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


                       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, 1999

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO
      _____________

                           Commission file no. 1-10340

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

                  DELAWARE                                   11-2953972
-----------------------------------------            ---------------------------
  (State or other jurisdiction of                       (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, par value $.001 per share         American Stock Exchange

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

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

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

         The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant on June __, 1998 was $__________. Such
aggregate market value is computed by reference to the closing sales price of
the Class A common stock on such date. For purposes of this calculation, the
Registrant has excluded the Class B common stock, which is held primarily by
affiliates and is not publicly-traded.

         The number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: __________ shares of Class A
common stock and _________ shares of Class B common stock as of the close of
business on June __, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain portions of the Registrant's Proxy Statement relating to the
Registrant's 1999 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.

<PAGE>
                                     PART I

ITEM 1.        BUSINESS

GENERAL

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

PRODUCTS

         We distribute four general categories of products:

         o     fragrances and cosmetics;

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

         o     prescription pharmaceuticals; and

         o     non-perishable food items.

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

         FRAGRANCES AND COSMETICS

         We distribute prestige designer fragrances of many large manufacturers,
which include Ralph Lauren, Calvin Klein, Estee Lauder, Lancome, Chanel, and
Tommy Hilfiger. See "Manufacturers and Suppliers." Fragrance and cosmetic sales
accounted for approximately 36% of our revenues during the fiscal year ended
March 31, 1997, 39% of our revenues during the fiscal year ended March 31, 1998
and 40% of our revenues during the fiscal year ended March 31, 1999. Our profit
margins on fragrance and cosmetic sales are typically greater than those on name
brand health and beauty aids and, accordingly, we have sought to increase our
sales and marketing efforts in this area. We have entered into a services and
supply agreement with The Fragrance Counter to provide fragrances and cosmetics
and other services until October 1999 for sales on the Internet.


Some fragrance and cosmetic brands that we distribute are:

o        Polo                             o        Clinique
o        Eternity                         o        Estee Lauder
o        Hugo                             o        Lancome



<PAGE>




Some fragrance and cosmetic products that we distribute are:

o        Perfume                          o        Eyeshadow
o        Cologne                          o        Lipstick
o        Nail Polish                      o        Mascara

         HEALTH AND BEAUTY AIDS

         We distribute approximately 8,000 brand name health and beauty aid
products by such manufacturers as Colgate-Palmolive, Clairol, Procter & Gamble,
Johnson & Johnson and Gillette. See "Manufacturers and Suppliers." We also
distribute nail polish, toothpaste, petroleum jelly and other health and beauty
aid products manufactured by others and sold under our Allou brand label.


Some health and beauty aid brands that we distribute are:

o        Pantene Pro-V shampoo            o      Colgate toothpaste
o        Johnson's Baby Lotion            o      Rave hairspray
o        Gillette Mach 3 razors           o      Vaseline Intensive Care lotion


Some health and beauty aid products that we distribute are:

o        Antacids                         o      Oral Antiseptics and Sprays
o        Baby Care                        o      Deodorants
o        Cough and Cold Remedies          o      Shampoos

         PRESCRIPTION PHARMACEUTICALS

         During fiscal 1994, we acquired the capital stock of M. Sobol, Inc., a
manufacturers' distributor of branded prescription pharmaceuticals. M. Sobol,
Inc. was founded in 1928 and currently distributes pharmaceuticals to
approximately 700 independent pharmacies in the Northeast. We purchase
approximately 4,000 branded pharmaceuticals from such manufacturers as Pfizer,
Eli Lilly, Merck and Glaxo. Additionally, we distribute 3,000 generic
prescription pharmaceutical products which are purchased from manufacturers such
as Schein Pharmaceuticals, Inc., Barre National, Inc., and Sidmak Laboratories,
Inc. Pharmaceuticals accounted for approximately 17% of our revenues during the
fiscal year ended March 31, 1997, 15% of our revenues during the fiscal year
ended March 31, 1998 and 14% of our revenues during the fiscal year ended March
31, 1999.

         FOOD

         We sell non-perishable packaged food items which we purchase almost
exclusively at discount prices from major food companies. This product line
requires little additional operating costs to us since sales of non-perishable
food are pre-sold and drop-shipped directly to our customers from the vendors.
Non-perishable food items accounted for approximately 13% of our revenues during
the fiscal year ended March 31, 1997, 9% of our revenues during the fiscal year
ended March 31, 1998 and 10% of our revenues during the fiscal year ended March
31, 1999.

                                       -2-

<PAGE>



         HAIR AND SKIN CARE PRODUCT MANUFACTURING

         During fiscal 1996, we purchased selected assets of Russ Kalvin, Inc.
This acquisition has enabled us to manufacture and distribute salon quality hair
and skin care products to national mass merchandisers and independent retailers.
Since 1998, we have manufactured upscale hair and skin care products for J.C.
Penney, Bath and Body Works, Sears, Roebuck & Co., Warner Bros., and Victoria's
Secret. This business generates substantially higher gross profit margins than
our distribution business.

MANUFACTURERS AND SUPPLIERS

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

         We typically purchase health and beauty aids and pharmaceuticals from
manufacturers on open accounts which are payable in 30 days and may receive
discounts of up to 2% for early payments. As is customary in the industry, we
prepay our suppliers for products that we order from them. If the products that
we have prepaid for and ordered are not shipped to us, this could have an
adverse effect on our operations. To date, we have not suffered any such adverse
effect. In addition, we may return health and beauty aid and prescription
pharmaceutical products to our suppliers for full credit if the products are
damaged, their shelf life has expired, or they are otherwise not saleable.

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

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

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

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


                                       -3-

<PAGE>



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

MARKETING AND SALES

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

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

OPERATIONS

         We maintain an approximately 144,000 square foot warehouse facility
with sales and administrative offices in Brentwood, New York. The warehouse
typically contains inventory for approximately three months of distribution to
customers. We use a computerized data base system which enables management to
monitor sales, purchases and inventory status. Historically, we have not
experienced problems with product shelf lives, as most products we sell are not
perishable. Those products that are perishable generally can be returned to the
manufacturer if they are not sold by the expiration date. We also lease an
approximately 80,000 square foot facility in Saugus, California and a 15,000
square foot facility in Miami, Florida.

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

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

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

MANAGEMENT INFORMATION AND CONTROL SYSTEM

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

                                       -4-

<PAGE>



with real-time inventory and pricing information and to ship orders within 48
hours of receipt, which allows our customers to better manage their inventory.

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

COMPETITION

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

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

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

EMPLOYEES

         As of March 31, 1999, we employed approximately 290 persons on a full
time basis, including five in executive positions, 13 in purchasing, 29 in
marketing and sales, 34 in administration and accounting, and 209 in warehouse
and receiving. Some of our sales personnel are partially paid on a commission
basis. During peak selling seasons we also employ part-time personnel.

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

TRADENAMES AND TRADEMARKS

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


                                       -5-

<PAGE>



GOVERNMENT REGULATION

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

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


ITEM 2.        PROPERTIES

         We lease approximately 144,000 square feet of space for our principal
executive offices, warehouse and distribution facilities and sales headquarters
in the Brentwood Industrial Park, 50 Emjay Boulevard, Brentwood, New York 11717.
We have a ten-year lease which expires on May 31, 2005, and includes a five-year
option for renewal. The base annual rental of the property is approximately
$500,000 with additional charges for insurance, fuel and taxes and increases
during the initial term of the lease. We also lease 80,000 square feet of space
in Saugus, California to manufacture and distribute hair and skin care products.
The lease expires September 30, 2000 with a five-year option for renewal at a
base annual rental of approximately $300,000 with additional charges for
insurance, fuel, taxes and increases during the initial term of the lease. We
also lease 15,000 square feet of space in Miami, Florida, which expires on June
30, 2000 at a base annual rent of approximately $45,000 for warehousing and
distribution purposes.


ITEM 3.        LEGAL PROCEEDINGS

         We are a party to a number of legal proceedings in connection with
claims made for goods sold, all of which are routine litigation incidental to
our business.


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

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

                                       -6-

<PAGE>



                                     PART II

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

Market Information

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

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

                                                HIGH                 LOW
                                                ----                 ---

FISCAL YEAR ENDED MARCH 31, 1998:
Quarter ending June 30, 1997.................   $7.125              $5.000
Quarter ending September 30, 1997............    8.250               6.750
Quarter ending December 31, 1997.............    8.187               7.375
Quarter ending March 31, 1998................    8.875               7.125

FISCAL YEAR ENDING MARCH 31, 1999:
Quarter ending June 30, 1998.................   $16.00              $7.938
Quarter ending September 30, 1998............    11.25               4.313
Quarter ending December 31, 1998.............    12.25               3.375
Quarter ending March 31, 1999................    12.875              7.625

Quarter ending June 30, 1999
          (through June 9, 1999).............   $14.25              $6.938

Holders

           As of June 9, 1999, there were 112 holders of record of our Class A
common stock and 4 holders of record of our Class B common stock. Based upon
conversations with brokers, management believes that there are in excess of
1,000 beneficial owners of the Class A common stock.

Dividends

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


                                       -7-

<PAGE>



ITEM 6.             SELECTED FINANCIAL DATA

                        ALLOU HEALTH & BEAUTY CARE, INC.

<TABLE>
<CAPTION>

                                                                     YEARS ENDED MARCH 31,
                                                     ----------------------------------------------------------
                                                       1995        1996        1997        1998        1999
                                                       ----        ----        ----        ----        ----
                                                                      (DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:

<S>                                                 <C>        <C>         <C>         <C>         <C>
Revenues.........................................     $237,542   $273,322    $285,311    $301,756    $337,389
Costs of revenues................................      208,906    241,734     250,843     262,601     291,681
                                                       -------    -------     -------     -------     -------
Gross profit.....................................       28,636     31,588      34,468      39,155      45,708

Warehouse and delivery expense...................        6,864      8,063       8,592       9,317      10,525
Selling, general and administrative expense......       10,250     11,894      12,766      14,458      25,767
                                                       -------    -------     -------     -------     -------
Income from operations...........................       11,522     11,637      13,110      15,380       9,416
Interest and other...............................        3,956      5,513       6,567       8,470       7,167
                                                       -------    -------     -------     -------     -------
Income before income taxes.......................        7,566      6,118       6,543       6,910       2,249

                                                       -------    -------     -------     -------     -------
Net income.......................................       $4,681     $3,757     $ 4,059     $ 4,280      $1,348
                                                       =======    =======     =======     =======     =======
Net income per common share(1)

 Basic                                                 $   .22   $    .74     $   .71     $   .66     $   .84
                                                       =======    =======     =======     =======     =======

 Diluted                                               $   .20   $    .72     $   .70     $   .65     $   .80
                                                       =======    =======     =======     =======     =======
OTHER DATA:
Depreciation and amortization....................          413        525         667         688         833
EBITDA...........................................       11,956     12,167      13,824      16,081      13,258
Capital expenditures.............................        1,452      1,483         626         553         891
Ratio of earnings to fixed charges...............         2.90       2.10        1.99        1.81        1.22

BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents........................          126        144          77          47         400
Total assets.....................................      106,214    126,185     161,348     178,384     219,907
Total long-term liabilities, including current
   maturities....................................        1,059        782       2,382       2,000       1,432
Stockholders' equity.............................       40,176     44,168      48,227      52,613      60,336
</TABLE>

(1)    Net income per common share for fiscal 1997 and prior periods have been
       restated in accordance with Financial Accounting Standards No. 128,
       "Earnings Per Share, which requires presentation of basic earnings per
       share and diluted earnings per share."

                                       -8-

<PAGE>



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

RESULTS OF OPERATIONS

FISCAL 1999 COMPARED TO FISCAL 1998

         REVENUES. Revenues for the fiscal year ended March 31, 1999 increased
$35.6 million or 12% to $337.3 million, as compared to $301.8 million for the
fiscal year ended March 31, 1998, which resulted from increased revenues from
certain segments of our business as described below. The increased demand for
our products resulted from an expanded customer base and increases in same store
sales.

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

         COST OF GOODS SOLD. Cost of goods sold for the fiscal year ended March
31, 1999 decreased as a percentage of revenues to 86.4% from 87.0% for the
fiscal year ended March 31, 1998. This decrease in the cost of goods sold
resulted primarily from improved profit margins associated with the distribution
of fragrance products.

         WAREHOUSE, DELIVERY, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Warehouse, Delivery, Selling, General and Administrative expenses for the fiscal
year ended March 31, 1999 increased $12.5 million or 52.6% to $36.3 million, as
compared to $23.8 million for the fiscal year ended March 31, 1998. This
increase was due to increased marketing expenses associated with our
wholly-owned internet subsidiary, The Fragrance Counter, Inc. which amounted to
approximately $10.0 million. On April 23, 1999 we sold a controlling interest of
The Fragrance Counter to private investors lead by the Sudbury Group. We
received $11,296,584 in cash and $8.9 million in interest bearing notes. As a
result of this transaction we retain a 13% interest in The Fragrance Counter.
Through a supply and service agreement we will continue to act as a vendor and
fulfillment center to The Fragrance Counter. We realized an approximate profit
of $10.0 million as a result of the sale which will be reflected in our
financial statements for the quarter ending June 30, 1999.

         INTEREST EXPENSE. Interest expense for the fiscal year ended March 31,
1999 increased $1.7 million or 20% to $10.2 million, as compared to $8.5 million
for the fiscal year ended March 31, 1998 due to increased borrowings at a higher
rate.

         NET INCOME. As a result of the foregoing, our net income for the fiscal
year ended March 31, 1999 decreased $2.9 million or 68.5% to $1.3 million, as
compared to $4.3 million for the fiscal year ended March 31, 1998 due primarily
to the factors discussed above.

FISCAL 1998 COMPARED TO FISCAL 1997

         REVENUES. Revenues for the fiscal year ended March 31, 1998 were $301.8
million representing a 5.8% increase over revenues of $285.3 million for the
fiscal year ended March 31, 1997, which resulted from increased revenues from
certain segments of our business as described below. The increased demand for
our products resulted from an expanded customer base and increases in same store
sales.

                                       -9-

<PAGE>



         Contributions to this increase in revenues by product segment is as
follows: health and beauty aids increased 12.8% in fiscal 1998 compared to
fiscal 1997 due to increases in same store sales. Prestige designer fragrances
grew 14% in fiscal 1998 compared to fiscal 1997 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 22%
in fiscal 1998 as compared to fiscal 1997. This segment of our business is
categorized by our ability to purchase off-price, non-perishable branded foods.
During fiscal 1998 demand outpaced supply resulting in an increase in the price
that we would have to pay for merchandise which we would distribute. We decided
to limit sales in this segment of our business to a level which would result in
improved profit margins. Sales of prescription pharmaceuticals remained
relatively constant in fiscal 1998 compared to the prior year.

         COST OF GOODS SOLD. Cost of goods sold decreased as a percentage of
revenues to 87.0% for fiscal 1998 from 87.9% for fiscal 1997. This decrease in
the cost of goods sold resulted primarily from improved profit margins
associated with the distribution of fragrance products.

         WAREHOUSE, DELIVERY, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Warehouse, Delivery, Selling, General and Administrative expenses increased as a
percentage of revenues to 7.9% for fiscal 1998 from 7.5% for fiscal 1997. This
increase was due, in part, to increased expenses associated with our
manufacturing operations and advertising expenditures relating to The Fragrance
Counter.

         INTEREST EXPENSE. Interest expense as a percentage of revenues
increased to 2.8% for fiscal 1998 from 2.3% for fiscal 1997 due to increased
borrowings at a higher rate.

         NET INCOME. Net income for fiscal 1998 was $4.3 million which was a
5.5% increase over the net income for fiscal 1997 of $4.1 million due primarily
to the factors discussed above.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

         Cash increased $353,415 to $400,090 at March 31, 1999 from $46,675 at
the beginning of the fiscal year. The cash increase reflects accounts receivable
payments received that were not applied to our loan balance of March 31, 1999.

         Our working capital increased $8.2 million to $5.2 million at March 31,
1999 from $44.0 million at March 31, 1998, primarily due to an increase in
accounts receivable and inventories less an increased amount due the bank,
accounts payable and accrued expenses.

         At March 31, 1999 we had $123,371,228 in borrowings and approximately
$21,628,772 million of unused credit under our $145 million credit facility. Our
new credit facility is secured by a security interest in certain of our assets
and properties including the capital stock of certain of our subsidiaries.

         We require capital principally to grow the business through
acquisition, expansion of current operations, to pay off debt, and for general
operating purposes. We currently estimate capital expenditures of approximately
$1.0 million per annum are required to adequately maintain our current
operations.

         Our primary sources of liquidity are expected to be cash flows from
operations and our financing agreement with a consortium of banks let by the
First National Bank of Boston for financing our accounts receivable and
inventory under our $145,000,000 bank line of credit. The loan is collaterized
by our inventory and accounts receivable. Interest on the loan balance is
payable monthly at 3/8% above the prime rate or 2% above the Eurodollar rate at
our option. The effective interest rate charged to us at March 31, 1999 was
7.65% which was based on a combination of 2% above the Eurodollar rate and 3/8%
above the prime rate. We utilize cash generated from

                                      -10-

<PAGE>



operations to reduce short-term borrowings, which in turn acts to increase loan
availability consistent with our financing agreement.

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

         Operations for the year ended March 31, 1999, excluding non-cash
charges for depreciation and amortization and deferred income taxes, provided
cash of $3.0 million. Other changes in assets and liabilities resulting from
operating activities for the year ended March 31, 1999 used cash of $20.3
million, resulting in net cash used in operating activities of $17.3 million.
Investing activities, which principally consisted of acquisitions of property,
plant and equipment, resulted in a use of cash of $891,390 for the year ended
March 31, 1999. For the year ended March 31, 1999, financing activities provided
cash of $18.6 million, principally consisting of increased borrowing and
issuance of common stock.

YEAR 2000

         We do not expect that the cost to modify or replace software that we
use, so that our software will properly recognize dates beyond December 31,
1999, will be material. If we are not successful in implementing any necessary
changes to our software, we expect to then develop contingency plans to address
any matters not corrected in a timely manner. We have initiated formal
communications with our significant vendors and customers to determine the
extent that the needs of those parties to modify their software to properly
recognize dates beyond December 31, 1999 may affect us. There can be no
guarantee that the systems of those other companies will be timely converted.
Furthermore, there is no assurance that their conversion will be compatible with
information included in our systems, without a material adverse effect on our
business, financial condition or results of operations. To the extent that
responses to such communications with our vendors are unsatisfactory, we expect
to take steps to ensure that our vendors' have demonstrated that they have made
the necessary modifications to their software.

INFLATION AND SEASONALITY

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


                                      -11-

<PAGE>



ITEM     8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

         None.

                                    PART III

         The information called for by Part III (Items 10,11,12 and 13) is
incorporated by reference to such information as it will be included in our
definitive Proxy Statement with respect to our 1999 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.


                                      -12-

<PAGE>

                                     PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>

         (a)      DOCUMENTS FILED AS PART OF THIS REPORT.

            <S>         <C>                                                                                <C>
                  1.       Financial Statements                                                                Page
                                                                                                               ----

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

                           Consolidated Balance Sheet -- March 31, 1999 and 1998................................F-2

                           Consolidated Statement of Operations -- Years ended March 31, 1999,
                           1998 and 1997........................................................................F-3

                           Consolidated Statement of Shareholders' Equity -- Years ended March
                           31, 1999, 1998 and 1997..............................................................F-4

                           Consolidated Statement of Cash Flows -- Years ended March 31, 1999,
                           1998 and 1997........................................................................F-5

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

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

                  2.       Financial Statement Schedules

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

         (b)      REPORTS ON FORM 8-K.

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

         (c)      EXHIBITS.

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

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

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

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

*10.1    Employment Contract dated as of August 1, 1998 between the Registrant
         and Victor Jacobs.

*10.2    Employment Contract dated as of August 1, 1998 between Registrant and
         Herman Jacobs.

                                      -13-

<PAGE>



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

*10.3    Employment Contract dated as of August 1, 1998 between the Registrant
         and Jack Jacobs.

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      -14-

<PAGE>



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

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

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

*27      Financial Data Schedule

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


                                      -15-

<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 28, 1999

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

SIGNATURES                                      TITLE                                    DATE
----------                                      -----                                    ----

<S>                              <C>                                             <C>
      /s/ Victor Jacobs             Chairman of the Board and Chief Executive        June 28, 1999
----------------------------------- Officer
          Victor Jacobs

      /s/ Herman Jacobs             President and Director                           June 28, 1999
-----------------------------------
          Herman Jacobs

  /s/ David Shamilzadeh             Chief Financial Officer, Chief Accounting        June 28, 1999
----------------------------------- Officer and Director
      David Shamilzadeh

        /s/ Jack Jacobs             Director                                         June 28, 1999
-----------------------------------
            Jack Jacobs

       /s/ Ramon Montes             Director                                         June 28, 1999
-----------------------------------
           Ramon Montes

       /s/ Sol Naimark              Director                                         June 28, 1999
-----------------------------------
           Sol Naimark

        /s/ Jeffrey Berg            Director                                         June 28, 1999
-----------------------------------
            Jeffrey Berg
</TABLE>

<PAGE>


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



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

         We have audited the accompanying consolidated balance sheets of Allou
Health & Beauty Care, Inc. as of March 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended March 31, 1999, in
conformity with generally accepted accounting principles.



/s/ MAYER RISPLER & COMPANY, P.C.

June 2, 1999
New York, New York


                                       F-1

<PAGE>
<TABLE>
<CAPTION>



                       ALLOU HEALTH AND BEAUTY CARE, INC.
                           CONSOLIDATED BALANCE SHEETS

ASSETS
------                                                                                     March 31,            March 31,
                                                                                            1999                 1998
                                                                                            ----                 ----
Current Assets
--------------
<S>                                                                                 <C>                  <C>
   Cash                                                                                $      400,090       $       46,675
   Accounts Receivable (less allowance for
    doubtful accounts of $1,615,965 at March 31,
    1999 and $371,475 at March 31, 1998)                                                   50,162,450           44,117,911
   Inventories                                                                            122,917,911          112,530,659
   Prepaid Purchases                                                                       24,682,481            9,816,237
   Other Current Assets                                                                    12,876,642            1,864,481
                                                                                         ------------         ------------

         Total Current Assets                                                            $211,039,574         $168,375,963

   Property and Equipment, Less Accumulated
    Depreciation                                                                            3,839,906            3,613,223
   Other Assets                                                                             5,027,901            6,395,110
                                                                                         ------------         ------------

                TOTAL ASSETS                                                             $219,907,381         $178,384,296
                                                                                         ============         ============

                       LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
   Amounts Due Bank                                                                      $123,371,228         $110,596,761
   Current Portion of Long-Term Debt                                                          707,652              645,233
   Accounts Payable and Accrued Expenses                                                   33,936,223           13,174,949
   Deferred Income Taxes                                                                      832,000                - 0 -
                                                                                         ------------         ------------
         Total Current Liabilities                                                       $158,847,103         $124,416,943
                                                                                         ------------         ------------

Long Term Liabilities
   Long-Term Debt, Less Current Portion                                                       724,234            1,354,462
                                                                                         ------------         ------------
         Total Long Term Liabilities                                                          724,234            1,354,462
                                                                                         ------------         ------------

                TOTAL LIABILITIES                                                        $159,571,337         $125,771,405
                                                                                         ------------         ------------

Commitments and Contingencies

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

   Class A Common Stock, $.001 par value;
    15,000,000 and 10,000,000 shares authorized;
     5,339,122 and 4,569,850 shares issued and
     outstanding at March 31, 1999 and March 31, 1998                                $          5,339      $         4,570
   Class B Common Stock, $.001 par value;
     2,200,000 shares authorized;
     1,200,000 shares issued and outstanding
     at March 31, 1999 and March 31, 1998                                                       1,200                1,200
   Additional Paid-In Capital                                                              29,956,769           23,582,240
   Retained Earnings                                                                       30,372,736           29,024,881
                                                                                         ------------         ------------

                TOTAL STOCKHOLDERS' EQUITY                                                 60,336,044           52,612,891
                                                                                         ------------         ------------

                TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                 $219,907,381         $178,384,296
                                                                                         ============         ============
</TABLE>

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

                                       F-2

<PAGE>
<TABLE>
<CAPTION>



                       ALLOU HEALTH AND BEAUTY CARE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                                  Years Ended March 31,

                                                                   1999                   1998                 1997
                                                                   ----                   ----                 ----

<S>                                                          <C>                    <C>                 <C>
Revenues                                                        $337,389,261           $301,756,467        $285,311,441

Costs of Revenues                                                291,681,302            262,600,862         250,843,851
                                                                ------------           ------------        ------------

                  Gross Profit                                    45,707,959             39,155,605          34,467,590
                                                                ------------           ------------        ------------


Operating Expenses

     Warehouse and Delivery                                       10,524,534              9,317,132           8,592,051
     Selling, General and Administrative                          25,767,425             14,458,182          12,765,898
                                                                ------------           ------------        ------------

            Total Operating Expenses                              36,291,959             23,775,314          21,357,949
                                                                ------------           ------------        ------------

            Income From Operations                                 9,416,000             15,380,291          13,109,641
                                                                ------------           ------------        ------------


Other Charges (Credits)
-----------------------

     Interest Expense                                             10,176,243              8,482,859           6,614,797
     Other                                                            (9,098)               (13,168)            (47,804)
     Gain on Sale of Minority Interest in Subsidiary              (3,000,000)                 - 0 -               - 0 -
                                                               -------------          -------------       -------------

            Total                                                  7,167,145              8,469,691           6,566,993
                                                               -------------          -------------       -------------

            Income Before Income Taxes                             2,248,855              6,910,600           6,542,648

     Provision for Income Taxes                                      901,000              2,630,390           2,484,113
                                                               -------------          -------------       -------------

            NET INCOME                                         $   1,347,855          $   4,280,210       $   4,058,535
                                                               =============          =============       =============



     Net Income Per Common Share:

     Basic                                                             $.22                   $.74                 $.71
                                                                        ===                    ===                  ===

     Diluted                                                           $.20                   $.72                 $.70
                                                                        ===                    ===                  ===

     Shares Used in Computing Earnings Per Common Share:

     Basic                                                         6,061,431             5,757,328            5,752,225
                                                                   =========             =========            =========

     Diluted                                                       6,800,143              5,972,392           5,809,082
                                                                   =========              =========           =========


</TABLE>

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


                                       F-3

<PAGE>
<TABLE>
<CAPTION>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                    YEARS ENDED MARCH 31, 1999, 1998 AND 1997



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

<S>                                    <C>                <C>                  <C>                 <C>
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

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

Net Income                                    - 0 -                   - 0 -            4,280,210           4,280,210
                                            -------             -----------          -----------         -----------

Balance, March 31, 1998                      $5,770             $23,582,240          $29,024,881         $52,612,891

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

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

Net Income                                    - 0 -                   - 0 -            1,347,855           1,347,855
                                            -------             -----------          -----------         -----------

Balance, March 31, 1999                      $6,539             $29,956,769          $30,372,736         $60,336,044
                                            =======             ===========          ===========         ===========
</TABLE>

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

                                       F-4

<PAGE>
<TABLE>
<CAPTION>
                        ALLOU HEALTH AND BEAUTY CARE INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                          Years Ended March 31,

                                                                            1999                   1998                 1997
                                                                            ----                   ----                 ----

Cash Flows From Operating Activities
------------------------------------

<S>                                                                     <C>                   <C>                   <C>
   Net Income                                                           $  1,347,855          $  4,280,210          $  4,058,535

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

   Depreciation and Amortization                                             832,613               687,604               666,508
   Deferred Income Taxes                                                     832,000                 - 0 -               (30,422)

Decrease (Increase) In Assets:

   Accounts Receivable                                                    (6,044,539)            4,306,971           (14,461,052)
   Inventories                                                           (10,387,252)          (15,869,556)          (24,970,782)
   Other Assets                                                          (24,679,102)           (5,638,365)            4,160,904

Increase (Decrease) In Liabilities:

   Accounts Payable and Accrued Expenses                                  20,761,274              (823,692)            3,573,638
                                                                          ----------           -----------           -----------

     Net Cash Used In Operating Activities                               (17,337,151)          (13,056,828)          (27,002,671)
                                                                          ----------           -----------           -----------

Cash Flows From Investing Activities
------------------------------------

   Acquisition of Property and Equipment                                   ( 891,390)             (553,011)             (626,255)
                                                                         -----------           -----------           -----------

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

   Net Increase in Amounts Due Bank                                       12,774,467            13,856,508            25,931,152
   Borrowings                                                                108,704               215,771             2,010,376
   Repayment of Debt                                                        (676,513)             (598,046)             (380,189)
   Net Proceeds from Exercise of Options
     and Issuance of Common Stock                                          6,375,298               105,750                 - 0 -
                                                                         -----------          ------------          ------------

       Net Cash Provided By Financing Activities                          18,581,956            13,579,983            27,561,339
                                                                         -----------          ------------          ------------

          NET INCREASE (DECREASE) IN CASH                                    353,415               (29,856)              (67,587)

          CASH AT BEGINNING OF YEAR                                           46,675                76,531               144,118
                                                                        ------------         -------------          ------------

          CASH AT END OF YEAR                                           $    400,090          $     46,675          $     76,531
                                                                        ============         =============          ============


Supplemental Disclosures of Cash Flow Information:

   Cash Paid For:
   Interest                                                              $10,162,264          $  8,364,098          $  6,438,593
   Income Taxes                                                          $ 1,474,304          $  2,773,345          $  2,302,293

</TABLE>

The Company issued equipment notes for $108,704, $215,771 and $2,010,376 during
the years ended March 31, 1999, 1998 and 1997, respectively.

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


                                       F-5

<PAGE>

<TABLE>
<CAPTION>


                             SELECTED FINANCIAL DATA

                         ALLOU HEALTH & BEAUTY CARE INC.


INCOME STATEMENT DATA:
                                                                  Year Ended March 31,
                                       1999        1998                   1997              1996            1995
                                       ----        ----                   ----              ----            ----
                                                     (In thousands, except for per share data)

<S>                                <C>              <C>               <C>               <C>             <C>
Revenues                             $337,389         $301,756          $285,311          $273,322        $237,542
Costs of revenues                     291,681          262,601           250,843           241,734         208,906
                                     --------         --------         ---------          --------        --------

Gross profit                           45,708           39,155            34,468            31,588          28,636

Warehouse and delivery expense         10,525            9,317             8,592             8,063           6,864
Selling, general and
  administrative expense               25,767           14,458            12,766            11,894          10,250
                                    ---------         --------         ---------          --------        --------

Income from operations                  9,416           15,380            13,110            11,631          11,522
Interest and other                      7,167            8,470             6,567             5,513           3,956
                                    ---------        ---------         ---------          --------        --------

Income before income taxes              2,249            6,910             6,543             6,118           7,566
                                    ---------        ---------         ---------          --------        --------

Net income                         $    1,348       $    4,280          $  4,059          $  3,757        $  4,681
                                    =========        =========         =========          ========        ========
Net income per common share 1

        Basic                      $      .22       $      .74        $      .71          $    .66       $     .84
                                    =========        =========         =========          ========        ========

        Diluted                    $      .20       $      .72        $      .70          $    .65       $     .80
                                    =========        =========         =========          ========        ========

BALANCE SHEET DATA:

                                                                     As of March 31,
                                       1999            1998               1997              1996            1995
                                       ----            ----               ----              ----            ----

Working capital                     $  52,192         $ 43,959          $ 42,052          $ 37,557        $ 36,193
Total assets                          219,907          178,384           161,348           126,185         106,214
Total long-term liabilities               724            1,354             1,841               560             814
Total liabilities                     159,571          125,771           113,121            82,016          66,038
Stockholders' equity                   60,336           52,613            48,227            44,168          40,176

</TABLE>

--------
1     Net income per common share for fiscal 1997 and prior periods have been
      restated in accordance with Financial Accounting Standards No. 128,
      "Earnings Per Share, which requires presentation of basic earnings per
      share and diluted earnings per share.


                                       F-6

<PAGE>

                       ALLOU HEALTH AND BEAUTY CARE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         ORGANIZATION AND PRINCIPLES OF CONSOLIDATION - 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 1,200,000 shares of its Class
B Common Stock, thus making it a wholly-owned subsidiary.

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

         The accompanying financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated.

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

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

         FAIR VALUE OF FINANCIAL INSTRUMENTS - The recorded amounts of financial
assets and liabilities at March 31, 1999 and 1998 approximate fair value due to
the relatively short period of time between origination of the instruments and
their expected realization, or, in the case of notes payable, because the notes
are at interest rates competitive with those that would be available to the
Company in the current market environment.

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

         Concentration of credit risk with respect to trade accounts receivable
is limited due to the number of entities and the size of those entities
comprising the Company's customer base.

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

         PROPERTY & EQUIPMENT - 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.

         GOODWILL - Goodwill representing the excess of the purchase price over
the fair value of net assets acquired is being amortized using the straight-line
method, over periods ranging from fifteen to forty years.

         INCOME TAXES - The provision for income taxes is determined in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities arise from temporary differences between the tax bases of assets
and liabilities and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
(see note 12).


                                       F-7

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         EARNINGS PER SHARE - Basic earnings per share is computed using the
weighted average number of common shares outstanding during the reporting
period. Diluted earnings per share is computed using the weighted average number
of common shares outstanding and the dilutive effect of potential common shares
(see note 13).

         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 Standards
No. 123.

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

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


2.       OTHER CURRENT ASSETS:

         Included in other current assets at March 31, 1999 are the following:

         (a)      Loans to officers of $1,750,000 with interest being charged
                  commensurate with the bank line of credit which was 7.16% at
                  March 31, 1999.

         (b)      Insurance reimbursement receivable of $6,835,812 for fire
                  damage sustained on February 19, 1999. The Company has filed a
                  claim in excess of $11,000,000 representing damaged
                  inventories at its gross selling price. These financial
                  statements reflect the damaged inventories at average cost
                  only.

         (c)      Prepaid advertising and marketing contracts totaling
                  $1,393,333, which represent payment in advance of services
                  performed.


                                       F-8

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.       PROPERTY AND EQUIPMENT:

         Property and equipment consists of:

                                  March 31,         March 31,      Estimated
                                     1999              1998      Useful Lives
                                     ----              ----      ------------

Machinery and Equipment           $1,989,344        $1,904,604        5 years
Furniture, Fixtures and
  Office Equipment                 3,234,679         2,575,258     5-10 years
Leasehold Improvements             2,861,482         2,714,254    10-33 years
                                   ---------         ---------
                                   8,085,505         7,194,116
Less:  Accumulated Depreciation    4,245,599         3,580,893
                                   ---------         ---------

                                  $3,839,906        $3,613,223
                                  ==========        ==========

         Depreciation expense for the years ended March 31, 1999, 1998 and 1997
amounted to $664,706, $582,546 and $608,644, respectively.


4.       OTHER ASSETS:

         Included in other assets are the following:

         a) Goodwill, net of amortization of $2,120,040 in fiscal 1999 and
         $1,696,279 in fiscal 1998 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. and Direct Fragrance Inc.
         Amortization expense for the years ended March 31, 1999, 1998 and 1997,
         amounted to $76,239, $66,864 and $57,864, respectively.

         b) Loans to officers of $2,016,665 in fiscal 1999 and $3,557,433 in
         fiscal 1998, which bear interest commensurate with the bank line of
         credit which was 7.16% at March 31, 1999 and 7.89% at March 31, 1998.


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 of
$145,000,000, with a $15,000,000 sublimit for overadvances. Interest on the loan
balance is payable monthly at 3/8% above the prime rate or 2% above the
Eurodollar rate, at the option of the Company. The loan is collateralized by the
Company's accounts receivable and inventories and the overadvances are
guaranteed by the Company's principal stockholders. In addition, the Company is
required to abide by certain financial covenants. The effective interest rates
charged to the Company at March 31, 1999 and 1998 were 7.16% and 7.89%,
respectively.


                                       F-9

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



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 $53,145, which include interest at rates varying from
         3/8% above the prime rate to 3.36% above the three year treasury rate.
         At March 31, 1999, the principal balance outstanding was $1,219,423.

         (b) A loan payable to the previous stockholder of M. Sobol, Inc.
         Interest is payable on the declining principal balance at 5.45% per
         annum, through April 1, 2000. At March 31, 1999 the principal balance
         outstanding was $212,462.

         The aggregate long-term debt is payable as follows:

           Year Ending
             March 31,
            ---------

                2000      $   707,652
                2001          622,860
                2002          101,374
                           ----------
                           $1,431,886


7.              ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

                Accounts payable and accrued expenses consist of:

                                                    March 31,      March 31,
                                                       1999           1998
                                                       ----           ----

    Accounts Payable, Purchases                    $28,669,375    $10,270,572
    Selling, General & Administrative Expenses       3,995,110      1,722,656
    Accrued Bank Interest                              683,173        669,194
    Accrued Payroll                                    588,565        512,527
                                                  ------------   ------------
                                                   $33,936,223    $13,174,949


8.         COMMITMENTS AND CONTINGENCIES:

           OPERATING LEASES - The Company is obligated under real property
operating leases expiring through May, 2005. Additionally, 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 a facility located in California. As of March 31, 1999,
total minimum annual rentals, excluding additional payments for real estate
taxes and certain expenses, are as follows:

                                      F-10

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


           Year Ending
             March 31,
             --------

              2000                  $878,684
              2001                   768,749
              2002                   625,939
              2003                   625,939
              2004                   625,939
              2005-2006              730,261

         Rent expense for the years ended March 31, 1999, 1998 and 1997 amounted
to $1,074,675, $895,879 and $896,910, respectively. Rent expense for the year
ended March 31, 1999 includes $144,271 paid for the Company's premises in
Florida where rent is being paid on a month to month basis.

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

         DEFINED CONTRIBUTION PLAN - Effective April 1, 1996, the Company
established a defined contribution plan (401k) for substantially all employees
not covered under collective bargaining agreements. All employees over the age
of 21, with at least one year of service to the Company, can contribute from 2%
to 15% of their gross salaries limited to Internal Revenue Service regulations.
Contributions by the Company are optional. For the years ended March 31, 1999,
1998 and 1997, the Company did not contribute to this plan.

         EMPLOYMENT AGREEMENTS - The Company has three year employment
agreements with three of its officers, which expire July 31, 2001. These
agreements provide for each officer to receive an annual salary of $300,000 and
a bonus of 3% of the first $2,000,000, 2% of the next $1,000,000 and 1% of the
remaining increase over the Company's prior year earnings before interest and
taxes. For the year ended March 31, 1999, these officers received no bonus. For
the years ended March 31, 1998 and 1997, such bonuses aggregated $206,482 and
$145,221, respectively.

         Effective September 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.

         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.

         CONTRACTS - The Company was obligated under contracts with internet
portals, through its subsidiary The Fragrance Counter Inc., beginning April 1,
1998 and expiring through December 31, 2001, totaling $16,829,000. With the sale
of a majority interest of The Fragrance Counter Inc. on April 23, 1999, as
disclosed in note 16, these contracts are no longer an obligation of the
Company.

                                      F-11

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9.       STOCK OPTION PLANS:

         The Company has adopted Stock Option Plans, which provide for the
granting of stock options to certain employees and directors. An aggregate of
2,800,000 shares of common stock are reserved for issuance under the Plans.
Incentive stock options are granted at no less than fair market value of the
shares on the date of grant. Options granted to individuals owning more than 10%
of the voting power of the Company's capital stock are granted at 110% of the
fair market value at the date of grant.

         Option activities for the years ended March 31, 1999, 1998, and 1997
were as follows:

                                   1999             1998               1997
                                   ----             ----               ----
Options outstanding
  at beginning of year            2,036,025        1,381,150         1,184,500
Granted                             559,750        1,136,100           375,000
Exercised                          (102,605)         (17,625)            - 0 -
Cancelled                            (3,750)        (463,600)         (178,350)
                                 ----------        ---------         ---------

Options Outstanding
  at end of year                  2,489,420        2,036,025         1,381,150
                                 ==========        =========         =========

Option price range
  at end of year              $5.80 to $7.70   $5.80 to $10.00   $5.80 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 1999, 1998 and 1997 consistent with the provisions of SFAS No.
123, net income per common share would have been reduced to the following pro
forma amounts:

                                            March 31,    March 31,    March 31,
                                              1999         1998         1997
                                              ----         ----         ----

   Net Income - Pro Forma                   $963,648    $4,060,011    $3,582,793
   Earnings Per Common Share - Pro Forma        $.14          $.68          $.62

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

         The weighted average fair value at date of grant for options granted
during fiscal 1999, 1998 and 1997 was $1.51, $2.43 and $1.50, respectively, and
were estimated using the Black-Scholes option pricing model. The following
assumptions were applied:

         No dividend yield; expected volatility rates of 42%, 31% and 25%; Risk
free interest rates approximating 4%, 6% and 5% and expected lives of 5 years, 4
years and 2.3 years, respectively.

                                      F-12

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10.      STOCKHOLDERS' EQUITY:

         On September 11, 1996, the stockholders of the Company approved an
increase in the number of authorized shares of Class B Common Stock from
1,700,000 to 2,200,000 shares. On September 15, 1998, the stockholders of the
Company approved an increase in the number of authorized shares of Class A
common stock from 10,000,000 to 15,000,000 shares. The Company is also
authorized to issue 1,000,000 shares of preferred stock. Holders of Class A
Common Stock and Class B Common Stock share pro rata in all dividends declared
by the Board of Directors. The holders of Class A Common Stock and Class B
Common Stock are entitled to one and five votes per share, respectively, for
every matter on which the stockholders of the Company are entitled to vote. Each
share of Class B Common Stock is convertible at the option of the holder into
one share of Class A Common Stock. All outstanding shares of Class A Common
Stock and Class B Common Stock are freely transferable, subject to applicable
law.

         On December 15, 1998, the Company sold 666,667 shares of its Class A
common stock at $9 per share in a private placement offering, which were
registered on January 26, 1999. Net proceeds to the Company from the offering
after deduction of associated expenses were $5,673,344. This sale included the
sale of Warrants which were exercisable into a variable number of shares of
Class A Common Stock if the market price fell below 115% ($10.35) of the sale
price during three exercise periods which began 30 days after the effective
date. As a result of the market price fluctuations of the Company's stock during
these periods, the Company is obligated to issue an additional 79,876 shares of
its Class A Common Stock in connection with the private placement.

         During the current period, employees of the Company exercised 102,605
of stock options, which resulted in net proceeds to the Company of $701,954.


11.      SALE OF A MINORITY INTEREST:

         On April 27, 1998, certain officers of the Company advanced cash of
$3,000,000 to The Fragrance Counter Inc., then a wholly owned subsidiary of the
Company, and received a note for $3,000,000 bearing interest of 8.75% per annum
with a maturity date of October 27, 1998. The note was convertible into a 17.5%
equity interest in common stock of The Fragrance Counter Inc. if the note was
not repaid by the due date. Additionally, these officers received warrants to
purchase a 17.5% equity interest in The Fragrance Counter Inc. at a cost of
$3,000,000 for a period of five years. On October 27, 1998 in lieu of repayment,
these officers received a 17.5% equity interest in common stock of The Fragrance
Counter Inc. Allou Health and Beauty Care Inc. retains 82.5% of the shares
outstanding. As a result of this transaction, the Company recognized a gain of
$3,000,000.


                                      F-13

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12.      INCOME TAXES:

         The components of income tax expense are summarized as follows:

                                              Years Ended March 31,
                                      1999         1998           1997
                                      ----         ----           ----
              Current:

              Federal               $ (17,000)   $2,153,045    $2,072,291
              State                    86,000       477,345       411,822
                                     --------    ----------    ----------
                                       69,000     2,630,390     2,484,113
                                     --------     ---------    ----------

              Deferred:

              Federal                 704,000         - 0 -         - 0 -
              State                   128,000         - 0 -         - 0 -
                                     --------    ----------   -----------
                                      832,000         - 0 -         - 0 -
                                     --------    ----------   -----------

              Total                  $901,000    $2,630,390    $2,484,113
                                     ========     =========   ===========

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

                                                                                     Years Ended March 31,
                                                                               1999         1998          1997
                                                                               ----         ----          ----

<S>                                                                          <C>          <C>           <C>
Federal Statutory Income Tax Rate                                              34.0%        34.0%         34.0%

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

Net Operating Loss Carryforward from
 Subsidiary                                                                    (1.2%)       (1.2%)        (1.3%)
                                                                               -----        -----         -----

        Total Effective Tax Rates                                              40.0%        38.1%         38.0%
                                                                               =====        =====         =====

Deferred tax assets (liabilities) are comprised of the following:

                                                                                         March 31,
                                                                                 1999              1998
                                                                                 ----              ----

Allowance for Uncollectible Accounts Receivable                              $   256,000     $     - 0 -
Gain on Sale of Minority Interest in Subsidiary                               (1,088,000)          - 0 -
                                                                               ---------      ----------

Net Deferred Tax Liability                                                   $  (832,000)    $     - 0 -
                                                                              ==========      ==========
</TABLE>

                                      F-14

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         At March 31, 1999, net operating loss carryforwards of approximately
$94,000 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.


13.      EARNINGS PER SHARE:

         The Company accounts for earnings per share in accordance with
Statement of Financial Accounting Standard No. 128, "Earnings Per Share". (SFAS
128) replaces the presentation of earnings per share ("EPS") with a presentation
of basic EPS based upon the weighted-average number of common shares for the
period. It also requires dual presentation of basic and diluted EPS for
companies with "complex capital structures", as defined. EPS for the current and
prior periods has been presented in conformity with the provisions of SFAS 128.
The following table is a reconciliation of the weighted-average shares
(denominator) used in the computation of basic and diluted EPS for the statement
of operations periods presented herein.

                                               Year Ended March 31,
                                        1999          1998          1997
                                        ----          ----          ----

Basic                                  6,061,431     5,757,328    5,752,225
Assumed exercise of stock options        738,712       215,064       56,857
                                      ----------     ---------   ----------
Diluted                                6,800,143     5,972,392    5,809,082
                                      ==========     =========    =========

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

         For the year ended March 31, 1999, all outstanding stock options were
included in the computation of diluted earnings per share. For the years ended
March 31, 1998 and 1997, options to purchase 415,300 and 548,400 shares,
respectively, were not included in the computation of diluted earnings per share
because the option exercise price was greater than the average market price of
the common shares.


14.      RELATED PARTY TRANSACTIONS:

         The Company purchases inventories from various entities that are
controlled by certain of the Company's officers. For the years ended March 31,
1999, 1998 and 1997, purchases from related parties amounted to $5,867,482,
$4,443,634 and $1,705,355, respectively., with $8,838,312 of prepaid purchases
at March 31, 1999.


15.      SEGMENT DATA:

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


                                      F-15

<PAGE>


                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



         The Company's reportable operating segments includes:

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

         b) Wholesale distribution of pharmaceuticals.

         c) Manufacturing of hair and skin care products.

         d) Sales of fragrances through the internet.

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

         Operating segment data for each of the three years in the period ended
March 31, 1999 was as follows:
<TABLE>
<CAPTION>

                                                                                 Internet
                                    Wholesale   Pharmaceuticals                    Sales    Intersegment
                                  Distribution   Distribution    Manufacturing  Operations  Transactions  Consolidated
                                 -------------  ---------------  -------------  ----------  ------------  ------------
Year Ended March 31, 1999
-------------------------

<S>                              <C>             <C>             <C>           <C>         <C>          <C>
   Revenue                         $292,004,548    $46,961,918     $1,867,979    $3,214,111  $(6,659,295) $337,389,261
   Depreciation and Amortization        624,514         14,189        106,079        87,831        - 0 -       832,613
   Income (Loss) From Operations     20,758,050        424,208     (1,630,531)  (10,135,727)       - 0 -     9,416,000
   Segment Assets                   200,889,277     12,744,061      2,252,195     4,021,848        - 0 -   219,907,381

Year Ended March 31, 1998

    Revenue                        $256,603,011    $45,856,322     $1,661,073      $664,250  $(3,028,189) $301,756,467
   Depreciation and Amortization        569,757         23,329         94,518         - 0 -        - 0 -       687,604
   Income (Loss) From Operations     16,905,035        413,980     (1,016,410)     (922,314)       - 0 -    15,380,291
   Segment Assets                   166,793,002      8,836,726      2,002,601       751,967        - 0 -   178,384,296

Year Ended March 31, 1997

   Revenue                         $234,482,864    $48,906,547     $1,922,030     $   - 0 -    $   - 0 -  $285,311,441
   Depreciation and Amortization        578,015         27,236         61,257         - 0 -        - 0 -       666,508
   Income (Loss) From Operations     13,725,130         84,189       (699,678)        - 0 -        - 0 -    13,109,641
   Segment Assets                   148,608,984     10,802,877      1,935,934         - 0 -        - 0 -   161,347,795

</TABLE>

                                      F-16

<PAGE>

                       ALLOU HEALTH AND BEAUTY CARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


16.      SUBSEQUENT EVENT:

         On April 23, 1999, the Company sold 69% of its interest in The
Fragrance Counter Inc. for net proceeds of $11,296,584 in cash and $8,900,000 in
notes, bearing interest at prime plus .375%. $400,000 is due in July, 1999 plus
accrued interest and $8,500,000 is due in April, 2000 plus accrued interest. The
Company retains a 13% minority interest.


17.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>

                                                                                  Diluted
                                                                 Net          Earnings (Loss)
                                            Gross              Income           Per Common
Quarters Ended           Revenues           Profit             (Loss)              Share
--------------           --------           ------            -------         ---------------
<S>                 <C>               <C>               <C>                  <C>
June 30, 1998            $68,634,713       $10,343,797       $    697,152         $ .11
June 30, 1997            $64,855,684      $  9,706,275       $    987,970         $ .16

September 30, 1998       $89,667,276       $11,366,851       $    236,744         $ .04
September 30, 1997       $83,341,115      $  9,290,085       $  1,228,750         $ .21

December 31, 1998        $89,542,944       $11,837,206       $  1,584,127         $ .24
December 31, 1997        $76,349,440       $10,653,164       $  1,322,032         $ .22

March 31, 1999           $89,544,328       $12,160,105       $ (1,170,164)        $(.15)
March 31, 1998           $77,210,228        $9,506,081       $    741,458         $ .12

</TABLE>

                                      F-17

<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, 1997
 Allowance for Doubtful Accounts            $373,890                 $560,000             $378,208            $555,682

March 31, 1998
 Allowance for Doubtful Accounts            $555,682                 $695,225             $879,432            $371,475

March 31, 1999
 Allowance for Doubtful Accounts            $371,475               $1,465,000             $220,510          $1,615,965
</TABLE>

                                       S-1

<PAGE>

                               INDEX TO EXHIBITS
                               -----------------


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, 1998 between the Registrant
          and Victor Jacobs.

*10.2     Employment Contract dated as of August 1, 1998 between Registrant and
          Herman Jacobs.

*10.3     Employment Contract dated as of August 1, 1998 between the Registrant
          and Jack Jacobs.

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

10.16     Master Lease Finance Agreement dated as of April 24, 1996 between
          BankBoston Leasing Inc. and Allou Distributors, Inc. (filed as Exhibit
          10-14 to Registrant's 1996 10-K and incorporated herein by reference).

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

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

*27       Financial Data Schedule

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