisco.  We contract with manufacturers to produce the products which carry our
name brand and we manufacture our proprietary  line of Russ Kalvin generic brand
hair and skin care products through our wholly-owned subsidiary,  Allou Personal
Care.

         We typically purchase health and beauty aids and  pharmaceuticals  from
manufacturers  on open  accounts  which are  payable in 30 days and may  receive
discounts of up to 2% for early  payments.  As is customary in the industry,  we
prepay certain suppliers for products that we purchase at deep discounts.  These
types of purchases are  opportunistic and highly dependent upon availability and
price.  If the products  that we have prepaid for and ordered are not shipped to
us, this could have an adverse  effect on our  operations.  To date, we have not
suffered any such adverse effect.  In addition,  we may return health

                                      -4-
<PAGE>

and beauty aid and  prescription  pharmaceutical  products to our  suppliers for
full credit if the products are damaged,  their shelf life has expired,  or they
are otherwise not saleable.

         Manufacturers  of  prestige  fragrances  have  historically  restricted
direct  sales of their  products  in the United  States  primarily  to  prestige
department stores and specialty stores. As a result,  mass-market retailers have
traditionally  obtained prestige products from secondary sources.  Historically,
the secondary sources available to the mass market have been limited to:


     o  direct  distributors  like  us  which  receive  products  directly  from
fragrance manufacturers, and

     o distributors  of prestige  products  manufactured  by, or distributed to,
foreign  sources  for  foreign  distribution,  which are  diverted to the United
States.

Under  existing  court  decisions,  there are  variations in the extent to which
trademark  laws,  copyright  laws  and  customs  regulations  may  restrict  the
importation  of  trademarked  or  copyright  fragrance  products  through  those
distributors  who divert the prestige  products to the United States without the
consent of the trademark or copyright owner. As is customary in the industry, we
purchase a substantial portion of our fragrance products from secondary sources.
In  addition,  from time to time,  we may take  advantage  of  favorable  buying
opportunities  and  purchase  limited  amounts of health and beauty aid products
from secondary sources.  There can be no assurance that these sources of product
will be  available  in the future or that may not  become  the  subject of legal
action arising from its buying  activities  with respect to these  products.  To
date, we have not been the subject of any such legal action.

         We have had long-term  relationships with most of our suppliers.  As is
customary in our industry, we have not entered into written agreements with most
of our suppliers.  However, we believe that our relationships with our suppliers
are good. We have not  experienced any  interruptions  in the supply of products
which have had a material adverse effect on our operations.

MARKETING AND SALES

         Sales  are  made  by  our   in-house   sales  staff  of   telemarketing
professionals.  We pay  in-house  sales  persons a base salary plus a commission
based on  sales  and  gross  margins.  Sales  are  also  made by  sales  account
representatives who make on-site visits to our customers.

         We publish a monthly  health and beauty aid  catalogue  and a quarterly
fragrance  catalogue   containing  order  forms,   product   descriptions,   the
manufacturer's  suggested  retail price and net cost per unit or per dozen.  The
catalogues are mailed to each of our active customers.  The catalogues also help
serve the advertising needs of the  manufacturers  which provide us with rebates
which  have  historically  paid for the full  cost of  preparing,  printing  and
mailing the catalogues.  In addition to the catalogues, we frequently supply our
customers with flyers advising them of items being sold at a discount.  The sale
of fragrances  nationally to independent  stores is handled  exclusively by mail
order through the catalogues.

OPERATIONS

         We maintain an  approximately  157,000 square foot  warehouse  facility
with sales and  administrative  offices in  Brentwood,  New York.  The warehouse
typically contains on a blended basis inventory for approximately four months of
distribution to customers.  We use a computerized data base system which enables
management to monitor sales,  purchases and inventory status.  Historically,  we


                                      -5-
<PAGE>

have not experienced problems with product shelf lives, as most products we sell
are not perishable. Those products that are perishable generally can be returned
to the  manufacturer if they are not sold by the expiration  date. We also lease
an approximately 105,000 square foot facility in Saugus, California and a 10,000
square foot facility in Miami, Florida.

         We contract with local carriers and independent trucking agents to make
deliveries to our customers.  From the time it is placed,  a customer order will
generally be shipped within 48 hours.

         Work in the  warehouse  is cyclical  and workers are trained in several
tasks so that they can be rotated to fill the jobs where they are most needed.

         Since we acquired selected assets of Russ Kalvin, Inc. in October 1995,
we have consolidated  operations and reduced overhead, and positioned ourself to
market and  manufacture  quality hair and skin care products to major  retailers
such as J.C.  Penney,  Bath and Body  Works,  Sears  Roebuck,  & Co.,  and other
specialty retailers.  We have consolidated all administrative  functions of Russ
Kalvin into our Brentwood, New York facility. In addition, we have 80,000 square
feet of leased  space in Saugus,  California  which is used to  manufacture  and
distribute  upscale  private  label  hair  and  skin  care  products  for  major
retailers.

MANAGEMENT INFORMATION AND CONTROL SYSTEM

         We use a proprietary,  computerized  database  management  system which
collects,  integrates  and analyzes data  concerning  sales,  order  processing,
shipping,  purchases,  receiving,  inventories and financial  reporting.  At any
given time,  we are able to determine  the quantity of each item in inventory by
brand,  style,  cost,  list price and other  characteristics.  Our  system  also
provides our telemarketing professionals with immediate product availability and
gross margin information  on-screen when receiving customer orders.  This system
allows  us to  provide  our  customers  with  real-time  inventory  and  pricing
information  and to ship  orders  within 48 hours of receipt,  which  allows our
customers to better manage their inventory.

         The computerized system enables us to better manage our inventories. It
keeps a running inventory of goods on hand for each item we distribute. When the
inventory of any item drops to a certain  pre-set  level, a purchase order for a
set number of additional units of the item is  automatically  written and, after
being reviewed by management, is sent directly to the manufacturer.

COMPETITION

         The  distribution  of health  and  beauty  aid  products  is  extremely
competitive.  We compete with  pharmaceutical  wholesalers that carry health and
beauty aid  products  as an  accommodation  for their  customers.  Many of these
wholesalers have greater  financial and other resources than we do. However,  to
our  knowledge,  there is no  significant  competitor  which  distributes to its
customers  the  assortment  of  fragrances,  cosmetics and health and beauty aid
products  that we  distribute.  We  believe  that we compete on the basis of the
services  we provide to our  customers  which  include  quick  delivery  and low
minimum order requirements.

         The  distribution  of fragrance and high priced  cosmetic items is also
very  competitive.  We compete  to obtain  our  fragrances  and  cosmetics  from
manufacturers  and importers  who also supply  competing  distributors  and sell
directly  to  retailers.  We compete on the basis of price and the  services  we
provide to our  customers,  which include  quick  delivery and low minimum order
requirements.

                                      -6-
<PAGE>

         In addition,  we face intensive  competition  with respect to marketing
our own brand of health and  beauty aid  products  and the Russ  Kalvin  generic
brand of hair and skin care  products.  We compete  with major health and beauty
aid companies, as well as hair and skin care companies who have well-established
product  lines,  spend large sums for  advertising  and  marketing  and have far
greater  financial  and other  resources  than we do. We also compete with these
companies for shelf space and product placement in various retail outlets.

EMPLOYEES

         As of March 31, 2000, we employed  approximately  307 persons on a full
time  basis,  including  8 in  executive  positions,  15  in  purchasing,  42 in
marketing and sales, 38 in administration  and accounting,  and 204 in warehouse
and  receiving.  Some of our sales  personnel are partially paid on a commission
basis. During peak selling seasons we also employ part-time personnel.

         We are a party to a collective  bargaining  agreement expiring December
14, 2000 with the National  Organization of Industrial  Trade Unions covering 85
of our warehouse  and  receiving  employees.  We have not  experienced  any work
stoppages. We believe our relations with our employees are satisfactory.


TRADENAMES AND TRADEMARKS

         We use the  unregistered  tradename  for our  brand  "Allou  Brand"  on
generic products that we distribute. With the introduction of additional generic
products,  we may adopt other  unregistered  tradenames and  trademarks.  During
fiscal  1996,  we acquired the patents,  trademarks  and all other  intellectual
property of Russ Kalvin, Inc. We believe that no single trademark,  tradename or
servicemark is material to our business as a whole.

GOVERNMENT REGULATION

         The United  States Food,  Drug and Cosmetic Act and the Fair  Packaging
and  Labelling  Act regulate  the purity and  packaging of health and beauty aid
products and fragrances and cosmetic products. Similar statutes are in effect in
various states. Manufacturers and distributors of health and beauty aid products
are also  subject to the  jurisdiction  of the  Federal  Trade  Commission  with
respect to matters such as advertising content and other trade practices. To our
knowledge, we only distribute products produced by manufacturers who comply with
those  regulations  and who  periodically  submit their  products to independent
laboratories for testing. However, the failure by our manufacturers or suppliers
to comply with applicable government regulations could result in product recalls
that could adversely affect our relationships  with our customers.  In addition,
the extent of potentially adverse government  regulations which might arise from
future legislation or administrative action cannot be predicted.

         Some of the products that we  manufacture  contain  alcohol and certain
active  ingredients  which are  regulated by the Bureau of Alcohol,  Tobacco and
Firearms and the Food and Drug Administration.  We have obtained the appropriate
licenses from these agencies in order to comply with applicable regulations.


                                      -7-
<PAGE>


ITEM 2.  PROPERTIES

         We lease  approximately  157,000 square feet of space for our principal
executive offices,  warehouse and distribution facilities and sales headquarters
in the Brentwood Industrial Park, 50 Emjay Boulevard, Brentwood, New York 11717.
We have a ten-year lease which expires on May 31, 2005, and includes a five-year
option for  renewal.  The base annual  rental of the  property is  approximately
$500,000 with  additional  charges for  insurance,  fuel and taxes and increases
during the initial term of the lease. We also lease 105,000 square feet of space
in Saugus, California to manufacture and distribute hair and skin care products.
The lease expires  September  30, 2000 with a five-year  option for renewal at a
base  annual  rental of  approximately  $414,000  with  additional  charges  for
insurance,  fuel,  taxes and increases  during the initial term of the lease. We
also lease 10,000 square feet of space in Miami, Florida, which expires on April
30, 2003 at a base annual rent of  approximately  $156,000 for  warehousing  and
distribution purposes.


ITEM 3.  LEGAL PROCEEDINGS

         We are a party  to a  number  of legal  proceedings,  all of which  are
routine litigation incidental to our business.


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

         During the fourth quarter of the fiscal year covered by this Report, no
matters were submitted to a vote of security holders through the solicitation of
proxies or otherwise.


                                      -8-
<PAGE>


                                     PART II

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

Market Information
------------------

         Our Class A common stock is listed on the American Stock Exchange under
the symbol "ALU".  There is no established public trading market for our Class B
common Stock.

         The following  table sets forth the quarterly  high and low sales price
of the Class A common stock during our last two fiscal years:
<TABLE>
<CAPTION>

                                                                        HIGH                   LOW
                                                                        ----                   ---
FISCAL YEAR ENDING MARCH 31, 1999:
<S>                                                                       <C>                 <C>
Quarter ending June 30, 1998.........................................     $16.00              $7.938
Quarter ending September 30, 1998....................................      11.25               4.313
Quarter ending December 31, 1998.....................................      12.25               3.375
Quarter ending March 31, 1999........................................      12.875              7.625

FISCAL YEAR ENDING MARCH 31, 2000:
Quarter ending June 30, 1999.........................................     $14.25              $7.625
Quarter ending September 30, 1999....................................       7.375              5.375
Quarter ending December 31, 1999.....................................       8.75               5.375
Quarter ending March 31, 2000........................................       9.50               6.312
Quarter ending June 30, 2000
          (through June 6, 2000).....................................     $ 8.00              $5.625
</TABLE>

Holders
-------

           As of June 26,  2000,  there were 93 holders of record of our Class A
common  stock and 4 holders  of record of our Class B common  stock.  Based upon
conversations  with  brokers,  management  believes  that there are in excess of
1,000 beneficial owners of the Class A common stock.

Dividends
---------

           We have not paid a dividend on our shares of Class A common  stock or
Class B  common  stock  and  have no  present  expectation  of  doing  so in the
foreseeable future.


                                      -9-
<PAGE>


                        ITEM 6. SELECTED FINANCIAL DATA .
                         ALLOU HEALTH & BEAUTY CARE INC.

INCOME STATEMENT DATA:
<TABLE>
<CAPTION>

                                                                              Years Ended March 31,
                                                   2000               1999(1)        1998(1)            1997                1996
                                                   ----               -------        -------            ----                ----
                                                                          (In thousands, except for per share data)
<S>                                               <C>               <C>               <C>              <C>                 <C>
Revenues                                          $421,047          $334,175          $301,092         $285,311            $273,322
Costs of revenues                                  367,964           289,637           262,237          250,843             241,734
                                                  --------          --------          --------         --------            --------
Gross profit                                        53,083            44,538            38,855           34,468              31,588

Warehouse and delivery expense                      12,307            10,279             9,288            8,592               8,063
Selling, general and
  administrative expense                            18,520            14,707            13,264           12,766              11,894
                                                  --------          --------          --------         --------            --------
Income from operations                              22,256            19,552            16,303           13,110              11,631
Interest and other                                  10,874             9,647             8,470            6,567               5,513
                                                  --------          --------          --------         --------            --------
Income from operations
  before income taxes                               11,382             9,905             7,833            6,543               6,118
                                                  --------          --------          --------         --------            --------
Discontinued operations, net
  of income taxes                                    7,916             4,599               576
                                                  --------          --------          --------
Net income                                         $14,959        $    1,348        $    4,280       $    4,059           $   3,757
                                                  ========          ========          ========         ========            ========

Net income per common share (2)

Basic:

Operations                                        $   1.05       $       .98        $      .84
Discontinued operations                               1.17       (       .76)       (      .10)
                                                  --------          --------          --------
                                                  $   2.22       $       .22        $      .74        $     .71          $      .66
                                                  ========          ========          ========         ========            ========
Diluted:

Operations                                       $     .97       $       .87        $      .81
Discontinued operations                               1.08       (       .67)       (      .09)
                                                  --------          --------          --------
                                                  $   2.05       $       .20        $      .72       $      .70          $      .65
                                                  ========          ========          ========         ========            ========
Balance Sheet Data:
                                                                                 As of March 31,
                                                   2000            1999               1998              1997                 1996
                                                   ----            ----               ----              ----                 ----
Cash                                           $        51        $      400        $       47       $       77           $      144
Working capital                                     64,725            52,192            43,959           42,052               37,557
Total assets                                       259,955           219,907           178,384          161,348              126,185
Total long-term liabilities                          1,640               724             1,354            1,841                  560
Total liabilities                                  183,799           159,571           125,771          113,121               82,016
Stockholders' equity                                76,157            60,336            52,613           48,227               44,168
</TABLE>

-----------------------
 (1) As a result of the sale at the  Company  of its  majority  interest  in The
Fragrance  Counter  Inc.,  the statement of income for the prior years have been
restated to segregate the net results of continued and discontinued operations.
 (2) Net income per common  share for fiscal  1997 and prior  periods  have been
restated in accordance with Financial  Accounting  Standards No. 128,  'Earnings
Per Share,  which requires  presentation of basic earnings per share and diluted
earnings per share.


                                      -10-
<PAGE>

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

RESULTS OF OPERATIONS

FISCAL 2000 COMPARED TO FISCAL 1999

         Revenues.  Revenues for the fiscal year ended March 31, 2000  increased
$86.9  million or 26% to $421.0  million,  as compared  to restated  revenues of
$334.2  million for the fiscal year ended March 31, 1999,  which  resulted  from
increased  revenues  from all segments of our business as described  below.  The
increased  demand for our  products  resulted  from an expanded  customer  base,
increases in same store sales and through revenues  generated as a result of our
acquisition of Tri-State Pharmaceutical  Consultants,  Corp., consummated during
the fourth quarter of fiscal 2000.

         Contributions  to this  increase in  revenues by product  segment is as
follows:  health and beauty aids increased 19% in fiscal 2000 compared to fiscal
1999 due to increases in same store sales and expanded  customer base.  Prestige
designer  fragrances  grew 20% in fiscal 2000  compared to fiscal 1999 due to an
increase in same store sales and an expanded  customer base, thus increasing the
volume of products  sold.  Nationally  advertised  branded  non-perishable  food
products  increased 38% in fiscal 2000, when compared to fiscal 1999, Because of
greater  quantities  of  promotionally  priced  non-perishable  food  items were
available  to us from our vendors  during  fiscal  2000.  Sales of  prescription
pharmaceuticals increased 135% in fiscal 2000 when compared to prior year.

         Cost of Goods Sold.  Cost of goods sold for the fiscal year ended March
31,  2000  increased  as a  percentage  of  revenues to 87.4% from 86.7% for the
restated  fiscal year ended March 31, 1999.  This  increase in the cost of goods
sold resulted  primarily  from  decreased  profit  margins  associated  with the
distribution of pharmaceutical products.

         Warehouse,  Delivery,  Selling,  General and  Administrative  Expenses.
Warehouse, Delivery, Selling, General and Administrative expenses for the fiscal
year  ended  March 31,  2000  increased  $5.3  million or 7.3% of sales to $30.8
million,  as compared to restated expenses of $24.9 million or 7.5% of sales for
the  fiscal  year  ended  March 31,  1999.  This  increase  was  largely  due to
marketing,  delivery and warehouse  expenses  associated  with our  wholly-owned
manufacturing subsidiary, Allou Personal Care.

         Interest Expense.  Interest expense for the fiscal year ended March 31,
2000  increased  $1.2 million or 2.6% as a percentage of sales to $10.9 million
as compared to $9.6 million or 2.9% restated for the fiscal year ended March 31,
1999 due to increased borrowings at a higher rate.

         Net  Income.  Our net income for the fiscal  year ended  March 31, 2000
increased $13.6 million or 901% to $14.9 million as compared to $1.3 million for
the fiscal year ended March 31, 1999. This increase in net income is due in part
to the sale of a majority  interest in our Internet  subsidiary during the first
quarter of fiscal 2000. Our  independent  auditors in accordance  with generally
accepted accounting  standards restated the financial statements of fiscal 1999,
to reflect the gains and losses resulting from the sale of our majority interest
in our Internet  subsidiary.  Therefore,  net income from continuing  operations
restated for fiscal 2000 is  $7,043,548 or 97 cents per share when compared to a
restated income from continuing  operations for fiscal year ended March 31, 1999
of $5,946,878.  Net income due to gains and losses from discontinued operations
for fiscal 2000 is $14,959,185  or $2.05 per share,  when compared to $1,347,855
or 20 cents per share for the same period a year-earlier.


                                      -11-
<PAGE>

FISCAL 1999 COMPARED TO FISCAL 1998

         Revenues.  Revenues for the fiscal year ended March 31, 1999  increased
$33.1 million or 12% to $334.2  million,  as compared to $301.1 million for the
fiscal year ended March 31, 1998,  which resulted from  increased  revenues from
certain  segments of our business as described  below.  The increased demand for
our products resulted from an expanded customer base and increases in same store
sales.

         Contributions  to this  increase in  revenues by product  segment is as
follows:  Health & Beauty Aids  increased  17% in fiscal 1999 compared to fiscal
1998 due to increases in same store sales. Prestige designer fragrances grew 19%
in fiscal  1999  compared  to fiscal 1998 due to an increase in same store sales
and an  expanded  customer  base thus,  increasing  the volume of product  sold.
Nationally  advertised  branded  non-perishable  food products  decreased 33% in
fiscal  1999 when  compared  to fiscal  1998.  This  segment of our  business is
categorized by our ability to purchase off- price, non-perishable branded foods.
During fiscal 1999 demand outpaced supply  resulting in an increase in the price
that we would have to pay for merchandise which we would distribute.  We decided
to limit sales in this  segment of our business to a level which would result in
improved profit margins. Sales of prescription pharmaceuticals remain relatively
constant in fiscal 1999 when compared to the prior year.

Cost of Goods Sold. Cost of goods sold for the fiscal year ended March 31, 1999
decreased as a  percentage  of revenues to 86.7 % from 87.1% for the fiscal year
ended March 31, 1998. This decrease in the cost of goods sold resulted primarily
from improved  profit  margins  associated  with the  distribution  of fragrance
products.

Warehouse,  Delivery,  Selling,  General & Administrative  Expenses.  Warehouse,
Delivery,  Selling,  General & Administrative Expenses for the fiscal year ended
March 31, 1999 increased  $2.4 million or 10.8% to $24.9 million.  This increase
was due largely to  increases  in  expenses  associated  with our  manufacturing
subsidiary expenses for fiscal 1999 were restated for reasons discussed above.

Interest  Expense.  Interest  expense  for the fiscal  year ended March 31, 1999
increased $1.2 million or 14% to $9.6 million as compared to $8.5 for the fiscal
year ended March 31, 1998, due to increased borrowings at a higher rate.

Net  Income.  Net income  from  continuing  operations  restated  for reasons as
discussed  above  increased $1.1 million or 22.4% to $5.9 million as compared to
$4.8 million for the fiscal year ended March 31, 1998,  due primarily to factors
discussed above.

LIQUIDITY AND CAPITAL RESOURCES

         Cash  decreased  $348,800 to $51,311 at March 31, 2000 from $400,090 at
the beginning of the fiscal year.

         Our working  capital  increased $12.5 million to $64.7 million at March
31, 2000 from $52.2  million at March 31, 1999,  primarily due to an increase in
accounts  receivable  and  inventories  less an  increased  amount due the bank,
accounts payable and accrued expenses.

                                      -12-
<PAGE>

         At March 31, 2000 we had $148.5 million in borrowings and approximately
$15.0 million of unused credit under our $163.5 million credit facility. Our new
credit  facility is secured by a security  interest in certain of our assets and
properties including the capital stock of certain of our subsidiaries.

         We  require   capital   principally   to  grow  the  business   through
acquisition,  expansion of current operations,  to pay off debt, and for general
operating purposes.  We currently estimate capital expenditures of approximately
$2.0  million  per  annum  are  required  to  adequately  maintain  our  current
operations.

         Our primary  sources of  liquidity  are  expected to be cash flows from
operations  and our  financing  agreement  with a consortium of banks led by the
Fleet Capital,  Corp. for financing our accounts  receivable and inventory under
our  $163.5  million  bank  line of  credit.  The  loan is  collaterized  by our
inventory  and  accounts  receivable.  Interest  on the loan  balance is payable
monthly  at 3/8%  above the prime  rate or 2% above the  Eurodollar  rate at our
option.  The  effective  interest rate charged to us at March 31, 2000 was 8.06%
which was based on a combination of 2% above the Eurodollar  rate and 3/8% above
the prime rate. We utilize cash generated from  operations to reduce  short-term
borrowings, which in turn acts to increase loan availability consistent with our
financing  agreement.  During the first  quarter of fiscal 2001 we were approved
for an increase to our  revolving  line of credit to $200  million of which $185
million  was  funded  during  May  2000.  This  financing  agreement  is  with a
consortium of banks led by Fleet Capital,  Corp. The loan is  collateralized  by
our  inventory  and  accounts  receivable.  Interest on the loan balance is .75%
above the prime rate or 2.5% above the Eurodollar rate at our option.

         Based upon current  levels of operations  and  anticipated  growth,  we
expect that  sufficient  cash flows will be generated  from  operations so that,
combined with other financing  alternatives and other refinancing  opportunities
we will be able to meet all of our debt service, capital expenditure and working
capital requirements.

         Operations  for the year  ended  March  31,  2000,  excluding  non-cash
charges for depreciation  and  amortization and deferred income taxes,  provided
cash of $7.3 million.  Other changes in assets and  liabilities  resulting  from
operating  activities  for the year  ended  March  31,  2000  used cash of $42.8
million,  resulting in net cash used in operating  activities of $35.6  million.
Investing  activities,  which principally consisted of acquisitions of property,
plant and  equipment,  resulted in a use of cash of $712,090  for the year ended
March 31, 2000. For the year ended March 31, 2000, financing activities provided
cash of  $28.0  million,  principally  consisting  of  increased  borrowing  and
issuance of common stock.

INFLATION AND SEASONALITY

         Inflation has not had any  significant  adverse effects on our business
and we do not  believe  it  will  have  any  significant  effect  on our  future
business.  Our  fragrance  business is seasonal,  with greater  sales during the
Christmas  season  than in  other  seasons.  Our  other  product  lines  are not
seasonal.

                                      -13-
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The  information  required  by this time is set forth in the  Financial
Statements, commencing on page F-1 included herein.

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

         None.

                                    PART III

         The  information  called  for by Part III  (Items  10,11,12  and 13) is
incorporated  by  reference  to such  information  as it will be included in our
definitive   Proxy  Statement  with  respect  to  our  2000  Annual  Meeting  of
Stockholders  to be filed  pursuant  to  Regulation  14A  under  the  Securities
Exchange Act of 1934, as amended.

                                      -14-
<PAGE>


                                     PART IV


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

         (a)      Documents filed as part of this Report.
<TABLE>
<CAPTION>
                <S>      <C>                                                                                 <C>
                  1.       Financial Statements                                                                Page
                                                                                                               ----

                           Report of Independent Auditor........................................................F-1

                           Consolidated Balance Sheets -- March 31, 2000 and 1999...............................F-2

                           Consolidated Statements of Income -- Years ended March 31, 2000,
                           1999 and 1998........................................................................F-3

                           Consolidated Statements of Stockholders' Equity -- Years ended March
                           31, 2000, 1999 and 1998..............................................................F-4

                           Consolidated Statement of Cash Flows -- Years ended March 31, 2000,
                           1999 and 1998........................................................................F-5

                           Selected Financial Data .............................................................F-6

                           Notes to Consolidated Financial Statements...........................................F-7

                  2.       Financial Statement Schedules

                           Schedule VIII-   Valuation and Qualifying Accounts and Reserve                       S-1
</TABLE>

         (b)      Reports on Form 8-K.

         No  reports on Form 8-K were  filed by the  Registrant  during the last
fiscal quarter of the period covered by this Report.

         (c)      Exhibits.

                  The following Exhibits are filed as a part of this Report:

Exhibit No.                         Description

3.1      Restated  Certificate  of  Incorporation  of the  Registrant  (filed as
         Exhibit  3.1 to  Registrant's  Quarterly  Report  on Form  10-Q for the
         fiscal quarter ended September 30, 1996 Commission File No. 1-10340 and
         incorporated herein by reference).

3.2      By-Laws  of  the  Registrant  (filed  as  Exhibit  3b  to  Registration
         Statement  No.  33-26981 on Form S-1  ("Registrant's  Form  S-1"),  and
         incorporated herein by reference).


                                      -15-
<PAGE>


10.4     Employment  Contract  dated as of June 30, 1996 between the  Registrant
         and Ramon  Montes  (filed as  Exhibit  10.3 to  Registrant's  Quarterly
         Report  on Form  10-Q  for the  fiscal  quarter  ended  June  30,  1996
         Commission File No. 1-10340 and incorporated herein by reference).

10.5     Amended and Restated 1989 Incentive Stock Option Plan (filed as Exhibit
         10(e) to  Registrant's  Annual  Report on From 10-K for the fiscal year
         ended  March 31, 1990  Commission  File No.  1-10340  and  incorporated
         herein by reference).

10.6     1991 Stock  Option  Plan  (filed as Exhibit  10(e)(1)  to  Registrant's
         Post-Effective   Amendment   No.  1  to   Registrant's   Form  S-1  and
         incorporated herein by reference).

10.7     1992 Stock  Option  Plan  (filed as Exhibit  10(e)(2)  to  Registrant's
         Annual  Report on From 10-K for the fiscal  year ended  March 31,  1993
         Commission File No. 1-10340 and incorporated herein by reference).

10.8     1995 Nonqualified Stock Option Plan (filed as Exhibit A to Registrant's
         1996  Definitive  Proxy  Statement on Schedule 14A Commission  File No.
         1-10340      and      incorporated      herein      by      reference).

10.9     1996  Stock  Option  Plan  (filed  as  Exhibit B to  Registrant's  1996
         Definitive  Proxy Statement on Schedule 14A Commission File No. 1-10340
         and incorporated herein by reference).

10.10    Lease Agreement dated December 8, 1993 between Allou Distributors, Inc.
         and Brentwood  Distribution Co. (filed as Exhibit 10(f) to Registrant's
         Annual  Report on Form 10-K for the fiscal  year ended  March 31,  1995
         Commission File No. 1-10340 ("1995 Form 10-K") and incorporated  herein
         by reference).

10.11    Lease  Agreement  dated  March 4, 1980  between  Registrant  and Pueblo
         Supermarkets,  Inc. (filed as Exhibit 10g to Registrant's  Form S-1 and
         incorporated herein by reference).

10.12    Lease Agreement dated January 1, 1993 between M. Sobol,  Inc. and Simon
         and Barbara J. Mandell (filed as Exhibit 10(g) to  Registrant's  Annual
         Report on Form 10-K for the fiscal year ended March 31, 1994 Commission
         File  No.  1-10340  ("1994  Form  10-K")  and  incorporated  herein  by
         reference).

10.13    Agreement dated December 13, 1994 between Allou Distributors,  Inc. and
         the National  Organization of Industrial Trade Unions (filed as Exhibit
         10(i) to the  Registrant's  1995 Form 10-K and  incorporated  herein by
         reference).

10.14    Agreement dated December 15, 1997 between Allou Distributors,  Inc. and
         Local No. 1. (titled as Exhibit 10.14 to the Registrant's 1998 10-K and
         incorporated herein by reference).

10.15    Third  Restated and Amended  Revolving  Credit and  Security  Agreement
         dated  October 22, 1997 among  BankBoston,  N.A.,  IBJ Schroder  Bank &
         Trust Company,  Sanwa Business  Credit  Corporation,  LaSalle  Business
         Credit,  Inc.,  Bank Leumi Trust Company of New York,  The Dime Savings
         Bank of New  York,  FSB,  The  First  National  Bank of  Maryland,  Key
         Corporate  Capital,  Inc.  (titled as Exhibit 10.15 to the Registrant's
         1998 10-K and incorporated herein by reference).

10.16    Master  Lease  Finance  Agreement  dated as of April 24,  1996  between
         BankBoston Leasing Inc. and Allou Distributors,  Inc. (filed as Exhibit
         10.14 to Registrant's 1996 10-K and incorporated herein by reference).

                                      -16-
<PAGE>


21       Subsidiaries  of the  Registrant  (filed as Exhibit 21 to  Registrant's
         1996 10-K and incorporated herein by reference).

*23      Consent of Mayer Rispler & Company, P.C.

*27      Financial Data Schedule


----------------
* Filed herewith


                                      -17-
<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.


                                        ALLOU HEALTH & BEAUTY CARE, INC.

                                        By:     /s/ Victor Jacobs
                                           ---------------------------
                                                    Victor Jacobs
                                                    Chairman of the Board and
                                                    Chief Executive Officer

Dated:   June 29, 2000


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


                SIGNATURE                                   TITLE                              DATE
                ---------                                   -----                              ----

<S>                                                                                                   <C>
                                             Chairman of the Board, and Chief                    June 29, 2000
/s/ Victor Jacobs                            Executive Officer
-------------------------------------------
Victor Jacobs


/s/ Herman Jacobs                            President and Director                              June 29, 2000
-------------------------------------------
Herman Jacobs


                                             Chief Financial Officer, Chief
/s/ David Shamilzadeh                        Accounting Officer and                              June 29, 2000
-------------------------------------------  Director
David Shamilzadeh


/s/ Jack Jacobs                              Director                                            June 29, 2000
-------------------------------------------
Jack Jacobs


/s/ Sol Naimark                              Director                                            June 29, 2000
-------------------------------------------
Sol Naimark


/s/ Jeffrey Berg                             Director                                            June 29, 2000
-------------------------------------------
Jeffrey Berg


/s/ Stuart Glasser                           Director                                            June 29, 2000
--------------------------------------
Stuart Glasser
</TABLE>


                                      II-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------


Board of Directors & Stockholders:
Allou Health & Beauty Care, Inc.
Brentwood, New York

     We have  audited  the  accompanying  consolidated  balance  sheets of Allou
Health  &  Beauty  Care,  Inc.  as of March  31,  2000 and 1999 and the  related
consolidated statements of income,  stockholders' equity and cash flows for each
of the years in the  three-year  period  ended March 31, 2000.  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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the financial position of Allou Health
and  Beauty  Care,  Inc.  at March 31,  2000 and 1999,  and the  results  of its
operations  and its cash  flows for each of the years in the  three-year  period
ended  March  31,  2000,  in  conformity  with  generally  accepted   accounting
principles.




New York, New York
June 19, 2000

                                      F-1

<PAGE>

                       ALLOU HEALTH AND BEAUTY CARE, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                      ASSETS
                                                      ------
<TABLE>
<CAPTION>
                                                                                          March 31,            March 31,
                                                                                            2000                 1999
                                                                                            ----                 ----
Current Assets
--------------
<S>                                                                                  <C>                    <C>
   Cash                                                                              $         51,311       $      400,090
   Accounts Receivable (net of allowance
    for doubtful accounts of $1,285,000
    and $1,615,965, respectively)                                                          75,853,958           50,162,450
   Inventories                                                                            163,752,266          122,917,911
   Prepaid Purchases                                                                        2,942,409           24,682,481
   Other Current Assets                                                                     4,283,598           12,876,642
                                                                                         ------------         ------------
         Total Current Assets                                                            $246,883,542         $211,039,574

   Property and Equipment, Net                                                              3,924,543            3,839,906
   Other Assets                                                                             9,147,367            5,027,901
                                                                                         ------------         ------------
                TOTAL ASSETS                                                             $259,955,452         $219,907,381
                                                                                         ============         ============


                                        LIABILITIES & STOCKHOLDERS' EQUITY
                                        ----------------------------------
Current Liabilities
-------------------
   Amounts Due Bank                                                                      $148,470,692         $123,371,228
   Current Portion of Long-Term Debt                                                        1,831,547              707,652
   Accounts Payable and Accrued Expenses                                                   29,289,177           33,936,223
   Income Taxes Payable                                                                     2,566,969              832,000
                                                                                         ------------         ------------
         Total Current Liabilities                                                       $182,158,385         $158,847,103
                                                                                                              ------------
Long Term Liabilities
---------------------
   Long-Term Debt                                                                           1,640,222              724,234
                                                                                         ------------         ------------
         Total Long Term Liabilities                                                        1,640,222              724,234
                                                                                         ------------         ------------
                TOTAL LIABILITIES                                                        $183,798,607         $159,571,337
                                                                                         ------------         ------------

Commitments and Contingencies

Stockholders' Equity
--------------------
   Preferred Stock, $.001 par value, 1,000,000
    shares authorized, none issued and outstanding.

   Class A Common Stock, $.001 par value;
     15,000,000 shares authorized; 5,566,273 and
     5,339,122 shares issued and outstanding, respectively                           $          5,566     $          5,339
   Class B Common Stock, $.001 par value;
     2,200,000 shares authorized;
     1,200,000 shares issued and outstanding                                                    1,200                1,200
   Additional Paid-In Capital                                                              30,818,158           29,956,769
   Retained Earnings                                                                       45,331,921           30,372,736
                                                                                         ------------         ------------
                TOTAL STOCKHOLDERS' EQUITY                                                 76,156,845           60,336,044
                                                                                         ------------         ------------
                TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                 $259,955,452         $219,907,381
                                                                                         ============         ============
</TABLE>

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

                                      F-2

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                                  Years Ended March 31,
                                                                   2000                   1999                 1998
                                                                   ----                   ----                 ----
<S>                                                               <C>                    <C>                  <C>
Revenues                                                          $421,046,773           $334,175,150         $301,092,217
Costs of Revenues                                                  367,963,675            289,637,296          262,236,856
                                                                  ------------           ------------         ------------
                Gross Profit                                        53,083,098             44,537,854           38,855,361
                                                                  ------------           ------------         ------------
Operating Expenses
------------------

   Warehouse and Delivery                                           12,306,859             10,279,515            9,288,146
   Selling, General and Administrative                              18,519,681             14,706,612           13,264,610
                                                                  ------------           ------------         ------------
         Total Operating Expenses                                   30,826,540             24,986,127           22,552,756
                                                                  ------------           ------------         ------------
         Income From Operations                                     22,256,558             19,551,727           16,302,605
                                                                  ------------           ------------         ------------
Other (Expense) Income
----------------------

   Interest Expense                                              (  10,902,244)         (   9,655,427)      (    8,482,859)
   Other                                                                28,234                  9,098               13,168
                                                                  ------------           ------------         ------------
         Total                                                   (  10,874,010)        (    9,646,329)      (    8,469,691)
                                                                  ------------           ------------         ------------
         Income Before Income Taxes                                 11,382,548              9,905,398            7,832,914

   Provision for Income Taxes                                        4,339,000              3,958,520            2,976,507
                                                                  ------------           ------------         ------------
   Income From Continuing Operations                                 7,043,548              5,946,878            4,856,407
                                                                  ------------           ------------         ------------
Discontinued Operations:

Loss From Discontinued Operations
 Net of Income Taxes                                           (       516,764)        (    6,399,023)     (       576,197)

   Gain on Disposal of Segment
    Net of Income Taxes                                              8,432,401              1,800,000                - 0 -
                                                                  ------------           ------------         ------------
         Gain (Loss) on Discontinued Operations                      7,915,637         (    4,599,023)     (       576,197)
                                                                  ------------           ------------         ------------
         NET INCOME                                              $  14,959,185         $    1,347,855       $    4,280,210
                                                                  ============           ============         ============
Earnings (Loss) Per Common Share - Basic
----------------------------------------

   Continuing Operations                                                 $1.05                  $.98                  $.84
   Discontinued Operations                                                1.17                  (.76)                 (.10)
                                                                          ----                  ----                  ----
         Net Earnings Per Share                                          $2.22                   $.22                 $.74
                                                                         =====                   ====                 ====
Earnings (Loss) Per Common Share - Diluted
------------------------------------------

   Continuing Operations                                                $  .97                   $.87                 $.81
   Discontinued Operations                                                1.08                   (.67)                (.09)
                                                                          ----                  ----                  ----
         Net Earnings Per Share                                          $2.05                   $.20                 $.72
                                                                         =====                   ====                 ====

Shares Used in Computing Earnings Per Common Share
--------------------------------------------------

   Basic                                                             6,673,617              6,061,431            5,757,328
                                                                  ============           ============         ============
   Diluted                                                           7,296,884              6,800,143            5,972,392
                                                                  ============           ============         ============
</TABLE>
   The accompanying notes are an integral part of these consolidated financial
                                   statements.

                                      F-3
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>

                                                         Common            Additional             Retained
                                                          Stock          Paid In Capital          Earnings              Total
                                                          -----          ---------------          --------              -----
<S>                                                       <C>               <C>                   <C>                 <C>
Balance, March 31, 1997                                   $5,752            $23,476,508           $24,744,671         $48,226,931

Net Proceeds From Exercise
  of Options                                                  18                105,732                 - 0 -             105,750

Net Income                                                 - 0 -                  - 0 -             4,280,210           4,280,210
                                                           -----                 -----             ----------          ----------
Balance, March 31, 1998                                   $5,770            $23,582,240           $29,024,881         $52,612,891

Net Proceeds From Exercise
  of Options                                                 102               701,852                  - 0 -             701,954

Issuance of Common Stock                                     667             5,672,677                  - 0 -           5,673,344

Net Income                                                 - 0 -                 - 0 -              1,347,855           1,347,855
                                                           -----                 -----             ----------          ----------
Balance, March 31, 1999                                   $6,539           $29,956,769            $30,372,736         $60,336,044

Net Proceeds From Exercise of Options                         66               360,696                  - 0 -             360,762

Issuance of Common Stock                                     161               500,693                  - 0 -             500,854

Net Income                                                 - 0 -                 - 0 -             14,959,185          14,959,185
                                                           -----                 -----             ----------          ----------

Balance, March 31, 2000                                   $6,766           $30,818,158            $45,331,921         $76,156,845
                                                          ======           ===========            ===========         ===========
</TABLE>

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

                                      F-4
<PAGE>


                        ALLOU HEALTH AND BEAUTY CARE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                          Years Ended March 31,
                                                                            2000                   1999                 1998
                                                                            ----                   ----                 ----
Cash Flows From Operating Activities
------------------------------------
<S>                                                                      <C>                    <C>                 <C>
   Net Income From Continuing Operations                                 $  7,043,548           $  5,946,878        $  4,856,407

Adjustments to Reconcile Net Income to Net Cash
  Used in Operating Activities:

   Income (Loss) From Discontinued Operations                               7,915,637           (  4,599,023)      (     576,197)
   Depreciation and Amortization                                              939,198                832,613             687,604
   Deferred Income Taxes                                                (     725,600)               832,000               - 0 -

Decrease (Increase) In Assets:

     Accounts Receivable                                                  (25,691,508)          (  6,044,539)          4,306,971
     Inventories                                                          (40,834,355)           (10,387,252)        (15,869,556)
     Other Assets                                                          26,401,905            (24,679,102)       (  5,638,365)

Increase (Decrease) In Liabilities:

     Accounts Payable and Accrued Expenses                               (  2,186,477)            20,761,274      (      823,692)
                                                                          -----------            -----------         -----------
        Net Cash Used In Operating Activities                             (27,137,652)           (17,337,151)        (13,056,828)
                                                                          -----------            -----------         -----------
Cash Flows From Investing Activities
------------------------------------

     Acquisition of Property and Equipment                              (     712,090)          (    891,390)      (     553,011)
                                                                          -----------            -----------         -----------

Cash Flows From Financing Activities
------------------------------------

     Net Increase in Amounts Due Bank                                      25,099,464             12,774,467          13,856,508
     Borrowings                                                             3,993,256                108,704             215,771
     Repayment of Debt                                                   (  1,953,373)         (     676,513)        (   598,046)
     Net Proceeds from Exercise of Options
       and Issuance of Common Stock                                           361,616              6,375,298             105,750
                                                                          -----------            -----------         -----------
         Net Cash Provided By Financing Activities                         27,500,963             18,581,956          13,579,983
                                                                          -----------            -----------         -----------
               NET (DECREASE) INCREASE IN CASH                          (     348,779)               353,415       (      29,856)


               CASH AT BEGINNING OF YEAR                                      400,090                 46,675              76,531
                                                                          -----------            -----------         -----------
               CASH AT END OF YEAR                                     $       51,311          $     400,090      $       46,675
                                                                          ===========            ===========         ===========
Supplemental Disclosures of Cash Flow Information:

   Cash Paid For:
     Interest                                                             $10,762,927            $10,162,264         $  8,364,098
     Income Taxes                                                        $  5,279,000           $  1,474,304         $  2,773,345

   Non-Cash Financing Activities:
     Notes Issued                                                        $  2,873,369          $     108,764        $     215,771
     Common stock issued for business acquisition                             500,000                  - 0 -               -  0 -
</TABLE>
   The accompanying notes are an integral part of these consolidated financial
                                   statements.

                                      F-5

<PAGE>

                        SELECTED QUARTERLY FINANCIAL DATA
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                           First             Second               Third              Fourth
                                          Quarter            Quarter             Quarter             Quarter               Total
                                          -------            -------             -------             -------               -----
March 31, 2000
--------------
<S>                                       <C>                <C>                 <C>                <C>                 <C>
Revenues                                  $78,147,211        $101,011,666        $108,094,099       $133,793,797        $421,046,773

Income from
 continuing operations                      1,335,745           2,063,686           1,915,933          1,728,184           7,043,548
Income (loss) from
 discontinued operations                   12,796,461               - 0 -               - 0 -   (a) (  4,880,824)          7,915,637
                                          -----------       -------------       -------------      -------------         -----------
Net income (loss)                         $14,132,206       $   2,063,686       $   1,915,933      $(  3,152,640)        $14,959,185
                                          ===========       =============       =============      =============         ===========

Earnings per common share - basic
---------------------------------

   Continuing operations                       $  .20               $ .31               $ .29              $ .25               $1.05
   Discontinued operations                       1.93               - 0 -               - 0 -               (.76)               1.17
                                               ------               -----               -----              -----               -----
       Net income (loss)                        $2.13               $ .31               $ .29              $(.51)              $2.22
                                                =====               =====               =====              =====               =====

Earnings per common shares - diluted
------------------------------------

   Continuing operations                       $  .18               $ .29               $ .27              $ .24              $  .98
   Discontinued operations                       1.69               - 0 -               - 0 -               (.61)               1.08
                                               ------               -----               -----              -----               -----
       Net income (loss)                        $1.87               $ .29               $ .27              $(.37)              $2.06
                                                =====               =====               =====              =====               =====

a)   Reflects  an  adjustment  due to the  Company's  100%  valuation  allowance
     against its note receivable net of taxes. (see note 2)

March 31, 1999
--------------

Revenues                                  $68,321,125         $88,985,409         $87,998,697        $88,869,919       $334,175,150

Income from
 continuing operations                      1,337,114           1,387,100           1,684,738          1,537,926          5,946,878
Loss from
 discontinued operations                 (    639,962)       (  1,150,356)      (     100,611)       ( 2,708,094)       ( 4,599,023)
                                          -----------       -------------       -------------      -------------        -----------
Net income (loss)                       $     697,152       $     236,744        $  1,584,127       $( 1,170,168)       $ 1,347,855
                                          ===========       =============       =============      =============        ===========
Earnings per common share - basic
---------------------------------

   Continuing operations                        $ .23               $ .23               $ .28              $ .24             $ .98
   Discontinued operations                       (.11)               (.19)               (.01)              (.45)             (.76)
                                               ------               -----               -----              -----              -----
       Net income (loss)                        $ .12               $ .04               $ .27              $(.21)            $ .22
                                                =====               =====               =====              =====              =====

Earnings per common share - diluted
-----------------------------------

   Continuing operations                        $ .21               $ .23               $ .26              $ .17             $ .87
   Discontinued operations                       (.10)               (.19)               (.02)              (.36)             (.67)
                                               ------               -----               -----              -----              -----
       Net income (loss)                        $ .11               $ .04               $ .24              $(.19)            $ .20
                                                =====               =====               =====              =====              =====
</TABLE>

     Earnings  per  common  share  are  computed  independently  for each of the
quarters  presented.  Therefore,  the  sum of the  quarterly  per  common  share
information may not equal the annual earnings per common share.


                                      F-6
<PAGE>
                       ALLOU HEALTH AND BEAUTY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     DESCRIPTION  OF  OPERATIONS  - The  Company is engaged in the  business  of
distributing brand name health and beauty aids, cosmetics,  fragrances,  grocery
products and pharmaceuticals.  The Company also distributes generic brand health
and beauty aids and manufactures hair and skin care products.  The Company sells
these products primarily to retailers throughout the United States.

     PRINCIPLES  OF  CONSOLIDATION  - The  accompanying  consolidated  financial
statements  include  the  accounts  of the  Company  and its  subsidiaries.  All
significant intercompany transactions and balances have been eliminated.

     REVENUE  RECOGNITION  - The  Company  recognizes  revenue  at the  time the
products are shipped to the customer.

     FAIR VALUE OF  FINANCIAL  INSTRUMENTS  - The  carrying  values of financial
instruments  approximate  fair value due to the relatively  short period of time
between  origination of the instruments and their expected  realization,  or, in
the case of notes payable,  because the notes are at interest rates  competitive
with  those  that  would be  available  to the  Company  in the  current  market
environment.

     CONCENTRATION  OF CREDIT  RISK - The  Company  extends  credit  based on an
evaluation of the customer's  financial  condition,  generally without requiring
collateral.  Exposure to losses on receivables is principally  dependent on each
customer's  financial  condition.  The Company  monitors its exposure for credit
losses and maintains allowances for anticipated losses.

     Concentration  of credit risk with respect to trade accounts  receivable is
limited due to the number of entities and the size of those entities  comprising
the Company's  customer base. No single customer  accounted for more than 10% of
the Company's  consolidated  net revenues  during fiscal years 2000,  1999  and
1998.

     INVENTORIES - Inventories,  which consist of finished goods,  are stated at
the lower of average cost (first-in first-out) method or market.

     PROPERTY  AND  EQUIPMENT  -  Property  and  equipment  are  stated at cost.
Depreciation is provided over the estimated useful lives of the assets by use of
straight-line and accelerated methods.

     GOODWILL - Goodwill  representing the excess of the purchase price over the
fair value of net assets  acquired is being  amortized  using the  straight-line
method,  over periods ranging from ten to forty years. The Company  periodically
performs  reviews  to  evaluate  the   recoverability   of  goodwill  and  other
intangibles and takes into account events or circumstances  that warrant revised
estimates of useful lives or that indicate that an impairment exists.


                                      F-7
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     INCOME TAXES - The  provision  for income taxes is determined in accordance
with SFAS No.  109,  "Accounting  for  Income  Taxes."  Deferred  tax assets and
liabilities arise from temporary differences between the tax bases of assets and
liabilities and their reported amounts in the consolidated  financial statements
that will result in taxable or deductible amounts in future years.

     PER SHARE DATA - Basic  earnings per share is based on the weighted  effect
of all common shares issued and  outstanding,  and is calculated by dividing net
income  available  to  common   stockholders  by  the  weighted  average  shares
outstanding  during the period.  Diluted  earnings  per share is  calculated  by
dividing net income by the weighted  average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be  issued  assuming  conversion  of  all  potentially  dilutive  common  shares
outstanding.

     STOCK  BASED  COMPENSATION  - The  Company  accounts  for stock  options as
prescribed  by APB  Opinion  No.  25 and  discloses  the pro  forma  information
required by Statement of Financial Accounting Standards No. 123. Accordingly, no
compensation  expense has been recognized in the financial statement for options
granted  with an exercise  price at least  equal to market  value at the date of
grant or in connection with the employee stock purchase plans.

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

     IMPACT  OF  RECENTLY  ISSUED  ACCOUNTING  STANDARDS  - In  June  1998,  the
Financial  Accounting  Standards Board issued Statement No. 133,  Accounting for
Derivative  Instruments and Hedging Activities,  which is required to be adopted
in years  beginning  after June 15,  2000.  Because the Company  does not employ
derivatives,  management  believes that the adoption of the new  Statement  will
have no effect on earnings or the financial position of the Company.

     RECLASSIFICATIONS  - As a result of the sale by the Company of its majority
interest in The  Fragrance  Counter  Inc.,  (note 2) the statement of income and
cash flows for the prior years and related notes have been restated to segregate
the net results of continued and discontinued operations.

2.  ACQUISITIONS AND DISPOSITIONS

     On June 23, 1998, the Company purchased certain assets of Direct Fragrance,
Inc., a telemarketer of fragrances located in Florida for $2,761,671. The assets
include inventories, fixed assets and intangibles.


                                      F-8
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     On April  27,  1998,  certain  officers  of the  Company  advanced  cash of
$3,000,000 to The Fragrance  Counter Inc., then a wholly owned subsidiary of the
Company,  and received a note for $3,000,000 bearing interest of 8.75% per annum
with a maturity  date of  October  27,  1998.  On  October  27,  1998 in lieu of
repayment,  these officers  received a 17.5% equity  interest in common stock of
The  Fragrance  Counter  Inc.  As a  result  of this  transaction,  the  Company
recognized a gain, net of taxes, of $1,800,000 in fiscal 1999.

     On April 23, 1999,  the Company sold a majority  interest in The  Fragrance
Counter Inc. for net proceeds of  $11,296,584  in cash and  $8,900,000 in notes,
secured by The Fragrance  Counter Inc.  common stock,  bearing  interest at 3/8%
above the prime rate.  $400,000 was due and paid in July 1999 and $8,500,000 was
due in April  2000 with  accrued  interest.  The  Company  retained  a  minority
interest.

     In April 2000,  the Company was notified that the makers of the notes would
not honor their  obligation.  As a result,  the Company sent a notice of default
requesting either payment of the notes or a private sale of the collateral which
consists of 1,816,239  shares of  ibeauty.com  common  stock,  a privately  held
internet  company,  which is the  successor  to The  Fragrance  Counter Inc. The
Company has recorded a valuation allowance of $8,500,000 equal to the face value
of the  notes.  As a  result  of the  sale,  the  Company  recognized  a gain of
$8,432,401  net of taxes in fiscal 2000,  after the  provision for the valuation
allowance.

     On  January  3,  2000,  the  Company  purchased  the  intangible  assets of
Tri-State  Pharmaceutical  Consultants Corp., a pharmaceutical  wholesaler,  for
cash and stock.  The Company  also  entered  into an  employment  contract  with
Tri-State's former principal shareholder.

     On  February 8, 2000,  the Company  entered  into an  agreement  whereby it
obtained a 50%  interest in Discreet  Medical  Solutions,  LLC (DMS),  a company
formed to create an  internet  portal to  provide  on-line  delivery  of certain
medical products and content.  The terms of the agreement require the Company to
advance up to $5,000,000 for general working capital  purposes.  Interest is due
from DMS at a rate 3/4%  above the prime  rate and  payments  commence  once DMS
operates  at a positive  cash flow level.  DMS  expects to  commence  operations
during the Company's second quarter.  At March 31, 2000, the outstanding balance
due to the Company was $123,323.

3.  OTHER CURRENT ASSETS:
     The components of other current assets are:
<TABLE>
<CAPTION>
                                                           March 31,             March 31,
                                                             2000                  1999
                                                             ----                  ----
<S>                                                      <C>                  <C>
         Interest bearing officers loans                 $1,743,866           $1,750,000
         Insurance reimbursement receivable                   - 0 -            6,835,812
         Prepaid advertising contracts                        - 0 -            1,393,333
         Product rebates receivable                         789,809              424,435
         Other                                            1,749,923            2,473,062
                                                          ---------            ---------

                                                         $4,283,598          $12,876,642
                                                          =========           ==========
</TABLE>


                                      F-9
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



4.  PROPERTY AND EQUIPMENT:

     Property and equipment consists of:
<TABLE>
<CAPTION>

                                                                   March 31,                     Estimated
                                                            2000              1999             Useful Lives
                                                            ----              ----             ------------
<S>                                                       <C>                <C>                     <C>
Machinery and Equipment                                   $2,397,524         $1,989,344              5 years
Furniture, Fixtures and
 Office Equipment                                          3,138,250          3,234,679           5-10 years
Leasehold Improvements                                     3,166,945          2,861,482          10-33 years
                                                           ---------          ---------
                                                           8,702,719          8,085,505
Less:  Accumulated Depreciation                            4,778,176          4,245,599
                                                           ---------          ---------
                                                          $3,924,543         $3,839,906
                                                           =========          =========
</TABLE>

     Depreciation  expense  for the years ended  March 31,  2000,  1999 and 1998
amounted to $627,454, $664,706 and $582,546, respectively.

5. OTHER ASSETS:

     The components of other assets are:
<TABLE>
<CAPTION>
                                                                                March 31,
                                                                     2000                      1999
                                                                     ----                      ----
<S>                                                                <C>                          <C>
       Goodwill, net of amortization                               $4,844,727                   $2,120,040
       Interest bearing officers loans                                  - 0 -                    2,016,665
       Minority interest investment
         (under 20% ownership)                                      3,000,000                        - 0 -
       Other                                                        1,302,640                      891,196
                                                                    ---------                   ----------
                                                                   $9,147,367                   $5,027,901
                                                                    =========                    =========
</TABLE>
     Amortization  of  goodwill  charged to  operations  amounted  to  $148,073,
$76,239  and  $66,864  for the  years  ended  March  31,  2000,  1999 and  1998,
respectively.

6.  AMOUNTS DUE BANK:

     The Company has a secured  line of credit with a consortium  of banks.  The
financing  agreement provides for advances of up to 85% of eligible  receivables
and 60% of eligible inventories with aggregate maximum advances of $163,500,000,
with a  $5,000,000  sublimit for  overadvances.  Interest on the loan balance is
payable monthly at 3/8% above the prime rate or 2% above the Eurodollar rate, at
the option of the Company.  The loan is collateralized by the Company's accounts
receivable and inventories and the  overadvances are guaranteed by the Company's
principal stockholders. In addition, the Company is required to abide by certain
financial  covenants.  The  effective  interest  rates charged to the Company at
March 31, 2000 and 1999 were 7.96% and 7.16%, respectively.

     Effective May 8, 2000, the Company was approved for a $200,000,000  secured
line of credit with interest  payable at 3/4% above the prime rate or 2.5% above
the Eurodollar rate. As of June 19, 2000, the credit line has been funded in the
amount of $185,081,000.


                                      F-10
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




7.  LONG-TERM DEBT:

     Long-term debt consists of:

(a)       Notes  collateralized  by  certain  of  the  Company's  equipment  and
          leasehold  improvements,  payable in aggregate monthly installments of
          approximately  $67,885,  which include  interest at rates varying from
          3/8% above the prime rate to 3.36% above the three year treasury rate.
          At March 31, 2000, the principal balance outstanding was $1,639,359.

(b)       A loan  payable to the previous  stockholder  of M. Sobol,  Inc., with
          interest  payable  on the  declining  principal  balance  at 5.45% per
          annum, through April 1, 2000. At March 31, 2000, the principal balance
          outstanding was $109,042.

(c)       Notes  payable to previous  stockholder  of  Tri-State  Pharmaceutical
          Consultants  Corp.,  with interest payable on the declining balance at
          6% per annum  through July 1, 2002.  At March 31, 2000,  the principal
          balance outstanding was $1,723,368.

     The aggregate long-term debt is payable as follows:

           Year Ending

            March 31,
            ---------

                2001                               $1,831,547
                2002                                  717,481
                2003                                  349,560
                2004                                  141,702
                2005-2007                             431,479
                                                   ----------
                                                   $3,471,769
                                                   ==========

8.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

     Accounts payable and accrued expenses consist of:
<TABLE>
<CAPTION>

                                                                                         March 31,
                                                                               2000                 1999
                                                                               ----                 ----
<S>                                                                          <C>                  <C>
        Accounts Payable, Purchases                                          $25,527,469          $28,669,375
        Selling, General and Administrative Expenses                           2,391,120            3,995,110
        Accrued Bank Interest                                                    822,490              683,173
        Accrued Payroll                                                          548,098              588,565
                                                                            ------------         ------------
                                                                             $29,289,177          $33,936,223
                                                                            ============         ============
</TABLE>


                                      F-11
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.  COMMITMENTS AND CONTINGENCIES:

     OPERATING  LEASES - The Company is obligated under real property  operating
leases  expiring  through May, 2005. As of March 31, 2000,  total minimum annual
rentals,  excluding  additional  payments  for real  estate  taxes  and  certain
expenses, are as follows:

          Year Ending

           March 31,
           ---------

         2001                                  $968,419
         2002                                   855,027
         2003                                   799,457
         2004                                   652,989
         2005-2006                              730,262

     Rent expense for the years ended March 31, 2000,  1999 and 1998 amounted to
$1,157,837,  $1,074,675  and $895,879,  respectively.  Rent expense for the year
ended March 31, 2000 and 1999 includes $190,509 and $144,200, respectively, paid
for the  Company's  premises in Florida  where rent was being paid on a month to
month basis.  The Company  entered into a three year lease  agreement  for these
premises commencing May 1, 2000.

     UNION   CONTRACT  -  The  Company  has  an  agreement   with  the  National
Organization of Industrial  Trade Unions which  terminates on December 14, 2000.
The  agreement   covers  all  warehouse  and  receiving   employees,   excluding
supervisory personnel.

     DEFINED   CONTRIBUTION   PLAN  -  Effective  April  1,  1996,  the  Company
established a defined  contribution  plan (401k) for substantially all employees
not covered under collective bargaining  agreements.  All employees over the age
of 21, with at least one year of service to the Company,  can contribute from 2%
to 15% of their gross salaries limited to Internal Revenue Service  regulations.
Contributions  by the Company are optional.  For the years ended March 31, 2000,
1999 and 1998, the Company did not contribute to this plan.

     EMPLOYMENT  AGREEMENTS - The Company has three year  employment  agreements
with three of its officers, which expire July 31, 2001. These agreements provide
for each officer to receive an annual  salary of $300,000 and bonuses based on a
percentage of the Company's  earnings.  For the years ended March 31, 2000, 1999
and 1998, such bonuses aggregated $1,536,000, $- 0 - and $206,482, respectively.

     LEGAL PROCEEDINGS - The Company is a party to a number of legal proceedings
as either plaintiff or defendant, all of which are considered routine litigation
incidental to the business of the Company.


                                      F-12
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10.  STOCK OPTION PLANS:

     The Company has adopted Stock Option Plans,  which provide for the granting
of stock options to certain  employees and directors.  An aggregate of 3,800,000
shares of common  stock are reserved  for  issuance  under the Plans.  Incentive
stock options are granted at no less than fair market value of the shares on the
date of grant. Options granted to individuals owning more than 10% of the voting
power of the  Company's  capital  stock are  granted at 110% of the fair  market
value at the date of grant.

     Option activities for the years ended March 31, 2000, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>

                                                      2000                    1999                    1998
                                                      ----                    ----                    ----
<S>                                                   <C>                    <C>                     <C>
Options outstanding
  at beginning of year                                2,489,420              2,036,025               1,381,150
Granted                                                 388,300                559,750               1,136,100
Exercised                                          (     66,375)         (     102,605)            (    17,625)
Cancelled                                          (     36,880)         (       3,750)            (   463,600)
                                                    -----------           ------------               ---------
Options outstanding
  at end of year                                      2,774,465              2,489,420               2,036,025
                                                    ===========           ============            ============
Option price range
  at end of year                                 $4.00 to $10.00         $4.00 to $7.70         $5.80 to $10.00
                                                  ====     =====          ====     ====          ====     =====
</TABLE>

     The  Company has adopted the  disclosure  only  provisions  of SFAS No. 123
"Accounting  for  Stock-Based  Compensation."  If the  Company  had  elected  to
recognize  compensation  costs  based on the fair value at the date of grant for
awards  consistent  with the  provisions  of SFAS No. 123, net income per common
share from continuing operations would have been reduced to the following:
<TABLE>
<CAPTION>
                                                                              Years Ended March 31,
                                                                 2000                1999                1998
                                                                 ----                ----                ----
<S>                                                             <C>                  <C>                  <C>
        Net Income - Pro Forma                                  $6,210,756           $5,553,573           $4,636,208

        Earnings Per Common Share - Pro Forma                         $.86                 $.81                 $.64
</TABLE>

     The  weighted  average  fair  values at date of grant for  options  granted
during fiscal 2000, 1999 and 1998 was $3.09, $1.51 and $2.43, respectively,  and
were  estimated  using the  Black-Scholes  option  pricing  model  utilizing the
following assumptions:  No dividend yield; expected volatility rates of 54%, 42%
and 31%; risk free interest rates approximating 6%, 4% and 6%, respectively, and
expected lives of 5 years.


                                      F-13
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11.  STOCKHOLDERS' EQUITY:

     On September 15, 1998, the stockholders of the Company approved an increase
in the number of  authorized  shares of Class A common stock from  10,000,000 to
15,000,000  shares.  The Company is also authorized to issue 1,000,000 shares of
preferred stock.  Holders of Class A Common Stock and Class B Common Stock share
pro rata in all  dividends  declared by the Board of  Directors.  The holders of
Class A Common Stock and Class B Common Stock are entitled to one and five votes
per  share,  respectively,  for every  matter on which the  stockholders  of the
Company are entitled to vote.  Each share of Class B Common Stock is convertible
at the  option  of the  holder  into one  share of  Class A  Common  Stock.  All
outstanding  shares of Class A Common  Stock and Class B Common Stock are freely
transferable,  subject to  applicable  law. The Company is  authorized  to issue
2,200,000 shares of Class B Common Stock.

     On December 15, 1998, the Company sold 666,667 shares of its Class A Common
Stock at $9 per share in a private placement offering,  which were registered on
January 26, 1999. Net proceeds to the Company from the offering after  deduction
of associated expenses were $5,673,344.  This sale included the sale of Warrants
which were  exercisable for variable number of shares of Class A Common Stock if
the  market  price  fell below 115%  ($10.35)  of the sale  price  during  three
exercise  periods which began 30 days after the  effective  date. As a result of
the market price  fluctuations  of the  Company's  stock  during these  periods,
during fiscal 2000 the Company issued an additional 85,304 shares of its Class A
Common Stock in connection with the private placement.

     During fiscal 1999, employees of the Company exercised of stock options for
102,605 shares, which resulted in net proceeds to the Company of $701,954.

     During fiscal 2000,  employees of the Company  exercised  stock options for
19,150 shares, which resulted in net proceeds to the Company of $360,762.

     On January 4, 2000,  the Company  issued  75,472  common  shares  valued at
$500,000,   in  connection   with  its  purchase  of  Tri-State   Pharmaceutical
Consultants Corp.

12.  INCOME TAXES:

   The  components  of  income  tax  expense  from  continuing   operations  are
summarized as follows:
<TABLE>
<CAPTION>

                                                             Years Ended March 31,
                                                2000                1999                  1998
                                                ----                ----                  ----
         Current:
<S>                                          <C>                   <C>                   <C>
          Federal                            $3,553,000            $3,364,742            $2,663,191
          State                                 679,600               913,778               313,316
                                             ----------            ----------            ----------
                                              4,232,600             4,278,520             2,976,507
                                              ---------             ---------             ---------
         Deferred:

          Federal                                98,000           (   272,000)                - 0 -
          State                                   8,400          (     48,000)                - 0 -
                                           ------------           -----------        --------------
                                                106,400           (   320,000)                - 0 -
                                             ----------            ----------        --------------

         Total                               $4,339,000            $3,958,520            $2,976,507
                                              =========             =========             =========
</TABLE>


                                      F-14
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     The following is a  reconciliation  of the statutory income tax rate to the
total effective tax rates on income from continuing operations:
<TABLE>
<CAPTION>

                                                                                     Years Ended March 31,
                                                                               2000         1999          1998
                                                                               ----         ----          ----
<S>                                                                             <C>          <C>           <C>
Federal Statutory Income Tax Rate                                               34.0%        34.0%         34.0%

Increase in Tax Rates Resulting from:
 State Income Taxes, Net of Federal Tax
  Benefits                                                                       4.1%         7.2%          5.3%

Benefit of Net Operating Loss Carryforward                                      (0.0%)       (1.2%)        (1.2%)
                                                                                 ----         ----          ----
       Effective Tax Rates For Continuing Operations                            38.1%        40.0%         38.1%
                                                                                =====        =====         =====
</TABLE>

Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>

                                                                                          March 31,
                                                                                2000               1999
                                                                                ----               ----
<S>                                                                        <C>                   <C>
Deferred Gain on Sale of Minority Interest in Subsidiary                   $       - 0 -         $(1,088,000)
Other                                                                           (106,400)            256,000
                                                                                 -------          ----------
Net Deferred Tax Liability                                                     $(106,400)       $(   832,000)
                                                                                 =======          ==========
</TABLE>

13.  EARNINGS PER COMMON SHARE:

     The following  table sets forth a  reconciliation  of the  weighted-average
shares  (denominator)  used in the  computation of basic and diluted EPS for the
statement of operations periods presented herein.
<TABLE>
<CAPTION>
                                                                             Years Ended March 31,
                                                                   2000              1999               1998
                                                                   ----              ----               ----
<S>                                                               <C>                <C>               <C>
Basic                                                             6,673,617          6,061,431         5,757,328
Assumed exercise of stock options                                   623,267            738,712           215,064
                                                                  ---------         ----------         ---------
Diluted                                                           7,296,884          6,800,143         5,972,392
                                                                  =========          =========         =========
Potentially dilutive securities excluded from
 computations because they are anti-dilutive                        320,250              - 0 -           415,300
                                                                    =======              =====           =======
</TABLE>

     Net income as presented in the consolidated statement of operations is used
as the  numerator  in the  EPS  calculation  for  both  the  basic  and  diluted
computations.

14.  RELATED PARTY TRANSACTIONS:

     The Company purchases inventories from various entities that are controlled
by certain of the Company's  officers.  For the years ended March 31, 2000, 1999
and 1998,  purchases from related parties  amounted to $12,229,183,  $14,705,794
and $4,443,634, respectively.


                                      F-15
<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



15.  SEGMENT DATA:

     Operating  segments are defined as components of an enterprise  about which
separate financial  information is available that is evaluated  regularly by the
Company's chief operating  decision maker, or decision making group, in deciding
how to allocate  resources and in assessing  performance.  The  Company's  chief
operating decision maker is its Chief Executive Officer.  The operating segments
of the  Company  are  managed  separately  because  each  segment  represents  a
strategic  business unit that offers different  products or a different customer
base.

     The Company's reportable operating segments are:

a)       Wholesale distribution of cosmetics, fragrances, health and beauty aids
         and non-perishable food products.

b)       Wholesale distribution of pharmaceuticals.

c)       Manufacturing of hair and skin care products.

     The accounting policies of the Company's operating segments are the same as
those  described in Note 1 - Summary of  Significant  Accounting  Policies.  The
Company evaluates the performance of its segments based on segment profit, which
includes the overhead charges directly  attributable to the segment and excludes
certain expenses,  which are managed outside the reportable segments.  Corporate
expenses  including  interest  and  income  taxes  are  being  allocated  to the
wholesale distribution segment only.

     Segment data from continuing  operations for each of the three years in the
period ended March 31, 2000 was as follows:
<TABLE>
<CAPTION>
                                      Wholesale     Pharmaceuticals                Intersegment
                                    Distribution     Distribution   Manufacturing  Transactions    Consolidated
                                    ------------     ------------   -------------  ------------    ------------
Year Ended March 31, 2000
<S>                                  <C>             <C>              <C>           <C>             <C>
  Revenue                            $334,797,233    $110,241,393     $7,327,336   $(31,319,189)    $421,046,773
  Depreciation and Amortization           743,110          53,700        142,388          - 0 -          939,198
  Income (Loss) From Operations
    Before Taxes                       11,250,797         406,067       (274,316)         - 0 -       11,382,548
  Segment Assets                      211,415,018      42,203,513      6,336,921          - 0 -      259,955,452

Year Ended March 31, 1999

   Revenue                           $292,004,548     $46,961,918     $1,867,979    $(6,659,295)    $334,175,150
   Depreciation and Amortization          712,345          14,189        106,079          - 0 -          832,613
   Income (Loss) From Operations
     Before Taxes                      11,111,721         424,208     (1,630,531)         - 0 -        9,905,398
   Segment Assets                     204,911,125      12,744,061      2,252,195          - 0 -      219,907,381

Year Ended March 31, 1998

  Revenue                            $256,603,011     $45,856,322     $1,661,073    $(3,028,189)    $301,092,217
  Depreciation and Amortization           569,757          23,329         94,518          - 0 -          687,604
  Income (Loss) From Operations
    Before Taxes                        8,435,344         413,980     (1,016,410)         - 0 -        7,832,914
  Segment Assets                      167,544,969       8,836,726      2,002,601          - 0 -      178,384,296
</TABLE>

                                      F-16