SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X|     Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934 for the fiscal year ended March 31, 1997

|_|     Transition  report  pursuant  to Section  13 or 15(d) of the  Securities
        Exchange  Act of 1934  for  the  transition  period  from  _________  to
        _________

Commission file number 1-10340

                        ALLOU HEALTH & BEAUTY CARE, INC.
             (Exact name of registrant as specified in its charter)

          Delaware                                               11-2953972
 ------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or 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, $.001 par value                   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  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. [X]

           On June 25, 1997,  the aggregate  market value of the voting stock of
Allou Health & Beauty  Care,  Inc.,  held by  non-affiliates  of the  Registrant
(consisting  of  Class A  Common  Stock,  $.001  par  value)  was  approximately
$30,321,823  based upon the closing  sales  price for such Common  Stock on said
date  as  reported  by  the  American  Stock  Exchange.  For  purposes  of  this
calculation,  the Registrant has excluded the Class B Common Stock which is held
only by affiliates.

           As of June 25, 1997, the  Registrant had 4,552,225  shares of Class A
Common Stock and 1,200,000 shares of Class B Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Certain  portions of the  Registrant's  definitive  Proxy Statement for the 1997
Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K.



<PAGE>



                                     PART I


ITEM 1.    BUSINESS

           Allou  Health & Beauty Care,  Inc.  (the  "Company" or "Allou"),  was
incorporated  under the laws of the State of  Delaware  in  January  1989 as the
successor  to Allou  Distributors,  Inc.  As used  herein,  unless  the  context
otherwise  requires,  the term  "Company"  refers to Allou Health & Beauty Care,
Inc. and its wholly-owned subsidiaries Allou Distributors,  Inc., M. Sobol, Inc.
("Sobol") and Allou Personal Care Corp. ("Allou Personal Care").

           The  Company  distributes  national  brand name health and beauty aid
("HBA") products,  fragrances and cosmetics,  non-perishable packaged food items
and prescription  pharmaceuticals  primarily to independent retailers in the New
York,  New  Jersey,  Connecticut,  Philadelphia  and  Miami  area.  The  Company
purchases  approximately 8,000 HBA products from such manufacturers as Procter &
Gamble Co.,  Johnson & Johnson and Gillette Co. and 7,000 fragrance and cosmetic
products directly from manufacturers  such as Revlon,  Inc. and Coty (a Division
of Pfizer  Inc.) and from  secondary  sources for sale to more than 4,200 retail
outlets including small discount chains,  individual HBA suppliers and non-chain
supermarkets.  Fragrance and cosmetic  products are also marketed  nationally to
discount chain stores such as Wal-Mart  Stores,  Inc. and Sears,  Roebuck & Co.,
independent retail stores and pharmacies directly or through Company catalogues.
The Company also  distributes  approximately 50 HBA products under the trademark
"Allou Brands." Although this activity has accounted for only a small percentage
of revenues to date,  the Company is  expanding  its  marketing  efforts in this
area.

           In addition, the Company,  through its wholly-owned subsidiary Sobol,
serves  as  a  direct   manufacturers'   distributor  of  branded   prescription
pharmaceuticals.  Sobol is  positioned  to bolster  its  market  share and gross
profit margins by diversifying  its product mix to include generic  prescription
pharmaceuticals and HBA products to an expanded customer base.

           In  October  1995,  the  Company  purchased  selected  assets of Russ
Kalvin's, Inc. ("Russ Kalvin's").  The Russ Kalvin's acquisition has enabled the
Company to manufacture and distribute  salon quality hair and skin care products
through its wholly-owned subsidiary, Allou Personal Care.

PRODUCTS

           The Company  distributes  five general  categories of products:  name
brand health and beauty aids, fragrances and cosmetics,  Allou Brands health and
beauty aids, food and prescription pharmaceuticals.



                                       -2-

<PAGE>



           Name Brand HBA Products
           -----------------------

           The Company  distributes  approximately 8,000 national name brand HBA
products.  Set  forth  below  are some of the 76  different  types  of  products
available from the Company in the national HBA line. However,  specific products
may vary depending upon the merchandise  which the Company is able to acquire at
a given time:

Allergy Relief                                   Insecticides
Adhesive Strips and Bandages                     Liniments and Rubs
Antacids                                         Lip Balms and Medication
Baby Needs                                       Nail Care
Bath Preps, Talcs, Colognes                      Nasal Sprays, Drops & Vapors
Batteries and Flashlights                        Oral Antiseptics and Sprays
Candy, Gum, Mints & Food                         Oral Hygiene
Cotton Products and Swabs                        Pain Relief
Cough and Cold Remedies                          Razor and Blades
Denture Products                                 Rubber Products and Gloves
Deodorants                                       Sedatives and Awakeners
Depilatories, Ladies Shave Preparations          Shampoos
Feminine Hygiene Products                        Shave Creams
Film, Cameras, Flashbulbs                        Shave Lotions and Colognes
First Aid Needs                                  Shoe Care
Foot Care                                        Skin Care Products
Hair Accessories                                 Soaps
Hair Coloring                                    Stationery and School Supplies
Hair Sprays                                      Toothbrushes
Hosiery                                          Toothpaste and Powders
Household Light Bulbs                            Vitamins and Tonics
Household Paper Products

           The sales of these products  accounted for approximately 34%, 33% and
33% of the Company's revenues, respectively, during the fiscal years ended March
31, 1995, 1996 and 1997.

           Fragrances and Cosmetics
           ------------------------

           Fragrances  distributed  by the  Company  include  those  produced by
Faberge,  Inc.,  Chanel,  Inc. and Revlon,  Inc. Among the cosmetic products are
eyeshadows, lipsticks, mascaras and skin care products produced by Revlon, Inc.,
Coty (a Division  of Pfizer  Inc.),  Lancome (a  Division of Cosmair,  Inc.) and
Estee Lauder,  Inc. See  "Manufacturers  and Suppliers." During the fiscal years
ended March 31, 1995,  1996 and 1997 fragrance and cosmetic sales  accounted for
approximately  32%, 32% and 36% of the  Company's  revenues,  respectively.  The
profit  margins on such  sales are  typically  greater  than those on name brand
health and beauty aids, and accordingly, the Company has


                                       -3-

<PAGE>



sought  to  increase  its  sales  and  marketing   efforts  in  this  area.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

           Allou Brands
           ------------

           The Company currently markets  approximately 50 health and beauty aid
products under the "Allou Brands"  tradename.  Sales of its own products account
for  only  a  small   percentage   of  the  Company's   business,   representing
approximately  1%, 1% and 1% of revenues during the fiscal years ended March 31,
1995,  1996 and  1997,  respectively.  The  Company  believes  that  many of its
customers   want  the   opportunity  to  purchase  a  portion  of  their  supply
requirements at a substantial savings which they can pass on to their customers.
Such  savings are afforded by the more  "generic"  Allou  Brands  products.  The
Company has found that sales of Allou Brands  products are more  profitable than
those of name  brand  products,  and  accordingly,  is  expanding  its sales and
marketing  efforts in this area by adding new items to its  product  line and by
increasing advertising activities.

FOOD

           The Company added the sale of  non-perishable  packaged food items to
its product line in fiscal 1991.  These food items,  which are purchased  almost
exclusively  at  discount  prices  from the major  food  companies,  are sold to
existing customers. This product line requires little additional operating costs
to the Company since sales of food are pre-sold and drop-shipped directly to the
customers from the vendors.  During the fiscal years ended March 31, 1995,  1996
and 1997, food items accounted for approximately 18%, 17% and 13%, respectively,
of the Company's revenues.

PRESCRIPTION PHARMACEUTICALS

           During fiscal 1994, the Company  acquired the capital stock of Sobol,
a manufacturers' distributor of branded prescription pharmaceuticals.  Sobol was
founded in 1928 and currently  distributes  pharmaceuticals to approximately 700
independent  pharmacies in the Northeast.  The Company intends to expand Sobol's
customer base to include many of the Company's  pharmacy  accounts as well as to
develop a national  mail-order  business  to include  both  generic  and branded
pharmaceutical  products.  The  Company  also plans to offer  Sobol's  customers
health and beauty  aids and  fragrances,  which  should  serve to boost  Sobol's
profitability. The Company purchases approximately 4,000 branded pharmaceuticals
from such  manufacturers  as Eli  Lilly  and  Company,  Glaxo  Holdings  p.l.c.,
Burroughs Wellcome Co. and Merck Sharp and Dohme, Inc. Additionally, the Company
distributes  3,000  generic  prescription   pharmaceutical  products  which  are
purchased  from  manufacturers  such  as  Schein  Pharmaceuticals,  Inc.,  Barre
National,  Inc., and Sidmak Laboratories,  Inc. For the fiscal years ended March
31, 1995, 1996 and 1997,  pharmaceuticals  accounted for approximately  15%, 18%
and 17%, respectively, of the Company's revenues.



                                       -4-

<PAGE>



HAIR AND SKIN CARE PRODUCTS

           During fiscal 1996, the Company purchased the selected assets of Russ
Kalvin's,  which assets included accounts receivable,  inventory,  equipment and
intellectual property (patents,  trademarks, etc.). This acquisition has enabled
the Company to  manufacture  and  distribute  salon  quality  hair and skin care
products to convenience stores, pharmacies and national mass merchandisers.  For
the fiscal  years  ended March 31, 1996 and 1997,  revenues  generated  from the
sales of such products were not material.

MANUFACTURERS AND SUPPLIERS

           The products the Company distributes are manufactured and supplied by
independent foreign and domestic  companies,  many of which also manufacture and
supply  HBA  products,  fragrances  and  cosmetics  for  many  of the  Company's
competitors.  The Company purchases  approximately  8,000 HBA products from such
manufacturers  as Procter & Gamble Co.,  Johnson & Johnson and  Gillette Co. and
approximately  7,000 fragrance and cosmetic products directly from manufacturers
such as Coty (a division of Pfizer  Inc.) and Revlon,  Inc.  and from  secondary
sources with access to close-out purchases from retailers. The Company contracts
with  manufacturers  to produce the Allou Brands  products and  manufactures  it
proprietary  line of Russ  Kalvin's  generic  brand hair and skin care  products
through its wholly-owned subsidiary, Allou Personal Care.

           The Company  typically  purchases  goods 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,  the  Company  does  not have any
licensing  or other  supply  agreements  with its  manufacturers  or  suppliers.
Therefore,  any of these companies could terminate their  relationship  with the
Company at any time.  Management believes the absence of such agreements between
the Company and its  suppliers  does not have a material  adverse  impact on the
Company,  since the Company has  experienced  no difficulty to date in obtaining
products  as needed  and  believes  there are a number of  alternate  sources of
supply for virtually all of the products that it sells. However, there can be no
assurance  the  Company  will  not  experience  difficulties  with  its  present
manufacturers or suppliers,  such as delays in obtaining  products,  which could
materially adversely affect its operations or relationship with customers.

MARKETING AND SALES

           The  Company  markets  national  brand and Allou  Brand HBA  products
primarily to retail  outlets  including  small discount  chains,  individual HBA
suppliers  and  non-chain  supermarkets  in  the  New  York  metropolitan  area,
Philadelphia,  Pennsylvania and Miami, Florida. In addition, the Company markets
fragrances  and  cosmetics to these  customers  and  nationally  to  independent
retailers,  pharmacies and chain stores,  including  Wal-Mart  Stores,  Inc. and
Sears,  Roebuck & Co. The  Company  currently  has  approximately  4,200  active
accounts.  No single  customer  accounted for 10% or more of the Company's sales
during the last two fiscal years.


                                       -5-

<PAGE>



           Sales are made by the Company's in-house sales staff of telemarketing
professionals.  In-house  sales persons are paid a base salary plus a commission
based on sales.

           The Company  publishes  an HBA and a fragrance  catalogue  each month
containing order forms, descriptions of all products carried by the Company, the
manufacturer's  suggested  retail price and net cost per unit or per dozen which
are mailed to each of the Company's active  customers.  The catalogues also help
serve the advertising needs of the manufacturers  which provide the Company with
rebates to pay for the cost of preparing,  printing and mailing the  catalogues.
In addition to the monthly  catalogues,  the  Company  frequently  supplies  its
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.

           The Company holds an annual exclusive trade show in New York City for
HBA  retailers  which is subsidized  by  manufacturers  who display their wares,
introduce  products  and meet with  customers.  The Company also  coordinates  a
program  sponsored by approximately  80 HBA retailers  whereby the retailers are
provided with circulars to send to their  customers,  point-of-sale  promotional
materials and product samples supplied by the manufacturers.

OPERATIONS

           The Company  maintains a 143,894 square foot warehouse  facility with
sales and administrative offices in Brentwood,  New York. The warehouse contains
inventory for  approximately  three months of  distribution  to  customers.  The
Company uses a computerized data base system which enables management to monitor
sales,  purchases and inventory status. The Company has not experienced problems
with product  shelf lives,  as most  products it sells are not  perishable.  HBA
products that are perishable  generally can be returned to the  manufacturer  if
they are not sold by the expiration date.

           The  Company's  trucking  agent has a trailer  which makes  bi-weekly
deliveries  to Florida as well as delivers  certain  fragrances to the Company's
Brentwood,  New York  warehouse on return trips from Florida,  as many fragrance
vendors are located in southeast Florida. All other deliveries are made daily by
trucks subleased from the Company by an entity which is paid on a per load basis
and  delivers  exclusively  for the  Company.  From  the  time it is  placed,  a
customer's  order will be delivered  within 48 hours if within the  metropolitan
New York City area, and within five days if out-of-state.

           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 the  acquisition  of the  selected  assets of Russ  Kalvin's in
October  1995,  the Company has been  engaged in  consolidating  operations  and
reducing  overhead at Russ  Kalvin's,  as well as  positioning  itself to market
nationally the Russ Kalvin's  generic brand hair and skin care products  through
its wholly-owned subsidiary, Allou Personal Care. The Company has consolidated


                                       -6-

<PAGE>



all administrative  functions of Russ Kalvin's at the Company's  Brentwood,  New
York  facility.  In addition,  the Company leases 80,000 square feet of space in
Saugus,  California  which is used to manufacture and distribute its proprietary
line of Russ Kalvin's generic brand hair care and skin care products.

MANAGEMENT INFORMATION AND CONTROL SYSTEM

           The Company utilizes a proprietary, computerized data base management
system which  collects,  integrates and analyzes data  concerning  sales,  order
processing, shipping, purchases, receiving, inventories and financial reporting.
At any given time, the Company is able to determine the quantity of each item in
inventory by brand, style, cost, list price and other characteristics.

           The system enables the Company to better manage its inventories.  The
system keeps a running  inventory of goods on hand for each item it distributes.
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 to the  manufacturer  with the
weekly orders.

           By eliminating  much of the paper flow and  dispensing  comprehensive
information,   this   system   has   enabled   the   Company   to   reduce   its
receipt-of-order-to-shipment time capability for New York City metropolitan area
customers to less than 48 hours,  substantially  reducing such customers need to
stock inventory, thereby saving the customer the cost of financing its inventory
requirements.

COMPETITION

           The  distribution  of HBA  products  is  extremely  competitive.  The
Company competes with  pharmaceutical  wholesalers that carry HBA products as an
accommodation  for  their  customers.  Many of such  distributors  have  greater
financial  and other  resources  than the  Company.  However,  to the  Company's
knowledge,  there is no significant competitor which distributes to its customer
base of  independent  retail  stores the  assortment  of HBA  products  that the
Company  distributes.  The Company believes it competes on the basis of services
rendered  to its  customer,  including  quick  delivery  and low  minimum  order
requirements.

           The  distribution of fragrance and high priced cosmetic items is very
competitive.  The Company  competes to obtain its  fragrances and cosmetics from
manufacturers  and middlemen  who also supply  competing  distributors  and sell
directly to retailers.  It competes on the basis of price and services  rendered
to its customers, including quick delivery and low minimum order requirements.

           In addition,  the Company faces intensive competition with respect to
marketing its own brand of HBA products and the Russ  Kalvin's  generic brand of
hair and skin care products.  The Company competes with major HBA companies,  as
well as hair and skin care companies, with well-established product lines, which
spend large sums for  advertising  and marketing and have far greater  financial
and other  resources  than the  Company.  The Company also  competes  with these
companies


                                      -7-

<PAGE>



for  shelf  space  and  product   placement  in  the  various  retail   outlets.
Additionally,  the Company  competes for the  manufacture  of its products  from
suppliers who also supply these and other  companies.  The Company believes that
it can offer customers substantial savings on its generic products.

EMPLOYEES

           As of March 31, 1997, the Company employed  approximately 250 persons
on a full time basis, including 5 in executive positions,  22 in purchasing,  65
in marketing and sales, 40 in administration and accounting,  118 in warehousing
and receiving. Certain of the sales personnel are partially paid on a commission
basis. During peak selling seasons the Company also employs part time personnel.

           The Company is a party to a collective  bargaining agreement expiring
December  14, 1997 with the National  Organization  of  Industrial  Trade Unions
covering all warehouse and receiving employees.  The Company has not experienced
any work  stoppages.  The Company  believes its relations with its employees are
satisfactory.

TRADENAMES AND TRADEMARKS

           The Company uses the unregistered  tradename "Allou Brand" on generic
products  that it  distributes.  With the  introduction  of  additional  generic
products,  the Company may adopt other  unregistered  tradenames and trademarks.
During fiscal 1996, the Company  acquired the patents,  trademarks and all other
intellectual  property of Russ  Kalvin's.  The Company  believes  that no single
trademark,  tradename or servicemark is material to the Company's  business as a
whole.

GOVERNMENT REGULATION

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




                                       -8-

<PAGE>



ITEM 2.    PROPERTIES

           The Company leases approximately 143,894 square feet of space for its
principal  executive  offices,  warehouse and distribution  facilities and sales
headquarters in the Brentwood  Industrial Park, 50 Emjay  Boulevard,  Brentwood,
New York  11717,  under a ten-year  lease  which  expires on May 31,  2005,  and
includes a five-year option for renewal, at a base annual rental of $546,797.20,
with additional  charges for insurance,  fuel and taxes and increases during the
initial term of the lease.  The Company  leases  80,000  square feet of space in
Saugus,  California,  which is used to manufacture  and distribute hair and skin
care  products.  The  proposed  term of the lease is five years with a five-year
option for renewal at a base annual rental of $300,000 with  additional  charges
for insurance, fuel, taxes and increases during the initial term of the lease.


ITEM 3.    LEGAL PROCEEDINGS

           (a) The Company is a party to a number of legal proceedings as either
plaintiff  or defendant in  connection  with claims made for goods sold,  all of
which are  considered  routine  litigation  incidental  to the  business  of the
Company.

           (b) No legal  proceedings  were terminated  during the fiscal quarter
ended March 31, 1997 (other than routine  litigation  incidental to the business
of the Company).


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.



                                       -9-

<PAGE>



                                     PART II


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

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

           The  Company's  Class A Common Stock is listed on the American  Stock
Exchange under the symbol "ALU".  There is no established  public trading market
for the Company's Class B Common Stock.

           The  following  table  sets  forth the  quarterly  high and low sales
prices of the Class A Common Stock during the Company's last two fiscal years:

CLASS A
COMMON STOCK                                      High                    Low


FISCAL YEAR ENDED MARCH 31, 1996

Quarter ending June 30, 1995..................... 8-15/16                8-1/16
Quarter ending September 30, 1995................ 8-1/4                  5-1/4
Quarter ending December 31, 1995................. 6-5/8                  5-3/4
Quarter ending March 31, 1996.................... 7-1/4                  5-15/16


FISCAL YEAR ENDED MARCH 31, 1997

Quarter ending June 28, 1996..................... 7-1/2                  6 5/8
Quarter ending September 30, 1996................ 6-7/8                  4-7/8
Quarter ending December 31, 1996................. 7-5/16                 5 3/4
Quarter ending March 31, 1997.................... 6-15/16                6-1/8


Holders
-------

           As of June  25,  1997,  there  were  126  holders  of  record  of the
Company's  Class A Common Stock and 4 holders of record of the Company's 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.



                                      -10-

<PAGE>



Dividends
---------

           The  Company  has not paid a dividend on its shares of Class A Common
Stock or Class B Common Stock and has no present  expectation of doing so in the
foreseeable future.



                                      -11-

<PAGE>



ITEM 6.    SELECTED FINANCIAL DATA

           ALLOU HEALTH & BEAUTY CARE, INC.

               (In thousands, except for share and per share data)

<TABLE>
<CAPTION>

INCOME STATEMENT DATA:

                                                 Year Ended March 31,
                                   1997       1996       1995       1994       1993
                                 --------   --------   --------   --------   --------
<S>                              <C>        <C>        <C>        <C>        <C>     
Revenues                         $285,311   $273,322   $237,542   $205,520   $161,914
                                 --------   --------   --------   --------   --------
Costs of revenues                 250,843    241,734    208,906    181,372    142,533
                                 --------   --------   --------   --------   --------

Gross profit                       34,468     31,588     28,636     24,148     19,381

Warehouse and delivery expense      8,592      8,063      6,864      5,391      4,417
Selling, general and
  administrative expense           12,766     11,894     10,250     10,226      8,055
                                 --------   --------   --------   --------   --------

Income from operations             13,110     11,631     11,522      8,531      6,909
Interest and other                  6,567      5,513      3,956      2,609      1,943
                                 --------   --------   --------   --------   --------

Income before income taxes          6,543      6,118      7,566      5,922      4,966
                                 --------   --------   --------   --------   --------

Net income (1)                   $  4,059   $  3,757   $  4,681   $  3,738   $  3,015
                                 ========   ========   ========   ========   ========

Net income per common share
  primary & fully diluted        $    .70   $    .65   $    .80   $    .73   $    .60
                                 ========   ========   ========   ========   ========

Dividends                        $      0   $      0   $      0   $      0   $      0
                                 ========   ========   ========   ========   ========


Balance Sheet Data:

                                                   As of March 31,
                                   1997       1996       1995       1994       1993
                                 --------   --------   --------   --------   --------

Working capital                  $ 42,052   $ 37,557   $ 36,193   $ 32,094   $ 19,732
Total assets                      161,348    126,185    106,214     84,770     63,777
Total long-term liabilities         1,841        560        814        895        410
Total liabilities                 113,121     82,016     66,038     50,743     43,311
Stockholders' equity               48,227     44,168     40,176     34,027     20,465
</TABLE>




                                      -12-

<PAGE>



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


RESULTS OF OPERATIONS

           FISCAL 1997 AS COMPARED TO FISCAL 1996
           --------------------------------------

           Revenues  for the fiscal year ended March 31,  1997  ("fiscal  1997")
were  $285,311,441,  representing a 4.4% increase over revenues of  $273,322,102
for the fiscal year ended March 31, 1996 ("fiscal  1996"),  which  resulted from
increased  revenues from certain segments of the Company's business as described
below. The increased demand for the Company's 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 and beauty aids increased 5.4% in fiscal 1997 compared to fiscal
1996 due to increases in same store sales.  Prestige  designer  fragrances  grew
18.8% in fiscal  1997  compared  to fiscal 1996 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 decreased 24%
in fiscal 1997, when compared to fiscal 1996.  This segment of Allou's  business
is categorized by the Company's  ability to purchase  off-price,  non-perishable
branded  foods.  During  fiscal 1997 demand  out-paced  supply  resulting  in an
increase  in the price that Allou  would  have to pay for  merchandise  which it
would  distribute.  Management  decided  to limit  sales in this  segment of its
business to a level which would  result in  improved  profit  margins.  Sales of
prescription  pharmaceuticals  remain  relatively  constant when compared to the
prior year. In each segment of the Company's businesses, revenues are recognized
at the time  merchandise  is shipped to the  customer,  either  directly  by the
Company  or, in the case of food  products,  drop-shipped  by third  parties  on
behalf of the Company.

           Cost of goods sold decreased as a percentage of revenues to 87.9% for
fiscal 1997 from 88.4% for fiscal 1996.  This decrease in the cost of goods sold
results  from  improved  profit  margins  associated  with the  distribution  of
fragrance products.

           Toward the end of fiscal 1997,  certain  opportunities  arose for the
purchase  of  fragrance  products  which are only  available  to the  Company at
unpredictable intervals. Fragrance products are purchased from secondary sources
of supply.  This method of purchasing  requires the Company to pre-pay for these
products in advance of delivery in order to ensure product  delivery.  Since the
merchandise  corresponding  to the  pre-payments  was not received during fiscal
1997,  neither  inventory  valuation nor cost of goods sold was affected for the
period.

           Warehouse   and   delivery   expenses,   selling   and   general  and
administrative expenses increased as a percentage of revenues to 7.5% for fiscal
1997 from 7.3% for fiscal 1996.  This  increase  was due, in part,  to increased
expenses  associated with the Company's purchase of its wholly-owned  subsidiary
Allou Personal Care.

           Inventories increased by approximately $25.0 million or 35% in fiscal
1997  from  $72.0  million  in  fiscal  1996.  This  increase  in  inventory  is
attributable to merchandise purchased in anticipation of increased sales.


                                      -13-

<PAGE>



           Interest  expense as a percentage  of revenues  increased to 2.3% for
fiscal 1997 from 2.0% for fiscal 1996 due to  increased  borrowings  at a higher
rate.

           Net income for fiscal 1997 was $4,058,535,  which is an 8.0% increase
over the net income for fiscal 1996 of $3,756,686,  due primarily to the factors
discussed above.

           FISCAL 1996 AS COMPARED TO FISCAL 1995
           --------------------------------------

           Revenues  for  fiscal  1996  were  $272,322,102,  representing  a 15%
increase over revenues of $237,542,426  for the fiscal year ended March 31, 1995
("fiscal 1995"), which resulted from increased revenues from each segment of the
Company's  business.  The increased demand for the Company's  products  resulted
from an expanded  customer base,  increases in same store sales and the addition
of prescription  pharmaceuticals  distributed through its subsidiary,  M. Sobol,
Inc., which was acquired on April 1, 1993 and has resulted in an increase in the
volume of products sold.

           Contributions  to this increase in revenues by product  segment is as
follows: Health and beauty aids increased 10% in fiscal 1996, compared to fiscal
1995, due to increases in same store sales.  Prestige  designer  fragrances grew
12% in  fiscal  1996,  compared  to the same  period  in  fiscal  1995 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  grew 10% in fiscal 1996,  compared to fiscal 1995,  due to an expanded
customer  base  and  increases  in  the  volume  of  products  sold.   Sales  of
prescription  pharmaceuticals  grew 37% in  fiscal  1996,  compared  to the same
period in fiscal  1995,  due to an increase in the volume of products  sold.  In
each segment of the company's  businesses,  revenues are  recognized at the time
merchandise is shipped to the customer,  either  directly by the Company,  or in
the case of food  products,  drop-shipped  by third  parties  on  behalf  of the
Company.

           Cost of goods sold increased as a percentage of revenues to 88.4% for
fiscal 1996 from 88% for fiscal  1995.  This  increase in the cost of goods sold
results  from   increased   revenues   contributed   by  the   distribution   of
non-perishable  food products and prescription  pharmaceuticals and lower profit
margins  associated with the  distribution of fragrance  products.  The food and
drug  distribution  industries  have lower gross profit margins when compared to
the Company's other business segments and, therefore,  the Company expects gross
profit margins to contract in the foreseeable  future as the market share of its
grocery and prescription businesses continue to expand.

           Toward the end of fiscal 1996,  certain  opportunities  arose for the
purchase  of  fragrance  products  which are only  available  to the  Company at
unpredictable intervals. Fragrance products are purchased from secondary sources
of supply.  This method of purchasing  requires the Company to pre-pay for these
products in advance of delivery in order to ensure product  delivery.  Since the
merchandise  corresponding  to the  pre-payments  was not received during fiscal
1996,  neither  inventory  valuation nor cost of goods sold was affected for the
period.

           Warehouse   and   delivery   expenses,   selling   and   general  and
administrative expenses increased as a percentage of revenues to 7.3% for fiscal
1996 from 7.2% for fiscal 1995,  which increase was due, in part, to lower gross
profit  margins  resulting  from increased  competition  within  segments of the
Company's business.



                                      -14-

<PAGE>



           Inventories  increased  approximately  $14.4  million for fiscal 1996
when  compared  to  fiscal  1995.   This  increase  in  inventory  is  primarily
attributable to merchandise purchased in anticipation of increased sales.

           Interest  expense as a percentage  of revenues  increased to 2.0% for
fiscal 1996 from 1.7% for fiscal 1995 due to increased borrowings.

           Net income for fiscal 1996 was  $3,756,686,  which is a 20%  decrease
over the net income for fiscal 1995 of $4,681,301,  due primarily to the factors
discussed above.

LIQUIDITY AND CAPITAL RESOURCES

           The Company meets its working  capital  requirements  from internally
generated  funds and from a revolving  credit  facility with the First  National
Bank of Boston (the "Agent"),  IBJ Schroder Bank & Trust Company, Sanwa Business
Credit  Corporation,  LaSalle Business Credit, Inc. and Bank of Tokyo-Mitsubishi
Trust Company for financing the Company's accounts receivable and inventory.  On
June 6, 1996, the Company and its  subsidiaries  entered into a Second  Restated
and Amended Revolving Credit and Security Agreement with The First National Bank
of Boston, IBJ Schroder Bank & Trust Company, Sanwa Business Credit Corporation,
LaSalle Business  Credit,  Inc. and The Bank of  Tokyo-Mitsubishi  Trust Company
(the "Revolving Credit Facility"). The Revolving Credit Facility provides, among
other  things,  for  a  maximum   availability  of  $105,000,000,   interest  on
outstanding loans, at the Company's option, at .375% above the Agent's base rate
or 2.00% above the  Eurodollar  rate,  overadvances  of up to  $6,500,000 in the
aggregate  and  letters  of credit of up to  $7,500,000  in the  aggregate.  The
Company must comply with certain  financial  covenants such as  maintaining  its
consolidated  tangible net worth, its interest coverage ratio, its current ratio
and  its  leverage  ratio  at the  levels  prescribed  in the  Revolving  Credit
Facility. The obligations of the Company under the Revolving Credit Facility are
secured by, among other things, the Company's inventory and accounts receivable.
As of March  31,  1997,  the  Company  had  $96,740,253  outstanding  under  the
Revolving Credit Facility. The effective interest rate charged to the Company at
March 31,  1997 was 8.37%,  which was based on a  combination  of 2.0% above the
Eurodollar  rate and 3/8%  above the prime  rate of the First  National  Bank of
Boston.  The Company uses cash  generated  from  operations to reduce short term
borrowings which in turn acts to increase loan availability  consistent with the
Company's financing agreement.

           On June 28, 1996, the Revolving Credit Facility was amended to, among
other  things,  include  in the  Borrowing  Base  a  percentage  of  outstanding
documentary  letters of credit and to revise the  definition of "Operating  Cash
Flow" to  exclude  from the  reduction  from Net  Income,  capital  expenditures
financed by third parties.  On October 15, 1996, the Revolving  Credit Agreement
was amended to increase from  $47,500,000 to $55,000,000 the amount equal to the
borrowing  base  percentage  of the "Net  Security  Value of Base  Inventory" in
determining  the  borrowing  base.  On December 6, 1996,  the  Revolving  Credit
Facility was amended to permit the Company to purchase  certain  inventory  from
fragrance  suppliers.  On February 14, 1997, the Revolving  Credit  Facility was
amended  to,  among other  things,  revise the  definition  of  "Inventory  Turn
Average"  and to change the level of the current  ratio for the  quarter  ending
March 31, 1997. On May 21, 1997, the Revolving  Credit  Agreement was amended to
increase the maximum  availability  from $105,000,000 to $110,000,000 and to add
Bank Leumi Trust Company of New York as an additional lender.

           The Company's accounts receivable increased to $48,424,882 for fiscal
1997 from $33,963,830 for fiscal 1996  representing an increase of 43% due to an
increase in sales and due to customers


                                      -15-

<PAGE>



which had previously paid the Company in an average of 49 days at March 31, 1996
and have been paying the Company in an average of 60 days at March 31, 1997. The
Company believes the slowness in collection of accounts  receivable is primarily
a symptom of the poor regional  economy.  The Company does not  anticipate  this
trend to continue once economic conditions improve.

           The Company  has  minimal  capital  investment  requirements  and any
significant capital expenditures are financed through long-term lease agreements
and  would not  adversely  impact  cash  flow.  The  Company  believes  that its
internally  generated  funds and its current and future bank line of credit will
be sufficient to meet its anticipated  cash and capital needs through the fiscal
year ending March 31, 1998.

INFLATION AND SEASONALITY

           Inflation  has  not  had  any  significant  adverse  effects  on  the
Company's business and the Company does not believe it will have any significant
effect on its future  business.  The Company's  fragrance  business is seasonal,
with  greater  sales  during the  Christmas  season than in other  seasons.  The
Company's other product lines are not seasonal.




                                      -16-

<PAGE>



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The  Financial   Statements  of  the  Company  identified  below  are
contained in this Report on the pages indicated: 
                                                                            Page
                                                                            ----

Report of Independent Auditor                                               F-2

Consolidated Balance Sheet -
March 31, 1997 and 1996                                                     F-3

Consolidated Statement of Operations -
Years ended March 31, 1997,
1996 and 1995                                                               F-4

Consolidated Statement of Shareholders' Equity -
Years ended March 31, 1997,
1996 and 1995                                                               F-5

Consolidated Statement of Cash Flows - Years
ended March 31, 1997, 1996
and 1995                                                                    F-6

Notes to Consolidated Financial Statements                                  F-7




                                       F-1

<PAGE>



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


Board of Directors:

Allou Health & Beauty Care, Inc.
Brentwood, New York


           We have audited the accompanying  consolidated balance sheet of Allou
Health  &  Beauty  Care,  Inc.  as of March  31,  1997 and 1996 and the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1997. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

           We  conducted  our  audits  in  accordance  with  generally  accepted
auditing standards.  Those standards require that we plan and perform the 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,  such financial  statements  present  fairly,  in all
material respects,  the financial position of Allou Health and Beauty Care, Inc.
at March 31, 1997 and 1996, and the results of its operations and cash flows for
each of the years in the  three-year  period ended March 31, 1997, in conformity
with generally accepted accounting principles.



                                                Respectfully submitted,         
                                                
                                                
                                                /s/Mayer Rispler & Company, P.C.
                                                --------------------------------
                                                Mayer Rispler & Company, P.C.
                                                Certified Public Accountants
June 17, 1997
New York, New York
                                                
                                                

                                       F-2

<PAGE>
                        ALLOU HEALTH & BEAUTY CARE, INC.
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                     ASSETS
                                     ------
                                                         March 31,      March 31,
                                                           1997           1996
                                                       ------------   ------------
<S>                                                    <C>            <C>         
Current Assets
--------------
Cash                                                   $     76,531   $    144,118
Accounts Receivable (less allowance for
 doubtful accounts of $555,682 at March 31,
 1997 and $373,890 at March 31, 1996 (Notes 1 & 5)       48,424,882     33,963,830
Inventories (Notes 1 & 5)                                96,661,103     71,690,321
Other Current Assets (Note 2)                             8,168,603     13,215,004
                                                       ------------   ------------
Total Current Assets                                   $153,331,119   $119,013,273

Fixed Assets, Less Accumulated Depreciation

 (Notes 1 & 3)                                            3,642,758      3,625,147
Other Assets (Note 4)                                     4,373,918      3,546,285
                                                       ------------   ------------
         TOTAL ASSETS                                  $161,347,795   $126,184,705
                                                       ============   ============

                       LIABILITIES & STOCKHOLDERS' EQUITY
                       ----------------------------------
Current Liabilities
   Amounts Due Bank (Note 5)                           $ 96,740,253   $ 70,809,101
   Current Portion of Long-Term Debt (Note 6)               540,500        222,393
   Accounts Payable and Accrued Expenses (Note 7)        13,998,641     10,425,003
                                                       ------------   ------------
Total Current Liabilities                              $111,279,394   $ 81,456,497
                                                       ------------   ------------

Long Term Liabilities
---------------------
   Long-Term Debt, Less Current Portion (Note 6)          1,841,470        529,390
   Deferred Income Taxes (Note 1)                             - 0 -         30,422
                                                       ------------   ------------
Total Long Term Liabilities                               1,841,470        559,812
                                                       ------------   ------------

         TOTAL LIABILITIES                             $113,120,864   $ 82,016,309
                                                       ------------   ------------

Commitments & Contingencies (Note 8)

Stockholders' Equity (Notes 1 & 9)
--------------------

Preferred Stock, $.001 par value, 1,000,000
  shares authorized, none issued and outstanding
Class A Common Stock, $.001
  par value; 10,000,000 shares authorized and
  4,552,225 issued and outstanding at
  March 31, 1997 and 1996                              $      4,552   $      4,552
Class B Common Stock, $.001 par value; 2,200,000 and
  1,700,000 authorized at March 31, 1997 and March
  31, 1996 respectively, 1,200,000 issued and
  outstanding at March 31, 1997 and 1996                      1,200          1,200
Additional Paid-In Capital                               23,476,508     23,476,508
Retained Earnings                                        24,744,671     20,686,136
                                                       ------------   ------------
         TOTAL STOCKHOLDERS' EQUITY                      48,226,931     44,168,396
                                                       ------------   ------------

         TOTAL LIABILITIES & STOCKHOLDERS' EQUITY      $161,347,795   $126,184,705
                                                       ============   ============
</TABLE>

                   The accompanying notes are an integral part
                          of this financial statement.


                                       F-3
<PAGE>



                        ALLOU HEALTH & BEAUTY CARE, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                        For the years ended March 31,

                                                   1997             1996             1995
                                                   ----             ----             ----
<S>                                           <C>              <C>              <C>          
Revenues                                      $ 285,311,441    $ 273,322,102    $ 237,542,426
Costs of Revenues                               250,843,851      241,734,316      208,906,041
                                              -------------    -------------    -------------
Gross Profit                                     34,467,590       31,587,786       28,636,385
                                              -------------    -------------    -------------
Operating Expenses
       Warehouse & Delivery                       8,592,051        8,062,827        6,864,463
       Selling, General & Administrative         12,765,898       11,893,687       10,250,475
                                              -------------    -------------    -------------
         Total Operating Expenses                21,357,949       19,956,514       17,114,938
                                              -------------    -------------    -------------
         Income From Operations                  13,109,641       11,631,272       11,521,447
                                              -------------    -------------    -------------
Other Charges (Credits)
       Interest Expenses                          6,614,797        5,524,543        3,978,453
       Other                                        (47,804)         (11,204)         (22,454)
                                              -------------    -------------    -------------
         Total                                    6,566,993        5,513,339        3,955,999
                                              -------------    -------------    -------------
         Income Before Income Taxes               6,542,648        6,117,933        7,565,448
       Provision for Income Taxes (Note 10)       2,484,113        2,361,247        2,884,147
                                              -------------    -------------    -------------
            NET INCOME                        $   4,058,535    $   3,756,686    $   4,681,301
                                              =============    =============    =============
Net Income Per Common Share (Note 1):
Primary & Fully Diluted                       $         .70    $         .65    $         .80
                                              =============    =============    =============
</TABLE>

                   The accompanying notes are an integral part
                          of this financial statement.



                                       F-4

<PAGE>

                         ALLOU HEALTH & BEAUTY CARE INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                  For the Years Ended March 31,
                                                             1997           1996            1995
                                                             ----           ----            ----
Cash Flows From Operating Activities
------------------------------------
<S>                                                     <C>             <C>             <C>         
Net Income                                              $  4,058,535    $  3,756,686    $  4,681,301
Adjustments to Reconcile Net Income to
           Net Cash Used in Operating Activities:
           Depreciation and Amortization                     666,508         562,529         450,396
Decrease (Increase) In Assets:
           Accounts Receivable                           (14,461,052)     (5,490,810)     (4,525,406)
           Inventory                                     (24,970,782)    (14,419,611)    (10,329,500)
           Other Assets                                    4,160,904       1,342,875      (5,812,774)
Increase (Decrease) In Liabilities:
           Accounts Payable & Accrued Expenses             3,573,638          98,938         803,184
           Income Taxes Payable                              (30,422)       (555,887)        363,187
                                                        ------------    ------------    ------------
                Net Cash Used In Operating
                      Activities                         (27,002,671)    (14,705,280)    (14,369,612)
                                                        ------------    ------------    ------------
Cash Flows From Investing Activities
------------------------------------
           Acquisition of Fixed Assets                      (626,255)     (1,947,844)     (1,451,966)
                                                        ------------    ------------    ------------
Cash Flows From Financing Activities
------------------------------------
           Net Increase in Amounts Due Bank               25,931,152      16,680,621      14,044,169
           Borrowings                                      2,010,376             -0-         211,284
           Repayment of Debt                                (380,189)       (245,116)       (126,683)
           Net Proceeds from Exercise of
             Warrants & Options                                  -0-         235,500       1,467,998
                                                        ------------    ------------    ------------
                Net Cash Provided By Financing
                      Activities                          27,561,339      16,671,005      15,596,768
                                                        ------------    ------------    ------------
                      NET INCREASE (DECREASE) IN CASH        (67,587)         17,881        (224,810)
                      CASH AT BEGINNING OF YEAR              144,118         126,237         351,047
                                                        ------------    ------------    ------------
                      CASH AT END OF YEAR               $     76,531    $    144,118    $    126,237
                                                        ============    ============    ============
Supplemental Disclosures of Cash Flow
  Information:
           Cash Paid For:
           Interest                                        6,438,593    $  5,464,832    $  3,844,593
           Income Taxes                                 $  2,302,293    $  3,243,631    $  2,520,960
</TABLE>

The Company issued  equipment notes for $2,010,376 and $211,284 during the years
ended March 31, 1997 and 1995, respectively.


                   The accompanying notes are an integral part
                          of this financial statement.


                                       F-5

<PAGE>



                        ALLOU HEALTH & BEAUTY CARE, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY




                                      Additional
                             Common      Paid         Retained
                              Stock   In Capital      Earnings       Total
                             ------   -----------   -----------   -----------

Balance March 31, 1994       $5,358   $21,773,404   $12,248,149   $34,026,911
Net Proceeds from Exercise
 of Warrants and Options        304     1,467,694           -0-     1,467,998
Net Income                      -0-           -0-     4,681,301     4,681,301
                             ------   -----------   -----------   -----------
Balance March 31, 1995       $5,662   $23,241,098   $16,929,450   $40,176,210
Net Proceeds from Exercise
 of Options                      90       235,410                     235,500
Net Income                      -0-           -0-     3,756,686     3,756,686
                             ------   -----------   -----------   -----------
Balance March 31, 1996       $5,752   $23,476,508   $20,686,136   $44,168,396
Net Income                      -0-           -0-     4,058,535     4,058,535
                             ------   -----------   -----------   -----------
Balance March 31, 1997       $5,752   $23,476,508   $24,744,671   $48,226,931
                             ======   ===========   ===========   ===========


                          The accompanying notes are an
                   integral part of this financial statement.


                                       F-6

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


1.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

           A.         Organization:

           Allou Health & Beauty Care, Inc. (the "Company") was  incorporated on
January  20,  1989  under the laws of the state of  Delaware,  on which  date it
acquired all of the outstanding shares of Allou  Distributors,  Inc. in exchange
for 2,400,000 shares  (1,200,000  post-split) of its Class B Common Stock,  thus
making it a wholly-owned subsidiary.

           Effective April 1, 1993, the Company  acquired all of the outstanding
shares  of  M.  Sobol,  Inc.,  a  wholesaler  of  pharmaceutical  products  in a
transaction accounted for under the purchase method. The price for the stock was
$1,472,382.

           On October 2, 1995,  the  Company  purchased  certain  assets of Russ
Kalvin Inc., a manufacturer of hair care products located in southern California
for $2,296,735. These assets included accounts receivable,  inventory, equipment
and intangibles.  The Company has incorporated  wholly-owned  subsidiaries  that
manufacture and distribute these products.

           These financial statements include the consolidated operations of the
Company  and  its   subsidiaries.   All  intercompany   transactions  have  been
eliminated.

           B.         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 hair care  products.  The  Company  sells these  products to  retailers
throughout the United States.

           C.         Revenue Recognition:

           The Company recognizes revenue on its entire product line at the time
the products are shipped to the customer.

           D.        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.

           E.         Inventories:

           Inventories, which consist of finished goods, are stated at the lower
of average cost or market.



                                       F-7

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

           F.         Fixed Assets:

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

           G.         Deferred Taxes:

           Deferred taxes  represent the amount due on the cumulative  effect of
change of inventory  valuation from LIFO to Average Cost Method. As permitted by
applicable  tax  regulations,  this  amount  can be  included  in income for tax
purposes ratably over six years.

           H.         Earnings Per Share:

           Primary and fully diluted earnings per share are computed on weighted
average  number of shares  actually  outstanding,  plus the shares that would be
outstanding  assuming the exercise of the Company's  outstanding  stock warrants
and stock  options,  which are  considered  to be common stock  equivalents,  in
accordance with the treasury stock method.

           I.         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.

           J.         Stock Based Compensation:

               The  Company  accounts  for stock  options as  prescribed  by APB
opinion No. 25 and includes pro forma information in the stock options footnote,
as permitted by statement of financial accounting standard No. 123.

2.         OTHER CURRENT ASSETS:
           Included in other current  assets at March 31, 1997 are $6,091,422 of
prepayments on merchandise and $689,560 of interest bearing loans to officers.




                                       F-8

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

3.         PROPERTY AND EQUIPMENT:

                                           March 31,     March 31,    Estimated
                                             1997          1996     Useful Lives
                                           --------      --------   ------------

Machinery & Equipment                    $1,765,908    $1,639,480    5 years

Furniture, Fixtures &
 Office Equipment                         2,295,084     2,015,415    5-10 years
Transportation Equipment                     96,750        96,750    3-5 years
Leasehold Improvements                    2,578,957     2,358,799    10-33 years
                                         ----------    -----------
                                          6,736,699      6,110,444
Less:  Accumulated Depreciation           3,093,941     2,485,297
                                         ----------    -----------
                                         $3,642,758    $ 3,625,147
                                         ==========    ===========


           Depreciation  expense for the years ended  March 31,  1997,  1996 and
1995 amounted to $608,644, $509,665 and $412,532, respectively.


4.         OTHER ASSETS:
           Included  in  other  assets  is  $1,763,143   of  goodwill,   net  of
amortization,  created  upon the  purchase of the shares of M. Sobol  Inc.,  the
Company's wholly-owned  subsidiary,  and the purchase of selected assets of Russ
Kalvin Inc. (see note 1-A), and $2,056,364 of interest-bearing  officers' loans.
The  goodwill  is  being   amortized   over  forty  years  and  fifteen   years,
respectively.  Amortization expense for the years ended March 31, 1997, 1996 and
1995 amounted to $57,864, $52,864 and $37,864, respectively.

5.         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
which  have been  increased  as of May 21,  1997 to  $110,000,000,  including  a
$6,500,000  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 inventory 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 rate charged to the Company at March
31, 1997 was 8.37%,  which was based on a combination of 2% above the Eurodollar
rate and 3/8% above the prime rate.

6.         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  $45,000,  which include interest at rates varying from 3/8% above
the prime rate to 3.36% above the treasury rate.

           (b) a loan payable to the previous stockholder of M. Sobol, Inc. (see
note  1-A).  Interest  payable  on the  declining  principal  balance  has  been
calculated at 5.45% per annum, through April 1, 2000.


                                       F-9

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

           The aggregate long-term debt is payable as follows:

   Year Ending
    March 31,

      1998                              $  540,500

      1999                                 575,497

      2000                                 595,072

      2001                                 572,914

      2002                                  97,987
                                        ----------
                                        $2,381,970
                                        ==========



7.         ACCOUNTS PAYABLE AND ACCRUED EXPENSES:



                                                     March 31,        March 31,
                                                       1997             1996
                                                       ----             ----

Cost of Revenues                                   $12,066,836       $ 8,471,396

Selling, General & Administrative                      928,967         1,245,841

Interest - Bank                                        550,433           374,229

Payroll                                                452,405           333,537
                                                   -----------       -----------
                                                   $13,998,641       $10,425,003
                                                   ===========       ===========



8.         COMMITMENTS AND CONTINGENCIES:


           A.  Operating Leases:
           Effective April 1995, the Company's lease was renegotiated to include
additional  space and the lease term was  extended  to May 2005.  Commencing  on
October 2, 1995, in connection with the operations of its wholly-owned hair care
products  subsidiaries,  the  Company  entered  into a five year  real  property
operating  lease for space located in  California.  As of March 31, 1997,  total
minimum annual rentals,  excluding additional payments for real estate taxes and
certain expenses, are as follows:
        Year Ending
         March 31,
           1998                                    $   855,197
           1999                                        852,797
           2000                                        858,797
           2001                                        768,749
           2002                                        625,939
           2003-2006                                 1,982,139

           Rent  expense  for the  years  ended  March 31,  1997,  1996 and 1995
amounted to $896,910, $744,505 and $490,052, respectively.

           B. The Company uses an entity for its deliveries  using the Company's
leased trucks and is charged on a per load basis. The Company assigned the truck
lease to this non-affiliated entity, however, the Company has guaranteed payment
and performance on all terms of the lease through its expiration in 1997.


                                      F-10

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

           The Company owns a trailer truck which has been assigned to an entity
in exchange  for such entity  assuming the loan  payments for such truck,  which
remain an obligation of the Company.

           C.        Union:
           The  Company  has an  agreement  with the  National  Organization  of
Industrial  Trade Unions which  terminates  on December 14, 1997.  The agreement
covers all warehouse and receiving employees, excluding supervisory personnel.

           D.        Defined Contribution Plan
           Effective April 1, 1996, the Company  established a  non-contributory
defined  contribution  plan (401K) for  substantially  all employees not covered
under collective bargaining agreements.


           E.        Stock Option Plans:

           Prior to 1995,  the Company  adopted three stock option plans,  which
provide for the granting of stock options to certain employees and directors. An
aggregate of  1,300,000  shares of Class A and Class B Common Stock are reserved
for issuance under these three plans. On September 11, 1996, the stockholders of
the Company  approved the Company's  1995  Non-Qualified  Stock Option Plan (the
"1995 Plan") and the 1996 Stock Option Plan (the "1996 Plan") which  provide for
the granting of stock options to certain  employees and directors.  An aggregate
of 500,000  shares of Class B Common Stock are  reserved for issuance  under the
1995 Plan and an  aggregate  of 1,000,000  shares of Class A Common  Stock,  are
reserved for issuance under the 1996 Plan.

           Incentive stock options are granted at no less than fair market value
of the shares on the date of grant and  options  granted to  individuals  owning
more than 10% of the voting power of the Company's capital stock must be granted
at 110% of the fair market value at the date of grant.

           Option  activity for the years ended March 31, 1997,  1996,  and 1995
was as follows:
                               1997             1996             1995
                               ----             ----             ----
Options outstanding
  at beginning of year        1,184,500        1,176,950          790,000
Granted                         375,000          136,550          415,450
Exercised                           -0-          (90,500)         (21,000)
Cancelled                      (178,350)         (38,500)          (7,500)
                             ----------       ----------       ----------
Outstanding at
  end of year                 1,381,150        1,184,500        1,176,950
                             ==========       ==========       ==========

Option price range
  at end of year        $5.80 to $10.00     $5.75 to $10.00    $2.50 to $10.00
                        =====    ======     =====    ======    =====    ======

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 in fiscal 1997 and 1996  consistent  with the provisions of SFAS No. 123,
net income per common share would have been reduced to the  following  pro forma
amounts:




                                      F-11

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

                                                  March 31,      March 31,
                                                     1997           1996
                                                  ---------      ---------

Net Income - Pro Forma                           $3,582,793     $3,196,406

Earnings Per Common Share - Pro Forma            $      .62     $      .56

           The pro  forma  amounts  are not  indicative  of  anticipated  future
disclosures  because SFAS 123 does not apply to options  granted  before  fiscal
1996.

           The fair value of each  option at date of grant for  options  granted
during  fiscal  1997  and 1996  was  $1.50  and  $2.07,  respectively,  and were
estimated  using  the   Black-Scholes   option  pricing  model.   The  following
assumptions were applied:

           No dividend  yield;  expected  volatility  rates of 25% and 32%; Risk
free interest  rates  approximating  5 % and expected lives of 3.3 years and 4.3
years, respectively.

           F. The Company's  three year  employment  agreements with four of its
officers,  which  expired on August 1, 1995,  provided  for annual  salaries  of
$150,000  each  for  three of the  officers  and  $225,000  for the  fourth.  In
addition, three of the officers received bonuses based on the Company's earnings
before  interest  and taxes.  For the year ended  March 31,  1995,  three of the
officers  waived their rights to a bonus of  $1,354,606  and the fourth  officer
received a bonus of $40,000.

           Effective  August 1,  1995,  the  Company  entered  into  three  year
employment  agreements with three of its officers.  These agreements provide for
each to  receive  annual  salaries  of  $300,000  and a bonus of 3% of the first
$2,000,000,  2% on the next $1,000,000 and 1% on the remaining increase over the
Company's  prior year  earnings  before  interest and taxes.  For the year ended
March 31, 1997, these three officers received a total bonus of $145,221. For the
year ended March 31, 1996, these three officers received no bonus.

           Effective  June 30,  1996,  the  Company  entered  into a three  year
employment  agreement with a fourth  officer,  providing for an annual salary of
$225,000 and a $75,000 bonus.

           G.        Letters of Credit:

           The Company has irrevocable  standby letters of credits in the sum of
$425,000 expiring thru February 28, 1998.

           H.        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.

9.         STOCKHOLDERS' EQUITY:

           On September 11, 1996, the  stockholders  of the Company  approved an
increase  of the  number  of  authorized  shares  of Class B Common  Stock  from
1,700,000 to 2,200,000 shares. The number of authorized shares of Class A Common
Stock is currently  10,000,000  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


                                      F-12

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

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.

           During the year ended March 31, 1990, the Company's  public  offering
became effective,  whereby 460,000 units, each consisting of three shares of the
Company's Class A common stock and three  redeemable Class A warrants were sold.
Additionally,  the underwriters were granted 40,000 units of purchase  warrants,
each consisting of three shares Class A Common Stock and three  redeemable Class
A and Class B warrants.

           During the years ended March 31, 1992, 1993 and 1994, 1,367,726 Class
A warrants and  1,355,516  Class B warrants were  exercised,  and 12,274 Class A
warrants and 12,200 Class B warrants were redeemed and cancelled.

           The Company also issued  36,000  warrants  which were  exercised  for
36,000  shares of Class A common stock.  In connection  with the purchase of its
wholly-owned  subsidiary  M. Sobol,  Inc.,  the Company  issued 15,000 shares of
Class A Common Stock.

           During the year ended  March 31,  1995,  the  underwriters  exercised
their 40,000 unit purchase warrants which consisted of 120,000 shares of Class A
common  stock,  120,000  Class A  warrants  and  42,483  Class B  warrants.  The
remaining  77,517 of unexercised  Class B warrants expired and were cancelled on
July 11, 1994.

10.        PROVISION FOR INCOME TAXES:

                                                        December 31,
                                             1997          1996          1995
                                             ----          ----          ----

Income  Before Income Taxes               $6,542,648    $6,117,933    $7,565,448
                                          ==========    ==========    ==========

  Federal Income Tax                      $2,072,291    $1,959,880    $2,372,572

  State Income Taxes                         411,822       401,367       511,575
                                          ----------    ----------    ----------
Total Provision for Income Taxes          $2,484,113    $2,361,247    $2,884,147
                                          ==========    ==========    ==========

           The following is a reconciliation of the statutory income tax rate to
the total effective tax rates:

                                                           March 31,
                                               1997          1996         1995
                                               ----          ----         ----
Federal Statutory Income Tax Rate               34%           34%          34%

Increase in Tax Rates Resulting from:

 State Income Taxes, Net of Federal Tax
  Benefits                                     (5.3%)         6.0%        5.6%
Net Operating Loss Carryforward from

 Subsidiary                                    (1.3%)        (1.4%)      (1.5%)
                                               -----         -----       -----
        Total Effective Tax Rates              38.0%         38.6%       38.1%
                                               =====         =====       =====


           At March 31, 1997, net operating loss  carryforwards of approximately
$140,000 are available to offset future earnings. These losses were generated by
the Company's subsidiary M. Sobol Inc., prior to its acquisition by the Company,
and as such are  limited to $85,000  per year as per  Internal  Revenue  Service
regulations.



                                      F-13

<PAGE>


                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

11.        RELATED PARTY TRANSACTIONS:



           For the years ended March 31,  1997,  1996 and 1995,  purchases  from
related parties amounted to $1,705,355,  $1,735,661 and $1,357,687 respectively,
with $15,952 outstanding at March 31, 1997.



12.        SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):



                                                                    Earnings Per
                                         Gross            Net         Common
Quarters Ended          Revenues         Profit         Income         Share
--------------         -----------     ----------     ----------     -------

June 30, 1996          $68,958,061     $8,130,446     $  802,667     $   .14
June 30, 1995          $64,432,369     $7,225,913     $1,156,829     $   .20

September 30, 1996     $76,838,439     $8,372,060     $1,076,844     $   .19
September 30, 1995     $66,913,389     $7,219,879     $  676,572     $   .12

December 31, 1996      $65,657,248     $8,358,715     $  934,315     $   .16
December 31, 1995      $76,715,466     $9,157,762     $1,198,267     $   .21

March 31, 1997         $73,857,693     $9,606,369     $1,244,709     $   .21
March 31, 1996         $65,260,878     $7,984,232     $  725,008     $   .12



                                      F-14

<PAGE>




                                                                   SCHEDULE VIII



                        ALLOU HEALTH & BEAUTY CARE, INC.



                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>

        Column A                            Column B        Column C       Column D       Column E
                                                           Additions      Deductions
        --------                            --------       ---------      ----------      --------
                                           Balance at      Charged to     Write off of     Balance
                                            Beginning      costs and     uncollectible     at end
       Description                          of period      expenses        accounts       of period
       -----------                          ---------      --------        --------       ---------
<S>                                         <C>            <C>            <C>             <C>     
March 31, 1995
 Allowance for Doubtful Accounts            $361,253       $294,000       $369,088        $286,165

March 31, 1996
 Allowance for Doubtful Accounts            $286,165       $412,000       $324,275        $373,890

March 31, 1997
 Allowance for Doubtful Accounts            $373,890       $560,000       $378,208        $555,682
</TABLE>


                                       S-1

<PAGE>

                        ALLOU HEALTH & BEAUTY CARE, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

                                                                     SCHEDULE IX

                        ALLOU HEALTH & BEAUTY CARE, INC.

                              SHORT-TERM BORROWINGS


<TABLE>
<CAPTION>

Column A                  Column B     Column C      Column D       Column E     Column F(a)
--------                  --------     --------      --------       --------     -----------

                                                      Maximum       Average         Weighted
Category of                            Weighted        amount        amount         average
aggregate                Balance at     average      outstanding   outstanding   interest rate
short-term                  end        interest        during        during         during
borrowings               of period       rate        the period    the period     the period
----------               ---------     --------      ----------    ----------     ----------
                                        (Daily                                     (Daily
                                         Basis)                                     Basis)
<S>                     <C>              <C>        <C>           <C>               <C>   
March 31, 1993
 Bank Loan              $36,114,991      5.55%      $35,079,883   $32,569,571       5.864%
                                                    
March 31, 1994                                      
 Bank Loan              $40,084,311      5.82%      $50,060,899   $45,141,816       5.53%
                                                    
March 31, 1995                                      
 Bank Loan              $54,128,480      8.45%      $60,387,121   $52,642,369       7.23%
                                                    
March 31, 1996                                      
 Bank Loan              $70,809,101      8.50%      $73,365,424   $67,206,057       8.14%
                                                    
March 31, 1997                                      
 Bank Loan              $96,740,253      8.37%      $97,125,175   $84,393,253       7.67%
</TABLE>


                                       S-2

<PAGE>



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 the
Registrant's  definitive Proxy Statement with respect to the  Registrant's  1997
Annual Meeting of  Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.








                                      -17-

<PAGE>




                                     PART IV



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



           (a) Documents filed as part of this Report:



                1.  Financial Statements



           The  following  financial  statements of the Company are contained in
Item 8 of this Report on the pages indicated:



                                                                            Page
                                                                            ----

Report of Independent Auditors                                               F-1

Consolidated Balance Sheet -
March 31, 1997 and 1996                                                      F-2

Consolidated Statement of Operations -
Years ended March 31, 1997,
1996 and 1995                                                                F-3

Consolidated Statement of Shareholders' Equity -
Years ended March 31, 1997,
1996 and 1995                                                                F-4

Consolidated Statement of Cash Flows - Years
ended March 31, 1997, 1996
and 1995                                                                     F-5

Notes to Consolidated Financial Statements                                   F-6








                                      -18-

<PAGE>



           2.         Financial Statement Schedules



           The  following  financial  statement  schedules are contained in this
Report on the pages indicated:



                                                                            Page
                                                                            ----


Schedule VIII-     Valuation and Qualifying Accounts and Reserve             S-1



Schedule IX -      Short-Term Borrowings                                     S-2



           Schedules other than those listed above have been omitted as they are
either not required, are not applicable,  or the information called for is shown
in the financial statements or notes thereto.





           3.         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).



10.1              Employment  Contract  dated as of August 1, 1995  between  the
                  Registrant  and  Victor  Jacobs  (filed  as  Exhibit  10.1  to
                  Registrant's  Annual  Report on Form 10-K for the fiscal  year
                  ended March 31, 1996 Commission File No. 1-10340 ("1996 10-K")
                  and incorporated herein by reference).


                                      -19-

<PAGE>






10.2              Employment  Contract  dated  as  of  August  1,  1995  between
                  Registrant  and  Herman  Jacobs  (filed  as  Exhibit  10.2  to
                  Registrant's 1996 10-K and incorporated herein by reference).



10.3              Employment  Contract  dated as of August 1, 1995  between  the
                  Registrant   and  Jack  Jacobs   (filed  as  Exhibit  10.3  to
                  Registrant's 1996 10-K and incorporated herein by reference).



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).


                                      -20-

<PAGE>




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             Restated and Amended  Revolving Credit and Security  Agreement
                  among the First National Bank of Boston, Bank Hapoalim B.M., v
                  dated  as  of  May  9,  1994   (filed  as  Exhibit   10(n)  to
                  Registrant's  1994  Form  10-K  and  incorporated   herein  by
                  reference).



10.15             First Amendment to Restated and Amended  Revolving  Credit and
                  Security  Agreement  among the First  National Bank of Boston,
                  Bank Hapoalim B.M.,  IBJ Schroder Bank & Trust Company,  Sanwa
                  Business Credit  Corporation,  LaSalle Business Credit,  Inc.,
                  The Bank of Tokyo  Trust  Company,  the  Registrant  and Allou
                  Distributors,  Inc.  dated  August 24,  1994 (filed as Exhibit
                  10(l) to the  Registrant's  1995  Form  10-K and  incorporated
                  herein by reference).



10.16             Second  Restated  and Amended  Revolving  Credit and  Security
                  Agreement  dated as of June 1996 among  Allou  Health & Beauty
                  Care, Inc., Allou Distributors,  Inc., The First National Bank
                  of


                                      -21-

<PAGE>




                  Boston,  IJB Schroder  Bank & Trust  Company,  Sanwa  Business
                  Credit  Corporation,  La Salle Business Credit,  Inc., and The
                  Bank of Tokyo -  Mitsubishi  Trust  Company  (filed as Exhibit
                  10.3 to  Registrant's  1996  10-K and  incorporated  herein by
                  reference).



*10.17            First  Amendment  to Second  Restated  and  Amended  Revolving
                  Credit and Security  Agreement dated as of June 28, 1996 among
                  Allou Health & Beauty Care, Inc., Allou Distributors Inc., The
                  First  National  Bank of  Boston,  IBJ  Schroder  bank & Trust
                  company,  Sanwa Business Credit Corporation,  LaSalle Business
                  Credit, Inc., and The Bank of Tokyo-Mitsubishi Trust Company.



*10.18            Second  Amendment  to Second  Restated  and Amended  Revolving
                  Credit and Security  Agreement,  dated  October 15, 1996 among
                  the Borrowers, the Agent and the Lenders.



*10.19            Third  Amendment  to Second  Restated  and  Amended  Revolving
                  Credit and Security Agreement, dated December 6, 1996.



*10.20            Fourth  Amendment  to Second  Restated  and Amended  Revolving
                  Credit and Security  Agreement,  dated as of February 14, 1997
                  among Allou Health & Beauty Care,  Inc.,  Allou  Distributors,
                  Inc., The First  National Bank of Boston,  IBJ Schroder Bank &
                  Trust Company,  Sanwa  Business  Credit  Corporation,  LaSalle
                  Business Credit, Inc. and The Bank of  Tokyo-Mitsubishi  Trust
                  Company.



*10.21            Fifth  Amendment  to Second  Restated  and  Amended  Revolving
                  Credit and Security Agreement,  dated May 21, 1997 among Allou
                  health  and  Beauty  Care,  Inc.,  Allou  Distributors,  Inc.,
                  BankBoston,   IBJ  Schroder  Bank  and  Trust  Company,  Sanwa
                  Business Credit  Corporation,  LaSalle Business Credit,  Inc.,
                  and The Bank of Tokyo-Mitsubishi Trust company, to reflect the
                  addition of Bank Leumi Trust company of New York as a Lender.



*10.22            Amendment to Guaranty and Subsidiary Tie-In  Agreement,  dated
                  as of May 1997 among Borrowers and Guarantors.




                                      -22-

<PAGE>




10.23             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).



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 & Co.



*27               Financial Data Schedule

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

* Filed herewith





           (b)        Reports on Form 8-K



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






                                      -23-

<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 30, 1997



           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.




Signatures                               Title                         Date


/s/ VICTOR JACOBS             Chairman of the Board and Chief      June 30, 1997
-----------------------       Executive Officer
Victor Jacobs


/s/ HERMAN JACOBS             President and Director               June 30, 1997
-----------------------
Herman Jacobs


/s/ DAVID SHAMILZADEH         Chief Financial Officer, Chief       June 30, 1997
-----------------------       Accounting Officer and Director
David Shamilzadeh


/s/ JACK JACOBS               Director                             June 30, 1997
-----------------------
Jack Jacobs


/s/  RAMON MONTES             Director                             June 30, 1997
-----------------------
Ramon Montes


/s/ SOL NAIMARK               Director                             June 30, 1997
-----------------------
Sol Naimark


/s/ JEFFREY BERG              Director                             June 30, 1997
-----------------------
Jeffrey Berg









<PAGE>


                                Index to Exhibits
                                -----------------


Exhibit
  No.                                 Description                           Page
-------                               -----------                           ----



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).



10.1           Employment  Contract  dated as of  August  1, 1995
               between the Registrant and Victor Jacobs (filed as
               Exhibit 10.1 to Registrant's Annual Report on Form
               10-K for the  fiscal  year  ended  March 31,  1996
               Commission  File No.  1-10340  ("1996  10-K")  and
               incorporated herein by reference).



10.2           Employment  Contract  dated as of  August  1, 1995
               between  Registrant  and Herman  Jacobs  (filed as
               Exhibit  10.2  to   Registrant's   1996  10-K  and
               incorporated herein by reference).



10.3           Employment  Contract  dated as of  August  1, 1995
               between the  Registrant  and Jack Jacobs (filed as
               Exhibit  10.3  to   Registrant's   1996  10-K  and
               incorporated herein by reference).



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






<PAGE>




Exhibit
  No.                                 Description                           Page
-------                               -----------                           ----



               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).






<PAGE>




Exhibit
  No.                                 Description                           Page
-------                               -----------                           ----



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          Restated and Amended Revolving Credit and Security
               Agreement among the First National Bank of Boston,
               Bank  Hapoalim  B.M.,  v dated  as of May 9,  1994
               (filed as Exhibit 10(n) to Registrant's  1994 Form
               10-K and incorporated herein by reference).



10.15          First Amendment to Restated and Amended  Revolving
               Credit  and  Security  Agreement  among  the First
               National Bank of Boston,  Bank Hapoalim  B.M., IBJ
               Schroder  Bank &  Trust  Company,  Sanwa  Business
               Credit Corporation, LaSalle Business Credit, Inc.,
               The Bank of Tokyo Trust  Company,  the  Registrant
               and Allou Distributors, Inc. dated August 24, 1994
               (filed as Exhibit 10(l) to the  Registrant's  1995
               Form 10-K and incorporated herein by reference).



10.16          Second Restated and Amended  Revolving  Credit and
               Security  Agreement  dated as of June  1996  among
               Allou   Health  &   Beauty   Care,   Inc.,   Allou
               Distributors,  Inc.,  The First  National  Bank of
               Boston,  IJB Schroder Bank & Trust Company,  Sanwa
               Business  Credit  Corporation,  La Salle  Business
               Credit,  Inc.,  and The Bank of Tokyo - Mitsubishi
               Trust   Company   (filed   as   Exhibit   10.3  to
               Registrant's 1996 10-K and incorporated  herein by
               reference).



*10.17         First  Amendment  to Second  Restated  and Amended
               Revolving  Credit and Security  Agreement dated as
               of June 28, 1996 among Allou Health & Beauty Care,
               Inc., Allou  Distributors Inc., The First National
               Bank of Boston, IBJ Schroder bank & Trust company,
               Sanwa   Business   Credit   Corporation,   LaSalle
               Business  Credit,  Inc.,  and The  Bank of  Tokyo-
               Mitsubishi Trust Company.



*10.18         Second  Amendment  to Second  Restated and Amended
               Revolving  Credit and  Security  Agreement,  dated
               October  15, 1996 among the  Borrowers,  the Agent
               and the Lenders.






<PAGE>




Exhibit
  No.                                 Description                           Page
-------                               -----------                           ----



*10.19         Third  Amendment  to Second  Restated  and Amended
               Revolving  Credit and  Security  Agreement,  dated
               December 6, 1996.



*10.20         Fourth  Amendment  to Second  Restated and Amended
               Revolving Credit and Security Agreement,  dated as
               of February  14, 1997 among Allou  Health & Beauty
               Care,  Inc., Allou  Distributors,  Inc., The First
               National Bank of Boston, IBJ Schroder Bank & Trust
               Company,   Sanwa  Business   Credit   Corporation,
               LaSalle  Business  Credit,  Inc.  and The  Bank of
               Tokyo- Mitsubishi Trust Company.



*10.21         Fifth  Amendment  to Second  Restated  and Amended
               Revolving Credit and Security Agreement, dated May
               21, 1997 among Allou health and Beauty Care, Inc.,
               Allou Distributors, Inc., BankBoston, IBJ Schroder
               Bank and  Trust  Company,  Sanwa  Business  Credit
               Corporation,  LaSalle Business  Credit,  Inc., and
               The Bank of  Tokyo-Mitsubishi  Trust  company,  to
               reflect the  addition of Bank Leumi Trust  company
               of New York as a Lender.



*10.22         Amendment  to  Guaranty  and   Subsidiary   Tie-In
               Agreement,  dated as of May 1997  among  Borrowers
               and Guarantors.



10.23          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).



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 & Co.



*27            Financial Data Schedule


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

* Filed herewith