<PAGE>


                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   ---------
   
                                FORM 10-KSB/A-1
    
(Mark One)

[   ] Annual Report to Section 13 or 15(d) of the Securities Exchange Act of
      1934

[ X ] Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

For the transition period from January 1, 1996 to September 30, 1996

Commission File No. 0-22432


                             DIPLOMAT CORPORATION
           (Exact name of registrant as specified in its character)

   Delaware                                 13-3727399
(State or other jurisdiction of             (I.R.S. Employer Identification No.
incorporation or organization)

25 Kay Fries Drive, Stony Point, New York                       10980
(Address of principal executive offices)                        (Zipcode)

Registrant's telephone number, including area code:   (914) 786-5552


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

Title of each Class                         Name of each exchange on which
Applicable                                  registered      None


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

       Common Stock, $.0001 par value and Common Stock Purchase Warrants
                               (Title of Class)

         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 prior 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 the


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Regulation S-K (s.229.405 of this chapter) 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 [X]

   
         The issuer's net sales for the most recent fiscal year were 
$19,222.801.
    

   
         The aggregate market value of the voting stock held by non-affiliates
based upon the closing bid price on March 20, 1997 was approximately 
$5,423,484.35.
    

   
         As of March 15, 1997 there were 5,343,525 shares of Common Stock, 
par value $.0001 per share, outstanding.
    

         Certain exhibits listed in Part IV have been incorporated by reference.
The index to exhibits appears on Page 32.


<PAGE>

                                       

                                    PART I

Item 1.  Business

General

         The term "the Company" shall include Diplomat Corporation and its
wholly-owned subsidiary, Biobottoms, Inc. ("Biobottoms") unless otherwise
indicated. The term "Diplomat" shall refer to the operations of the Diplomat
Corporation exclusive of the Biobottoms subsidiary.

         On February 9, 1996, Diplomat Corporation completed the acquisition of
Biobottoms, a California corporation located in Petaluma, California. Biobottoms
is a childrens' mail order catalog company selling apparel and accessories in
the United States for newborns through preteens. Management of the Company
believes that this business combination will strengthen the Company's existing
business by joining the manufacturing strength and expertise of the Company with
the retailing expertise of Biobottoms.

         The Company designs, develops, markets and distributes infantwear and
care products, nursery accessories and the products for infant and toddler
comfort and care. Through its wholly-owned subsidiary, Biobottoms, the Company
also sells apparel and accessories for newborns through preteens via direct mail
catalog. The Company sells primarily cloth diapers, diaper covers, furniture
covers, layette, infant and child travel products, such as infant car seat
covers, and other accessories marketed principally under the trademarks Ecology
KidsTM and BiobottomsTN. These products are marketed in the United States and
internationally. While international sales of Diplomat's products have not been
material, its products are sold in several Pacific Rim countries, (Japan,
Singapore, Taiwan and Malaysia). Biobottoms' products are sold domestically and
internationally. Biobottoms distributes a catalog in Japan and has an 800 number
which is answered in Japanese at the Petaluma office. Sales in Japan have
accounted for 20% of Biobottoms' sales since the Company acquired it.

         In November 1996, the Board of Directors approved a plan to restructure
its Stony Point, New York operations by eliminating several of its unprofitable
retail lines and downsizing its distribution facility. The Company intends to
focus its Stony Point on its traditional core business under its Ecology KidsTM
brand name, which has historically generated the largest part of the Company's
revenue. The Company also announced that it has changed its fiscal year end to
September 30.

Marketing and Sales

         The primary customers of Diplomat are major mass merchandisers,
including Toys 'R Us, Inc. ("Toys 'R Us") and Wal-Mart Stores, Inc.
(Wal-Mart").  The foregoing two customers represented a total of approximately
51% of the Diplomat operations total revenues during the fiscal year ended
September 30, 1996.  Diplomat's products are presently carried by Wal-Mart,



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Toys 'R Us, Target Stores and Baby Superstores, all nationally known merchants.
Diplomat's products are also sold to drug store chains, catalog showrooms, mail
order catalogs and food and drug chains which include Publix, Winn-Dixie and
Walgreens.

         Historically, Diplomat obtained substantially all of its raw materials
required for the manufacture of its products and shipped such materials to
contract manufacturers, who assembled the products in accordance with the
Company's specifications and under its supervision, either from facilities at
the Company's Rockland County, New York warehouse and distribution facilities,
or other locations in New York State.

         Biobottoms is a leading childrens' catalog company in the United States
selling apparel and accessories primarily for newborns through preteens. The
majority of the products offered for sale sold by Biobottoms are made of natural
fibers and are designed by Biobottoms with an emphasis on comfort and ease of
care. Biobottoms mailed over 9 million catalogs to its existing and prospective
customers and delivered over $17 million of merchandise in the fiscal year ended
September 30, 1996. The catalog is redesigned four times a year and is mailed as
many as 13 times a year to a combination of customers and prospective customers.
The catalog is divided into product categories, generally by the age of the
child and the size of the products being offered. Biobottoms also operates a
retail store selling overstocks and out-of-season items.

         Nearly 70% of Biobottoms' products are designed to its specifications
and marketed under Biobottoms' brand name. Established national brands, such as
CONVERSE and SARA'S PRINTS round out the product offering. Unlike other segments
of the apparel industry, the demand for children's clothing is driven by the
physical growth of the child, rather than changing fashions. As a result,
staples and basics account for much of the merchandise mix, with low return
rates and low markdowns.

         Biobottoms' brand products allow the Company to distinguish itself from
other catalogs and retailers. The lower cost of these goods also give management
more pricing flexibility. Biobottoms has increased its average order size in
each of the past few years by increasing the number of items per order while
decreasing the average item price. Biobottoms has also significantly expanded
the age range of its merchandise, testifying to the appeal of the Biobottoms
brand.

         The increase in the number of working women has provided a very
receptive environment for catalogers over the past two decades. The Company
understands that more than 70% of women aged 25 to 54 were working full time in
1993, versus 43% in 1965. The increasing number of dual income families and
single women in the workforce is expected to continue to fuel the growth of
direct marketing through the 1990's.

         Even though the Company has shifted its emphasis to the Biobottoms'
division, it continues to market Diplomat's products. The Company's plan is to

evaluate Diplomat's business and determine which areas should be continued.
Diplomats was a party to an exclusive distribution agreement ("the Lamaze
Agreement") with Ambrose & Montgomery, doing business

                                      4


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as "Lamaze from AMI". Pursuant to the Lamaze Agreement, Diplomat was granted the
right to utilize the Lamaze registered trademark in conjunction with the
manufacture, advertisement, promotion, distribution and sale of various products
for infants. The Lamaze Agreement expired in July 1996 and the Company currently
has no plans to extend it. Accordingly, the Company no longer uses the Lamaze
registered trademark.

New and Planned Products

         The Company's success depends in part upon the development of strong
brand identification for its current and proposed products. The primary
direction of the Company's marketing plan is to promote certain of its existing
products and develop new products under the Fresh Air Wear trademark. Achieving
and maintaining market acceptance for its products will require significant
efforts and expenditures. There can be no assurance that the Company will be
successful in effecting this plan.

         Product development and selection are based upon reliability of
vendors, visual appeal, perceived customer value, and uniqueness of design.
Biobottoms utilizes customers feedback on products' performance and their
reported preferences for new product designs, fabrications and category
expansion. Biobottoms' sales are generated from both house file customers
(persons who have either previously purchased from Biobottoms or requested a
catalog) and rented mailing lists (names of current customers from other catalog
companies). Analysis of this segmentation allows Biobottoms to mail frequently
and selectively to its most responsive customers.

Sourcing

         Biobottoms provides for manufacturing and sourcing of products in a
number of ways. Private label vendors supply some high volume basics, such as
t-shirts, play pants and knit shorts, where price competitiveness is critical.
Other manufacturers, that may be more costly, compared to private label vendors,
may be used for products requiring shorter lead times or testing fashion trends.
This provides greater flexibility for inventory management. Biobottoms'
manufacturing group provides control of the manufacturing process by closely
supervising all phases of production with local consultants and contractors.
Biobottoms' manufacturing group is a convenient source for testing new private
label product concepts. Branded merchandise from a variety of manufacturers is
the further source of products for Biobottoms.

Major Customers


         For the fiscal year ended December 31, 1995, two of the Company's
customers, Toys 'R Us and Wal-Mart individually accounted for approximately 23%
and 36% respectively, of the Diplomat net sales. For the nine month period ended
September 30, 1996, such customers

                                      5


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individually accounted for 11% and 40%, respectively, of the Diplomat
operation's sales. Sales to such customers accounted for approximately 22% of
the Company's sales for the nine month period ended September 30, 1996. The
Company has no written contracts with such customers and there can be no
assurance that such customers will continue to purchase products from the
Company. The loss of either of these customers would have a materially adverse
effect on the Company's business.

         In addition, the Company sold its products to approximately 500 retail
accounts consisting primarily of mass merchandisers and toy retailers, and, to a
lesser extent, drug store chains, catalog showrooms, mail order operations and
food store chains. In addition to Toys'R Us and Wal-Mart, the Company's
customers include Burlington Coat Factory, Kids 'R Us, Winn-Dixie Supermarkets,
American Drug Stores, Baby Superstores, Eckerd Drugs, Walgreens, Caldor, Target
Stores and Publix Supermarkets. A reduction in the number of retail accounts
from prior periods reflects a change in customer mix, with an increased emphasis
on mass merchandisers and chain stores. The decrease also reflects general
economic conditions which include a decrease generally in the number of
retailers.

         Seasonality of product is generally not a factor affecting the
Company's sales. Sales fluctuations are, however, affected by special seasonal
promotional activities of the merchandise retailer.

Quality Assurance

         Products developed for either Biobottoms or Fresh Air Wear and Ecology
Kids brands are chosen based upon the following criteria:

                          o   Quality
                          o   Price/Value
                          o   Fabric
                          o   Fit
                          o   Testing
                          o   Exclusivity
                          o   Color/Print
                          o   Styling
                          o   Manufacturing Responsibility
                          o   Merchandising

         Additionally, a minimum of two additional features beyond the must have
requirements that add appropriate performance or styling benefits, and are

comparable to the benchmarks, must be added. These include, but are not limited
to:

                          Specialized fabrications
                          Premium construction details

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                          Appropriate decorative items, such as buttons
                          Logos, Patches and  Graphics to enhance brand
                          identification

Governmental Regulation

         As a seller of infant products, the Company is subject to laws and
regulations administered by various states and the Federal Trade Commission. As
a seller of bedding products, the Company is also required to maintain licenses
in the various states where it conducts business. These licenses subject the
Company to compliance with a variety of laws and regulations regarding the
labeling and cleanliness of its products. In addition, the Company has all of
its bedding products produced to the upholstered product specifications required
by the flammability laws of the State of California, which the Company believes
to be the most stringent in the United States. The Company believes that it
complies with the laws and regulations in all material respects.

Product Liability

         The Company currently has an aggregate of $2,000,000 of product
liability insurance for its current products with an umbrella policy of up to
$3,000,000. The Company does not intend to increase such coverage upon
commercialization of any other product under development. There can be no
assurance that the Company's existing coverage will be sufficient to cover any
liability resulting from any product liability claims or that the Company would
have funds available to pay any claims over the limit of its insurance. Either
an underinsured or an uninsured claim could have a materially adverse effect on
the Company.

Employees

         As of December 15, 1996, the Company had 35 full time employees in its
Stony Point facility. Of such employees, three act in executive capacities,
three are full time sales and marketing personnel, one is a customer service
representative and 28 are administrative and warehouse personnel. None of the
employees are covered by a collective bargaining agreement. The Company
considers its relations with the employees to be good.

         Biobottoms employs permanent, full-time and part-time employees, part
time casual (not eligible for benefits), and temporary workers due to seasonal
increases in its sales volume. This allows for optimal employment levels during

peak and slack times. Also, it allows a portion of the work force the option of
flexible working hours. Biobottoms employed 131 employees at January 28, 1996
and 134 full time equivalents (total employee and temporary hours divided by an
annual 40 hour week) at January 15, 1997. None of the Biobottoms employees are
represented by any labor union.

                                      7


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Trademarks, Patents and Proprietary Rights

         The Company's success depends, in part, upon the development of strong
brand identification for its current and proposed products. Diplomat has federal
trademark protection for the name Ecology Kids(TM) and historically relied
heavily on its right to utilize the Lamaze name in accordance with its now
expired distribution agreement with AMI. The Company does not believe that the
inability to use the Lamaze name will have an adverse effect on the Company.

         The Company has federal trademark protection to utilize the name "Fresh
Air Wear" in connection with the sale of Biobottoms' products and may apply for
other trademarks as it deems appropriate. There can be no assurance that the
registrations will be issued, or that any registration issued will not be
infringed upon by others or that the Company can successfully challenge any
alleged infringement. In the event that it became necessary to establish
recognition of alternative trademarks, the cost of such development could be
substantial, and, as a result, materially adversely affect the Company's
business and prospects.

         In November, 1992 the Company acquired the four-year exclusive License
to a United States patented thermochromatic process that can be utilized with a
diaper cover to indicate wetness and soiling through heat generated color
changes. This License was entered into for the purpose of promoting an extension
of the Company's diaper cover business and for use in developing a disposable
diaper pad product combination, providing the convenience of disposable diapers,
while generating significantly less solid waste. Plans to develop the disposable
diaper pad product are not being actively pursued at this time.

         The License required that the Company pay fixed annual minimum royalty
payments of $50,000 in 1993, $87,500 in 1994, and $100,000 in 1995 and 1996. All
minimum royalty payments required to be paid have been paid through 1995 and the
balance of the 1996 payments will be paid by March 31, 1997 . The Company did
not exercise its right to extend the License.

Competition

         There are a wide range of catalogs selling infant and childrens'
apparel in competition with Biobottoms. These vary from general catalog
merchandisers, such as JC Penney to smaller specialty childrens' apparel
catalogs. Biobottoms believes it competes primarily with the latter, which group

includes: Hanna Anderson, Playclothes, Childrens Wear Digest, Storybook
Heirlooms, Wooden Soldier, and Lands End Kids. Companies in the catalog business
compete on price, product quality, features, benefits, brand name and customer
service. Biobottoms seeks to market a product line that is distinctive from its
competitors. Biobottoms also competes with non-mail order childrens' clothing
retailers, including specialty stores, department stores, major chains and
discount retailers. Gap Kids, Gymboree and other national retailers are also
competitors outside the direct mail industry. Although certain of these direct
competitors have greater financial and marketing resources, Biobottoms believes
that it has been able to be

                                      8


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competitive because of its ability to offer quality products, reasonable prices
and outstanding customer service.

         The infant and toddler products industries are extremely competitive in
the United States and Diplomat faces substantial competition in each of its
product lines. The Company competes in a variety of segments within these
product categories, including disposable diapers, infant and juvenile
furnishings and accessories. Competitive factors include quality, price, style,
name recognition and service. Although the Company believes that it can compete
favorably in these areas, there can be no assurance thereof.

Item 2.   Properties

Properties and Facilities

         In December 1992, Loshell Realty Corporation ("Loshell"), owner of the
real estate and buildings housing the Company's warehouse and distribution
facilities located at 25 Kay Fries Drive, Stony Point, New York (the
"Facilities"), transferred to the Company a fee interest in the Facilities,
subject to purchase money mortgage indebtedness. The Facilities consist of five
buildings aggregating approximately 40,000 square feet, located on approximately
seven acres. The Facilities had an adjusted basis of $1,984,857 when transferred
to the Company. Approximately 6,000 square feet of the Facilities are utilized
by the Company's contract manufacturers located at the premises. Sheldon R.
Rose, the Company's former President and Chief Executive Officer and his wife
are the sole shareholders of Loshell. In connection therewith, the Company
assumed purchase money mortgage indebtedness of Loshell aggregating
approximately $1,799,000 ($1,101,000 with respect to a first mortgage note due
August 2010, bearing interest at an initial rate of $11.75% adjusted every three
years, commencing July 1993 (currently 8.375%) and $698,000 with respect to a
subordinated mortgage note originally due July 1995 but (extended to January
1997), bearing interest at an initial rate of 11.5% per annum. Mr. Rose and his
wife have personally guaranteed payment of the first mortgage, and Mr. Rose and
Loshell are co-makers of the subordinated mortgage note. The Company pays
approximately $26,000 per month for both mortgage payments and real estate
taxes. The Company is currently negotiating the refinancing of the second

mortgage.

         Biobottoms leases approximately 17,600 square feet of office space and
15,600 square feet of warehouse space in Petaluma, California. In addition,
Biobottoms leases 1,700 square feet of retail space in Petaluma, California.
Total fixed monthly payments (exclusive of any applicable common area
maintenance charges) currently under these leases is $27,276 and the lease
agreements provide for fixed annual increases. The office lease and warehouse
leases expire on July 1, 1997. No determination has been made as to whether
either or both of these leases will be renewed. These properties are adequate
for current planned operations. Other suitable facilities are available at
competitive prices and terms. The retail lease for Petaluma renews bi-annually.

                                      9


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Item 3.   Legal Proceedings

         On July 17, 1996, BDO Seidman, LLP commenced an action against Diplomat
in the Supreme Court of the State of New York, New York County, to recover
accounting fees allegedly due in the amount of approximately $180,000. The
Company disputes this claim and intends to defend vigorously this action. In
addition, the Company believes that it has a claim against BDO Seidman, LLP for
damages in an amount which has not yet been determined. However, should the
claimant prevail, the result may have a materially adverse impact on the
Company.

         In September 1996, the Company was named as a defendant in an action
brought in the Supreme Court of the State of New York, County of Rockland
(Richard Tracy and Anne Tracy v. Insulx Product Corporation, Consolidated Rail
Corporation, Diplomat Corporation and Bruce M. Smith Contracting Corporation).
Mr. Tracy alleges that the defendants negligent maintenance of a railroad
crossing adjacent to the Company's property caused him to collide with a train.
Mr. Tracy is seeking $10,000,000 in damages for his injuries, and Mrs. Tracy is
seeking an additional $1,000,000 in damages for loss of Mr. Tracy's services.
The Company and its insurance carrier intend to vigorously defend against these
claims. The ultimate outcome of this litigation cannot presently be determined.
Accordingly, no provision for the liability has been made in the accompanying
financial statements. Additionally, the Company maintains $1,000,000 of
insurance coverage which could be applied to any liability posed by this matter.

         On November 20, 1996, a charge of employment discrimination was filed
by former employee Marilyn L. Vitale with the Equal Employment Opportunity
Commission ("EEOC") (Charge No. 171970094) and the New Jersey Division on Civil
Rights alleging violations of Title VII of the Civil Rights Act of 1964 and the
Americans with Disabilities Act against Diplomat Corporation. Specifically,
Charging Party alleges that Diplomat and certain current and former officers
discriminated against her based on her sex, disability and in retaliation for
complaining of such discrimination. Charging Party seeks reinstatement and
backpay. Potential backpay liability for the period January 29, 1996 to date is
$70,000. It is not possible to anticipate a potential damages award. At this

time, the EEOC is in the investigatory stage and has yet to make a
determination. The Company intends to vigorously defend against Ms.Vitale's
claims.

         Other than the above claims, the Company has no notice of any pending
or threatened litigation.

Item 4.  Submission of Matters To A Vote Of Security Holders

         During the fiscal year covered by this report, the Company did not
submit any matters to a vote of security holders.

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                                   PART  II

Item 5.  Market for the Company's Common Stock and Warrants

         As of the date hereof, the Company has outstanding its Common Stock
$.0001 par value ("Common Stock") and Warrants to purchase its Common Stock
("Warrants"). The principal market for the Common Stock and Warrants is the
NASDAQ Small Cap Market ("NASDAQ") under the symbols of DIPL and DIPLW,
respectively. The following table sets forth the closing high and low bid prices
for the Common Stock and Warrants for each calendar quarter. The prices
represent inter-dealer quotations without adjustment for retail markups,
markdowns or commissions and may not represent actual transactions. NASDAQ
quotations do not assume that the market for the Company's securities will be
sustained.

                                  Common Stock

<TABLE>
<CAPTION>
                                                              Bid                       Warrants
                                                              ---                       --------
For Fiscal Year Ending
December 30, 1995                           High              Low               High             Low
-----------------                           ----              ---               ----             ---
<S>                                         <C>               <C>               <C>              <C>
First Quarter                               5 _               2 _               3 _              3/4
Second Quarter                              3 1/4             1 1/4               _              _
Third Quarter                               3 3/4             1 3/16            1 _              1/2
Fourth Quarter                              3 11/16           1 _               1 1/16           1/4

1996
----
First Quarter                               2 1/16            1 _                 1/2            1/4
Second Quarter                              1 _               1 _                 _              3/16
Third Quarter                               2                   29/32             1/4            1/16
</TABLE>



         The Common Stock and Warrants commenced trading on NASDAQ on November
4, 1993.

         The Company believes that there are approximately 2,200 beneficial
owners of each of its securities.

                                DIVIDEND POLICY

         The Company has not paid any dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company intends
to retain any earnings to finance the growth of the Company. There can be no
assurance that the Company will ever pay cash dividends pursuant to the
Company's credit agreement with its commercial lender and the terms of
indebtedness incurred in connection with the acquisition of Biobottoms.

                                      11


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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1996 Compared to Twelve Months Ended December
30, 1995 (The Company has changed its fiscal period to September 30, 1996)

NET SALES

         Consolidated net sales for the Nine Month Period ended September 30,
1996 ("1996 Period") increased approximately $7,921,000 or 70% from the year
ended December 30, 1995 ("1995 Period") primarily as a result of the Biobottoms
sales of $11,774,000 from the date of acquisition, February 9, 1996. Sales of
Diplomat decreased 33% for the period. The lower sales in 1996 were also
impacted significantly by an adverse retailing environment that has continued
from the last quarter of 1995.

         Consolidated cost of sales were 69% of net sales in 1996 and 61% in
1995. The increase in cost of sales of $6,422,000 in 1996 included $5,942,000
from Biobottoms. Cost of sales of Diplomat increased 7% in 1996 although sales
decreased 33% primarily from a writedown of inventory from its restructuring.

         For the 1996 Period, Toys 'R Us and Wal-Mart represented 11% and 40%
respectively, of the Diplomat sales as compared to 23% and 36% in 1995.

OPERATING EXPENSES


         Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses, increased approximately
$5,977,000 from 1995 to 1996 primarily from $6,917,000 of Biobottoms operating
expenses. Consolidated operating expenses were 55% of net sales in 1996 and 41%
in 1995. There was a reduction of licensing fees in 1996 because of lower sales.

         Interest expense increased $302,000 in 1996 compared to 1995 as a
result of Diplomat's increased borrowing at higher interest rates which include
$245,000 of interest in connection with the acquisition of Biobottoms.

         The Company restructured its Stony Point, New York operations by
eliminating several of its unprofitable retail lines and downsizing its
distribution facility. The Company intends to focus its Stony Point operations
on its traditional core business. The restructuring expenses total approximately
$1,739,000 for the period ended September 30, 1996.

                                      12


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         The net loss for the 1996 period was $7,225,000 as compared to a net
loss of $721,000 for the 1995 period. Significantly lower sales of Diplomat
during 1996, without corresponding reductions in operating expenses and
additional interest expenses from the acquisition were the principal components
for the loss in 1996, in addition to the restructuring expenses. Biobottoms had
a net loss of $1,150,000 from the date of acquisition.

         The following summary combines the consolidated results of operations
of the Company and Biobottoms as if the acquisition had occurred at the
beginning of fiscal 1995, after giving effect to the amortization of goodwill
and increased interest expense on the acquisition debt.

<TABLE>
<CAPTION>
                                                      Nine Months                        Pro-Forma
                                                         Ended                       Nine Months Ended
                                                  September 30, 1996                 September 30, 1995
                                                 -------------------                 ------------------
<S>                                         <C>                                       <C>
Net Sales                                            $19,222,801                         $20,180,355
Cost of Goods Sold                                    13,334,588                          10,569,150
                                                     -----------                         -----------
Gross Profit                                           5,888,213                           9,611,205
                                                     -----------                         -----------
Selling, General & Administrative Expenses            10,589,561                           9,179,201
Restructuring Expense                                  1,738,975                        
                                                     -----------                         -----------
Operating Income(Loss)                                (6,440,323)                            432,004
Interest Expense                                         784,577                             933,895
                                                     -----------                   


Loss before Income Taxes                              (7,224,900)                           (501,891)
Income Taxes (benefit)                                       -0-                            (173,072)
                                                    -------------                          ---------
Net Loss                                            $ (7,224,900)                          $(328,819)
</TABLE>

Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995

NET SALES

         Consolidated Net Sales for the Nine Month Period ended September 30,
1996 ("1996 Period") decreased approximately $958,000 from the Nine Month Period
ended September 30, 1995 ("1995 Period") primarily as a result of lower sales of
Diplomat for the period. The lower sales in 1996 were impacted significantly by
an adverse retailing environment that has continued from the last quarter of
1995. The sales of Diplomat decreased 24% and the sales of Biobottoms increased
16% from 1995 to 1996.

         Consolidated cost of sales were 69% of net sales in 1996 and 52% in
1995. Cost of sales of Diplomat increased 32% primarily from a writedown of
inventory from its restructuring.

                                      13


<PAGE>



Cost of sales of Biobottoms increased 16% as a result of an increase in sales.

         For the 1996 period, Toys "R" Us and Wal-Mart represented 11% and 40%
respectively of the Diplomat sales as compared to 32% and 22% in 1995.

OPERATING EXPENSES

         Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses, increased $1,410,000 from
1995 to 1996. The increase resulted primarily from increased catalog expenses of
Biobottoms. The operating expenses of Diplomat increased by a minor amount from
1995 to 1996. Consolidated operating expenses were 55% of net sales in 1996 and
45% in 1995.

         The Company restructured its Stony Point, New York operations by
eliminating several of its unprofitable retail lines and downsizing its
distribution facility. The Company intends to focus its Stony Point operations
on its traditional core business. The restructuring expenses total approximately
$1,739,000 for the period ended September 30, 1996.

         Interest expenses decreased $141,000 in 1996 as a result of Biobottoms
decreased borrowing at lower rates.

         The net loss for the 1996 period was $7,225,000 as compared to a net

loss of $329,000 for the 1995 period. Significantly lower sales of Diplomat
during 1996, without corresponding reductions in operating expenses and
additional interest expenses from the acquisition were the principal components
for the loss in 1996, in addition to the restructuring expenses.

Results of Operations

Fiscal Year Ended December 30, 1995 Compared to Fiscal Year Ended December 31,
1994

Net Sales

         Net Sales for the year ended December 30, 1995 ("Fiscal 1995" or
"1995") increased approximately $1,023,000 or 10% from year ended December 31,
1994 ("Fiscal 1994" or "1994").

         The 1995 period was favorably impacted by the market acceptance and
resulting sales of the Lamaze Layette Program.

         Cost of sales were 61% of net sales in 1995 and 57% in 1994. During the
fourth quarter of 1995, the Company reserved $160,000 for slow moving inventory
of layette products.

                                      14


<PAGE>



         Form the year 1995, Toys 'R Us and Wal-Mart represented 23% and 36%,
respectively, of the Company's sales compared to 28% and 34% in 1994.

Operating Expenses

         Operating expenses as a percentage of sales decreased from 45% in 1994
to 41% in 1995.

         Operating expenses, which include selling, general, administrative
warehouse and distribution expenses, increased by approximately 1% from 1994 to
1995. With the introduction of the new product line in 1994, there was an
increase of approximately $322,000 for license fees associated with these
products. Payroll and consulting fees increased approximately $178,000 from 1994
to 1995. There was a reduction of travel and entertainment of approximately
$39,000, advertising and promotion of approximately $331,000, and commissions of
$36,000. A reserve of $100,000 was established in the fourth quarter in
connection with a barter transaction entered into in 1993.

         Interest expenses increased $79,000 as a result of increased borrowing
at higher interest rates in 1995 compared to 1994.

         The Company has net operating loss carry forwards which are available
to offset future taxable income.


         Net loss for Fiscal 1995 was $720,878 as compared to $439,459 for the
comparable period in 1994. Significantly lower sales during the fourth quarter
of the fiscal years 1995 and 1994, with lower reductions in operating expenses
were the principal components for the loss reported for such periods. Sales
during the fourth quarter have historically been lower than other periods. The
lower sales in the fourth quarter of Fiscal 1995 (approximately $1,353,000) as
compared to Fiscal 1994 (approximately $1,766,000) were also impacted
significantly by an adverse retailing environment that has continued in 1996.
The resulting net loss for the fourth quarter of 1995 increased approximately
$496,000, from $730,000 in 1994 to $1,226,000 in 1995, an increase of
approximately 68%.

Liquidity and Capital Resources

         The Company completed an initial public offering on November 13, 1993
and received net proceeds of approximately $4,454,000. Proceeds of the offering
were used for purchases of inventory, marketing and promotion, product
development, reduction of accounts payable and repayment of loans from a
principal stockholder and executive officer. The Company has relied upon the
proceeds of its initial public offering, borrowings from an institutional
lender, a principal stockholder and director of the Company, and proceeds from
the exercise of warrants in 1995 in order to fund its operation.

                                      15


<PAGE>
   
         The Company's principal working capital credit facility is provided by
Congress Financial Corporation ("Congress").
    
   
         In April 1994, the Company entered into an agreement with Congress
providing the Company with a maximum $3,000,000 secured line of credit to be
used for loans and trade letters of credit. The loan are secured by
substantially all of the Company's personal property, including without
limitation, accounts receivable, inventory and trademarks. The interest rate on
loans is two (2%) above the prime rate announced by Core States Bank. The credit
agreement contains restrictions relating to the payment of dividends.
Additionally, the Company is required to maintain a minimum of $3,500,000 in
stockholders' equity and a minimum of $4,500,000 of working capital (excluding
the Congress loan and certain subordinated debt). At September 30, 1997, the
Company was not in compliance with these financial covenants, however Congress
continued to extend the Company credit the under the terms of the original
agreement. On February 25, 1997, the violations were waived by Congress, and the
Company and Congress agreed on revised financial covenants. Under the revised
agreement, the stockholders' equity and working capital minimums (excluding the
Congress loan and certain subordinated debt) were reduced to (750,000) and 
500,000, respectively. Under the agreement the minimums shall be increased
during the fiscal year ending September 30, 1997 to (250,000) and 1,500,000,
respectively. The Company expects to be in compliance with the revised 
financial covenants at each measurement date.

         Under the terms of the credit agreement, the Company could borrow up to

85% of the amount of eligible accounts receivable (as defined in the agreement),
not to exceed the maximum credit. In February 1995 the Agreement was amended to
adjust the formula used to determine the amount available for revolving loans by
including therein an amount based upon eligible inventory not to exceed
$750,000.


    
   
         In connection with that amendment, Robert Rubin, a director and
principal stockholder of the Company, furnished the lender with a personal
limited guarantee up to a maximum liability of $375,000, pertaining to loans
made based upon eligible inventory. In connection with the initial Congress
transaction, the Company borrowed from Robert Rubin $590,000 on a secured term
loan basis, subordinated to Congress Financial, in order to repay in full its
then existing outstanding principal indebtedness to Citibank, N.A. Such Citibank
facility in the initial principal amount of $650,000, was established in June,
1993, secured by certain assets of the Company and a shareholder guaranty from
Mr. Rubin. The loan from Mr. Rubin is repayable with interest at the prime rate
plus 1 1/2%, with required principal payment amortization identical to the terms
applicable to the Citibank loan terms. Accordingly, the Company made principal
payments of $120,000 in 1994, $120,000 in 1995, $175,000 in 1996 and will be
required to make payments of $174,800 in 1997. The balance of this debt was 
converted into Preferred Stock in September, 1996.
    

       

                                      16

<PAGE>
       
   
         In connection with the Biobottoms acquisition, the Company incurred 
debt of $4,303,100 consisting of Deferred Payment Notes, payable to (i) the
former Biobottoms stockholders in the amount of $1,500,000, (ii) Mr. Rubin in
the amount of $2,353,100, and (iii) American United Global in the amount of
$450,000. The American United Global loan was paid in May, 1996. Under the
Deferred Payment Note, $750,000 was due August 9, 1996, $375,000 was due
November 9, 1996 and $375,000 is due August 9, 1997 together with interest. The
August and November 1996 payments have not been made. On December 9, 1996, the
holders of these notes gave notice of default in accordance with the acquisition
agreement. Under this agreement, the holders of the notes must wait 270 days
after giving notice before taking notice before taking further action in the
collection of these notes. On February 25, 1997, the holders of these notes
agreed not to initiate an enforcement action prior to December 31, 1997. In
connection with obtaining this agreement, Diplomat agreed to pay the holders of
the Deferred Payment Notes ten installments of $5,000 to be applied against the
Deferred Payment Notes commencing on February 21, 1997 and to undertake to
conduct a private placement of its securities to raise funds for repayment of
the remaining balance due on the Deferred Payment Notes. Should the Company fail
to raise enough funds for repayment, it has agreed to repay the Biobottoms
shareholders additional payments of $50,000 on July 1, 1997 and $100,000 on
December 15, 1997 to be applied against the Deferred Payment Notes. Mr. Rubin
furnished the former Biobottoms stockholders with a limited guarantee up to a
maximum liability of $100,000 pertaining to the payments due July 1, 1997 and

December 15, 1997.
    

         Effective September 30, 1996, Robert Rubin, a director and principal
stockholder of the Company, agreed to convert an aggregate of $2,900,000 in
outstanding debt into an aggregate of 290,000 Shares of Series B Preferred
Stock, which pay an annual dividend of 9% based on per share liquidation value.

   
         The Company has approved the issuance to Mr. Rubin an aggregate of 
550,000 shares of Common Stock in consideration of Mr. Rubin's waiver of certain
compensation owed to him and for restructuring certain debt owed to him, waiving
certain defaults and making additional loans to the Company in the aggregate
amount of $600,000. As of September 30, 1996, the 600,000 loan was converted
into 60,000 shares of Series C Preferred Stock, which pay an annual dividend of
9% based on per share liquidation value.
    

       

         In connection with the February 9, 1996 closing or the Biobottoms
acquisition (the "Closing"), Biobottoms established an inventory based credit
facility with Congress Financial Corporation, the Company's principal lender,
secured by a first priority security interest in substantially all of the assets
of Biobottoms and a guaranty of such obligations by the Company (the Biobottoms
Congress Loan Facility"). The maximum credit available under the facility is
$2,000,000 and on the date of Closing $848,531 was available and borrowed.

   
         The Biobottoms/Congress Loan Facility is guaranteed by the Company and
a default thereunder constitutes a default under the Company's Loan and Security
Agreement with Congress. The interest rate charged on the loan is the prime rate
as announced by Core States Bank, N.A. (the "Prime Rate") plus 2%. At September
30, 1997, the Biobottoms was not in compliance with certain covenants of the
loan agreement, however Congress continued to extend Biobottoms credit under the
terms of the original agreement. On February 24, the violations were waived by
Congress, and Congress and the Company agreed on revised financial covenants for
the remainder of the Company's fiscal year ending September 30, 1997. The
Company expects to be in compliance with the revised financial covenants at each
measurement date.
    

       

   
         In February 1997, Mr. Rubin made an additional loan to the Company in
the amount of $200,000. This loan, and Series B and C Preferred Stock are
referred to hereafter as the "Rubin Obligations."
    

                                      17


<PAGE>


       

       

         The Deferred Payment notes and the Rubin/American United loans are
subject to an Intercreditor Agreement with Congress Financial Corporation (the
"Intercreditor Agreement") which has the effect of restricting or limiting
enforcement remedies under the promissory notes evidencing the Deferred Payment
and the Rubin American United Loans prior to repayment of the senior debt
payable to Congress Financial Corporation and restricting the repayment of
principal payable thereon based upon certain minimum excess loan availability
requirements.

   
         The Intercreditor Agreement also provides that irrespective of the
relative priority status between the holders of the Deferred Payment obligations
and the Rubin/American United loans, repayment of the Deferred Payment is
permitted to be paid provided that there has been no default of senior debt
payable by the Company or Biobottoms to Congress, minimum excess availability
requirements under the Company's loan facility with Congress are satisfied and
such payments are made with proceeds from a subsequent sale of its capital
stock. Subject to the Intercreditor Agreement, the Deferred Payment and the
Rubin/American United loans will be payable from the proceeds from any sale of
capital stock by the Company in the proportions of 40% on account of the
Deferred Payment and 60% on account of the Rubin/American United Loans, except
that before any such distributions are made, the Company will be required to
reduce the outstanding principal amount of the Deferred Payment by $150,000.
These provisions were amended on February 25, 1997, such that the proceeds of a
private placement of the Company's Common Stock shall be applied first to repay
in full the principal of, and all accrued interests on, the Deferred Payment
notes. The Company does not presently have any commitment for any such
financing.
    

   
         The Intercreditor Agreement contains provisions to the effect that
prior to March 1, 1998, no principal amount of the Rubin Obligations may be
repaid, except from proceeds from the sale of capital stock by the Company,
subject in all respects to the Intercreditor Agreement. Commencing March 1, 1998
and subject to the provisions of the Intercreditor Agreement, including without
limitation the requirement that the Company have certain minimum levels of
excess loan availability at the time of the making of any such principal
payment, the Rubin Obligations are subject to principal payments monthly of the
amount equal to 25% of the Company's net profit for the second preceding month,
plus depreciation and amortization expenses for said month, with the unpaid
principal amount of the Rubin Obligations and unpaid interest accrued thereon
payable in full on February 9, 1999.
    

       

       


                                      18

<PAGE>

       

         In connection with the Biobottoms Congress Loan Facility, Mr. Rubin
also issued to Congress his written commitment to provide additional term loans
to the Company, not to exceed in the aggregate the principal amount of $300,000,
such loans to be made solely at the discretion of Congress. Proceeds from any
such loans may only be used by the Company to provide working capital for
Biobottoms.

         Proceeds from the Congress loan and the Rubin/American United Loans
were used on February 9, 1996 or remained otherwise available as of that date as
follows:


             Payment at Closing of Biobottoms'
             Institutional Secured Lender.......................$1,448,025
                                                     
             Cash portion of Biobottoms Purchase     
             Price...............................................1,000,000
                                                     
             Loan Costs and Legal Fees..............................96,690
                                                     
             Available Working Capital...........................1,103,816
                                                     
         At the time that the Biobottoms acquisition was completed, additional
equity financing was contemplated to fund the scheduled payments of the
acquisition debt and working capital requirements for the Diplomat and
Biobottoms businesses. Such financing was not secured within the time
constraints contemplated by the management of the Company. As a result, the
acquisition debt was not paid when due. In addition, the Company is experiencing
severe working capital shortages and requires additional capital resources to
fund its existing operations. Under Diplomat's and Biobottoms' lending
facilities with Congress Financial, the Company has borrowed the maximum amounts
available under the loan formula as of the date hereof and there is no unused
loan availability. The Company is pursuing a number of financing alternatives,
although there can be no assurance that such efforts will result in necessary
financing or that the terms of such financing will be on terms favorable to
existing stockholders. The failure to secure additional working capital and
funds to pay the Biobottoms acquisition debt will materially adversely affect
the business and financial condition of the Company. Insufficient working
capital may require the Company to reduce operations significantly.

   
         In July 1995, the Company, in connection with a financial consulting
agreement, issued to Boulder Enterprises, Inc., Class B, Class C and Class D
Warrants, each exercisable for 500,000 shares of common stock, at $1.37, $1.00
and $3.00 per share, respectively. All of the Class B Warrants were exercised
during 1995 providing the Company with net proceeds of $628,000. The Class D
Warrants expired in July, 1996.
    

                                      19


<PAGE>

       

         In August 1996, the Company, in connection with a Non-Qualified Stock
Option Plan, issued 500,000 options which were exercised at a price of $.95 per
share.

         There can be no assurance that the Company will operate profitably in
the future or that cash from operations will become the principal source of
funds for operations.

                                   PART III

Item 9.  Directors and Executive Officers, Promoters and Control Persons
         Compliance with Section 16(a) of the Exchange Act

Directors, Executive Officers and Key Employees

The Directors, Executive Officers and Key Employees of the Company are as
follows:

<TABLE>
<CAPTION>
                  Name                               Age                        Position
                  ----                               ---                        --------
<S>                                                <C>                         <C>
Robert M. Rubin                                      56                         Chairman of the Board
                                                                                   and Director

Jonathan Rosenberg                                   36                         President, Chief Executive
                                                                                   Officer and Director

Stuart A. Leiderman                                  52                         Executive Vice President of
                                                                                   Sales & Marketing and
                                                                                   Director

Edward E. Hinds                                      69                         Director

Irwin Oringer                                        60                         Chief Accounting Officer
                                                                                   and Controller

Howard Katz                                          55                         Director
</TABLE>

         Jonathan Rosenberg was appointed to the Board of Directors in July
1995, to fill the vacancy created by the resignation of Felice F. Mischel. Since
1993, Mr. Rosenberg served as an independent consultant to the Company,
providing advice in the operations and finance areas and in long-term strategic
planning. From 1987 until 1993, he was President and Chief Operating Officer of
Servtex International, Inc., a New York based company engaged in


                                      20


<PAGE>



international sourcing of imports and manufacturing activities on an agency
basis for textile related products.

         Stuart A. Leiderman has served as Executive Vice President of Sales and
Marketing since July 1989, and has been a Director of the Company since June,
1992. From 1985 to 1989, Mr. Leiderman was a Divisional Vice President for
Hasbro, Inc., Playskool Baby Division, a company engaged primarily in the
development, sales and marketing of toys.

         Robert M. Rubin has served as a Director of the Company since June,
1992. Since December 5, 1995, Mr. Rubin has been a Director of Help at Home,
Inc., a public company engaged in the business of providing homemaker and
general housekeeping services to elderly and disabled persons at home. Since
June 1994, Mr. Rubin has been a Director of Kaye Kotts Associates, Inc., a
public company that provides representation for delinquent tax payers before tax
authorities. In October 1996, Mr. Rubin became a director of Med-Emerg
International Inc., an operator of nursing homes and related healthcare
services. Currently, Mr. Rubin is also a director of Arzan International, an
Israeli food distributor.

         Mr. Rubin has served as the Chairman of the Board of Directors of
Western Power and Equipment Corporation ("WPEC"), a construction equipment
distributor, since November 20, 1992. Between November 20, 1992 and March 7
1993, Mr. Rubin served as Chief Executive Officer of WPEC. Between October, 1990
and January 1, 1994 Mr. Rubin served as the Chairman of the Board and Chief
Executive Officer of American United Global Inc., a telecommunications and
software company ("AUGI") and since January 1, 1994, solely as Chairman of the
Board of AUGI. Mr. Rubin was the founder, President, Chief Executive Officer and
a Director of Superior Care, Inc. ("SCI") from its inception in 1976 until May,
1986 and continued as a Director of SCI (now known as Olsten Corporation
("Olsten") until the latter part of 1987. Olsten, a New York Stock Exchange
listed company is engaged in providing home care and institutional staffing
services and health care management services. Mr. Rubin was formerly a Director
and Vice Chairman, and is a minority stockholder of American Complex Care,
Incorporated ("ACCI"), a public company which provided on-site health care
services, including intradermal infusion therapies. In April 1995, the principal
operating subsidiaries of ACCI petitioned in the Circuit Court of Broward
County, Florida for an assignment for the benefit of creditors. Mr. Rubin is
also a Director, Chairman and minority stockholder of Universal Self Care, Inc.,
a public company engaged in the sale of products used by diabetics, and Response
USA, Inc., a public company engaged in the sale and distribution of personal
emergency response systems. Mr. Rubin is also Chairman, Chief Executive Officer
and a Director and a principal stockholder of ERD Waste Corp., a public company
specializing in the management and disposal of municipal solid waste, industrial
and commercial nonhazardous solid waste and hazardous waste.


         Edward E. Hinds was appointed to the Board of Directors in March, 1994.
He is the retired Executive Vice President, Chief Operating Officer of Gerber
Childrens Wear, a division of Gerber Products, Inc., having served in that
capacity from 1986 - 1987.

                                      21


<PAGE>



         Irwin Oringer, a Certified Public Accountant, has been Chief Accounting
Officer and Controller of the Company since September, 1992. From October 1991,
until he joined the Company in September 1992, Mr. Oringer was Corporate
Controller of Trans-National Trade Development Corporation, a company engaged in
the business of importing diversified consumer products.

         From 1988 to October, 1991 he held a variety of financial management
positions with subsidiaries of Kenrich, Inc., a holding company for its business
engaged in the wire and cable business. In February, 1991 Kenrich and its
subsidiaries filed a petition under Chapter 11 of the Federal bankruptcy laws
and was subsequently liquidated.

         Howard Katz has been a Director of the Company since October, 1996. 
Mr. Katz has been Executive Vice President of American United Global,
Incorporated since April 15, 1996. From December, 1995 through April 15, 1996
Mr. Katz was a consultant for, and from January, 1994 through December, 1995 he
held various executive positions, including Chief Financial Officer from
December, 1994 through December, 1995 with National Fiber Network (a fiber
optics telecommunications company).  From January, 1991 through December, 1993
Mr. Katz was the President of Katlaw Construction Corporation, a company that
provides general contractor services to foreign embassies and foreign missions
located in the United States.  Prior to joining Katlaw Construction Corp., Mr.
Katz was employed as a management consultant by Coopers and Lybrand, LLP and as
a divisional controller for several large public companies.

         Directors of the Company are elected for one year terms or until their
successors are elected, and officers serve at the pleasure of the Board of
Directors.

Item 10.  Executive Compensation

         The following table sets forth a summary of the compensation paid to or
accrued by the Company during the fiscal period ended September 30, 1996 to the
Company's Chief Executive Officer and each of the other most highly compensated
executive officers of the Company.

determined as of the end of the last fiscal year.

<TABLE>
<CAPTION>
         Name                                                 Annual
          and                                                 Compensation(1)           Restricted

   Principal Position               Year                      Salary                    Stock Award
   ------------------               ----                      ------                    -----------
<S>                                 <C>                       <C>                       <C>
Sheldon R. Rose                     9/30/96                    $159,375
Chief Executive Officer             1995                        191,047
(Resigned 11/96)                    1994                        193,370(2)

Jonathan Rosenberg                  9/30/96                   $130,804
Chief Executive Officer

(Elected 11/96)
</TABLE>

                                      22


<PAGE>


<TABLE>
<S>                                 <C>                       <C>                     <C>
Stuart Leiderman                    9/30/96                   $ 112,500
Executive Vice President            1995                        139,334               68,000(3)
                                    1994                        143,654                 

Robert M. Rubin                     9/30/96                   $  87,791
Consultant                          1995                        109,708
                                    1994                        119,712
</TABLE>


(1)      The Company did not issue any bonuses, other annual compensation, stock
         appreciation rights or long term incentive plan payouts to any of the
         named individuals in the Summary Compensation Table.

(2)      The $193,370 represents approximately four months of Mr. Rose being
         paid at the rate of $175,000 per annum and eight months of being paid
         at $212,500 per annum.

(3)      In April 1993, Sheldon Rose and Lola Rose transferred 40,733 shares of
         Common Stock to Stuart Leiderman. Because Sheldon Rose and Lola Rose
         are controlling shareholders of the Company, such stock is deemed
         returned to the Company and issued from the Company to Stuart
         Leiderman.

         The value given this stock was $1.66 per share which was derived from
taking 50% of the effective IPO price of the Common Stock. Based upon the last
reported bid price for the Company's Common Stock on December 31, 1996 and
without consideration of any discount to market based upon applicable
restrictions applicable to these "restricted shares" of Common Stock, the fair
market value of such shares is approximately $20,360. The last reported bid
price for the Company's Common Stock was $1.00.

         In January 1996, Jonathan Rosenberg, a director of the Company, became

a full time employee of the Company, serving with the title of chief operating
officer. His compensation on an annualized basis is $175,000. In addition to
benefits generally available to senior level employees of the Company, he
receives an automobile allowance of $750 per month. In connection with his
employment, he was granted 75,000 incentive stock options , having an exercise
price of $1.50 per share, exercisable over a five (5) year period, 15,000 shares
per year.

                    OPTIONS/SAR  GRANTS IN LAST FISCAL YEAR


                                      23

<TABLE>
<CAPTION>


                                                                         Potential
                                                                         Realizable
                                                                         Value at
                                                                         Assumed
                                                                         Annual Rates of     Alternative (f)
                                                                         Stock Price         and (g); Grant
                                             Individual Grants           Appreciation for    Date Value
                                                                         Option Term

                                   Percent of
                  Number of        Total
                  Securities       Options/SARS
                  underlying       Granted to         Exercise of                                           Grant Date
                  option/SARs      Employees in       Base Price     Expiration                             Present Value$
Name              Granted (#)      Fiscal Year        ($/Sh)         Date            5%        10% ($)      (h)
(a)                 (b)             (c)                 (d)          (e)             (f)       (g)
-------------------------------------------------------------------------------------------------------------------------------
<S>               <C>              <C>                <C>            <C>           <C>         <C>          <C>
Jonathan          75,000           100%               $1.50          2001
Rosenberg
-------------------------------------------------------------------------------------------------------------------------------

===============================================================================================================================
</TABLE>

         In September 1996, the Company entered into an arrangement with
Gersten, Savage, Kaplowitz & Curtin,LLP ("GSK&C") which provided the GSK&C will
provide certain legal and consulting services to the Company over an extended
period of time. As compensation for its services, certain individual members of
the firm received an aggregate of 350,000 shares of Common Stock and options to
purchase an aggregate of 150,000 shares of Common Stock at $2.50 per share.

Employment and Related Agreements

         Sheldon R. Rose was employed under a three-year employment agreement
commencing on or about November 4, 1993, pursuant to which he was paid a base
salary of $175,000 per annum and was entitled to an annual cash bonus, based

upon the Company's reported pre-tax income from operations. In April 1994 the
Board of Directors approved a $37,500 increase to Mr. Rose's employment
agreement. No bonuses have been paid to Mr. Rose in the preceding three years.
In November 1996, the Company entered into a termination agreement with Mr.
Rose. The termination agreement provides for the cancellation of Mr. Rose's
agreement with the Company and his resignation as a Director of the Company.

         The agreement provides that the Company will pay Mr. Rose an aggregate
of $70,833.33 over a four month period as severance pay. As part of the
agreement, the Company and certain of its affiliates will either purchase or
cause to be purchased an aggregate of 1,019,000 shares

                                      24

                                       
<PAGE>



of the Company's Common Stock for an aggregate of $475,000.

         Stuart A Leiderman was employed under a three-year employment agreement
commencing on or about November 4, 1993, pursuant to which he is paid a base
salary of $150,000 per annum and is entitled to an annual bonus as determined by
the Board of Directors. No bonuses have been paid to Mr. Leiderman in the three
preceding fiscal years. The Company also provides and maintains an automobile
for Mr. Leiderman. Although the employment agreement has expired, Mr. Leiderman
is currently employed under the same terms.

         In January 1994, the Company entered into a three year financial
consulting agreement with Robert M. Rubin, a director and principal stockholder
of the Company, pursuant to which he is paid $125,000 per annum. In September
1996, this agreement was extended until December 31, 1998.

         In March 1994, the Company entered into a consulting agreement with
Francine H. Nichols to render consulting services pertaining to the development
and promotion of new products to be manufactured, marketed or distributed by the
Company, which may include the development of educational and developmental toy
products not presently developed by the Company. In order to assist the Company
in the implementation of its marketing and product promotion strategies, she
will prepare written educational editorial material relating to infant and child
care to be included with or printed on packaging of Company products, and for
pamphlets and similar materials to be distributed by the Company with its
products. The agreement provides for a term expiring December 31, 1996 and
provides that the Company will pay Ms. Nichols a consulting fee in the amount of
1% of net sales (as defined in the agreement) of products sold, marketed or
distributed by the Company with the trademark "Lamaze From AMI" or any variation
thereof. The maximum consulting fee in any year may not exceed $200,000.
The contract was not extended beyond its expiration date.

         In September 1996, the Company entered into an arrangement with
Gersten, Savage, Kaplowitz & Curtin,LLP ("GSK&C) which provided that GSK&C will
provide certain legal and consulting services to the Company over an extended
period of time.


         As compensation for its services, certain individual members of GSK&C
received an aggregate of 350,000 shares of Common Stock and options to purchase
an aggregate of 150,000 shares of Common Stock at $2.50 per share.

Stock Option Plan

         The Diplomat Corporation Stock Option Plan("Stock Option Plan")
provides for the issuance of up to 200,000 shares of Common Stock upon exercise
of incentive stock options and is intended to qualify under Section 422 of the
Internal Revenue Service Code of 1986, as amended ("Code").

                                      25


<PAGE>



         The Stock Option Plan may be administered by the Board of Directors or
by a stock option committee of the Board of Directors (the "Committee').
Incentive stock options are granted under the Stock Option Plan to employees
generally on the basis of the recipient's responsibilities and the achievement
of performance objectives. Subject to the limitations set forth in the Stock
Option Plan, the Board or the Committee has the authority to determine when the
options may be exercised and vest. Under the Plan, the per share exercise price
may not be less than the greater of 100% of the fair market value of the shares
on the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting rights of the Company's outstanding capital stock,
the per share exercise price must be at least 110% of the fair market value on
the date of grant and the term may not be longer than five years. As of this
date, the Company has issued an aggregate of 150,000 Stock Options, exercisable
at $1.50 per share, to four persons, two of whom is an officers and directors of
the Company.

         The Company also established in August 1996, a non-qualified stock
option plan providing for the issuance of up to 1,500,000 shares of Common Stock
to its directors, officers, key employees and consultants.

         To date, the Company has granted directors, officers and key employees
an aggregate of 150,000 incentive and non-qualified stock options, at an
exercise price of $1.50 per share, and 500,000 non-qualified stock options to
consultants of the Company, at an exercise price of $.95 per share. Future
grants could have an adverse affect on the market price of the Company's
securities.

   
         In November 1996, the Company adopted an Incentive Stock Option Plan
(the "1996 Plan") pursuant to which options to purchase a maximum of 1,500,000
shares of Common Stock of the Company (subject to adjustments in the event of
stock splits, stock dividends, recapitalizations and other capital adjustments)
may be granted to employees, officers and directors of the Company and other
persons who provide services to the Company. As of the date hereof, 1,060,000 of
such options have been granted at an exercise price of $1.00. The options to be

granted under the 1996 Plan are designated as incentive stock options or
non-incentive stock options by the Board of Directors which also has discretion
as to the persons to be granted options, the number of shares subject to the
options and the terms of the option agreements. Only employees, including
officers and part time employees of the Company, and non-employee directors,
consultants and advisors and other persons who perform significant service for
or on behalf of the Company, may be granted incentive stock options. Officers
and directors who currently own more than 5% of the issued and outstanding stock
are not eligible to participate in the plan.
    

         The 1996 Plan provides that options granted thereunder shall be
exercisable during a period of no more than ten years from the date of grant,
depending upon the specific option agreement, and that, with respect to
incentive stock options, the option exercise price shall be at least equal to
100% of the fair market value of the Common Stock at the time of the grant.

                                      26


<PAGE>



Employee Pension Plan

         In 1985, the Company instituted a pension plan (the "Pension Plan"),
which is a defined benefit pension plan maintained for all employees. Benefits
are payable based on 60% of average compensation for the three highest paid
consecutive years of service, reduced for less than 29 years of service
retirement. The Pension Plan is funded as required by the Employee Retirement
Income Security Act of 1974 ("ERISA") and does not require employee
contributions. Full vesting occurs immediately upon joining the Plan. As of the
date of this Prospectus, Sheldon R. Rose and Stuart A. Leiderman have accrued 22
and 5 years, respectively, of service under the Pension Plan. As of February
1993, the plan was curtailed and no additional pension benefits will accrue.

         The following table represents the benefits payable to an employee at
age 62, based on renumeration and years of service.

                                      27


<PAGE>


<TABLE>
<CAPTION>
=======================================================================================================================
Remuneration                                                  Years of Service
=======================================================================================================================
                        15                  20                    25                    30                    35
                        --                  --                    --                    --                    --
<S>                     <C>                 <C>                   <C>                  <C>                    <C>

$25,000                 $7,759              $10,345               $12,931               $15,000               $15,000

$50,000                 15,517              20,690                25,862                30,000                30,000

$75,000                 23,276              31,034                38,793                45,000                45,000

$100,000                31,034              41,379                51,724                60,000                60,000

$125,000                38,793              51,724                64,655                75,000                75,000

$150,000                46,552              62,069                66,586                90,000                90,000

$175,000                54,310              72,414                90,517                105,000               105,000

$200,000                62,069              62,759                103,448               120,000               120,000
and above
=======================================================================================================================
</TABLE>


Limitation on Liability of Director

         As permitted by Delaware law, the Company's Certificate of
Incorporation contains an article limiting the personal liability of directors.
The Certificate of Incorporation provides that a director of the Company shall
not be personally liable for any damages from any breach of fiduciary duty as a
director, except for liability based on a judgement or other final adjudication
adverse to him establishing that his acts or omissions were committed in bad
faith, or the result of active or deliberate dishonesty and were material to the
cause of action so adjudicated, or that he personally gained a financial profit
or other advantage to which he was not legally entitled. This article is
intended to afford directors additional protection and limit their potential
liability from suits alleging breach of the duty of care. The Company believes
this article may assist it in securing services of directors who are not
employees of the Company. As a result of the inclusion of such a provision,
holders of the Common Stock may be unable to recover monetary damages against
directors for actions taken by them which constitute negligence or gross
negligence in violation of their fiduciary duties, although it may be possible
to obtain injunctive or other equitable relief with respect to such actions. If
equitable remedies are found not to be available for any particular use, holders
of the Common Stock may not have an effective remedy against the challenged
conduct.

         The Company's Certificate of Incorporation and Bylaws also provide for
indemnification of all officers and directors of the Company to the fullest
extent permitted by law. In addition, Messrs. Rose and Leiderman have been
entitled to such indemnification pursuant to their respective employment
agreements with the Company.

         Insofar as indemnification for liabilities arising under the 
Securities Act of 1933 (the

                                      27



<PAGE>



"Act") may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.

Item 11.   Security Ownership of Certain Beneficial Owners and Management

   
<TABLE>
<CAPTION>
                                                                       Percentage
                                                  Number of Shares (1)             Beneficially Owned
<S>                                              <C>                              <C>
Boulder Enterprises, Inc.(2)                               500,000                            8.56%

Robert M. Rubin (3)(6)                                   5,983,000                           57.45%

Sheldon R. Rose (4)                                      1,039,000                           19.37%

Lola Rose (4)                                            1,039,000                           19.37%

Stuart  A. Leiderman(3)(9)                                 188,000                            3.51%

Jonathan Rosenberg(3)(5)                                    95,000                            1.78%

Edward E. Hinds(3)                                           1,000                             *

Gersten, Savage, Kaplowitz
   & Curtin, LLP(7)                                        500,000                            9.10%

Howard Katz(8)                                                0                                  0

All officer and directors
   as a group (5 persons)                                6,317,000                           59.72%
</TABLE>
    

(1)      Beneficial ownership is determined in accordance with the rules of the
         Securities and Exchange Commission and generally includes voting or
         investment power with respect to securities. Shares of Common Stock
         issuable upon conversion of outstanding preferred stock, or subject to
         options, or warrants currently exercisable or convertible, or
         exercisable or convertible within 60 days, are deemed outstanding for
         computing the percentage of any other person.

   
(2)      Represents 500,000 shares of Common Stock, issuable upon conversion of
         Class C Warrants, entitling the holders of each class to acquire

         500,000 shares of Common Stock exercisable at $2.50 per share. Boulder
         Enterprises, Inc. maintains a
    
                                      28


<PAGE>



         business address at 140 Euclid Avenue, Suite 4E, Hackensack, New Jersey
         and its sole officer, director and stockholder is Stuart Jacobson.

(3)      The business address of such person is c/o Diplomat Corporation, 25 Kay
         Fries Drive, Stony Point, New York 10980.

   
(4)      Lola Rose is the wife of Sheldon Rose. Includes (1) 487,000 shares of
         common stock owned by Sheldon Rose, (ii) 532,000 shares of common stock
         owned by Lola Rose, and (iii) 20,000 shares issuable upon the exercise
         of 20,000 options issued to Sheldon Rose pursuant to the 1992 Option
         Plan. Each of them disclaim beneficial ownership in shares owned by the
         other. Their address is 70 Tranquility Road, Wesley Hills, NY 10901.
    

   
(5)      145,000 shares are issuable upon exercise of currently exercisable
         options. Does not include shares issuable upon exercise of 200,000
         options, which are not yet exercisable, issued to Mr. Rosenberg
         pursuant to the 1996 Option Plan.
    

   
(6)      Represents (i) 913,000 shares of Common Stock currently owned, (ii)
         1,000,000 shares of Common Stock issuable upon conversion of 100,000
         shares of the Company's Series A Preferred Stock, (iii) 290,000 shares
         of Series B Preferred Stock which provide for certain conversion rights
         and entitle him to 2,900,000 votes, (iv) 60,000 shares of Series C
         Preferred Stock which provide for certain conversion rights and
         entitle him to 600,000 votes, (v) 20,000 shares of Common Stock
         issuable upon exercise of currently exercisable options issued pursuant
         to the 1992 Stock Option Plan, and (vi) 550,000 shares of Common Stock
         approved for issuance but not yet issued. See "Management" and
         "Description of Securities - Preferred Stock."
    
   
(7)      The shares are owned by three individual partners of the law firm who
         may be deemed to be acting as a group. Includes (i) 350,000 shares of
         Common Stock currently owned and (ii) an aggregate of 150,000 shares
         which may be issued upon exercise of currently exercisable options
         issued pursuant to the August 1996 Stock Option Plan. The business 
         address of the firm is 101 East 52nd Street, New York, New
         York 10022. 

    
   
(8)      Does not include shares issuable upon exercise of 75,000 options, 
         which are not yet exercisable, issued to Mr. Katz pursuant to the 1996
         Stock Option Plan.
    

   
(9)      Includes shares issuable upon exercise of 20,000 options which
         are currently exercisable. Does not include shares issuable upon 
         exercise of 80,000 options, which are not yet exercisable, issued to 
         Mr. Liederman pursuant to the 1996 Option Plan.
    

Item 12.   Certain Relationships and Related Transactions

         In April 1994, the Company entered into an agreement with Congress
Financial Corporation providing the Company with a $3.0 million secured line of
credit to be used for loans and trade letters of credit (the "Agreement"). The
loans are secured by substantially all of the Company's personal property,
including without limitation, accounts receivable, inventory and trademarks. The
interest rate on loans is two percent above the prime rate announced by
Philadelphia National Bank.
   
         Under the terms of the Agreement, the Company may borrow up to 85% of
the amount of eligible accounts receivable(as defined in the Agreement), not to
exceed the maximum credit. In February 1995, the Agreement was amended to 
adjust the formula used to determine the amount available for revolving loans by
including therein an amount based upon eligible inventory not to exceed
$750,000. At the present time, the company is fully utilizing its line of
credit. On February 9, 1996, the date of closing of the purchase of Biobottoms
by Diplomat, Congress entered into a loan and
    
                                      30


<PAGE>



security agreement with Biobottoms providing for a line of credit of $2.0
million limited to 45% of eligible inventory (as defined in the Agreement).

         In April 1994 and in connection with the Congress agreement, the
Company borrowed from Mr. Rubin, $590,000 on a secured term loan basis,
subordinated to Congress, in order to repay in full its then existing
outstanding principal indebtedness to Citibank, N.A. Such Citibank facility in
the initial principal amount of $650,000 was established in June, 1993, secured
by certain assets of the Company and a shareholder guaranty by Mr. Rubin. The
loan from Mr. Rubin was repayable with interest at the prime rate plus 1%, with
required principal payment amortization identical to the terms applicable to the
Citibank loan terms. Accordingly, the Company was required to make principal
payments on the loan from Mr. Rubin of $120,000 in 1994, $120,000 in 1995,

$120,000 in 1996 and the balance in 1997.
   
         At September 30, 1996 the currently outstanding balance of $310,000 was
converted into preferred stock. Initial borrowings from Congress in the amount
of $1,065,192 were used to repay indebtedness to the American Insured
Receivables Fund, the Company's former asset based lender. In February 1995, the
Agreement was amended to adjust the formula used to determine the amount
available for revolving loans by including therein an amount based upon eligible
inventory not to exceed $750,000. In connection with this amendment, Robert
Rubin, a director and principal stockholder of the Company, furnished the lender
with a personal limited guaranty up to a maximum liability of $375,000,
pertaining to loans made based upon eligible inventory.
    
         The Company employed Mr. Rose's brother-in-law as director of
purchasing and human resources with an annual salary of $75,000 until February
1995. Subsequent to that date and until his termination in October 1996, he has
been employed as a consultant at the rate of $19,365 for the 1996 period. The
Company also employed five (5) other members of Mr. Rose's immediate family and
during the nine months ended September 30, 1996 they were paid aggregate
salaries of approximately $135,000. Such persons include Lola Rose, Mr. Rose's
wife, a principal stockholder of the Company. The Company believes that the
terms of such employment were no less favorable than would have been obtained
from unrelated parties. At the present time, only one family member remains
employed.

         In January 1994, the Company entered into a three year financial
consulting agreement with Robert M. Rubin, a director and principal stockholder
of the Company, providing for the payment to him of $125,000 per annum. Mr.
Rubin consults with the Company on financial management and long term planning
matters, including consideration of acquisitions. The term of the agreement was
extended to December 31, 1998 in consideration of Mr. Rubin's subordinated loan
to the Company made in connection with the credit agreement described above.
   
         In July 1995, pursuant to the Company's 1992 Stock Option Plan, 
the Company granted each of Sheldon R. Rose, Jonathan Rosenberg and Robert M.
Rubin, options to purchase 20,000 shares of the Company's common stock and Irwin
Oringer 15,000 shares of the Company's common stock, all at an
exercise price of $1.50 per share, exercisable over a five year term expiring
July 14, 2000. The common shares
    
                                      31


<PAGE>



underlying such options were included in a registration statement that became
effective in March 1995. As of the date hereof, none of such stock options were
exercised.

         In 1996, pursuant to the Company's 1992 Stock Option Plan, the Company
granted Jonathan Rosenberg Options to purchase 75,000 shares of the Company's
common stock at an exercise price of $1.50. To date, none have been exercised.

   
In February 1996, Mr. Rubin loaned the Company $2,353,500 to be used as part of
the acquisition price of Biobottoms. In connection with such loan, the Company
issued Mr. Rubin 100,000 shares of its Series A Preferred Stock, convertible
into 1,000,000 shares of common stock at the option of Mr. Rubin. The holder of
such shares of preferred stock will have the right subject to a subordination
and intercreditor agreement by and among Congress, Robert Rubin, American United
Global, Inc. and Joan Cooper and Anita Dimondstein as Agents, during any period
during which there shall be a n Event of Default under the Rubin/American United
Loans, as such term is defined therein, to designate a majority of the members
of the Board of Directors of the Company. Such right of designation will
continue during the duration of any such Event of Default. The Company has
agreed at its sole cost and expense to include the common shares issuable upon
conversion of the shares in any registration filed with the Securities and
Exchange Commission by the Company within six months of the date of the issue.
In the absence of such filing, the Company has agreed, at its sole cost and
expense and upon the request of Mr. Rubin, to file and use its best efforts to
effect a registration of such shares within three (3) months of his written
request.
    
         The shares of common stock issuable upon conversion of the preferred
stock issued to Mr. Rubin will also be subject to a voting agreement by and
between Mr. Rubin ( or any transferees of such shares) Sheldon R. Rose and Lola
Rose, The President, a director and a principal shareholder of the Company and
his spouse, respectively, providing that such common shares shall be voted in
the proportion that such shares bear to the number of shares of common stock
owned by such persons, it being the intention of the parties that the issuance
of such common shares not change proportionate voting powers of such persons.
   
         The Company has approved the issuance to Mr. Rubin of an aggregate of
550,000 shares of Common Stock in consideration of Mr. Rubin's waiver of certain
compensation owed to him and for restructuring certain debt owed to him, waiving
certain defaults and providing an additional loan to the Company in the
aggregate amount of $600,000.
    
   
         As of September 30, 1996, the $600,000 loan was converted into 60,000
Shares of Series C Preferred Stock. The Series C Preferred Stock, which has a
liquidation value of $10.00 per Share is convertible into Common Stock at 75% of
the current market price based on the average closing price for the Common Stock
for the 10 days preceding the conversion. Each

                                  32
<PAGE>

share of Series C Preferred Stock entitles the holder to 10 votes per share. The
Series C Preferred Stock pays an annual dividend of 9%, based on the per Share
liquidation value. In the event that the dividend, which is payable monthly, is
not paid for three consecutive months , Mr. Rubin shall be entitled to an
additional 100,000 Shares of Common Stock for each month that the dividend is
not paid.
    
   
         As of September 30, 1996, Robert Rubin, a director and principal
stockholder of the Company, converted an aggregate of approximately $2,900,000

in outstanding debt into an aggregate of 290,000 Shares of Series B Preferred
Stock. The Series B Preferred Stock, which has a liquidation value of $10 per
share, is convertible into Common Stock at 75% of the current market price based
on the average closing price for the Common Stock for the 10 days preceding the
conversion. In addition, each share of Series B Preferred entitles the holder
thereof to 10 votes per share. The Series B Preferred Stock pays an annual
dividend of 9%, based on the per Share liquidation value. In the event that the
dividend, which is payable monthly, is not paid for three consecutive months,
Mr. Rubin shall be entitled to an additional 100,000 Shares of Common Stock for
each month that the dividend is not paid.
    
   
         On September 9, 1996, the Company entered into an arrangement with
Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP ("GSKF&C") which provided
that GSKF&C will provide certain legal and consulting services to the Company
over an extended period of time. As compensation for its services, certain
individual members of GSKF&C received an aggregate of 350,000 shares of Common
Stock and options to purchase an aggregate of 150,000 shares of Common Stock at
$2.50 per share.
    
   
         In November 1996, the Company issued an aggregate of 1,060,000 options
to 35 employees of the Company, including two executive officers and one outside
director, pursuant to the November 1996 Plan. The options are exercisable at
$1.00 per share, vest over a period of five years, and expire ten years from the
date of grant, if not sooner due to termination or death of the employee.
    


    
<PAGE>



Item 13.      Exhibits, Lists and Reports on Form 8-K

(a)  Exhibits (numbered in accordance with Item 601 of Regulation S-B).

Exhibit
   No.                              Description
   ---                              -----------
3a.               Certificate of Incorporation, as amended*

3b                By-laws, amended*

3d                Amendment to Certificate of Incorporation*

4a                Form of Common Stock Certificate*

4b                Form of Warrant Agency Agreement between the Registrant and
                  North American Transfer Company*

4c                Revised form of Unit Purchase Option*


4d                Common Stock Purchase Warrant*

4e                Form of Class B Warrant***

4f                Form of Class C Warrant***

4g                Form of Class D Warrant***

4h                Certificate of Designation of Class B of Class C Preferred
                  Stock

10b               Employment Agreement with Stuart A. Leiderman*

10c               Stock Option Plan*

10c-1             1996 Stock Option Plan

10d               Exclusive Distributorship Agreement by and between  Ambrose &
                  Montgomery, Inc. and Diplomat Juvenile Corporation*

10e               License Agreement by and between Diplomat Juvenile
                  Corporation, Wesley Howell and Steve Prested*

10f               Loshell Realty mortgages with Union State Bank and Stony Point
                  Technical Park,

                                      33


<PAGE>



                  Inc. and related Mortgage Notes, including Sheldon Rose
                  guarantee of Union State Bank*

10g               Barter Agreement dated July 16, 1993 between Media Barter
                  Associates and Registrant with exhibits*

10h               Agreement dated as of January 1, 1994 by and between Diplomat
                  Corporation and Robert M. Rubin**

10i               Agreement dated as of March 1, 1994 by and between Francine H.
                  Nichols and Diplomat Corporation**

10j               First Amendment to Exclusive Distributorship Agreement by and
                  between Ambrose & Montgomery, Inc. and Diplomat Corporation**

10k               Collateral Assignment of Trademarks and Trademark Licenses
                  (Security Agreement) by and between Congress Financial
                  Corporation and Diplomat Corporation**

10l               Second Amendment to Exclusive Distributorship Agreement
                  between Ambrose Montgomery, Inc. and Diplomat Corporation***


10m               Letter Agreement between Diplomat Corporation and Boulder
                  Enterprises, Inc.***

10n               Amended and Restated Subordinated and Intercreditor Agreement
                  dated as of February 9, 1996 by and among Congress Financial
                  Corporation, Robert Rubin, American United Global, Inc.,  Joan
                  Cooper and Anita Dimondstein, as agents, Diplomat Corporation
                  and Biobottoms, Inc. ****

10o               Amendments No. 1, No. 2 and No. 3 to Loan and Security
                  Agreement by and between Congress Financial Corporation and
                  Diplomat Corporation. ****

10p               Loan and Security Agreement made as of February 9, 1996 by and
                  among Robert M. Rubin, American United Global, Inc., Diplomat
                  Corporation and Biobottoms, Inc. ****

10q               Secured Subordinated Term Note dated February 9, 1996 in the
                  principal amount of $2,353,100 of Diplomat Corporation payable
                  to American United Global, Inc. ****

10r               Secured Subordinated Term Note dated February 9, 1996 in the
                  principal amount of $450,000 of Diplomat Corporation payable
                  to American United Global, Inc.

                                                        33


<PAGE>



                  ****

10s               Biobottoms, Inc. Guarantee of $2,353,100 Secured Subordinated
                  Term Note. ****

10t               Biobottoms, Inc. Guarantee of $450,000 Secured Subordinated
                  Term Note. ****

10u               Loan and Security Agreement dated February 9, 1996 by and
                  between Congress Financial Corporation and Biobottoms, Inc.
                  ****

32

10v               Diplomat Corporation Guarantee dated February 9, 1996 to
                  Congress Financial Corporation of Biobottoms, Inc.
                  Indebtedness. ****

10w               Collateral Assignment of Trademarks and Trademark Licenses
                  dated February 9,1996 between Biobottoms, Inc. and Congress
                  Financial Corporation. ****


10x               Security Agreement (Rights in Agreement and Plan of Merger)
                  dated February 9, 1996 between Biobottoms, Inc. Diplomat
                  Corporation and Congress Financial Corporation. ****

10y               Agreement and Plan of Merger by and among Diplomat
                  Corporation, Diplomat Acquisition Corporation, Biobottoms,
                  Inc. and Principal Stockholders, together with Amendment No. 1
                  thereto. ****

10z               Form of Secured Subordinated Term Note dated February 8, 1996
                  in the principal amount of $750,000 payable by Diplomat
                  Corporation to form Biobottoms' Stockholders payable November
                  9, 1996 and August 9, 1997. ****

10aa              Form of Secured Convertible Term Note dated February 8, 1996
                  in the amount of $750,000 payable by Diplomat Corporation to
                  former Biobottoms' Stockholders payable August 9, 1996. ****

10bb              Security Agreement dated February 9, 1996 by and between
                  Biobottoms, Inc., Diplomat Corporation, and Joan Cooper and
                  Anita Dimondstein, as Agents.  ****

10cc              Consulting Service Agreement dated February 9, 1996 by and
                  among Diplomat Corporation, Diplomat Acquisition Corporation,
                  Biobottoms, Inc., and Anita Dimondstein. ****

10dd              Consulting Service Agreement dated February 9, 1996 by and
                  among Diplomat Corporation, Diplomat Acquisition Corporation,
                  Biobottoms, Inc., and Joan Cooper. ****

                                      34


<PAGE>




21                Subsidiaries of the Registrant

*        Incorporated by reference to Diplomat Corporation Registration
         Statement No. 33-66910 NY

**       Incorporated by reference to Diplomat Corporation Annual Report on Form
         10KSB for the year ended January 1, 1994.

***      Incorporated by reference to Diplomat Corporation Registration No.
         33-95986

****     Incorporated by reference to Diplomat Corporation Annual Report on Form
         10KSB for the year ended December 31, 1995.

(b)      Reports on Form 8-K.  The Registrant filed a report on Form 8-K for a

         reportable event dated November 26, 1996.

                                      35

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders
Diplomat Corporation
Stony Point, New York

                  We have audited the accompanying consolidated balance sheet
of Diplomat Corporation and Subsidiary as of September 30, 1996 and December
30, 1995 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the nine months ended September, 30, 1996 and the
year ended December 30, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

                  In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Diplomat
Corporation and Subsidiary as of September 30, 1996 and December 30, 1995 and
the results of its operations and its cash flows for the nine months ended
September 30, 1996 and the year ended December 30, 1995 in conformity with
generally accepted accounting principles.

                                                  Feldman Radin & Co., P.C.
                                                  Certified Public Accountants
   
New York, New York 
January 16, 1997 (February 25, 1997
as to (i) the third and fourth 
paragraphs of Note 10 and (ii)
subsection (a) of Note 11).
    

                                      F-2

<PAGE>


                      DIPLOMAT CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET

                               SEPTEMBER 30, 1996

<TABLE>
<S>                                                                               <C>         
                                     ASSETS

CURRENT ASSETS:
     Cash and cash equivalents                                                    $     69,258
     Accounts receivable - trade, less allowance
         for possible losses of approximately $ 75,000                               1,663,511
     Inventories                                                                     3,747,740
     Prepaid expenses                                                                1,006,978
     Other current assets                                                              732,978
                                                                                  ------------
              TOTAL CURRENT ASSETS                                                   7,220,465
                                                                                  ------------

PROPERTY AND EQUIPMENT,
     less accumulated depreciation                                                   2,222,348

OTHER ASSETS
     Goodwill                                                                        3,616,444
     Other                                                                             613,660
                                                                                  ------------
                                                                                  $ 13,672,917
                                                                                  ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable - trade                                                     $  4,903,719
     Loans payable - bank, revolving credit agreement                                2,170,652
     Accrued expenses                                                                2,069,123
     Current maturities of other long term debt                                        705,981
     Acquisition loans payable                                                       1,500,000
                                                                                  ------------
              TOTAL CURRENT LIABILITIES                                             11,349,475
                                                                                  ------------

LONG TERM DEBT, less current maturities                                              1,046,835
                                                                                  ------------

STOCKHOLDERS' EQUITY
     Preferred stock, $.10 par value, 1,000,000 shares authorized, 410,000
          shares issued and outstanding                                              4,100,000
     Common stock, $.0001 par value, 50,000,000 shares authorized,
         4,993,525 shares issued and outstanding                                           500

     Paid-in capital                                                                 6,076,399
     Accumulated deficit                                                            (8,900,292)
                                                                                  ------------
              TOTAL STOCKHOLDERS' EQUITY                                             1,276,607
                                                                                  ------------

                                                                                  $ 13,672,917
                                                                                  ============
</TABLE>

                       See notes to financial statements.

                                      F-3

<PAGE>
                      DIPLOMAT CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        Nine
                                                     months ended           Year ended
                                                     September 30,         December 30
                                                         1996                 1995
                                                     ------------         ------------
<S>                                                  <C>                  <C>         
NET SALES                                            $ 19,222,801         $ 11,301,314

COST OF GOODS SOLD                                     13,334,588            6,913,011
                                                     ------------         ------------

         GROSS PROFIT                                   5,888,213            4,388,303
                                                     ------------         ------------

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES          10,589,561            4,629,692

RESTRUCTURING EXPENSE                                   1,738,975                 --
                                                     ------------         ------------

OPERATING INCOME (LOSS)                                (6,440,323)            (241,389)

OTHER INCOME                                                7,935               10,784

INTEREST EXPENSE                                         (792,512)            (490,273)
                                                     ------------         ------------

LOSS BEFORE INCOME TAXES                               (7,224,900)            (720,878)

INCOME TAXES (BENEFIT)                                       --                   --
                                                     ------------         ------------

NET LOSS                                             $ (7,224,900)        $   (720,878)
                                                     ============         ============



NET LOSS PER COMMON SHARE:                           $      (1.59)        $      (0.16)
                                                     ============         ============

AVERAGE NUMBER OF SHARES USED IN COMPUTATION            4,549,525            4,493,525
                                                     ============         ============
</TABLE>

                       See notes to financial statements.

                                     F - 4

<PAGE>


                      DIPLOMAT CORPORATION AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                    NINE MONTHS ENDED SEPTEMBER 30, 1996 AND

              YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994

<TABLE>
<CAPTION>
                                           Common Stock             Preferred Stock 
                                    -------------------------   -------------------------    Paid-in    Accumulated
                                      Shares        Amount        Shares        Amount       Capital      Deficit       Total
                                    -----------   -----------   -----------   -----------  -----------  -----------   -----------
<S>                                 <C>           <C>           <C>           <C>          <C>          <C>           <C>        
Balance at January 1, 1994            3,975,000   $       398          --     $      --    $ 4,573,501  $  (515,056)  $ 4,058,843

     Issuance of common stock            10,755             2                                       (2)         --           --
     Net loss                                                                                     --       (439,459)     (439,459)
                                    -----------   -----------   -----------   -----------  -----------  -----------   -----------

Balance at December 31, 1994          3,985,755           400          --            --      4,573,499     (954,515)    3,619,384

     Issuance of common stock,
       net costs of issuance
       of $59,500                       500,000            50                                  627,950                    628,000
     Issuance of common stock             7,770             8                                       (8)                      --
     Net loss                                                                                              (720,878)     (720,878)
                                    -----------   -----------   -----------   -----------  -----------  -----------   -----------

Balance at December 30, 1995          4,493,525   $       458          --     $      --    $ 5,201,441  $(1,675,393)  $ 3,526,507

     Exercise of Options, issuance
       of 500,000 shares of common
       stock par .0001 @ .95            500,000            50                                  474,950                    475,000
     Issuance of common stock                                                                  400,000                    400,000
     Issuance of preferred stock                                       --       4,100,000                               4,100,000
     Net loss                                                                                            (7,224,900)   (7,224,900)
                                    -----------   -----------   -----------   -----------  -----------  -----------   -----------

Balance at September 30, 1996         4,993,525   $       508          --     $ 4,100,000  $ 6,076,391  $(8,900,293)  $ 1,276,607
                                    ===========   ===========   ===========   ===========  ===========  ===========   ===========
</TABLE>

                      See notes to financial statements.

                                     F - 5

<PAGE>


                      DIPLOMAT CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        For the nine     For the year
                                                                        months ended        ended
                                                                        September 30,     December 30,
                                                                            1996             1995
                                                                         -----------      -----------
<S>                                                                      <C>              <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                            $(7,224,900)     $  (720,878)
     Adjustment to reconcile net loss to net cash
         provided by (used in) operating activities:
            Depreciation                                                     211,237          117,533
            Issuance of common shares                                        400,000

CHANGES IN ASSETS AND LIABILITIES:
     (Increase) decrease in accounts receivable                             (282,507)          42,990
     (Increase) decrease in inventories                                    2,551,187         (658,489)
     (Increase) decrease in prepaid expenses                                 400,240           81,559
     (Increase) decrease in other current assets                             702,866            8,315
     (Increase) decrease in other assets                                     500,202          (58,068)
     Increase (decrease) in accounts payable                                 502,311           14,639
     Increase (decrease) in accrued expenses                               1,552,586           38,224
                                                                         -----------      -----------
         NET CASH USED BY OPERATING ACTIVITIES                              (686,788)      (1,134,175)
                                                                         -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Cash paid for Biobottoms, Inc. (net of cash acquiredof ($1,250)      (2,899,211)            --
     Acquisition of property and equipment                                  (211,096)         (26,979)
                                                                         -----------      -----------
         NET CASH FLOWS USED BY INVESTING ACTIVITIES                      (3,110,307)         (26,979)
                                                                         -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Long term advance from stockholder                                         --            250,000
     Repayment of loans payable , stockholder                                   --             (8,881)
     Proceeds of loans payable, affiliate                                    450,000             --
     Revolving credit agreement                                              583,650          589,531
     Issuance of warrants                                                       --            628,000
     Issuance of common stock                                                475,000             --
     Borrowings from stockholder                                           2,620,000             --
     Repayment of long term debt and loan payables                          (393,678)        (207,160)
                                                                         -----------      -----------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                         3,734,972        1,251,490
                                                                         -----------      -----------


NET INCREASE (DECREASE) IN CASH                                              (62,113)          90,336

CASH AND CASH EQUIVALENTS, at beginning of period                            131,371           41,035
                                                                         -----------      -----------

CASH AND CASH EQUIVALENTS, at end of period                              $    69,258      $   131,371
                                                                         ===========      ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
     Cash paid during the year for:
         Interest                                                        $   706,000      $   418,000
                                                                         ===========      ===========
         Income taxes                                                    $      --        $    21,600
                                                                         ===========      ===========
</TABLE>

                       See notes to financial statements.

                                     F - 6

<PAGE>
                      DIPLOMAT CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      NINE MONTHS ENDED SEPTEMBER 30, 1996

                      AND THE YEAR ENDED DECEMBER 30, 1995

1.       SIGNIFICANT ACCOUNTING POLICIES:

                  A. The financial statements include the accounts of the
         Company and its wholly-owned subsidiary. All significant intercompany
         balances and transactions have been eliminated.

                  B. Inventories are stated at the lower of cost or market.
         Cost is determined by the first-in, first-out (FIFO) method.

                  C. Property and equipment are stated at cost. Depreciation is
         provided using primarily the straight-line method and accelerated
         methods (for machinery and equipment) over the expected useful lives
         of the assets, which range from 31.5 years for the building and real
         property, to between five and 10 years for machinery, furniture and
         equipment.

                  D. The Company follows SFAS 109 for income taxes. Pursuant to
         SFAS 109 deferred tax assets and liabilities are determined based on
         differences between the financial reporting and tax basis of assets
         and liabilities and are measured by applying enacted tax rates and
         laws to taxable years in which such differences are expected to
         reverse.

                  E. For purposes of the statement of cash flows, the Company
         considers all highly liquid debt instruments purchased with an
         original maturity of three months or less to be cash equivalents.

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

                  G. In March 1995, the Financial Accounting Standards Board
         ("FASB") isuued Statement of Financial Accounting Standards ("SFAS")
         No. 121, "Accounting For the Impairment of Long Lived Assets and For
         Long Lived Assets to be Diposed Of". SFAS No. 121 requires the
         Company to review long-lived assets and certain identifiable assets
         and any goodwill related to those assets for impairment whenever
         circumstances and situations change

                                      F - 7


<PAGE>

         such that there is an indication that the carrying amounts may not be
         recoverable. The adoption of SFAS No. 121 did not result in any
         material adjustments in the financial statements for the period ended
         September 30, 1996.

                  H. Effective December 30, 1995, the Company adopted SFAS No.
         107, "Disclosures About Fair Value of Financial Instruments", which
         requires disclosure of fair value information about financial
         instruments whether or not recognized in the balance sheet. The
         carrying amounts reported in the balance sheet for cash, trade
         receivables, accounts payable and accrued expenses approximate fair
         value based on the short term maturity of these instruments.

                  I. The Company accounts for stock transactions in accordance
         with APB No. 25, "Accounting for Stock Issued to Employees". In
         accordance with SFAS No. 123, "Accounting for Stock based
         Compensation", the Company has adopted the pro-forma disclosure
         requirements contained therein.

                  J. Direct response advertising costs, consisting primarily of
         catalog preparation, printing and postage expenditures, are amortized
         over the period during which the benefits are expected. Advertising
         costs, principally the amortization of such prepaid catalog costs, of
         approximately $3,033,000 are included in the accompanying statement of
         operations for the eight months ended September 30, 1996. Included in
         other current assets at September 30, 1996, is approximately $463,000
         of prepaid catalog costs.

2.       BUSINESS:

                  The Company is engaged in two lines of business and
         accordingly its operations are classified into two business segments:
         specialty catalog retail operations of natural fiber apparel and
         related products utilizing environmentally "friendly" materials for
         children from infancy to early adolescence, and the manufacturing
         marketing and distribution of infants accessories principally to mass
         merchants.

                  As of 1995, the Company reported its results of operations on
         a fifty-two/fifty-three week year ending on the Saturday closest to
         December 31. However, on November 12, 1996, the Company has changed
         its reporting date to September 30.

3.       ACQUISITION OF BIOBOTTOMS, INC. AND RELATED FINANCING:

                  A. Acquisition of Biobottoms, Inc.: On February 9, 1996, the
         Company completed the acquisition of Biobottoms, Inc. ("Biobottoms"),
         a California-based mail-order catalog company, specializing in apparel
         and accessories for newborn through preteen children, pursuant to an
         Agreement and Plan of Merger made as of December 22, 1995 by and among
         Diplomat Corporation, Diplomat Acquisition Corp., a wholly-owned
         subsidiary


                                      F - 8

<PAGE>

         of the Company, organized under the laws of the State of Delaware
         ("DAC"), Biobottoms and Joan Cooper and Anita Dimondstein, individuals
         and principal stockholders of Biobottoms (the "Merger Agreement").
         Biobottoms has become a wholly-owned subsidiary of the Company and
         will continue its principal place of business in Petaluma, California.

                  The Company paid $2,500,000 for Biobottoms, $1,000,000 in
         cash and $1,500,000 in the form of two promissory notes to Biobottoms'
         shareholders, each in the amount of $750,000 ("Acquisition notes").
         The notes bear interest at 1% over the prime rate as defined in the
         agreements. One such note is due six months from the acquisition date
         and the second note is due in two equal installments of $375,000, nine
         months and eighteen months after the date of acquisition,
         respectively. Additionally, the Company incurred costs related to the
         acquisition in the amount of approximately $720,000. Of this amount,
         $600,000 represents the estimated fair value of 100,000 shares of the
         Company's convertible Series A preferred stock issued to a significant
         stockholder (who is also a member of the Board of Directors), as a fee
         for his assistance in consummating the acquisition. The Series a
         preferred shares are convertible into 1,000,000 common shares of the
         Company. The Series A preferred stock is not entitled to any specific
         dividends or liquidation rights.

                  The acquisition of Biobottoms has been accounted for as a
         purchase and accordingly, its results of operations are included with
         the Company's beginning February 9, 1996.

                  The following unaudited pro-forma summary combines the
         consolidated results of operations of the Company and Biobottoms as if
         the acquisition had occurred at the beginning of 1995, after giving
         effect to certain adjustments, including amortization of goodwill,
         increased interest expense on the acquisition debt, and the
         adjustments required as a result of changes to certain employment
         agreements as a direct result of the acquisition.

                                                             Year ended
                                                          December 30, 1995
                                                          -----------------
                                                             (unaudited)

                           Net sales                      $      27,137,857
                           Net loss                              (1,719,030)
                           Net loss per common share                  (0.38)

                   The pro-forma results do not necessarily represent results
         which would have occurred if the acquisition had taken place on the
         basis assumed above, nor are they indicative of the results of future
         combined operations.


                                     F - 9

<PAGE>

                  B. Financing: Simultaneously with the closing of the
         Biobottoms acquisition, the Company and Biobottoms entered into a loan
         and subordinated security agreement with a director and principal
         stockholder of the Company and an affiliate of such individual
         pursuant to which the Company borrowed from such director and
         principal stockholder and affiliate $2,353,100 and $450,000,
         respectively. The loan from the director and principal stockholder was
         utilized to fund the acquisition of Biobottoms in part. The loan from
         the affiliate has been utilized for working capital purposes. Subject
         to an intercreditor agreement between the Company's asset based lender
         and other lenders, the $450,000 loan is payable in full on May 4,
         1996. If the repayment is not made on such date, the Company will be
         required to pay a default fee of $50,000.

                  In connection with such aforementioned loan by a director and
         principal stockholder of the Company in the amount of $2,353,100, the
         Company issued 100,000 shares of its Series A Preferred Stock, which
         are convertible into 1,000,000 shares of common stock at the option of
         the director and principal stockholder. The holder of such shares of
         preferred stock will have the right, subject to a subordination and
         intercreditor agreement by and among Congress Financial Corporation
         and others, during any period during which there shall be an Event of
         Default under such loans, as such term is defined therein, to
         designate a majority of the members of the Board of Directors of the
         Company. Such right of designation will continue during the duration
         of any such Event of Default. The Company has agreed at its sole cost
         and expense to include the common shares issuable upon conversion of
         the shares in any registration statement filed with the Securities and
         Exchange Commission by the Company within six months of the date
         hereof.

4.       MANAGEMENT PLANS:

                  For the nine months ended September 30, 1996 and the years
         ended December 31, 1995 and 1994, the Company's net loss was
         approximately $7,225,000, $721,000 and $439,000, respectively.
         Management attributes the losses in 1995 and 1994 to lower sales
         without corresponding reductions in operating expenses . In 1996,
         significantly lower sales, additional interest expenses from the
         acquisiton of Biobottoms, Inc., and expenses incurred as a result of
         management's restructuring plan were the principal components for the
         substanial loss. These losses placed a severe strain on the Company's
         liquidity and working capital and diverted management attention to
         financial matters, as well as substantially increased legal fees and
         the cost of financing.

                  The Company has taken several actions to improve its ability
         to meet its obligations and enhance working capital. Subsequent to
         September 30, 1996, the Company commenced negotiations with lenders to
         extend due dates of currently due obligations and concurrently, is in

         the process of negotiating to sell equity secuities via private
         placement. Management believes that the actions taken and its plans to
         reduce expenses and improve operating margins will allow the Company
         to meet its obligations and achieve positive cash flow. However, no
         assurances can be given that the Company will be successful in
         achieving those 

                                    F - 10

<PAGE>

         reductions and achieving profitability or positive cash flow.

5.       RESTRUCTURING OF OPERATIONS:

                  During the quarter ended September 30, 1996, management
         instituted various actions designed to significantly cut costs in the
         Company's manufacturing operation located in Stony Point, New York,
         and to refocus the operation on its most profitable product lines and
         channels of distribution. Towards this end, the following significant
         decisions were made: (i) the former Chief Executive Officer's
         contract, which expired in October 1996, was not renewed, and all ties
         with this officer were severed; (ii) certain royalty agreements,
         specifically those related to products which the Company is
         discontinuing, were not renewed by the Company; (iii) a decision was
         made to target primarily mass merchant customers; and (iv) significant
         permanent cutbacks in personnel and other operating costs were made.

                  As a result of the actions taken, the Company incurred
         restructuring charges of approximately $1,738,975. The restructuring
         charges include approximately $568,000 primarily for write-offs and
         other costs associated with the discontinuance of various products and
         $771,000 for severance pay and professional and consulting fees
         payable in connection with the restructuring plan.

6.       CONVERSION OF STOCKHOLDER DEBT AND ISSUANCE OF SERIES B 
         PREFERRED STOCK

         Effective September 30, 1996, a significant stockholder and member of
         the Company's Board of Directors converted $3,500,285 of indebtedness
         into 290,000 shares of Series B preferred stock of the Company and
         60,000 shares of the Company's Series C preferred stock. Both the
         Series Band C shares of preferred stock have a liquidation preference
         of $10 per share ("Liquidation Value") and a normal dividend of 9% of
         Liquidation Value, payable monthly. Should the Company not pay the
         dividends on either the Series B or C preferred stock for three
         consecutive months, the holder will be entitled to receive 100,000
         shares of the Company's common stock for each month that the dividend
         has not been paid as a penalty. The preferred stock, based on
         Liquidation Value is convertible into common stock of the Company at
         75% of the average market value of the common stock for the ten
         trading days immediately preceding the day of conversion. The
         preferred stock also has voting rights equal to 3,500,000 shares of
         common stock on all matters on which common stock votes, including

         election of directors. As part of the consideration for the conversion
         the holder was issued 500,000 shares of the Company's common stock.
         The issuance of the common stock was valued at approximately $0.80 per
         share, the estimated fair value of such shares at the time of
         issuance.

                                    F - 11

<PAGE>

7.       INVENTORIES:

                  Inventories consist of the following:

                                                          September 30,
                                                              1996
                                                          -------------
                    Raw materials and packaging           $     297,776
                    Work-in-process                             409,177
                    Finished goods                            3,040,787
                                                          =============
                                                          $   3,747,740
                                                          =============


8.       PROPERTY AND EQUIPMENT:

                  Property and equipment consist of the following:

                                                          September 30,
                                                              1996
                                                          -------------
                    Land                                  $     420,000
                    Building                                  1,807,347
                    Equipment                                 1,680,206
                                                          -------------
                                                              3,907,553
                    Less accumulated depreciation             1,685,205
                                                          -------------
                                                          $   2,222,348
                                                          =============

9.       OTHER ASSETS:

                                                          September 30,
                                                              1996
                                                          -------------
                    Goodwill                              $   3,616,444
                    Noncurrent deferred tax asset               581,535
                    Deposits                                     32,125
                                                          =============
                                                          $   4,230,104
                                                          =============


                                    F - 12

<PAGE>

10.      REVOLVING CREDIT AGREEMENTS:

         (a) In April 1994, the Company entered into an agreement with
         Congress Financial Corporation ("Congress") providing the Company with
         a $3,000,000 collateralized line of credit to be utilized for loans
         and trade letters of credit. The loan is collateralized by
         substantially all of the Company's personal property, including
         accounts receivable, inventory, and trademarks. The interest rate on
         loans is 2% above the prime rate announced by Philadelphia National
         Bank. The prime rate was 8.25% and 8.75% at September 30, 1996 and
         December 30, 1995, respectively.

                  Pursuant to the amended terms dated October 1995, the Company
         may borrow up to an amount equal to the sum of:

                  (I)   85% of eligible accounts receivable (as defined)
                  (ii)  100% of cash collateral
                  (iii) the lesser of 35% of eligible inventory (as defined) or
                          $1,250,000, less
                  (iv)  any availability reserves.

                  The revolving credit agreement contains restrictions relating
         to the payment of dividends, and the maintenance of working capital
         and stockholders' equity. As of September 30, 1996, the Company was in
         violation of the financial covenants contained in the agreement. On
         February 24, 1997, the violations were waived by the lender and
         concurrently, the lender and the Company agreed on revised financial
         covenants for the remainder of the Company's fiscal year ending
         September 30, 1997. The Company expects to be in compliance with the
         revised financial covenants at each measurement date. Up to $375,000
         of such loan is guaranteed by a director and significant stockholder.

         (b) On February 9, 1996, the Company's, a wholly owned subsidiary
         (Biobottoms), entered into a new financing arrangement with Congress
         which includes a $2,000,000 revolving credit line, restricted to the
         lesser of 45% of the value of eligible inventory or 80% of the value
         of an orderly liquidation of such inventory. Borrowings on the line of
         credit bear interest at the prime rate plus 2% and it expires on
         February 9, 1999. Fees are paid on the unused line of credit at the
         rate of 1/2%. The line of credit is collateralized by substantially
         all of the Company's assets. As of September 30, 1996, as a result of
         cross defaults due to the violations described in the preceeding
         paragraph, Biobottoms was in violation of certain of the financial
         covenants contained in the agreement. On February 24, 1997, these
         violations were waived by the lender and concurrently, the lender and
         the Company agreed on revised financial covenants for the remainder of
         the Company's fiscal year ending September 30, 1997. The Company
         expects to be in compliance with the revised covenants at each
         measurement date.


                                     F - 13

<PAGE>

11.      LONG-TERM DEBT:

                Long-term debt consists of the following at September 30, 1996:

        Note payable - bank, payable in monthly
        installments of $10,018 which includes interest at
        8.375%, due August 2010. The note is collateralized
        by land and buildings and is guaranteed by a
        stockholder.                                            $      986,581

        Note payable - bank, payable in monthly
        installments of $7,201 which includes interest at
        12%, due January 1997. The note is collateralized
        by land and buildings and is cosigned by a
        stockholder. (b)                                               582,049

        Equipment Loans - payable in monthly installments              184,186

        Acquisition notes payable. (a)                               1,500,000
                                                                --------------
                                                                     3,252,816
                                                                --------------
        Current portion - acquisition notes, former stockholders     1,500,000

        Current maturities of other long term debt                     705,981
                                                                --------------
        Total current                                                2,205,981
                                                                --------------
        Long - term debt                                        $    1,046,835
                                                                ==============

                  The maturities of long term debt is as follows:

                         1997            $  2,205,981
                         1998                  93,759
                         1999                  92,448
                         2000                  52,125
                         Thereafter           808,503
                                         ------------
                                         $  3,252,816
                                         ============

         (a) The Company paid $1,500,000 in the form of two promissory notes to
         Biobottoms' shareholders, each in the amount of $750,000 ("Acquisition
         notes"). The notes bear interest at 1% over the prime rate as defined
         in the agreements. One such note is due six months from the
         acquisition date and the second note is due in two equal installments
         of $375,000 nine months and eighteen months after the date of
         acquisition respectively. The Company did not make the payments which
         were required in August and November 1996. On December 9, 

                                    F - 14
<PAGE>
         1996 the Company received notification of the default from the former
         Biobottoms shareholders, which required that the Company cure the
         default under the notes within 270 days, or be subject to enforcement
         action. On February 25, 1997, the Biobottoms former stockholders 
         agreed not to initiate enforcement action as a result of this or 
         subsequent defaults until not earlier than December 31, 1997. In
         connection with obtaining this agreement, Diplomat agreed to pay the
         Biobottoms shareholders ten installments of $5,000 to be
         applied against the Acquisition Notes, commencing on February 21, 1997
         and to undertake to conduct a private placement of its securities to 
         raise funds for the repayment of the remaining balance due on the 
         Acquisition Notes. Should the Company fail to raise enough funds for 
         repayment, it has agreed to pay the Biobottoms shareholders 
         additional payments of $50,000 on July 1, 1997 and $100,000 on 
         December 15, 1997 to be applied against the Acquisition Notes.

         (b) Full payment of this mortgage was due on January 26, 1997. The
         lender has agreed to extend the mortgage for an additional twelve
         months in exchange for an extension fee of 15,000 and the agreement to 
         bring certain past due amounts current.

12.      STOCKHOLDERS' EQUITY:

                  A. On December 31, 1992, the Board of Directors has adopted a
         stock option plan which allows for the grant of option to employees
         and non-employees to purchase up to 200,000 shares of the Company's
         common stock. The exercise price per share cannot be less than the
         fair market value of the Company's common stock on the date of grant.
         During each of 1996 and 1995, the Company issued 75,000 options
         exercisable at $1.50 per share. There were no options exercised or
         canceled during either of the years presented.

                  B. There are currently 581,175 warrants outstanding to
         purchase shares of the Company's common stock at $3.50 per share. The
         warrants, which were issued in connection with the Company's initial
         public offering of its common stock, are exercisable until November 4,
         1998. To date, these warrants have not been exercised.

                  C. During 1995, warrants to purchase 1,500,000 shares of
         common stock were granted; 500,000 of these warrants, exercisable at
         $1.37 per share, were exercised resulting in net proceeds to the
         Company of $628,000. The remaining 1,000,000 warrants were exercisable
         as follows, (I) 500,000 at $3.00 per share expiring on July 18, 1996
         and (ii) 500,000 at $1.00 per share expiring on July 18, 1997. The
         warrants expiring July 18, 1996 were not exercised.

                  D. In September 1996, the Company issued 500,000 common
         shares at $0.95 per share to previously unrelated investors from the
         exercise of options. Net proceeds to the Company were $475,000.

                  E. In November 1996, the Company adopted an Incentive Stock
         option Plan (the 1996 Plan) pursuant to which options to purchase a

         maximum of 1,500,000 shares of the company's common stock (subject to
         adjustment in the case of stock splits, stock dividends,
         recapitalizations and other capital adjustments) may be granted to
         employees, oficers and directors of the Company and other persons who
         provide services to the Company. As of January 31, 1997, 985,000 of
         such options have been granted at an exercise price of $1.00 per
         share. The 1996 Plan provides that options granted thereunder shall be
         exercisable during a period of no more than ten years from the date of
         grant, and with respect to incentive stock options, the exercise price
         shall be at least equal to 100% of the fair market valuee of the
         common stock at the date of grant. No options under the plan were
         exercised as of January 

                                    F - 15
<PAGE>

         31, 1997.

13.      CONCENTRATION OF CREDIT RISKS:

                  Financial instruments that potentially subject the Company to
         concentrations of credit risk consist principally of trade accounts
         receivable. Concentrations of credit risk with respect to trade
         receivables include concentrations of trade accounts in the juvenile
         products industry.

                  To counter the credit risk associated with the Company's
         trade receivables, the Company purchases credit insurance covering
         substantially all major customers.

14.      NET SALES:

                  For the nine months ended September 30, 1996 and the years
         ended December 30, 1995 and December 31, 1994 two customers accounted
         for 6% and 15%, 23% and 36% and 28% and 34% of net sales,
         respectively.

15.      COMMITMENTS AND CONTINGENCY:

                  A. Effective July 1, 1993, the Company entered into a license
         agreement with an unaffiliated third party, pursuant to which the
         Company was granted an exclusive license to the use of a registered
         trademark for the manufacture, advertisement, promotion, distribution
         and sales of certain products within the United States.

                  An amendment effective January 1995, obligates the Company to
         distribute a number of Authorized Products sufficient to generate
         minimum net annual sales of $4,500,000 for the twelve months ended
         December 30, 1995, and each year thereafter during the term of the
         agreement. In the event that such minimum net sales goals are not
         achieved, the Company must pay the licensor the Distribution Fee based
         upon such volumes. Additionally, the Company paid the licensor 9% of
         net sales of licensed products of up to $5,000,000 and 10% of such net
         sales in excess of $5,000,000. This license agreement expired on June

         30, 1996 and was not renewed by the Company.

                  B. The Company's former Chief Executive Officer was employed
         under a three-year employment agreement effective November, 1993, as
         amended in April 1994 pursuant to which he was paid a base salary of
         $212,500 per annum and was entitled to an annual cash bonus, based
         upon the Company's reported pretax income from operations. The
         employment agreement expired in November 1996 and was not renewed.

                  An executive vice-president of the Company is employed under
         a three-year agreement, effective November 1993, pursuant to which he
         earns an annual salary of $150,000 and is entitled to an annual bonus
         as determined by the Company's Board of Directors. The contract
         expired in November 1996. The employee continues to be employed by the
         company pursuant to the terms of the original agreement.

                                    F - 16
<PAGE>

                  C. In January 1994, the Company entered into a three-year
         financial consulting agreement with a director and principal
         stockholder of the Company, providing for the payment of $125,000 per
         annum.

                  D. Leases:

                  The Company leases its office, warehouse, and retail store
         facilities under operating lease agreements. The terms of the lease
         agreements provide for the minimum annual rentals.

                  Furniture minimum annual lease payments under lease
         agreements with terms in the excess of one year, at September 30,
         1996, are as follows:

                           1997                     $217,000

                  The operating leases provide for annual increases in lease
         payments. The Company recognizes the total lease expense on a
         straight-line basis over the lives of the leases in accordance with
         generally accepted accounting principles.

                  Rent expense for operating leases in excess of one year was
         approximately $226,000 and $351,802 for the fiscal years ended
         September 30, 1996 and January 28, 1996, respectively.

                  E. Litigation

                           In September 1996, the Company was named as a
         defendant in an action brought in the Supreme Court of New York. The
         plaintiff alleges that the defendants' (including the Company)
         negligent maintenance of a railroad crossing adjacent to the Company's
         property caused him to collide with a train. The plaintiff is seekink
         $10,000,000 in damages for his injuries, and his spouse is seeking an
         additional $1,000,000 in damages for loss of the plaintiff's services.

         The Company and its insurance carrier intend to vigorously defend this
         action. The ultimate outcome of the litigation cannot be presently
         determined. The Company does maintain $1,000,000 of insurance coverage
         which could be applied to any liability posed by this matter.

16.      INCOME TAXES:

                  The following analyzes the deferred tax assets and
          liabilities required at September 30, 1996: 

          Deferred tax asset:

             Net operating loss carry forward                     $  2,579,000

             Restructuring reserves                                  1,287,000

             Inventory                                                 176,000

                                    F - 17

<PAGE>

             Other items                                               174,000
                                                                  ------------
                                                                     4,216,000

             Less: Valuation allowance                             (3,047,000)

                                                                  ------------
                   Deferred tax asset                                1,169,000

          Deferred tax liability

             Tax basis of assets less than basis for financial

               reporting purposes and other items                    (103,000)

                                                                  ============
                                                                  $  1,066,000
                                                                  ============


                  A valuation allowance is provided to reduce the deferred tax
         assets to a level which, more likely than not, will be realized. The
         net deferred tax asset reflects management's estimates of the amount
         which will be realized from future profitability which can be
         predicted with reasonable certainty. The valuation allowance was
         $3,047,000 at September 30, 1996, which represents an increase of
         $2,769,000 over the amount reported at December 30, 1995.

                  As of December 30, 1995, the Company has net operating loss
         carry forwards for Federal income tax purposes of approximately
         $1,263,000 which are available to offset future Federal taxable income
         through 2009.


                  The provision for income taxes differs from the amount
         computed by applying the 34% federal statutory income tax rate to the
         net loss before provision for income taxes as follows:

<TABLE>
<CAPTION>
                                                           Nine months
                                                              ended             Year ended          Year ended
                                                          September 30,        December 30,        December 31,
                                                              1996                1995                 1994
                                                           -----------         -----------         -----------
<S>                                                        <C>                 <C>                 <C>         
      Income tax benefit computed at statutory rate        $(2,456,000)        $  (112,805)        $  (214,000)
      State tax benefit, net of federal tax benefit           (313,000)
      Adjustment to valuation allowance                      2,769,000             112,805              88,000
                                                           -----------         -----------         -----------
      Income tax (benefit) as reported                     $      --           $      --           $  (126,000)
                                                           ===========         ===========         ===========
</TABLE>


17.      BUSINESS SEGMENT INFORMATION:

                  Summarized financial information by business segment for nine
         months ending September 30, 1996 is as follows:

                                    F - 18

<PAGE>


                                                        Nine months
                                                           ended
                                                       September 30, 
                                                           1996
                                                       ------------

               Net sales:

                    Specialty catalog retail           $ 11,672,908
                    operations

                    Mass merchant manufacturing
                    and distribution                      7,549,893

                                                       ------------
                                                         19,222,801

                                                       ============
               Operating income (loss):

                    Specialty catalog retail             (1,085,728)
                    operations


                    Mass merchant manufacturing          (2,154,973)
                    and distribution
                                                       ------------
                                                         (3,240,701)

                                                       ============
               Total assets:
                    Specialty catalog retail
                    operations                            5,310,725

                    Mass merchant manufacturing
                    and distribution                      7,762,192

                                                       ------------
                                                         13,072,917

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

               Depreciation and amortization:
                    Specialty catalog retail
                    operations                              125,555

                    Mass merchant manufacturing
                    and distribution                         85,682

                                                       ------------
                                                            211,237

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

               Capital expenditures:

                                    F - 19

<PAGE>

                    Specialty catalog retail                202,633
                    operations

                    Mass merchant manufacturing
                    and distribution                          8,463

                                                       ------------
                                                       $    211,096
                                                       ============


18.      NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED):

                  The following summarizes the Company's results of operations
         for nine months ended September 30, 1995:

                                                              Nine months
                                                                 ended
                                                           September 30, 1995
                                                               -----------

                   Net sales                                   $ 9,947,418
                   Cost of sales                                 5,668,256
                                                               -----------
                   Gross profit                                  4,279,162
                   Operating expenses                            3,414,301

                                                               -----------
                   Operating income                                864,861
                   Other income                                     14,739
                   Interest expense                               (374,121)
                                                               -----------
                   Income before income taxes                      505,479
                   Income taxes                                     47,000

                                                               -----------
                   Net income                                  $   458,479
                                                               ===========
                   Net income per share                        $      0.12
                                                               ===========
                   Number of shares used in 
                   computation                                   3,985,755


                                    F - 20



<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 Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.

                                            DIPLOMAT CORPORATION

                                            By:  /s/ Jonathan Rosenberg
                                                ______________________________
                                                Jonathan Rosenberg
                                                President, Chief Executive 
                                                Officer

Dated:  April 2, 1997

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons, which include the
Chief Executive Officer, the Chief Financial Officer and a majority of the Board
of Directors, on behalf of the Registrant and in the capacities and on the dates
indicated:

<TABLE>
<CAPTION>
         Name                                                 Title                                  Date
         ----                                                 -----                                  ----
<S>                                                  <C>                                         <C>

/s/ Jonathan Rosenberg
_______________________________                      President, Chief Executive Officer          April 2, 1997
Jonathan Rosenberg                                   and Director
                                                     (Principal Executive Officer)
/s/ Robert M. Rubin
_______________________________                      Chairman of the Board and a                 April 2, 1997
Robert M. Rubin                                      Director

/s/ Stuart A. Leiderman
_______________________________                      Executive Vice President of                 April 2, 1997
Stuart A. Leiderman                                  Sales and Marketing and a Director

_______________________________                      Director                                    April 2, 1997
Edward E. Hinds

_______________________________                      Director                                    April 2, 1997
Howard Katz

/s/ Irwin Oringer              
_______________________________                      Principal Accounting Officer                April 2, 1997
Irwin Oringer                                        and Controller
</TABLE>

<PAGE>
                                       
                          CERTIFICATE OF DESIGNATION
                                       
                           OF THE PREFERRED STOCK OF
                                       
                             DIPLOMAT CORPORATION

         Pursuant to the provisions of Section 151 of the Delaware Corporations
Law, Diplomat Corporation (the "Company"), a corporation organized and existing
under the Delaware Corporations Law, hereby adopts the following Designations,
Rights and Limitations of its Series B and Series C Preferred Stock.

         Designation of Series B Preferred Stock

         Of the 1,000,000 shares of Preferred Stock authorized pursuant to the
Company's Certificate of Incorporation, Two Hundred and Ninety Thousand
(290,000) of such shares are hereby designated as the Series B Preferred Stock.

         The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series B Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:

         1.       Liquidation Preference.  The entire class of Series B
                  Preferred Stock shall have a liquidation preference of
                  $2,900,285 (the "Liquidation Value").

         2.       Dividends. The Series B Preferred Stock shall receive an
                  annual dividend of 9% of the Liquidation Value commencing
                  January 1, 1997, payable monthly in arrears. In the event that
                  the Company does not pay such dividend for three consecutive
                  months, the holder shall receive 100,000 shares of the
                  Company's common stock for each month that the dividend is not
                  fully paid.

         3.       Conversion. The Series B Preferred Stock is convertible, based
                  on its Liquidation Value, into shares of the Company's common
                  stock at 75% of the average market value of the common stock
                  for the ten trading days immediately preceding the day of
                  conversion. The Series B Preferred Stock is convertible any
                  time at the option of the holder.

         4.       Voting.  The Series B Preferred Stock shall have voting rights
                  equal to 2,900,285 shares of the Company's common stock on all
                  matters on which the common stock votes.

                                      38


<PAGE>




         Designation of Series C Preferred Stock

         Of the 1,000,000 shares of Preferred Stock authorized pursuant to the
Company's Certificate of Incorporation, Sixty Thousand (60,000) of such shares
are hereby designated as the Series C Preferred Stock.

         The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series C Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:

         1.       Liquidation Preference.  The entire class of Series C
                  Preferred Stock shall have a liquidation preference of
                  $600,000 (the "Liquidation Value").

         2.       Dividends. The Series C Preferred Stock shall receive an
                  annual dividend of 9% of the Liquidation Value commencing
                  January 1, 1997, payable monthly in arrears. In the event that
                  the Company does not pay such dividend for three consecutive
                  months, the holder shall receive 100,000 shares of the
                  Company's common stock for each month that the dividend is not
                  fully paid.

         3.       Conversion. The Series C Preferred Stock is convertible, based
                  on its Liquidation Value, into shares of the Company's common
                  stock at 75% of the average market value of the common stock
                  for the ten trading days immediately preceding the day of
                  conversion. The Series C Preferred Stock is convertible any
                  time at the option of the holder.

         4.       Voting.  The Series C Preferred Stock shall have voting rights
                  equal to 600,000 shares of the Company's common stock on all
                  matters on which the common stock votes.

         This Certificate of Designation has been duly adopted by the Board of
Directors of the Company pursuant to authority vested in the Board of Directors
by the Certificate of Incorporation of the Company, as amended.

                                      39


<PAGE>




Signed and attested to on November 20, 1996

                                                 /s/ Jonathan Rosenberg
                                                 --------------------------
                                                 Jonathan Rosenberg,
                                                 President

Attest:


/s/ Stuart A. Leiderman
---------------------------
Stuart A. Leiderman, Secretary

                                      40