================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(X)      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 or  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934

                                       OR

( )      TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE  ACT OF 1934  

         For the transition period from _________ to ____________
 
                         Commission File Number 0-23222


                               FINISHMASTER, INC.
             (Exact Name of Registrant as Specified in its Charter)

            Indiana                                          38-2252096
(State or other Jurisdiction of                            (I.R.S. Employer 
Incorporation or Organization)                         Identification Number)

54 Monument Circle, Suite 700, Indianapolis, IN                46204
 (Address of principal executive offices)                    (Zip Code)

        Registrant's Telephone Number, including area code:    (317) 237-3678
                                                               --------------

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

  Title of each class            Name of each exchange on which registered
          NONE                                     NONE

           Securities registered pursuant to Section 12(g) of the Act
                                  Common stock
                                (Title of Class)

Indicate  by check  mark  whether  the  registrant  (1) has  filed  all  annual,
quarterly and other  reports  required to be filed by Section 13 or 15(d) of the
Securities  Exchange Act of 1934 during the preceding  twelve months and (2) has
been subject to the filing requirements for at least the past 90 days.

                                                  Yes   X        No
                                                      -----        -----

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (ss.  229.405 of this chapter) is not contained  herein,  and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of February 28, 1998 $49,384,000.

At February 28, 1998,  there were  outstanding  5,993,640 shares of Registrant's
common stock.

                       Documents Incorporated By Reference

Portions of the annual proxy  statement for the year ended December 31, 1997 are
incorporated by reference into Part III.

                                 Page 1 of ____

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                               FINISHMASTER, INC.
                           ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS



ITEM                                                                       PAGE

   1       Business........................................................

   2       Properties......................................................

   3       Legal Proceedings...............................................

   4       Submission of Matters to a Vote of Security Holders.............

   5       Market for Registrant's Common Equity 
               and Related Shareholder Matters.............................

   6       Selected Financial Data.........................................

   7       Management's Discussion and Analysis of 
           Financial Condition and Results of Operations...................

   8       Financial Statements and Supplemental Data......................

   9       Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure.........................

  10       Directors and Executive Officers of the Registrant..............

  11       Executive Compensation..........................................

  12       Security Ownership of Certain Beneficial Owners and Management..

  13       Certain Relationships and Related Transactions..................

  14       Exhibits, Financial Statement Schedules, 
               and Reports on Form 8-K.....................................

  15       Signatures......................................................

  16       List of Financial Statements and Financial Statement Schedules..



<PAGE>



                                     PART I

ITEM 1 - BUSINESS

General


FinishMaster,  Inc.  ("FinishMaster"  or "the Company") is the leading  national
distributor of automotive paints, coatings and paint-related  accessories to the
automotive  collision  repair industry in the United States.  The Company serves
its customers through 143 sales outlets and three  distribution  centers located
in 22  states.  The  Company  has  approximately  20,000  customers  to which it
provides a  comprehensive  selection  of brand name  products  supplied  by E.I.
DuPont  de  Nemours  &  Co.  ("DuPont"),  PPG  Industries,  Inc.  ("PPG"),  BASF
Corporation ("BASF"),  and Minnesota Mining & Manufacturing Co., Inc. ("3M"), in
addition to its own FinishMaster  PrivateBrand  refinishing  accessory products.
The Company is  typically  the  primary  source of supply to its  customers  and
offers a broad range of services designed to enhance the operating  efficiencies
and competitive positions of its customers and suppliers.

The Company  has been the leading  consolidator  in the  automotive  refinishing
distribution   industry,   having   successfully   completed   approximately  25
acquisitions  over the past  seven  years,  ranging  in size from  $0.3  million
fill-in acquisitions to the $73.4 million acquisition of Thompson PBE, Inc. (the
"Thompson  Acquisition").  In addition to the cash purchase  price,  the Company
refinanced approximately $34.5 million of Thompson's outstanding indebtedness at
the date of purchase.  The  Thompson  Acquisition,  completed in November  1997,
significantly expanded the Company's geographic presence in the Southeastern and
Western United States.  Subject to receipt of shareholder approval,  the Company
expects to close the acquisition of LDI AutoPaints, Inc.("AutoPaints") (the "LDI
Acquisition"),  which will  increase  the  Company's  presence in  Florida.  The
Company  intends to  continue  its  strategy  of  expanding  through  additional
acquisitions.

The Company is an Indiana  corporation.  On March 1, 1998, the Company relocated
its corporate  headquarters from the Kentwood,  Michigan  distribution center to
newly renovated office space in Indianapolis, Indiana. The Company has agreed to
lease that space from LDI, Ltd. ("LDI"),  an Indiana limited partnership and the
indirect parent of AutoPaints,  an Indiana  corporation which owns approximately
67.5% of the outstanding  shares of the Company.  The Company  believes that the
terms of the lease will be at least as  favorable  to the  Company as those that
could be obtained by arms-length  negotiations with an unaffiliated third party.
As a result of this move the  principal  executive  offices of the  Company  are
located at 54  Monument  Circle,  Suite  700,  Indianapolis,  IN 46204,  and its
telephone number is (317) 237-3678.


Industry Overview

The U.S. automotive paint distribution market is approximately $2.4 billion. The
end users of the products distributed by the Company are principally independent
collision  repair shops and  automobile  dealers.  Additionally,  businesses and
government  entities  that  maintain  their own  automobile  fleets,  sellers of
automotive  salvage and other  commercial and  industrial  users make up smaller
percentages  of the  Company's  customer  base.  Automotive  paint  and  related
supplies,  in  contrast  to labor  and  parts,  represent  only a small  portion
(approximately 7-10%) of the total cost of a typical repair job. However,  while
paint is a relatively minor component of the total repair cost, it is a critical
factor in the customer's level of satisfaction.

The domestic wholesale  aftermarket for automotive paint and related supplies is
characterized by a small number of manufacturers of paint and supplies. The five
predominant  manufacturers of automotive paint  distributed in the United States
are DuPont, PPG, BASF, The  Sherwin-Williams  Company  ("Sherwin-Williams")  and
Akzo Nobel ("Sikkens").  In addition,  several other large foreign manufacturers
have recently taken steps to expand the  distribution of their paint products in
the United States. 3M is the predominant  manufacturer of related supplies which
include the most frequently used refinishing  materials,  supplies,  accessories
and tools such as sand paper, masking tape and paint masks.

While automotive paint  manufacturing is highly  concentrated,  automotive paint
distribution  and the end users of automotive paint are highly  fragmented.  The
Company  believes that a large number of independent  distributors of automotive
paint serve an aggregate  of up to 50,000  collision  repair  shops  nationwide.
Based on  published  industry  data,  the  Company  believes  that the number of
collision  repair shops has decreased  approximately  5% in each of the last two
years.  Distributors,  which  tend to be  family-owned  with  only  one to three
distribution  sites,  typically serve a highly localized customer base with each
distribution  site serving  customers  located  within 5 to 10 miles of the site
depending upon demographics, road access and geography.

Below is a Market Profile obtained from Industry Publications:

                No. of Collision               Annual Shop
                  Repair Shops                    Revenue
                                                ($Millions)
                        9,000                  *$0.2
                       13,000                    $0.2 to $0.3
                       12,500                    $0.3 to $0.45
                        7,000                    $0.45 to $0.6
                        3,500                    $0.6 to $1.0
                        2,800                    $1.0 to $2.0
                          800                    $2.0 to $3.0
                          450                    $3.0 to $5.0
                          100                  **$5.0

*  Less than
** Greater than



Due to  the  large  number  of end  users,  and  their  increasing  demands  for
personalized  services  such  as  multiple  daily  deliveries,  assistance  with
color-mixing and matching,  and assistance with paint application techniques and
environmental  compliance reporting,  manufacturers  typically service end-users
through distributors such as FinishMaster.  Nevertheless,  some of the Company's
paint   manufacturers  have  elected  to  operate   company-owned   distribution
facilities in selected markets, including markets in which the Company operates.
The Company believes,  however,  that the largest automotive paint manufacturers
have generally avoided the cost of operating their own distribution  network due
to their  inability to offer  multiple  lines of paint which  prevents them from
spreading  distribution  expenses across the market's entire potential  customer
base.  Consequently,  the Company believes that independent distributors such as
the Company,  which can sell the products of several  paint  manufacturers,  are
better situated to service end users' needs than the distribution  facilities of
automotive paint manufacturers.

Distributors and repair shops are in the process of consolidation  due to, among
other things, the declining number of repair jobs. According to the estimates of
one industry source, the total number of vehicles on the road has increased from
approximately  140 million in 1980 to 189  million in 1996,  while the number of
repair jobs has declined from approximately 18.5 million in 1980 to an estimated
13.0  million  in  1995.  This  decline  has been due to,  among  other  things,
automotive  safety  improvements such as anti-lock  brakes,  rear  window-placed
brake lights and more reliable  radial tires.  Stricter drunk driving laws, more
vigorous law  enforcement  and the  increasing  percentage  of drivers  reaching
middle  age have  also  resulted  in  fewer  accidents.  Additionally,  a higher
percentage  of collision  damaged cars are declared  total  losses,  rather than
repaired,   due  to  uni-body  construction  and  rising  costs  of  repair  and
refinishing.  Over the past  several  years,  the industry  has  benefited  from
warranty work to repair  defective paint finishes on certain  domestic  vehicles
manufactured in the late 1980s and early 1990s.  However,  the Company  believes
that the volume of warranty  repair work decreased  significantly  in 1995, 1996
and 1997 from the levels  experienced  in prior years  because of steps taken by
the major U.S.  automobile  manufacturers to reduce multi-year warranty programs
to repaint certain vehicles.  The Company does not expect to realize significant
future benefits from this set of warranty programs.

The Company  believes  that  environmental  and other  regulatory  pressures and
technological  advancements in paints and coatings are also significant  factors
leading to  consolidation  of both  distributors  and  collision  repair  shops.
Historically,  the application of paints and coatings has released emissions due
to the products' high solvent  content.  In an effort to reduce these emissions,
environmental  regulations  have been proposed or implemented at federal,  state
and local levels.  Paint  manufacturers  have responded to these  regulations by
introducing  technologically  advanced lower volatile organic  compounds ("VOC")
and  water-borne  paints which  require more  advanced  application  techniques.
Furthermore,  the application  equipment itself has been improved.  For example,
the latest high  volume low  pressure  ("HVLP")  spray guns  deliver  paint more
efficiently to a given  surface,  resulting in less paint being emitted into the
atmosphere.  As a result,  automotive  refinishing has become a complex process,
often  requiring  advanced  spray  booths and air  filtration  systems to reduce
unwanted  particulates and emissions.  This complexity  places new challenges on
automotive  refinishers who may not have the training or expertise  necessary to
apply the new paints and  coatings  or the  financial  resources  to acquire the
necessary  equipment.  The Company  believes  that its  experience  in assisting
customers  with  regulatory  compliance and reporting in California and Colorado
will be applicable in other geographic  areas as  EPA-sponsored  VOC regulations
are enacted nationwide.

Further,  insurance  companies have begun to designate  certain collision repair
shops as so-called "direct repair providers." As such, the designated  collision
repair  shops  (approximately  6,500 in the U.S.) are  directed  business by the
insurance  carriers in return for price  concessions  from customary  rates. The
Company believes this trend favors larger, more efficient repair shops.

Products and Suppliers

The Company offers its customers a  comprehensive  selection of prominent  brand
name products and its own FinishMaster  PrivateBrand  products. The product line
consists of  approximately  9,000 stock  keeping units  ("SKUs"),  including the
three leading  brands of  automotive  paints and coatings and a leading brand of
related accessories. FinishMaster PrivateBrand products include some of the most
frequently used refinishing accessories such as masking materials, body fillers,
thinners, reducers and cleaners.

The following table  illustrates the approximate  number of SKUs,  suppliers and
selected  brand names in each of the  Company's  major product  categories.  The
Company may change from time to time the selection and mix of its products.

<TABLE>
<CAPTION>

                                     Approximate
                                      Number of       Approximate
Product Category                    Manufacturers      Number of           Selected Suppliers and
                                    and Suppliers        SKUs                    Brand Names
---------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>              <C>                                        
  Branded Paints and Coatings             3+           3,400            DuPont, PPG, BASF, etc.
  Branded Accessories                     3            2,700            3M, Dynatron, US Chemical
  Private Label Accessories              25              100            FinishMaster PrivateBrand
  Other Miscellaneous Products                         2,800            Various
---------------------------------------------------------------------------------------------------
       Total                                           9,000
</TABLE>

The Company  relies on four  leading  suppliers  for the majority of its product
requirements.  DuPont, PPG, and BASF supply virtually all of the Company's paint
products,   while  3M  is  the  Company's   largest  supplier  of  paint-related
accessories.   Products   supplied  by  DuPont,   PPG  and  BASF  accounted  for
approximately  65% and 3M  approximately  25% of revenues  in 1997.  The Company
continuously  seeks  opportunities with new and existing suppliers to supply the
highest quality products.

The Company  believes that DuPont,  PPG and BASF are market leaders,  accounting
for a majority of total domestic  automotive  paint sales.  The Company believes
that in fiscal  1997,  it was the largest  purchaser of  aftermarket  automotive
paint in the United  States from each of these  manufacturers.  The Company also
acquires  a  modest  amount  of its  paint  requirements  from  several  foreign
manufacturers  which have  recently  taken steps to expand the  distribution  of
their paint products in the United States. As is common industry  practice,  the
Company  does  not  maintain  long-term  supply  contracts  with  any of its key
suppliers.  The Company  enters into written  agreements  with most of its major
suppliers for each sales outlet. These agreements are nonexclusive and set forth
the  suppliers'  warranties,  procedures  for resolving  disputes and provisions
which generally  allow for annual returns of obsolete  inventory to the supplier
in return for credit or new inventory.  Prices and terms are  established by the
suppliers' invoices and published price lists and may be changed by the supplier
without  notice.  In addition,  the  agreements  require the Company to maintain
adequate inventories at a regularly  established place of business, to train and
manage its sales  staff,  and to use its best  efforts to promote the  products.
These agreements  typically contain reciprocal clauses allowing  cancellation on
written  notice  ranging from 30 to 90 days.  Although  each of these  suppliers
generally  competes  with the others along product  lines,  the Company does not
believe  the  products  are  completely  interchangeable  because  of high brand
loyalty  among  customers  and  their  brand-specific  color  matching  computer
systems. For this reason, the Company's acquisition program is also dependent on
the  willingness of the principal paint suppliers to continue to supply acquired
businesses.  The Company has agreements with other  warehouse  suppliers for the
purchase  of  certain  paint and  non-paint  supplies  in  specified  geographic
locations. These agreements contain minimum volume commitments.

Whenever  practical,  purchases  from  suppliers  are made in large  volumes  to
maximize volume discounts and optimize payment terms. In addition, the Company's
size generally  permits it to benefit from periodic special  incentive  programs
available from suppliers,  which programs provide additional  purchase discounts
and extended due dates of payments in exchange for large volume  purchases.  The
Company also benefits from manufacturer-provided discounts upon early payment of
certain accounts and from other  supplier-supported  programs.  Branded products
carry  the  manufacturers'  guaranties.  Defective  products  typically  may  be
returned to  manufacturers  at no charge to the Company  and  obsolete  products
generally may be returned for a slight restocking fee. Due to the manufacturers'
favorable  return  policies,  the  Company  also  accepts  customer  returns  of
defective or obsolete products.  The Company has arrangements with its suppliers
that enable the Company to return  product to the  suppliers  subject to certain
restocking charges.

The  Company  purchases  substantially  all  of  its  automotive  paint  related
accessories  directly  from  3M,  although  such  supplies  are  also  generally
available from independent warehouse  distributors at somewhat higher costs. The
Company  regularly  purchases a small number of products not available  directly
from the manufacturers  and certain low volume items from independent  warehouse
distributors.

Services

The  Company  offers  comprehensive  value-added  services  designed  to  assist
customers  in  operating  their  businesses  more  effectively.  These  services
include:

Rapid Delivery. Products are delivered to customers using the Company's delivery
fleet of approximately 800 trucks.  The Company offers multiple daily deliveries
per  customer to meet its  customers'  just-in-time  inventory  needs.  Customer
concerns  for  product  availability  typically  take  priority  over all  other
competitive considerations, including price.

Technical  Support.  The Company's  technical support personnel  demonstrate and
recommend products. In addition,  they assist customers with problems related to
their particular product applications. Equipment specialists provide information
to customers regarding their heavy equipment requirements,  such as spray booths
and frame straightening equipment, which are sold by the Company.

Product  Training.  As a result of increasing  regulations,  manufacturers  have
introduced   technologically   advanced,   lower  VOC  paints,   which   require
significantly more sophisticated  application  techniques.  The Company provides
training  services  to its  customers  in  order to  teach  them the  techniques
required to work with these products.  Training sessions are typically conducted
jointly  by the  Company  and  by one or  more  of its  major  suppliers  at the
customer's location or at an off-site location.

Management  Seminars.  Management seminars are conducted at convenient locations
to inform  customers about  regulations,  compliance,  and techniques to improve
productivity and industry trends.

Color  Matching.  The  growing  number of paint  colors is a  challenge  for the
refinishing  industry.  DuPont, for example, has more than 120,000 mix formulas.
With its sophisticated  PC-based color matching  equipment and specialists,  the
Company provides color matching services to its customers.

Inventory  Management.  The Company performs  monthly  physical  inventories for
customers who request this service.  The Company also  provides  customers  with
management information reports on product usage.

Assistance  with  Environmental  Compliance  Reporting.  California  air quality
regulations  mandate  paint and  application  methods  which  result in  reduced
atmospheric emissions of paint and other related materials.  In California,  the
Company  provides  information  to its  customers  with  respect to air  quality
reporting and arranges  demonstrations of new products and applications designed
to comply  with air quality  regulations.  In  addition,  in  California  and in
Colorado,  the  Company  assists  its  customers  with  environmental  reporting
requirements by providing special reports designed to simplify their compliance.
The EPA has  proposed  regulations  to control  VOC  emissions  from  automobile
refinishing nationwide and, accordingly, the Company is considering an expansion
of these programs.

Personnel  Placement.  Certain of the Company's divisions maintain an employment
data base which includes  employment  openings and/or persons seeking employment
with collision  repair shops located in the market  served.  Upon request from a
customer  to fill an  opening,  the Company may provide the names of one or more
persons for the  position.  Similar  services are  available to persons  seeking
employment.  The  Company  does not charge for this  service but  benefits  from
enhanced relationships with its customers and their employees.

Operations

Warehouse.  The Company operates three distribution centers which are located in
Michigan,  California and Florida.  Products are delivered from the distribution
centers to sales outlets weekly by one of the Company's six semi-trucks.

Sales  Outlets.  As of March 31, 1998,  the Company  operated 143 sales  outlets
servicing  customers  in 22 states with a delivery  fleet of  approximately  800
vehicles.  Sales outlets are  strategically  located in order to provide  prompt
service to the Company's customers.  Each sales outlet maintains a comprehensive
selection of competitively priced products tailored to the specific market needs
of its customers.  While supplier commitments in a given market may prevent some
outlets  from  carrying  all of the  Company's  product  lines,  each  outlet is
authorized to carry the majority of the  products,  including at least two major
paint brands. Sales outlets electronically order their inventory requirements on
a regular  basis from the  Company's  distribution  center or directly  from the
manufacturer.

Management  Information Systems. Each of the Company's sales outlets uses either
personal computers or terminals for inventory control and order processing.  The
Company's  main IBM AS/400  computers  collect and  process  data  required  for
operations  analysis,  finance,  warehouse and administrative  functions and the
management of receivables and inventory.  The Company  believes that its current
systems are  adequate  but has  initiated a program to research  further  system
integration  potential  and  operational  efficiencies.  The  Company  has  also
implemented  a  detailed  plan to  ensure  Year  2000  compliance.  The  Company
contemplates  working  closely with its major  suppliers  and customers in their
Year 2000 compliance efforts.  FinishMaster,  like most  organizations,  has not
completed the Year 2000 Compliance process but does not believe that the cost of
such process will be material or that there is a material uncertainty  regarding
its ability to complete  said  process by Year 2000.  The Company has in place a
detailed testing and correction plan which would provide for a smooth transition
into 2000. The focus is to confirm that the supply chain,  from  manufacturer to
FinishMaster to customer,  is not broken due to computer  problems at the change
of the century. In addition,  the Company has written  verification of Year 2000
compliance from all its hardware,  software and suppliers with which it has data
processing relationships.

Sales and Marketing

As of March 31,  1998,  the  Company  employed a 309 person  direct  sales force
consisting of approximately 244 sales representatives,  29 regional managers, 27
technicians and 9 general  managers.  The Company assigns its sales personnel to
specific customer accounts in an effort to build long-term relationships.  Sales
representatives  make frequent  visits to customer  sites in order to review the
customer's requirements and to offer general, technical and product support. The
Company's  sales  personnel are generally  compensated  through a combination of
sales commissions and base salaries. The Company emphasizes continuing education
and training of its sales force in order to provide a high degree of support for
its  customers.   The  Company's  customers  primarily  consist  of  independent
automotive  body repair shops and automobile  dealerships.  The Company does not
maintain long-term contracts with its customers.

Customers

In 1997,  the  Company  served  approximately  20,000  customers,  none of which
accounted for more than 1% of the Company's  sales. The Company believes that it
is the principal  source of supply of automotive  paint and related supplies for
most of its  customers.  In addition to independent  collision  repair shops and
automobile dealers,  which are the Company's largest category of customers,  the
Company's  customers  include  van  converters,   trucking  companies,  schools,
municipalities, government agencies, sellers of automotive salvage, refinishers,
marine and aviation refinishers and other commercial and industrial users.

Competition

The  distribution  segment  of the  automotive  refinishing  industry  is highly
fragmented  and  competitive  with  many  independent   distributors   competing
primarily on the basis of technical  assistance and expertise,  price,  speed of
delivery  and  breadth  of  product  offering.  There  are no other  independent
national distributors of automotive refinish paints and accessories. There are a
number  of  independent  regional  distributors,  many of  which  are in  direct
competition  with the Company on a regional or local level.  Competition  in the
purchase of  independent  distributors  and sales  outlets may occur between the
Company and other automotive  refinishing  distributors  which are also pursuing
growth through acquisitions.

The Company may also encounter  significant  sales  competition  from new market
entrants,   automotive  paint  manufacturers,   buying  groups  or  other  large
distributors  which may seek to enter such  markets or may seek to compete  with
the  Company  for  attractive  acquisition  candidates.   Although  the  largest
automotive   paint   manufacturers   have   generally  not  operated  their  own
distributors, or have done so only on a limited basis, they may decide to expand
such activity in the future. For example,  Sherwin-Williams  distributes its own
automotive  paints  through its sales  outlets.  In addition,  BASF,  one of the
Company's principal  suppliers,  distributes through its own outlets.  While the
Company does not believe that current direct distribution  efforts by automotive
paint  manufacturers  have  significantly  affected  its sales,  there can be no
assurance  that the Company  will not  encounter  increased  competition  in the
future.  The Company may also compete  with its  suppliers in selling to certain
large volume end users such as van  converters,  small  manufacturers  and large
fleet operators.

Employees

As of March 31, 1998, the Company employed approximately 1,660 persons on a full
and  part-time  basis.  None  of  the  employees  are  covered  by a  collective
bargaining  agreement and the Company considers its relations with its employees
to be good.

Governmental Regulation

The Company is subject to various federal, state and local laws and regulations.
These  regulations  impose  requirements  on the Company and its  customers  and
provide  opportunities  to the Company for providing  services to customers with
respect to the use of new products and applications  designed to comply with air
quality regulations. Pursuant to the regulations of the United States Department
of Transportation  and certain state  transportation  departments,  a license is
required to transport the Company's products and annual permits are required due
to classification of certain of the Company's  products as "hazardous."  Various
state and  federal  regulatory  agencies,  such as the  Occupational  Safety and
Health  Administration  and the United States  Environmental  Protection Agency,
have jurisdiction over the operation of the Company's  distribution  centers and
sales outlets,  including worker safety,  community and employee "right-to-know"
laws, and laws regarding clean air and water. In addition,  state and local fire
regulations  extensively  control  the design  and  operation  of the  Company's
facilities.  Such  regulations are complex and subject to change.  Regulatory or
legislative  changes may cause future increases in the Company's operating costs
or otherwise negatively affect operations.  Although the Company believes it has
been and is  currently  in  compliance  with the  applicable  standards  imposed
pursuant to such laws and  regulations,  there can be no  assurance  that in the
future the Company may not be adversely  affected by such  regulations  or incur
increased  operating  costs in  complying  with such  regulations.  The  Company
believes  that,  on  balance,  these  regulations  favorably  affect the Company
because it is, in most  instances,  better able than its smaller  competitors to
comply with such regulations and to assist its customers with compliance.

Environmental

The principal environmental  legislation presently affecting the Company and its
customers in a significant manner is described below.

Resource  Conservation  and Recovery Act of 1976  ("RCRA").  RCRA  regulates the
treatment,  storage and  disposal of  hazardous  and solid  wastes.  Under RCRA,
liability  and stringent  management  standards are imposed on a person who is a
generator or transporter of a hazardous waste or an owner or operator of a waste
treatment,  storage or disposal facility. At some of its locations,  the Company
is subject to RCRA requirements as a small quantity generator.

Comprehensive  Environmental  Response,  Compensation  and Liability Act of 1980
("CERCLA").  CERCLA addresses cleanup of sites at which there has been or may be
a release of hazardous substances into the environment. CERCLA assigns liability
for costs of cleanup and for damage to natural  resources (i) to any person who,
currently or at the time of disposal of a hazardous substance, owned or operated
any facility at which hazardous  substances  were deposited;  (ii) to any person
who by  agreement  or  otherwise  arranged  for the  disposal or  treatment,  or
arranged with a transporter for transport for disposal or treatment of hazardous
substances  owned or  possessed  by such  person;  and (iii) to any  person  who
accepted hazardous  substances for transport to disposal or treatment facilities
or sites  selected by such  person  from which there is a release or  threatened
release of hazardous substances. The Company has acquired a number of businesses
which  prior to  acquisition  may have sent  waste to sites  which  have  become
subject to government cleanup under CERCLA.

Clean Air Act and 1990  Amendments.  The Clean Air Act requires  compliance with
national  ambient  air  quality  standards  ("NAAQS")  and  empowers  the EPA to
establish and enforce limits on the emission of various pollutants from specific
types of  facilities.  The Clean Air Act  Amendments of 1990 (the  "Amendments")
modify the Clean Air Act in a number of significant areas. The Amendments, among
other things, establish new programs and deadlines for achieving compliance with
NAAQS, establish controls for hazardous air pollutants, establish a new national
permit  program for all major sources of pollutants and create  significant  new
penalties,  both civil and  criminal,  for  violations of the Clean Air Act. The
Amendments  specifically  require  a review  of VOC  emissions  from  commercial
products  (which  encompass  emissions  relating to the  application of paint to
automobiles).  Pursuant to this review,  the EPA decided to develop  regulations
controlling  automotive  refinishing  coatings.  At  some of its  locations  the
Company is subject to the Clean Air Act because it uses paint spraying equipment
for paint matching and for training of customers.

Other Federal and State Environmental Laws. The Company's operations are subject
to regulation under,  among others,  the following federal laws: the Clean Water
Act, the Safe Drinking Water Act, the Occupational Safety and Health Act and the
Hazardous  Materials  Transportation  Act. In  addition,  many states have other
regulations and policies to cover more detailed  aspects of hazardous  materials
management.

Local Air Quality  Regulations.  The South Coast Air Quality Management District
(the "SCAQMD")  (Southern  California)  and the Bay Area Air Quality  Management
District (the  "BAAQMD")  (San  Francisco  Bay Area) have  detailed  regulations
pertaining to metal coating and the use of VOCs. These regulations  prohibit the
sale of nonconforming automobile paint at the distributor level, which increases
somewhat  the  compliance  obligations  of the Western  Division's  distribution
sites.  Subsequently,  based on published  industry data, 15 states have adopted
VOC regulations through March 1998. Most of these states have VOC limits similar
to the VOC limits proposed by the EPA. The national  regulations proposed by the
EPA will not  override  more  restrictive  state and local  regulations  such as
California's  regulations,  which have the lowest VOC limits in the country. The
Company  believes its experience  with such  regulations,  including  compliance
reporting and the use of paints and equipment designed to meet such regulations,
is not matched by most smaller competitors.

Compliance by the Company with environmental protection laws has had no material
effect upon capital expenditures, earnings or competitive position.


<PAGE>

ITEM 2 - PROPERTIES

The following  table sets forth  certain  information  regarding the  facilities
operated by the Company as of March 31, 1998.



State (By Division)                  Number of               Number of
                                    Sales Outlets       Distribution Centers
-----------------------------------------------------------------------------
Central/Northeastern Division
   Connecticut                             3
   Delaware                                1
   Illinois                                5
   Indiana                                 3
   Maryland                                3
   Massachusetts                           4
   Michigan                               11                       1
   New Jersey                              7
   Ohio                                    2
   Oklahoma                                1
   Pennsylvania                            3
   Texas                                  12
   Virginia                                4
   Wisconsin                               3
--------------------------------------------------------------------------
                                          62                       1
Southeastern Division
   Alabama                                 1
   Florida                                30                       1
   Georgia                                 2
   North Carolina                          6
   South Carolina                          3
--------------------------------------------------------------------------
                                          42                       1
Western Division
   Arizona                                 3
   California                             30                       1
   Colorado                                6
--------------------------------------------------------------------------

                                          39                       1
--------------------------------------------------------------------------

          Total                          143


The  Company's  sales  outlets  range in size from 1,200  square  feet to 13,000
square  feet.  Some of the larger  sales  outlets  are also used as "drop  ship"
points from which they supply  other sales  outlets.  Sales  outlets  consist of
inventory storage areas,  mixing  facilities,  display and counter space and, in
some instances,  sales office space. Sales outlets are strategically  located in
major  markets to maximize  market  penetration,  transportation  logistics  and
overall customer service. The Company's  distribution centers range in size from
5,000 square feet to 38,500 square feet. The  distribution  centers are equipped
with efficient material handling and storage equipment.

The Company owns the distribution  center and one sales outlet in Michigan,  one
sales outlet in Indiana,  and one in Florida. The remainder of the sales outlets
and the other  distribution  centers are leased with terms expiring from 1997 to
2006,  with  options to renew.  The Company  typically  assumes the lease of the
former owner in  acquisitions.  In a number of instances,  the  Company's  sales
outlets are leased from the former owners of businesses acquired by the Company.
The  Company  believes  that all of its leases  were at fair  market  rates when
executed, that presently no single lease is material to its operations, and that
alternative sites are presently available at market rates.

The Company is leasing 8,800 square feet of executive  offices which are located
in Indianapolis, Indiana.

Effective March 1, 1998, the Company  relocated its corporate  headquarters from
the Kentwood,  Michigan  distribution  center to newly renovated office space in
Indianapolis,  Indiana. The Company has agreed to lease that space from LDI. The
Company  believes  that the terms of the lease will be at least as  favorable to
the Company as those that could be obtained by arms-length  negotiations with an
unaffiliated third party.

ITEM 3 - LEGAL PROCEEDINGS

None.

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

None.

ADDITIONAL ITEM - EXECUTIVE OFFICER OF THE REGISTRANT

The following sets forth certain  information concerning the executive officers
of the Company who are not also directors:

Roger A.  Sorokin (age 57) has served as Vice  President-Finance  of the Company
for more than the previous five years.

Charles  "Remy"  Stephenson  (age 44) was named  Senior  Vice  President  of the
Company,   with   responsibility   for  sales  and  store   operations  for  the
Central/Northeastern  Division, in October,  1997. Prior to joining the Company,
Mr. Stephenson served as Vice President of Marketing of the Company from August,
1997 to October, 1997. Prior to joining the Company, Mr. Stephenson was employed
by Sherwin Williams Auto Finishes Inc. as Director of Sales from September, 1994
to August,  1997 and Regional Director of the Western Region from October,  1991
to September, 1994.



                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED  SHAREHOLDER MATTERS
-------------------------------------------------------------------------------

FinishMaster's  common  stock trades on The NASDAQ stock market under the symbol
FMST. The number of beneficial owners of FinishMaster's common stock at December
31, 1997 was approximately 588.

The range of high and low sales  prices  reported  by NASDAQ  for the last eight
quarters were:

     YEAR          QUARTER ENDED                HIGH              LOW

     1996          March 31                     15                9-1/2
     1996          June 30                      15-1/4            9-9/16
     1996          September 30                 11-5/8            8-1/4
     1996          December 31                  9-3/8             6-1/2
     1997          March 31                     8-1/2             5-3/4
     1997          June 30                      8-3/4             5-1/4
     1997          September 30                 8-3/4             5-3/8
     1997          December 31                  11-3/4            6-1/4
     1998          January 1-March 27           10-1/2            8

No cash  dividends on common stock have been paid during any period and none are
expected to be paid in the foreseeable  future. The Company anticipates that all
earnings and other cash resources of the Company will be retained by the Company
for investment in its business.



<PAGE>

ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated  financial data as of and for the year ended
December 31, 1997, the nine month period ended December 31, 1996 and three years
ended  March  31,1996,  1995 and 1994 are  derived  from the  Company's  audited
consolidated  financial  statements.  The  financial  data  should  be  read  in
conjunction with the Company's  audited  consolidated  financial  statements and
notes  thereto,  which are included  elsewhere  herein,  and with  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>

                                          Fiscal Year      Nine Months
                                        Ended December    Ended December
                                              31,              31,                        Year Ended March 31,
                                           1997 (2)          1996 (1)           1996              1995              1994
                                        ---------------- ----------------- ---------------- ----------------- -----------------

                                                                (in thousands, except per share data)
Statements of Operations Data
<S>                                        <C>                <C>             <C>                <C>              <C>     
Net sales                                  $130,175           $ 95,822        $107,511           $ 79,382         $ 64,693
Gross profit                                 47,107             33,891          38,012             28,048           22,068
Income from operations                        3,832              2,566           5,073              5,394            3,710
Net income                                 $    656           $    660        $  2,649           $  3,462         $  2,145
                                           ========           ========        ========           ========         ========
                                                                                                                
Net income per share - Basic               $   0.11           $   0.11        $   0.44           $   0.58         $   0.48
                                           ========           ========        ========           ========         ========
Diluted                                    $   0.11           $   0.11        $   0.44           $   0.58         $   0.48
                                           ========           ========        ========           ========         ========
                                                                             
Weighted average shares outstanding           5,994              6,000           6,000              6,000            4,472

</TABLE>

(1)      The  Company  changed its  fiscal  year-end  from March 31 to
         December 31, effective for the period ended December 31, 1996.

(2)      The operating results for the year ended December 31, 1997 are affected
         by the  acquisition  of Thompson,  PBE, Inc. on November 21, 1997.  The
         results of Thompson for the month of December, 1997 are included in the
         December 31, 1997  amounts.  For further  explanation  of the operating
         effect of the Thompson  acquisition,  see "Management's  Discussion and
         Analysis of Financial  Condition and Results of  Operations"  at Item 7
         for the year ended December 31, 1997.


<TABLE>
<CAPTION>
                                       December 31,                               March 31,
                                   1997             1996            1996            1995             1994
                              ---------------- --------------- --------------- --------------- -----------------
                                                                                     (1)
                                                               (in thousands)
Balance Sheet Data
<S>                             <C>              <C>             <C>             <C>             <C>     
Working capital                 $ 42,093         $ 22,819        $ 25,036        $ 17,763        $ 21,734
Total assets                     215,418           66,477          66,772          46,442          39,287
Long-term debt                   142,140           21,970          23,248           7,208           3,967
Stockholders' equity              32,932           32,326          31,665          28,956          25,554
</TABLE>


(1)      The  Company  changed its  fiscal  year-end  from March 31 to
         December 31, effective for the period ended December 31, 1996.

(2)      The operating results for the year ended December 31, 1997 are affected
         by the  acquisition  of Thompson,  PBE, Inc. on November 21, 1997.  The
         results of Thompson for the month of December, 1997 are included in the
         December 31, 1997  amounts.  For further  explanation  of the operating
         effect of the Thompson  acquisition,  see "Management's  Discussion and
         Analysis of Financial  Condition and Results of  Operations"  at Item 7
         for the year ended December 31, 1997.

Acquisition Data

Acquisitions  made by  FinishMaster  have been  accounted  for as purchases  and
accordingly,  the acquired  assets and  liabilities  have been recorded at their
estimated fair values at the dates of  acquisition.  Operating  results of these
acquired  organizations  are included in FinishMaster's  consolidated  financial
statements from the respective dates of purchase.  Details of these acquisitions
are  contained  in the  notes  to the  consolidated  financial  statements.  The
Thompson, PBE, Inc. acquisition was accounted for as a purchase and accordingly,
the purchase  price was  allocated to assets  acquired and  liabilities  assumed
based upon their estimated fair values at the date of acquisition.


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

General

FinishMaster, Inc. is the leading distributor of automotive paints, coatings and
paint-related  accessories to the automotive  collision  repair  industry in the
United States.  The Company  serves its customers  through 143 sales outlets and
three  distribution  centers located in 22 states. The Company has approximately
20,000  customers to which it provides a  comprehensive  selection of brand name
products  supplied by E.I. DuPont de Nemours & Co.  ("DuPont"),  PPG Industries,
Inc.  ("PPG"),  BASF  Corporation  ("BASF") and Minnesota Mining & Manufacturing
Co., Inc. ("3M") in addition to its own  FinishMaster  PrivateBrand  refinishing
accessory products. The Company is typically the primary source of supply to its
customers and offers a broad range of services designed to enhance the operating
efficiencies and competitive positions of its customers and suppliers.

The  Company  is  the  leading   consolidator  in  the  automotive   refinishing
distribution   industry,   having   successfully   completed   approximately  25
acquisitions  over the past  seven  years,  ranging  in size from  $0.3  million
fill-in  acquisitions  to the  acquisition  of Thompson PBE, Inc. (the "Thompson
acquisition").  On November 21, 1997,  the Company  acquired  substantially  all
outstanding   shares  of  common  stock  of  Thompson  PBE,   Inc.,  a  Delaware
corporation,  for $8.00 per share, or an aggregate of approximately $73,471,000,
including acquisition costs. In addition to the cash purchase price, the Company
refinanced  approximately  $34,474,000 of Thompson's outstanding indebtedness at
the date of  purchase.  The  Thompson  acquisition,  significantly  expanded the
Company's geographic presence in the Southeastern and Western United States. The
Company's operations are currently organized into three divisions:  Southeastern
Division,  Western  Division,  and  Central/Northeastern  Division.  The Company
intends to continue its strategy of expanding through additional acquisitions.

As part of the  integration  of Thompson  PBE and  FinishMaster,  the Company is
planning to  consolidate  and upgrade its store and corporate  computer  systems
over  the  next  two  years.  Current  estimates  for  this  upgrade  amount  to
approximately $3.5 million.

Effective  March 1, 1998 the Company moved its corporate  offices to 54 Monument
Circle,  Indianapolis,  IN 46204.  Relocating  to the new  headquarters  will be
executive  management  including  the  President  and Chief  Operating  Officer,
Purchasing,  Management  Information  Systems,  Human Resources,  Operations and
Finance Executives, as well as the Accounting department.

Computer memory was very expensive on early mainframe computers, therefore, some
computer  programs used only the final two digits for the year in the date field
and  assumed  that the first two digits  were "19." As a result,  some  computer
applications  may be unable to interpret the change from year 1999 to year 2000.
The Company has implemented a detailed plan to ensure Year 2000 compliance.  The
Company  contemplates  working closely with its major suppliers and customers in
their Year 2000 compliance efforts. FinishMaster,  like most organizations,  has
not  completed  the Year 2000  Compliance  process but does not believe that the
cost of such  process  will be material or that there is a material  uncertainty
regarding its ability to complete said process by Year 2000.  The Company has in
place a detailed  testing and  correction  plan which would provide for a smooth
transition  into 2000.  The focus is to  confirm  that the  supply  chain,  from
manufacturer to FinishMaster to customer, is not broken due to computer problems
at the change of the century. In addition,  the Company has written verification
of Year 2000 compliance from all its hardware, software and suppliers with which
it has data processing relationships.

The Company changed its fiscal year-end from March 31 to December 31,  effective
for the period ending December 31, 1996.



<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for the periods  indicated certain items from the
Company's  Statement  of  Operations  and the  corresponding  calculations  as a
percentage of net sales.


<TABLE>
<CAPTION>
                                                                                Twelve Months Ended         Twelve Months Ended
                                                                                      12/31/96                   12/31/95
                                                  Year Ended 12/31/97             (unaudited) (1)             (unaudited) (1)

                                                 $            % of NS            $              % of NS     $            % of NS
                                               ------------------------       --------------------------    ---------------------
NET SALES                                        $130,175        100.0%         $125,795          100.0%  $   99,235       100.0%
COST OF SALES                                      83,068         63.8%           81,591           64.9%      63,568        64.1%
                                               ------------------------       --------------------------    ---------------------
                                                                                                                            
<S>                                                <C>            <C>             <C>              <C>                      <C>  
GROSS PROFIT                                       47,107         36.2%           44,204           35.1%      35,667        35.9%
                                                                                                              

EXPENSES:
Operating                                           20,568        15.8%           20,295           16.1%      14,676        14.8%
Selling, general and administrative                 17,982        13.8%           17,427           13.8%      13,381        13.5%
Depreciation                                         1,435         1.1%              974            0.8%         559         0.5%
Amortization of intangible assets                    3,290         2.6%            2,487            2.0%       1,284         1.3%
                                               ------------------------       --------------------------    ---------------------
                                                                                                                        
                                                    43,275        33.3%           41,183           32.7%      29,900        30.1%
                                               ------------------------       --------------------------    ---------------------
INCOME FROM OPERATIONS                               3,832         2.9%            3,021            2.4%       5,767         5.8%

OTHER INCOME (EXPENSE)
Investment income                                      128         0.1%               99            0.1%        261          0.3%
Interest expense                                    (2,789)       (2.1%)          (1,713)          (1.4%)      (687)        (0.7%)
                                               ------------------------       --------------------------    ---------------------
                                                    (2,661)       (2.0%)          (1,614)          (1.3%)      (426)        (0.4%)
                                               ------------------------       --------------------------    ---------------------

INCOME BEFORE INCOME TAXES                           1,171         0.9%           1,407             1.1%       5,341         5.4%
Income tax expense                                     515         0.4%             745             0.6%       1,871         1.9%
                                               ------------------------       --------------------------    ---------------------
NET INCOME                                       $     656         0.5%       $     662             0.5%    $  3,470         3.5%
                                               ========================       ==========================    =====================

NET INCOME PER SHARE - BASIC                  $       0.11                    $    0.11                     $   0.58
                                              ============                    ==========                    ========

                     - DILUTED                $       0.11                    $    0.11                     $   0.58
                                              ============                    =========                     ========


WEIGHTED AVERAGE  SHARES OUTSTANDING
                                                     5,994                        6,000                        6,000
                                              ============                    =========                     ========
</TABLE>

(1)      The  Company  changed its  fiscal  year-end  from March 31 to
         December 31, effective for the period ended December 31, 1996.

Year ended December 31, 1997 versus Twelve months ended December 31, 1996

The Company changed its fiscal year-end from March 31 to December 31,  effective
for the period ended December 31, 1996. As a result, the audited amounts for the
year ended December 31, 1997 are presented with the comparable unaudited amounts
for the twelve months ended December 31, 1996 and 1995. Management believes that
for purposes of management's  discussion and analysis the comparison between the
twelve month periods  provides a more meaningful  understanding of the Company's
performance.  The results of operations  for the fiscal year ended  December 31,
1997 include the results of  operations  for Thompson  from  December 1, 1997 to
December 31, 1997.  The results of  operations  for the period from November 21,
1997, the date of the acquisition, to November 30, 1997 is not significant.

Net Sales.  Net sales for the year ended  December  31, 1997  increased  by $4.4
million or 3.5% to $130.2  million  from  $125.8  million for the same period in
1996.  This increase was  attributable  to the additional  sales  contributed by
Thompson  of $12.4  million  for the  month of  December  and sales  from  other
acquisitions  of $1.7 million for the year.  The Thompson sales were offset by a
decline in same outlet  sales.  Same outlet sales  declined  primarily  due to a
slowdown in the van conversion industry, the loss of certain low margin business
resulting  from small market share,  suppliers  discounting  and offering  large
incentives in certain  markets to increase market share and flat industry market
conditions.

Gross  Profit.  Gross profit for the year ended  December 31, 1997  increased to
$47.1 million from $44.2 million for the same period in 1996.  Gross profit as a
percentage of sales increased to 36.2% for the year ended December 31, 1997 from
35.1% for the same period in 1996.  The increase in gross profit  percentage  is
the result of  participation  in suppliers'  rebate and  incentive  programs and
optimizing early payment discounts from suppliers.

Operating  Expenses.  Operating  expenses  for the year ended  December 31, 1997
increased  by $0.3  million to $20.6  million  from $20.3  million  for the same
period in the prior year.  Operating expenses as a percent of sales decreased to
15.8% for the year ended December 31, 1997 compared to 16.1% for the same period
in 1996. Operating expenses consist of wages, building and vehicle costs for the
outlets and the distribution  centers.  The decrease in operating  expenses as a
percentage  of  sales  is  the  result  of  the  Company's  profit   improvement
activities,  including, but not limited to, staffing reductions and streamlining
sales outlet and distribution  activities,  which reduced operating  expenses by
approximately $2.4 million.  The profit improvements of $2.4 million were offset
by Thompson's  operating  expenses of $2.3 million for the month of December and
other acquisitions of $0.4 million for the year.

Selling, General, and Administrative Expenses. (SG&A) SG&A expenses for the year
ended  December 31, 1997  increased by $0.6 million to $18.0  million from $17.4
million for the same period in the prior year. SG&A decreased as a percentage of
sales to 13.8% for the year ended  December  31, 1997  compared to 13.9% for the
same  period for the year  ended  December  1996.  SG&A costs for the year ended
December 31, 1997 were reduced  approximately  $2.5 million over the same period
in the prior  year as the result of the  Company's  cost  reduction  activities,
including head count reductions,  professional  fees, travel and  entertainment,
and  advertising.  The cost  reduction of $2.5 million was offset by  Thompson's
SG&A costs for the month of December  of $2.2  million,  selling  costs of other
acquisitions  of $0.3 million and one time costs related to the  integration  of
Thompson and future  acquisitions  of $0.6 million.  General and  administrative
expenses consist of corporate support staff and expenses for commission,  wages,
and expenses supporting customer sales activity.

Depreciation and Amortization of Intangible  Assets.  Depreciation  expenses for
the year ended  December 31, 1997 increased by $0.5 million over the same period
in  the  prior  year.   Depreciation  and  amortization  consists  primarily  of
depreciation  expenses  related to the corporate  distribution  center and store
locations  and  amortization  of  goodwill  and  non-compete  costs  related  to
acquisitions.  The  increase  is  attributable  to $0.2  million  of  Thompson's
depreciation  for the month of  December.  In  addition,  $0.3  million  is from
depreciable assets acquired to improve operating  efficiencies as well as a full
year's depreciation on assets from the prior year's  acquisitions.  Amortization
of intangible  assets  increased by $0.8 million for the year ended December 31,
1997 over the same period of the prior year.  The  increase is  attributable  to
$0.3  million of goodwill  amortization  for the Thompson  acquisition  and $0.5
million of additional acquired intangibles.

Interest  Expense.  Interest  expense  increased $1.1 million for the year ended
December  31,  1997 over the same  period in the prior  year.  Interest  expense
primarily  includes  interest on mortgages and notes payable to former owners of
acquired businesses as well as interest on the Company's credit facilities.  The
increase  in interest  expense  was the result of  interest on debt  incurred to
finance the Thompson transaction. The Thompson transaction occurred November 21,
1997 and the  total  acquisition  price  of $73.5  million  was  funded  through
borrowings.

Provision for Income Tax. The Company's  effective tax rate for the for the year
ended  December  31, 1997 was 44%  compared to 53% for the twelve  months  ended
December 31, 1996. This rate varied from the Company's statutory tax rate of 34%
primarily  due to  state  taxes  along  with  certain  expenses  which  are  not
deductible for tax purposes.

Twelve months ended  December 31, 1996 versus  Twelve months ended  December 31,
1995

For purposes of management's  discussion and analysis, the unaudited amounts for
the twelve  months ended  December 31, 1996 are  presented  with the  comparable
unaudited amounts for the twelve months ended December 31, 1995.

Net Sales.  Net sales for the twelve months ended  December 31, 1996 were $125.8
million,  an increase of  approximately  26.8% compared to $99.2 million for the
twelve months ended December 31, 1995.  The sales  increase  resulted from sales
generated by  acquisitions  in Maryland and Virginia in the twelve  months ended
December 31, 1996. In addition,  acquisitions in Delaware, Michigan, New Jersey,
Oklahoma, Pennsylvania, and Texas in 1995 contributed sales to the entire twelve
months ended December 31, 1996.

Gross  Profit.  Gross profit for the twelve  months ended  December 31, 1996 was
$44.2 million compared to $35.7 million for the twelve months ended December 31,
1995 and as a  percentage  of net sales  decreased  to 35.1% from  35.9%.  Gross
profit percentage  declined as a percentage of net sales as competitive  pricing
pressures  increased  in the twelve  months  ended  December  31,  1996 as paint
manufacturers intensified efforts to gain market share.

Operating Expenses.  Operating expenses for the twelve months ended December 31,
1996 were $20.3  million  compared to $14.7  million for the twelve months ended
December 31, 1995.  Operating expenses as a percentage of net sales increased to
16.1% for the twelve  months ended  December 31, 1996  compared to 14.8% for the
twelve  months ended  December 31, 1995.  Operating  expenses  consist of wages,
building and vehicle  costs for the outlets and the  distribution  centers.  The
increase as a percentage of net sales  resulted from higher  operating  costs of
recent  acquisitions  along with one-time  expenses related to consolidating and
relocating  several  facilities in 1996.  Efficiencies  gained from sales outlet
consolidations  in the Southwestern  Region has enabled the Company to close its
Texas  distribution  center during the first quarter of 1997.  Certain  expenses
related to the  closing of the Texas  distribution  center  affected  the twelve
months ended December 31, 1996. The  additional  expense  increase was partially
offset by the Company's programs to reduce costs.

Selling,  General and Administrative.  SG&A expenses for the twelve months ended
December 31, 1996 were $17.4  million  compared to $13.4  million for the twelve
months  ended  December  31, 1995.  SG&A  expenses as a percentage  of net sales
increased  to 13.8% for the twelve  months ended  December 31, 1996  compared to
13.5% for the twelve months ended December 31, 1995.  General and administrative
expenses consist of corporate support staff and expenses for commission,  wages,
and expenses supporting customer sales activity.

Depreciation  and  Amortization.  Depreciation  and  amortization for the twelve
month  period was $3.5 million  compared to $1.8  million for the twelve  months
ended December 31, 1995.  Depreciation  and  amortization as a percentage of net
sales  increased to 2.8% for the twelve months ended  December 31, 1996 compared
to 1.8%  for the  twelve  months  ended  December  31,  1995.  Depreciation  and
amortization consist primarily of depreciation  expenses related to the Michigan
distribution  center and sales outlets and amortization of goodwill and costs of
non-competition  agreements  related to acquisitions.  The increase results from
amortization  of  intangibles  and  depreciation  of fixed  assets  incurred  in
connection  with the Company's  acquisitions in Virginia and Maryland during the
current period and a full year's  amortization and depreciation for prior year's
acquisitions  along with  revisions,  in 1996, to the estimated lives of certain
intangibles.

Interest Expense. Interest expense for the twelve months ended December 31, 1996
was $1.7 million  compared to $0.7 million for the twelve months ended  December
31, 1995.  Interest expense  primarily  includes interest on mortgages and notes
payable to former  owners of  acquired  businesses  as well as  interest  on the
Company's  line of credit.  The increase was the result of interest  incurred in
connection with seller financing for current year acquisitions and the increased
use of the Company's line of credit to support  acquisitions and working capital
requirements.

Provision for Income Tax. The Company's effective tax rate for the twelve months
ended  December  31, 1996 was 53%  compared to 40% for the twelve  months  ended
December 31, 1995. This rate varied from the Company's statutory tax rate of 34%
primarily  due to  state  taxes  along  with  certain  expenses  which  are  not
deductible for tax purposes.







<PAGE>



QUARTERLY INFORMATION

The following  table sets forth  consolidated  statements of operations data for
each of the eight  quarters  ended  December 31, 1997.  The unaudited  quarterly
information has been prepared on the same basis as the annual  information  and,
in management's  opinion,  includes all  adjustments,  consisting of only normal
recurring entries,  necessary for a fair presentation of the information for the
quarters  presented.  The operating  results for any quarter are not necessarily
indicative of results for any future period.

<TABLE>
<CAPTION>
                                                                  Quarterly Results for the Periods Ended
                                                     December 31, 1997                           December 31, 1996
                                        --------------------------------------------  ------------------------------------------
                                        3/31/97    6/30/97    9/30/97    12/31/97(3)  3/31/96    6/30/96    9/30/96    12/31/96
                                                                 (in thousands, except per share data)
<S>                                      <C>        <C>        <C>        <C>          <C>         <C>       <C>         <C>    
Net sales                                $29,239    $31,034    $30,696    $39,206      $29,973     $33,149   $33,399     $29,274
Cost of sales                             18,610     19,462     19,539     25,457       19,660      21,222    21,584      19,125
                                        --------   --------   --------   --------     --------    --------  --------    --------
Gross profit                              10,629     11,572     11,157     13,749       10,313      11,927    11,815      10,149
Operating expenses                         4,667      4,593      4,739      6,569        4,982       5,062     5,182       5,069
Selling, general and
   administration                          3,801      3,942      3,903      6,336        4,235       4,425     4,062       4,705
Depreciation and  amortization(1)          1,017      1,026      1,057      1,625          641        705        769      1,346
                                        --------   --------   --------   --------     --------    --------  --------    --------
Income(loss) from operations               1,144      2,011      1,458       (781)         455       1,735     1,802        (971)
Investment income, net                         6         26         35         61           22          29        12          36
Interest expense                            (494)      (437)      (345)    (1,513)        (340)       (478)     (509)       (386)
                                        --------   --------   --------   --------     --------    --------  --------    --------
                                                                                                      
Income(loss) before income taxes             656      1,600      1,148     (2,233)         137       1,286     1,305      (1,321)
Income tax expense(benefit) (1)              250        595        436       (766)         135        587        478       (455)
                                        --------   --------   --------   --------     --------    --------  --------    --------
Net income (loss)                         $  406   $  1,005  $     712    $(1,467)     $     2    $    699 $     827    $   (866)
                                        ========  =========  =========  ==========     =======    ======== =========    =========

Net income (loss) per share - Basic (2)   $ 0.07     $ 0.17     $ 0.12   $ (0.24)       $ 0.00     $ 0.12     $ 0.14   $   (0.14)
                                        ========  =========  =========  =========    =========   ========  =========   ==========
                           - Diluted (2)  $ 0.07     $ 0.17     $ 0.12   $ (0.24)       $ 0.00     $ 0.12     $ 0.14   $   (0.14)
                                        ========  =========  =========  =========    =========   ========  =========   ==========
</TABLE>


(1)      The increase in depreciation and amortization results from amortization
         of intangibles and  depreciation of fixed assets incurred in connection
         with the Company's  acquisitions in the periods ended December 31, 1997
         and 1996 and a full  year's  amortization  and  depreciation  for prior
         year's  acquisitions  along with  revisions to the  estimated  lives of
         certain intangibles in the quarter ending December 31, 1996.

(2)      The sum of the  quarterly  net income  (loss) per share amounts for the
         periods  presented may not equal the annual amount reported because net
         income per share is computed independently for each quarter.

(3)      The  operating  results for the  quarter  ended  December  31, 1997 are
         affected by the Thompson  acquisition,  which was completed on November
         21, 1997.  The results of Thompson for the month of December,  1997 are
         included in the December 31, 1997 amounts.  For further  explanation of
         the operating  effect of the Thompson  acquisition,  see  "Management's
         Discussion   and  Analysis  of  Financial   Condition  and  Results  of
         Operations" for the year ended December 31, 1997.


Seasonality  and  Quarterly  Fluctuations.  The  Company's  sales and  operating
results  have  varied  from  quarter to quarter  due to various  factors and the
Company expects these fluctuations to continue. Among these factors are seasonal
buying  patterns  of the  Company's  customers  and the timing of  acquisitions.
Historically,  outlet sales have slowed in the late fall and winter of each year
largely due to inclement  weather and the reduced number of business days during
the holiday season. As a result, financial performance for the Company's outlets
is generally  lower during the December and March quarters  compared to the June
and  September  quarters.  In  addition,  the timing of  acquisitions  may cause
substantial  fluctuations  of operating  results  from  quarter to quarter.  The
Company takes advantage of periodic special  incentive  programs  available from
suppliers which extend the due date of purchases beyond terms normally available
with large volume  purchases.  The timing of these  programs can  contribute  to
fluctuations  in  the  Company's  quarterly  cash  flow.  Although  the  Company
continues  to  investigate  strategies  to smooth  the  seasonal  pattern of its
quarterly  results of  operations,  there can be no assurance that the Company's
net sales,  results of  operations  and cash flow will not  continue  to display
these seasonal patterns.



<PAGE>



INFLATION AND OTHER ECONOMIC FACTORS

Inflation  affects  FinishMaster's  costs of materials sold,  salaries and other
related  costs  of  distribution.   To  the  extent  permitted  by  competition,
FinishMaster has offset these higher costs of materials  through selective price
increases.

The Company's business may be negatively affected by cyclical economic downturns
in the markets in which it operates. In addition,  markets in the van conversion
industry may increase the cyclical nature of the Company's operations.  Sales in
this market accounted for approximately 5-10% of sales for the periods reported.
There is no assurance that the Company will not be materially adversely affected
in the future by cyclical  downturns in its  markets.  The  Company's  financial
performance  is  also  dependent  on  its  ability  to  acquire  businesses  and
profitably  integrate  them into their  operations.  

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company  considered  the  provisions of Financial  Reporting  Release No. 48
"Disclosure of Accounting  Policies for  Derivative  Financial  Instruments  and
Derivative Commodity  Instruments and Disclosure of Quantitative and Qualitative
Information  about Market Risk  Inherent in  Derivative  Financial  Instruments,
Other Financial  Instruments and Derivative Commodity  Instruments." The Company
had no holdings of  derivative  financial  or  commodity  based  instruments  at
December 31, 1997. A review of the Company's  other  financial  instruments  and
risk  exposures at December 31, 1997  indicated that the Company had exposure to
interest rate risk. At December 31, 1997,  the Company  concluded that near-term
changes to interest rates should not materially  affect the Company's  financial
position, results of operations or cash flows.

Other discussion  regarding the Company's  business risks is presented in Item 1
"Business" on this Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

The consolidated  financial  statements contain audited statements of cash flows
for the year ended  December 31, 1997,  the nine months ended  December 31, 1996
and the year ended March 31, 1996. The following table shows unaudited condensed
consolidated  statements  of cash flows for the three  comparable  twelve  month
periods.

<TABLE>
<CAPTION>
                                               Year Ended             Twelve Months Ended        Twelve Months Ended
                                           December 31, 1997           December 31, 1996          December 31, 1995
                                                                          (unaudited)                (unaudited)
                                           --------------------------------------------------------------------------
                                                                         (in thousands)
<S>                                           <C>                          <C>                          <C>      
Net cash provided by (used in):

Operating activities                          $  1,257                     $  3,280                     $ (1,875)
                                                                                                     
Investing activities                           (74,846)                      (6,135)                      (5,085)
                                                                                                     
Financing activities                            73,653                        2,617                        7,084
                                              --------                     --------                     -------- 
                                                                                                     
Increase (decrease) in cash                         64                         (238)                         124
                                                                                                     
Cash at beginning of period                        300                        1,647                        2,138
                                              --------                     --------                     -------- 
                                                                                                     
Cash at end of period                         $    364                     $  1,409                     $  2,262
                                              ========                     ========                     ======== 
</TABLE>


The Company's liquidity and capital resources have been significantly influenced
by acquisition  activity.  The Company  historically  has financed  acquisitions
through a combination of seller  financing,  internally  generated cash flow and
unsecured bank borrowings under the Company's loan facilities.  In addition, net
proceeds of $16.2 million from a February,  1994 public stock offering were used
to accelerate the Company's acquisition program.

On November 21, 1997, the Company acquired  substantially all of the outstanding
common  stock of  Thompson  PBE,  Inc.  for  $8.00  per  share.  Thompson,  like
FinishMaster,  is an aftermarket  distributor of automotive paints, coatings and
related supplies. The total purchase price, including related acquisition costs,
was   $73,471,000.   The  Company  also   refinanced   $34,474,000  of  Thompson
indebtedness.  The Company  funded the  acquisition  and  refinanced  Thompson's
indebtedness  with a combination of bank financing and  subordinated  borrowings
from LDI.

Cash  provided  by  operating  activities  was $1.3  million  for the year ended
December  31,1997,  compared to $3.3  million for the  comparable  period of the
prior  year.   The  decrease  in  cash   provided  by  operations  is  primarily
attributable to cash used to take advantage of early payment discounts available
from  suppliers  and for  partial  payment  of the  past due  Thompson  accounts
payable.  In  addition,  cash was used for large  inventory  buys at year end in
advance of price increases.

Cash of $3.4 million was provided by accounts receivable reductions for the year
ended December 31, 1997 compared to $1.0 million in the same period of the prior
year. This was a result of increased collection efforts and improvements in days
sales outstanding.

The Company  used cash of $1.5  million in the year ended  December 31, 1997 and
$0.4  million  in the same  period  in the  prior  year as the  result  of large
inventory buys from major suppliers in advance of price increases.  Inventory at
December 31, 1997  included  approximately  $5.0 million  attributable  to large
year-end buys.

Cash used of $6.4 million for  accounts  payable and other  current  liabilities
increased  $5.3 million over the same period in the prior year.  The increase in
cash used was a result of increased  participation  in major  supplier  discount
programs and the payment of Thompson's past due accounts payable.

The Company's  investing  activities used cash of $74.1 million to acquire three
businesses,  including  Thompson,  in the year ended  December  31,  1997.  This
compares to $5.3  million used to acquire six  businesses  in the same period in
the prior year. In addition the Company had capital expenditures of $0.7 million
and $0.6 million in the years ended  December  31, 1997 and 1996,  respectively.
Capital expenditures were primarily for sales outlet and warehouse  improvements
and equipment.  The Company uses operating leases to finance its computer system
and delivery vehicles.

The Company's  financing  activities provided cash of $73.7 million for the year
ended December 31, 1997 compared to $2.6 million in the same period in the prior
year. For the year ended December 31, 1997 cash was provided from  borrowings to
finance the Thompson acquisition of $73.8 million and $34.4 million to refinance
Thompson's  debt. In addition,  $5.6 million was borrowed on the working capital
line to reduce  Thompson's  past due accounts  payable and $4.1 million was used
for  repayment  of long  term  seller  financing  on  other  current  and  prior
acquisitions.  For the year ended  December 31, 1996 cash  provided by financing
activities  of $2.6  million  was  used  for  working  capital  and  acquisition
requirements.

The Company had working capital of  approximately  $42.0 million at December 31,
1997. In addition to working capital,  the Company had term credit and revolving
credit  facilities  totaling $100 million,  and senior  subordinated debt of $30
million.  At December 31, 1997 the Company had available  $8.5 million of unused
revolving credit.

As a condition of the amended bank credit  facility of $100 million,  LDI agreed
to make by June 30, 1998 an additional  equity investment of $14 million or such
lesser amount as may be acceptable to the Company's bank. The Company intends to
satisfy this requirement through an acquisition of LDI AutoPaints ("AutoPaints")
in exchange for equity in the Company.

The Company is  currently  pursuing  other  financing  arrangements.  Should the
Company be successful in implementing  favorable financing terms,  proceeds will
be used to retire certain bank term loans,  a portion of  outstanding  under the
revolving  credit  facility  and the  subordinated  debt  payable to LDI.  Early
retirement of indebtedness will result in an extraordinary loss in the amount of
the net book value of  capitalized  debt  issue  costs.  At  December  31,  1997
unamortized debt issue costs were approximately $1.6 million.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This Report contains  certain  forward-looking  statements  pertaining to, among
other things,  the Company's  future results of operations,  cash flow needs and
liquidity,   acquisitions   and  other   aspects   of  its   business.   Similar
forward-looking  statements may be made by the Company from time to time.  These
statements  are based  largely on the  Company's  current  expectations  and are
subject to a number of risks and  uncertainties.  Actual  results  could  differ
materially from these forward-looking statements.  Important factors to consider
in evaluating such forward-looking statements include changes in external market
factors,  changes in the Company's  business strategy or an inability to execute
its  strategy  due  to  changes  in  its  industry  or  the  economy  generally,
difficulties associated with assimilating acquisitions,  the emergence of new or
growing   competitors,   seasonal  and  quarterly   fluctuations,   governmental
regulation,  the potential loss of key suppliers,  and various other competitive
factors.  In light of these risks and  uncertainties,  there can be no assurance
that  the  future  developments  described  in  the  forward-looking  statements
contained in this Report will in fact occur.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The response to this item is submitted in a separate section of this report.

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

None.

                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Item 10 is  incorporated  by reference from the  Registrant's  definitive  proxy
statement to be filed within 120 days of December 31, 1997.

ITEM 11 - EXECUTIVE COMPENSATION

Item 11 is  incorporated  by reference from the  Registrant's  definitive  proxy
statement to be filed within 120 days of December 31, 1997.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 12 is  incorporated  by reference from the  Registrant's  definitive  proxy
statement to be filed within 120 days of December 31, 1997.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 13 is  incorporated  by reference from the  Registrant's  definitive  proxy
statement to be filed within 120 days of December 31, 1997.

                                     PART IV

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

(a)List the following documents filed as part of this report:

Financial Statements -- Included elsewhere in this report.

Report of Independent Auditors

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders' Equity

Notes to Consolidated Financial Statements

Financial Statement Schedules


(b)   Reports on Form 8-K:

         - A Form 8-K was  filed on  October  15,  1997 to  accompany  the press
         release  issued in  connection  with the execution of the Agreement and
         Plan  of  Merger,   dated  as  of  October  14,  1997,   by  and  among
         FinishMaster, Inc., FMST Acquisition Corporation and Thompson PBE, Inc.
         ("Thompson"),   pursuant  to  which  the  Company   would  acquire  the
         outstanding shares of Thompson for a price of $8.00 per share.

         - A Form 8-K was filed on  December  on  December 3, 1997 to report the
         completion  of the  acquisition  by the  Company of  Thompson,  and was
         amended  by a Form  8-K/A  filed on  February  2,  1998 to  incorporate
         certain pro forma  consolidated  financial  statements  of the Company,
         after giving effect to the acquisition of Thompson.

(c)      The Exhibits filed herewith or incorporated herein by reference are set
         forth in the Exhibit Index on page ___.



<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date  March  31, 1998                        FINISHMASTER, INC.

                                             By: /s/ Thomas U. Young
                                                 ------------------------------
                                                 Thomas U. Young,
                                                 President, Vice Chairman of the
Board and Chief Operating Officer

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

    Signature                        Date            Title
    ----------------------------------------------------------------------------
(1) Principal Executive Officer:

    /s/Andre B. Lacy
    -------------------
    Andre B. Lacy                   March 31, 1998   Chairman of the Board
                                                     and Chief Executive Officer
    (2) Principal Financial 
        and Accounting Officer:


     /s/Roger A. Sorokin   
    -------------------
    Roger A. Sorokin                March 31, 1998   Vice President--Finance

(3) A Majority of the 
    Board of Directors:


     /s/Andre B. Lacy
    -------------------
    Andre B. Lacy                   March 31, 1998   Director


     /s/Thomas U. Young
    -------------------
    Thomas U. Young                 March 31, 1998   Director


     /s/Margot L. Eccles
    -------------------
    Margot L. Eccles                March 31, 1998   Director


     /s/William J. Fennessy
    -------------------
    William J. Fennessy             March 31, 1998   Director


     /s/Peter L. Frechette
    -------------------
    Peter L. Frechette              March 31, 1998   Director


     /s/Michael L. Smith
    -------------------
    Michael L. Smith                March 31, 1998   Director


     /s/Walter S. Wiseman
    -------------------
    Walter S. Wiseman               March 31, 1998   Director


<PAGE>



                           ANNUAL REPORT ON FORM 10-K
                        ITEM 8 and 14(a)(1) AND (2), (c),
                                     AND (d)
          LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
                                CERTAIN EXHIBITS
                          FINANCIAL STATEMENT SCHEDULE
                          YEAR ENDED DECEMBER 31, 1997
                               FINISHMASTER, INC.
                              INDIANAPOLIS, INDIANA

<PAGE>



FORM 10-K--ITEM 8 and 14(a)(1) AND (2)
FINISHMASTER, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE


The  following  consolidated  financial  statements  of  FinishMaster,  Inc. and
Subsidiaries are included in Item 8 of this Report:

Page

Report of Independent Auditors                                           ____

Consolidated Balance Sheets                                              ____

Consolidated Statements of Operations                                    ____

Consolidated Statements of Cash Flows                                    ____

Consolidated Statements of Shareholders' Equity                          ____

Notes to Consolidated Financial Statements                               ____


         The   following    consolidated   financial   statement   schedule   of
         FinishMaster, Inc. and Subsidiaries is submitted herewith:

Schedule II                                                              ____


     All  other  schedules  for  which  provision  is  made  in  the  applicable
     accounting  regulation of the Securities and Exchange Commission are either
     included  within the financial  statements,  not required under the related
     instruction or are inapplicable and, therefore, have been omitted.


<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders
FinishMaster, Inc.



We have audited the  accompanying  consolidated  balance sheets of FinishMaster,
Inc. and  Subsidiaries  as of December  31, 1997 and December 31, 1996,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the year  ended  December  31,  1997 and the nine month  period  ended
December 31, 1996.  Our audits also  included the financial  statement  schedule
listed in the index at Item 14(a).  These  financial  statements  and  financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule 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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
FinishMaster,  Inc. and  Subsidiaries at December 31, 1997 and December 31, 1996
and the  consolidated  results of their  operations and their cash flows for the
year ended December 31, 1997 and the nine-month  period ended December 31, 1996,
in  conformity  with  generally  accepted  accounting  principles.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.




                                                        COOPERS & LYBRAND L.L.P.



Grand Rapids, Michigan
March 20, 1998



<PAGE>


REPORT OF INDEPENDENT AUDITORS





Board of Directors and Stockholders
FinishMaster, Inc.



We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity,  and cash flows of FinishMaster,  Inc. and Subsidiary for
the year ended March 31, 1996. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  consolidated  financial  statements  referred to above  present
fairly, in all material respects the consolidated results of operations and cash
flows of FinishMaster, Inc. and Subsidiary for the year ended March 31, 1996, in
conformity with generally accepted accounting principles.





                                                          ERNST & YOUNG L.L.P.








Detroit, Michigan
April 18,1996


<PAGE>



REPORT OF INDEPENDENT AUDITORS





Board of Directors and Stockholders
FinishMaster, Inc.



We have audited the consolidated  financial statements of FinishMaster,  Inc. as
of March 31, 1996 and for the year then ended and have issued our report thereon
dated April 18, 1996. Our audit also included Schedule II of FinishMaster,  Inc.
which is included in the  financial  statement  schedule  listed in the index at
Item 14(a) of FinishMaster,  Inc. in its Annual Report on Form 10-K for the year
ended March 31, 1996. This financial statement schedule is the responsibility of
FinishMaster, Inc. management. Our responsibility is to express an opinion based
on our audits.

In our opinion, the financial statements schedule of FinishMaster, Inc. referred
to above, when considered in relation to the FinishMaster,  Inc. basic financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.







                                                  ERNST & YOUNG L.L.P.















Detroit, Michigan
April 18, 1996


<PAGE>



                               FINISHMASTER, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)


<TABLE>
<CAPTION>
                                                                                        December 31,         December 31,
                                                                                            1997                 1996
                                                                                     -------------------- --------------------

ASSETS
CURRENT ASSETS
<S>                                                                                      <C>                  <C>      
     Cash                                                                                $     364            $     300
     Accounts receivable, net of allowance for doubtful
         accounts of $2,247 and $700 respectively                                           28,744               12,752
     Inventory                                                                              53,442               24,828
     Refundable income taxes                                                                 1,299                   -
     Deferred income taxes                                                                   3,844                  474
     Prepaid expenses and other current assets                                               2,751                  785
                                                                                          --------               ------
                                                        TOTAL CURRENT ASSETS                90,444               39,139

PROPERTY AND EQUIPMENT
     Land                                                                                      368                  368
     Vehicles                                                                                1,082                   55
     Buildings and improvements                                                              3,797                3,105
     Machinery, equipment and fixtures                                                       9,065                5,909
                                                                                            ------               ------
                                                                                            14,312                9,437
     Accumulated depreciation                                                               (4,016)              (2,866)
                                                                                        -----------            ---------
                                                                                            10,296                6,571
OTHER ASSETS
     Intangible assets, net                                                                110,870               20,357
     Deferred income taxes                                                                   3,374                  289
     Other                                                                                     434                  121
                                                                                       -----------           ----------
                                                                                           114,678               20,767
                                                                                          --------             --------
                                                                                         $ 215,418             $ 66,477
                                                                                         =========             ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Note payable, bank                                                              $         -             $    1,841
     Accounts payable                                                                       28,274                7,786
     Accrued expenses and other current liabilities                                         12,072                2,554
     Current maturities of long-term obligations                                             8,005                4,139
                                                                                            ------               ------
                                                   TOTAL CURRENT LIABILITIES                48,351               16,320

LONG-TERM OBLIGATIONS, less current maturities                                             134,135               17,831

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, no par value, 1,000,000 shares authorized;
         no shares issued and outstanding
     Common stock, $1 stated value; 10,000,000 shares authorized;
         5,992,640 and 6,000,140 shares issued and outstanding                              5,993                6,000
     Additional paid-in capital                                                             14,466               14,509
     Retained earnings                                                                      12,473               11,817
                                                                                           -------              -------
                                                                                            32,932               32,326
                                                                                          --------              -------
                                                                                         $ 215,418             $ 66,477
                                                                                         =========             ========
</TABLE>



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


<PAGE>



                               FINISHMASTER, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                            Nine Months
                                                                        Year Ended             Ended             Year Ended
                                                                       December 31,         December 31,         March 31,
                                                                           1997                 1996               1996
                                                                    -------------------- ------------------- ------------------

<S>                                                                      <C>                  <C>                 <C>     
NET SALES                                                                $130,175             $ 95,822            $107,511

COST OF SALES                                                              83,068               61,931              69,499
                                                                          -------              -------             -------
GROSS PROFIT                                                               47,107               33,891              38,012

EXPENSES:
   Operating                                                               20,568               15,313              16,382
   Selling, general and administrative                                     17,982               13,192              14,467
   Depreciation                                                             1,435                  755                 779
   Amortization of intangible assets                                        3,290                2,065               1,311
                                                                           ------               ------              ------
                                                                           43,275               31,325              32,939
                                                                          -------              -------             -------
                                            INCOME FROM OPERATIONS          3,832                2,566               5,073

OTHER INCOME (EXPENSE):
   Investment income                                                          128                   77                 183
   Interest expense                                                        (2,789)              (1,373)               (841)
                                                                          --------             --------          ---------
                                                                           (2,661)              (1,296)               (658)
                                                                         ---------             --------            --------

INCOME BEFORE INCOME TAXES                                                  1,171                1,270               4,415
   Income tax expense                                                         515                  610               1,766
                                                                          -------              -------              ------
                                                                         $    656             $    660             $ 2,649
                                                                         ========             ========             =======
NET INCOME

                              NET INCOME PER SHARE       - BASIC       $      .11           $      .11          $      .44
                                                                       ==========           ==========          ==========

                                                         - DILUTED     $      .11           $      .11          $      .44
                                                                       ==========           ==========          ==========

                               WEIGHTED AVERAGE SHARES OUTSTANDING          5,994                6,000               6,000
                                                                         ========            =========             =======

</TABLE>


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


<PAGE>



                               FINISHMASTER, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                          Nine months      Year ended
                                                             Year ended  ended December    March 31,
                                                            December 31,     31,
                                                                 1997        1996          1996
                                                           -------------------------------------------

OPERATING ACTIVITIES:
<S>                                                         <C>              <C>              <C>     
  Net income                                                $    656         $    660         $  2,649
                                                                                           
  Adjustments  to  reconcile  net  income                                                  
    to net cash  provided  by  (used  in)                                                  
    operating activities:                                                                  
      Depreciation and amortization                            4,725            2,820            2,090
     Bad debt expense                                            859              798              548
                                                                                           
     Deferred income taxes                                      (681)            (400)             (38)
      Changes in operating assets and liabilities:                                         
         Account receivable                                    3,388            2,324           (1,997)        
         Inventories                                          (1,456)            (815)            (778)
         Prepaids and other current assets                       177             (270)            (243)
         Accounts payable and other current liabilities       (6,411)          (2,775)          (2,694)
                                                            --------         --------         --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES            1,257            2,342             (463)
                                                                                           
                                                                                           
INVESTING ACTIVITIES:                                                                      
  Business acquisitions                                      (74,149)          (3,083)         (22,193)
  Purchases of property and equipment                           (697)            (620)            (762)
  Sale of marketable securities                                   --               --            6,906
  Other                                                           --              (11)            (313)
                                                            --------         --------         --------
                                                                                           
NET CASH USED IN INVESTING ACTIVITIES                        (74,846)          (3,714)         (16,362)
                                                                                           
                                                                                           
FINANCING ACTIVITIES:                                                                      
                                                                                           
  Net borrowings (repayments) under note payable, bank        (1,841)           1,841               --
                                                                                           
  Purchase of common stock                                       (50)              --               --
  Acquisition financing                                       73,819            1,191           10,774
  Debt issuance costs                                         (1,689)              --               --
                                                                                           
  Proceeds from long-term obligations                         41,951               --            7,809
  Repayment of long-term obligations                         (38,537)          (2,469)          (2,787)
                                                            --------         --------         --------
NET CASH PROVIDED BY FINANCING ACTIVITIES                     73,653              563           15,796
                                                            --------         --------         --------
                                                                                           
                                                                                           
INCREASE (DECREASE) IN CASH                                       64             (809)          (1,029)
                                                                                           
CASH AT BEGINNING OF PERIOD                                      300            1,109            2,138
                                                            --------         --------         --------
                                                                                           
CASH AT END OF PERIOD                                       $    364         $    300         $  1,109
                                                            ========         ========         ========
                                                                                           
                                                                                           
                                                                                           
SUPPLEMENTAL  DISCLOSURE  OF CASH FLOW  INFORMATION                                        
Cash paid during the period for:                                                           
    Interest                                                $  2,192         $  1,313         $    762
                                                            ========         ========         ========
                                                                                           
    Taxes                                                   $  1,520         $    687         $    774
                                                            ========         ========         ========
</TABLE>


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


<PAGE>



                               FINISHMASTER, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         Additional        Net
                                                             Common       paid-in       Unrealized      Retained
                                                             Stock        Capital      Gain/(Loss)      Earnings      Totals
                                                          ------------- ------------- --------------- ------------- ------------

<S>                                                        <C>          <C>            <C>          <C>           <C>       
BALANCES AT APRIL 1, 1995                                    $ 6,000      $ 14,508       $      (60)  $    8,508    $   28,956

Adjustment related to sale of marketable securities                                              60                         60

Net income for the year                                                                                    2,649         2,649
                                                             -------       -------        ---------      -------        ------

BALANCES AT MARCH 31, 1996                                     6,000        14,508                 -      11,157        31,665

Options exercised                                                                1                                            1

Net income for the nine month period                                                                         660           660
                                                             -------       -------        ---------      -------        ------

BALANCES AT DECEMBER 31, 1996                                  6,000        14,509                        11,817        32,326
                                                                                            -

Purchase of common stock                                          (7)          (43)
                                                                                                                           (50)

Net income for the year                                                                                      656           656
                                                             -------       -------        ---------      -------        ------

BALANCES AT DECEMBER 31, 1997                                $ 5,993      $ 14,466        $    -          $12,473      $32,932
                                                             =======      ========        ======          =======      =======
</TABLE>





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


<PAGE>

FINISHMASTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SIGNIFICANT ACCOUNTING POLICIES

Nature of Business:  FinishMaster, Inc. ("the Company" or "FinishMaster") is the
leading national  distributor of automotive  paints,  coatings and paint-related
accessories to the automotive collision repair industry. As of December 31, 1997
the Company  operated  143 sales  outlets and three  distribution  centers in 22
states.  The  Company is  organized  into three major  geographic  regions - the
Southeastern,  Western  and  Central/Northeastern  Divisions.  The  Company  has
approximately 20,000 customers to which it provides a comprehensive selection of
brand name products supplied by DuPont, PPG, BASF and 3M, in addition to its own
FinishMaster  PrivateBrand refinishing accessory products. The Company is highly
dependent on a small number of key suppliers.

Majority  Stockholder:  On February 23, 1994,  the Company  completed an initial
public  offering of common stock on the NASDAQ national market under the trading
symbol "FMST." The Company sold 1.7 million shares of common stock at an initial
public offering price of $10.50 per share. The net proceeds from the offering of
approximately  $16.2  million were used by  FinishMaster  to fund  acquisitions,
repay indebtedness,  finance working capital and for general corporate purposes.
As a result of these  transactions,  4,045,000  shares or 67.4% of the Company's
outstanding stock was owned by Maxco, Inc.  ("Maxco") at March 31, 1996. On July
9, 1996, LDI AutoPaints, Inc. ("AutoPaints"), an Indiana corporation,  purchased
all of the shares of common stock owned by Maxco.  Effective  December 31, 1996,
LDI, Ltd.  ("LDI")  transferred to AutoPaints 100 shares of the Company which it
had  purchased  on the  open  market  in  August,  1995.  As a  result  of these
transactions,  AutoPaints'  ownership of FinishMaster stock was 4,045,100 shares
or 67.5% at December 31, 1997.

Use of Estimates:  The preparation of these consolidated financial statements in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

Principles of Consolidation:  The consolidated financial statements,  identified
as FinishMaster,  Inc., include the consolidated accounts of FinishMaster, Inc.,
Thompson  PBE,  Inc.,  and  Refinishers  Warehouse,  Inc.  Sales by  Refinishers
Warehouse are primarily to FinishMaster and are eliminated in consolidation. All
other significant intercompany, equity accounts and transactions are eliminated.
References to the Company or  FinishMaster  throughout this report relate to the
consolidated entity.

Transactions with Majority Shareholder:  AutoPaints is a wholly-owned subsidiary
of Lacy  Distribution,  which is, in turn,  a  wholly-owned  subsidiary  of LDI.
Pursuant to an arrangement between the Company and AutoPaints,  the Company pays
AutoPaints  for services it provides to the Company.  During the period  between
July 10, 1996 and  December 31, 1997,  AutoPaints  has provided  services to the
Company to support  certain  managerial  tasks.  Accordingly,  the Company  paid
$291,000 to AutoPaints  during the year ended December 31, 1997, and $262,000 in
the  nine  months  ended  December  31,  1996  in  return  for the  services  of
AutoPaints.

Prior to July 9, 1996, the Company received  certain services from Maxco.  These
services  included  central  processing  of all  insurance,  including  employee
benefit coverages, general and automobile liability,  property and casualty. All
expenses  directly  attributable  to  FinishMaster  were  allocated  by Maxco to
FinishMaster.

Receivables:  Trade  accounts  receivable  represent  amounts due primarily from
automotive body repair shops and  dealerships.  Trade  receivables are typically
not collateralized.  No single customer exceeds 10% of the Company's receivables
at December 31, 1997.

Inventories:  Inventories are stated at the lower of first-in, first-out cost or
market and  consist  primarily  of  purchased  paint and  refinishing  supplies.
Substantially all inventories consist of finished goods.

Properties and  Depreciation:  Property and equipment are stated on the basis of
cost and include  expenditures  for new facilities and equipment and those which
materially extend the useful lives of existing facilities and equipment.

Expenditures  for normal  repairs and  maintenance  are charged to operations as
incurred.  Depreciation  is  computed  by  the  straight-line  method  over  the
following range of estimated useful lives:


          Vehicles                                5 Years
          Building & Improvement                  Up to 40 Years
          Leasehold Improvement                   Life of Lease
          Machinery, Equipment & Fixtures         3 to 10 Years


<PAGE>

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)


Income Taxes: Deferred income taxes are recognized for the temporary differences
between the tax bases of assets and liabilities  and their  financial  reporting
amounts. The income tax provision is the tax  payable/recoverable for the period
and the change during the period in deferred tax assets and liabilities.

Intangibles:  Intangibles  primarily  consist  of the  excess  of cost over fair
market value of net assets of acquired businesses.  Intangible assets, including
non-compete  agreements,  are  amortized on a  straight-line  basis over periods
ranging from 5 to 30 years.
Debt issuance costs are amortized over the term of the debt agreement.

The  carrying  value of goodwill is  periodically  reviewed to  determine  if an
impairment  has  occurred.  The Company  measures the  potential  impairment  of
recorded  goodwill based on the estimated  undiscounted cash flows of the entity
acquired over the remaining amortization period.

Advertising:  Advertising  costs are  expensed as  incurred.  The  amounts  were
immaterial for all periods presented.

Recent  Accounting  Pronouncements:  In June of 1997,  the Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 130,
"Reporting  Comprehensive  Income." This statement establishes standards for the
reporting  and display of  comprehensive  income and its  components  within the
financial  statements.  Comprehensive  income  includes  items  such as  foreign
currency items, minimum pension liability adjustments,  and unrealized gains and
losses on certain  investments in debt and equity securities.  This statement is
effective   for  fiscal  years   beginning   after   December  15,  1997,   with
reclassification of prior periods required.

In June of 1997, the Financial  Accounting  Standards Board issued Statements of
Financial  Accounting  Standards  No.  131,  "Disclosure  about  Segments  of an
Enterprise and Related  Information." This statement  establishes  standards for
the way in which public entities report  information about operating segments in
annual  financial   statements.   It  also  establishes  standards  for  related
disclosures about products and services,  geographic areas, and major customers.
This  statement  requires  that  general-purpose  financial  statements  include
selected information reported on a single basis of segmentation.  This statement
is  effective  for  fiscal  years   beginning  after  December  15,  1997,  with
restatement of comparative information for earlier years being required.

The Company is currently evaluating the impact of these pronouncements.

Reclassification:  Certain  reclassifications  have been reflected in prior year
amounts to conform with the presentation of corresponding amounts in the current
period.

2.  NET INCOME PER SHARE

In February of 1997, the Financial  Accounting  Standards Board issued Statement
of Financial  Accounting Standards No. 128, "Earnings per Share". This Statement
simplifies  the  standards  for  computing  earnings  per share,  replacing  the
presentation of primary earnings per share with a presentation of basic earnings
per share.  SFAS No. 128 also  requires dual  presentation  of basic and diluted
earnings per share on the face of the income  statement  for all  entities  with
complex  capital  structures.  Basic  earnings per share is computed by dividing
income available to common stockholders by the weighted-average number of common
shares  outstanding  for the  period.  Diluted  earnings  per share is  computed
similarly to fully  diluted  earnings per share  pursuant to APB Opinion No. 15,
"Earnings per Share", which is superseded by this Statement.



<PAGE>



2. NET  INCOME  PER  SHARE  (continued)  
The following  table sets forth the  computation of basic and diluted net income
per share (in thousands except per share data):

<TABLE>
<CAPTION>
                                                            Nine Months
                                          Year Ended           Ended        Year Ended March 31,
                                       December 31, 1997    December 31,            1996
                                                                1996
                                       ------------------ ----------------- ------------------
Numerator:
<S>                                        <C>                 <C>                 <C>   
    NET INCOME                             $  656              $  660              $2,649
                                           ------              ------              ------

Denominator:                                                                     
    BASIC-WEIGHTED AVERAGE SHARES           5,994               6,000               6,000
Effect of dilutive securities:                                                   
    EMPLOYEE STOCK OPTIONS                     --                  --                  46
                                                                                 
  DILUTED-WEIGHTED AVERAGE SHARES           5,994               6,000               6,046
                                           ------              ------              ------
                                                                                 
Basic net income per share                 $ 0.11              $ 0.11              $ 0.44
                                           ======              ======              ======
                                                                                 
                                                                                 
Diluted net income per share               $ 0.11              $ 0.11              $ 0.44
                                           ======              ======              ======
</TABLE>

                                                                           

The effect of employee  stock  options on the  calculation  of weighted  average
shares  outstanding  for purposes of determining  diluted  earnings per share is
antidilutive  for the year ended  December  31, 1997 and the nine  months  ended
December 31, 1996.


3.  ACQUISITIONS

The following table  summarizes the assets  acquired and liabilities  assumed in
acquisitions  made  by  FinishMaster  in each of the  periods  presented.  These
acquisitions have been accounted for as purchases and accordingly,  the acquired
assets and liabilities  have been recorded at their estimated fair values at the
dates of acquisition. Intangible assets related to goodwill and covenants not to
compete  were  recorded  with each  acquisition.  Operating  results of acquired
entities have been included in FinishMaster's  consolidated financial statements
as of the respective date of purchase.

<TABLE>
<CAPTION>
                                                                                          Nine Months
                                                                      Year Ended        ended December      Year Ended
                                                                     December 31,             31,           March 31,
                                                                         1997                1996             1996
                                                                  -------------------- ----------------- ----------------
                                                                                      (in thousands)

<S>                                                                  <C>                    <C>               <C>     
Accounts receivable                                                  $   20,239             $    755          $  3,229
Inventory                                                                27,158                  511             8,500
Deferred taxes                                                            6,082                  -                 -
Equipment and other                                                       8,029                  456             1,492
Intangible assets                                                        91,629                2,617            13,247
                                                                         ------                -----            ------
                                                                        153,137                4,339            26,468
Liabilities assumed                                                      78,988                1,256             4,275
                                                                        -------               ------            ------
                                             ACQUISITION PRICE           74,149                3,083            22,193
Acquisition debt                                                         73,819                1,191            10,774
                                                                        -------               ------           -------
                            NET ASSETS OF BUSINESSES ACQUIRED,
                                       NET OF ACQUISITION DEBT       $      330             $  1,892          $ 11,419
                                                                     ==========             ========          ========

Number of acquisitions                                                        3                    1                16
</TABLE>


<PAGE>


3.  ACQUISITIONS (continued)

On November 21, 1997, the Company acquired  substantially all of the outstanding
common  stock of  Thompson  PBE,  Inc.  for  $8.00  per  share.  Thompson,  like
FinishMaster,  is an aftermarket  distributor of automotive paints, coatings and
related supplies. The total purchase price, including related acquisition costs,
was  $73,471,000.  The Company funded the acquisition with a combination of bank
financing and  subordinated  borrowings  from LDI. The acquisition was accounted
for as a purchase and  accordingly,  the purchase  price was allocated to assets
acquired and  liabilities  assumed based upon their estimated fair values at the
date of  acquisition.  Goodwill  resulting  from the  acquisition of Thompson is
being amortized over 30 years.

The following table sets forth the unaudited pro forma results of operations for
the  current  period  in which  acquisitions  occurred  and for the  immediately
preceding period as if the acquisitions were consummated at the beginning of the
immediately preceding period. The unaudited pro forma results of operations data
consists of the historical  results of the Company as adjusted to give effect to
(1) a  reduction  in  employment  and  rental  expense to  reflect  closure  and
consolidation  of certain  facilities,  (2)  amortization  of goodwill  and debt
issuance  costs,  and  (3) an  increase  in  interest  expense  attributable  to
financing of the acquisitions. This pro forma information does not purport to be
indicative  what results  would have been had the  acquisitions  been made as of
those dates or of results which may occur in the future.

<TABLE>
<CAPTION>
                                               Year Ended              Nine Months Ended           Year Ended
                                                December                   December                March 31,
                                                31, 1997                      31,                     1996
                                                                             1996
                                              --------------------- ------------------------ -----------------------
                                                          (in thousands except per share data)

<S>                                               <C>                       <C>                     <C>       
Net sales                                         $  317,594                $ 245,337               $  115,104
Net income (loss)                                    (5,305)                  (2,139)                    2,737
Net income (loss) per common share - Basic       $    (0.89)              $    (0.36)            $        0.46
                                   - Diluted     $    (0.89)              $    (0.36)            $        0.46
Weighted average number of common shares              5,994                    6,000                     6,000

</TABLE>


4. INTANGIBLE ASSETS

Intangible assets consisted of the following (in thousands):



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

Goodwill                                   $107,673              $ 16,044
Non-compete agreements                       11,080                10,860
Debt issuance costs                           1,689                    --
                                           --------              --------
                                                             
                                            120,442                26,904
Less accumulated amortization                 9,572                 6,547
                                           --------              --------
Intangible assets, net                     $110,870              $ 20,357
                                           ========              ========
                                                      




<PAGE>



5.  LONG-TERM OBLIGATIONS

Long-term obligations consisted of the following:

<TABLE>
<CAPTION>
                                                                              December 31,       December 31,
                                                                                  1997              1996
                                                                             --------------- -- --------------
                                                                                      (in thousands)

<S>                                                                            <C>                <C>     
Notes payable to former owners of acquired businesses with
     interest at various rates up to 12%, due 1998 though 2007                 $ 18,353           $ 12,911
Note payable to bank under line of credit with interest
     rate not exceeding the prime interest rate, refinanced in 1997
                                                                                      -              7,288
Term credit facility payable to bank, bearing interest at 8.16%,
     payments 1999 through 2003                                                  40,000                  -
Revolving credit facility bearing interest at 8.16 to 9.5%,
     due November 2003                                                           51,479                  -
Senior subordinated debt payable to LDI at 9.0%,
     due May 2004                                                                30,000                  -
Other long-term financing at various rates                                        2,308              1,771
                                                                             ----------         ----------
                                                                                142,140             21,970
Less current maturities                                                           8,005              4,139
                                                                              ---------          ---------
                                                                               $134,135           $ 17,831
                                                                               ========           ========
</TABLE>


Revolving  Credit  Facility:  The Company has a revolving credit facility with a
bank, limited to the lesser of $60 million less letter of credit obligations, or
80  percent  of  eligible  accounts  receivable  plus  65  percent  of  eligible
inventory,  less letter of credit  obligations  and a reserve  for three  months
facility rent. Principal is due on November 19, 2003. Interest rates and payment
dates are variable  based upon  interest  rate options  selected by  management.
Interest  rates at December  31, 1997  varied from 8.16% to 9.5%.  The  interest
rates  are  2.25%  over  LIBOR or 1% over  prime in the  case of  Floating  Rate
Advances. The Company is charged an annual administrative fee of $50,000, and an
annual  commitment fee,  payable  monthly,  of 0.5% on the unused portion of the
revolving credit facility.

Term  Credit  Facility:  The term loan  requires  quarterly  principal  payments
beginning  March 31, 1999.  Interest  rates and payment dates are variable based
upon interest rate options selected by management. The interest rate at December
31, 1997 was 8.16%. This rate is 2.25% over LIBOR.

Substantially  all of the Company's assets serve as collateral for the revolving
credit  facility  and term credit  facility.  These  credit  agreements  contain
various covenants  pertaining to, among other things,  achieving a minimum fixed
coverage ratio, a leverage ratio,  and an interest  expense  coverage ratio. The
covenants  also  limit  purchases  and  sales of  assets,  restrict  payment  of
dividends  and direct the use of excess  cash flow.  These  quarterly  covenants
become  effective  with the period  ending March 31, 1998. As a condition of the
amended  bank credit  facility of $100  million,  LDI agreed to make by June 30,
1998 an additional equity investment of $14 million or such lesser amount as may
be  acceptable  to the  Company's  bank.  The  Company  intends to satisfy  this
requirement through an acquisition of LDI AutoPaints  ("AutoPaints") in exchange
for equity in the Company. (See Note 10).

Senior  Subordinated  Debt: The senior  subordinated  debt matures May 19, 2004.
Interest  accrues  at 9.0%  annually,  and is  payable  quarterly.  Holders  of
subordinated  debt are expressly  subordinate  in right of payment to all senior
indebtedness.


The aggregate  principal payments for the next five years subsequent to December
31, 1997 are as follows, in thousands:

                             1998                  $     8,005
                             1999                        9,513
                             2000                       10,725
                             2001                       10,104
                             2002                       10,494
                             Thereafter                 93,299
                                                   -----------
                                                   $   142,140
                                                   ===========


<PAGE>

5.  LONG-TERM OBLIGATIONS (continued)

The Company is  currently  pursuing  other  financing  arrangements.  Should the
Company be successful in implementing  favorable financing terms,  proceeds will
be used to retire  certain  bank term  loans,  a portion of amounts  outstanding
under the revolving  credit facility and the  subordinated  debt payable to LDI.
Early  retirement of indebtedness  will result in an  extraordinary  loss in the
amount of the net book value of  capitalized  debt issue costs.  At December 31,
1997 unamortized debt issue costs were approximately $1.6 million.

The carrying amounts of certain  financial  instruments  such as cash,  accounts
receivable,  accounts payable and long term obligations  approximate  their fair
values.  The fair value of the long-term debt is estimated using discounted cash
flow analysis and the Company's current incremental  borrowing rates for similar
types of arrangements.


6.  EMPLOYEE SAVINGS PLAN

The  Company  has an  Employee  Savings  Plan  which  covers  substantially  all
employees who have met certain  requirements as to date of service.  The Company
currently  contributes  $0.25 for each $1  contributed  by employees up to 6% of
their annual  compensation.  In  addition,  the Company may  contribute,  at the
discretion  of the Board of Directors,  an additional  amount equal to 1% of the
employees'  annual  compensation.  Company  contributions  charged to operations
under the Plan were  approximately  $182,000  for year ended  December 31, 1997,
$189,000 for the nine months  ended  December 31, 1996 and $198,000 for the year
ended March 31, 1996.


7.  STOCK OPTIONS

On November  30,  1993,  an  Employee  Stock  Option Plan was  ratified to grant
options on up to 600,000 shares of the Company's  common stock to officers,  key
employees and non-employee  directors of the Company.  All options granted under
this plan have been  granted at a price equal to the market price at the date of
the grant. All options granted have a maximum life of ten years from the date of
the grant and are fully vested at the date of issue.

The Company recognizes  compensation expense related to its stock option plan in
accordance with APB No. 25 "Accounting  for Stock Issued to Employees."  Options
are granted at not less than the fair market value of the Company's common stock
on the date of grant, therefore, no compensation is recognized. Had compensation
expense been  determined at the date of the grant based on the fair value of the
awards  consistent  the  Statement of Financial  Accounting  Standards  No. 123,
"Accounting  for Stock Based  Compensation",  the  Company's  net income and net
income per share would have been reduced to the pro forma  amounts  indicated in
the following table:

<TABLE>
<CAPTION>
                                               Year Ended December         Nine Months         Year Ended March
                                                       31,             Ended December 31,            31,
                                                       1997                    1996                   1996
                                              ----------------------- ----------------------- ---------------------
Net Income                                                   (in thousands, except per share data)
<S>                                                   <C>                     <C>                    <C>    
    As Reported                                       $ 656                   $ 660                  $ 2,649
    Pro Forma                                         $ 523                   $ 660                  $ 2,010

Net income per share
    As Reported          - Basic                      $ 0.11                  $ 0.11                  $ 0.44


                         - Diluted                    $ 0.11                  $ 0.11                  $ 0.44

    Pro Forma            - Basic                      $ 0.09                  $ 0.11                  $ 0.34
                         - Diluted                    $ 0.09                  $ 0.11                  $ 0.33

</TABLE>

<PAGE>



7.  STOCK OPTIONS (continued)

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes  option pricing model with the following  assumptions for December
31, 1997, December 31, 1996 and March 31, 1996 respectively:  risk free interest
rate of 5.5,  5.7 and 5.7  percent;  no dividend  yield for all years;  expected
lives of 9, 8 and 8 years; and volatility of 46.8 percent for all years.  Option
valuation models, like the stock price Black-Scholes model, require the input of
highly  subjective  assumptions  including the expected stock price  volatility.
Because changes in the subjective  input  assumptions can materially  affect the
fair value  estimate,  in  management's  opinion,  the  existing  models may not
necessarily  provide a  reliable  single  measure of the fair value of its stock
options.

<TABLE>
                                      December 31, 1997                December 31, 1996                March 31, 1996
                                  -----------------------------     ----------------------------      -------------------------
                                                  Weighted-Avg.                   Weighted-Avg.                  Weighted-Avg.
                                  Options        Exercise Price     Options       Exercise Price      Options    Exercise Price
                                  -------        --------------     -------       --------------      -------    --------------
<S>                                <C>             <C>              <C>             <C>             <C>             <C>   
Outstanding-beginning of
year
                                   169,310         $ 10.71          222,085         $10.72            123,800         $10.50
Granted                             45,000          $ 7.00                -              -             99,500         $11.00
Exercised                               -                -              140         $10.50                  -              -
Forfeited                            4,310          $10.50           52,635         $10.76              1,215         $10.50
                                  -------           ------           -------        ------            -------         ------
Outstanding and
exercisable-end of year
($7.00 to $11.00 per share)
                                  210,000           $ 9.92           169,310        $10.71            222,085         $10.72
                                  =======           ======           =======        ======            =======         ======
</TABLE>


The  weighted-average  fair  value of  options  granted  during  the year  ended
December  31,  1997 and  March  31,  1996  were  $4.85  and  $6.65  per  option,
respectively.  The remaining contractual life of options outstanding at December
31, 1997 is 8.3 years.



8.  INCOME TAXES

The provision for federal and state income taxes consisted of the following,  in
thousands:

                    Year Ended      Nine Months Ended      Year Ended
                December 31, 1997   December 31, 1996    March 31,1996
             --------------------   -----------------    -------------

Current:
   Federal         $ 1,010                $   778           $ 1,477
   State               186                    232               327
                                                         
Deferred              (681)                  (400)              (38)
                   -------                -------           -------
                   $   515                $   610           $ 1,766
                   =======                =======           =======
                                                                          





<PAGE>



8.  INCOME TAXES (continued)

The reconciliation of income taxes computed at the federal statutory tax rate to
the Company's effective tax rate is as follows:

<TABLE>
<CAPTION>
                                  Year Ended        Nine Months Ended      Year Ended
                               December 31, 1997    December 31, 1996    March 31, 1996
                              ------------------    -----------------    ---------------
<S>                                  <C>                  <C>               <C>  
Federal statutory tax rate           34.0%                34.0%             34.0%
State tax provision                   6.8                  8.3               4.9
Other                                 3.3                  5.7
                                                                             1.1
                              ==================    =================    ===============
Effective tax rate                   44.1%                48.0%             40.0%
                              ==================    =================    ===============
</TABLE>



Significant  components of the Company's  deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows (in thousands):

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

   Deferred tax assets
     Depreciation                           $  712             
     Amortization of intangibles             1,023                  $  647
     Allowance for doubtful accounts         1,106                     277
     Inventory                               1,770                     190
     Accrued expenses                        2,555             
     Other, net                                 52                      23
                                            ------                  ------
                                                               
                                             7,218                   1,137
   Deferred tax liabilities                                    
     Depreciation                               --                     374
                                            ------                  ------
                                            $7,218                  $  763
                                            ======                  ======
                                                        


9.  CONTINGENCIES AND COMMITMENTS

FinishMaster  occupies  facilities  and uses  equipment  under  operating  lease
agreements requiring annual rental payments  approximating the following amounts
(in thousands) for the five years subsequent to December 31, 1997:


                               1998               $   6,610
                               1999                   5,484
                               2000                   2,857
                               2001                   1,115
                               2002                     463
                               Thereafter               998
                                                 ----------
                                                  $  17,527
                                                  =========


Rent expense  charged to operations,  including  short-term  leases,  aggregated
$3,831,963, $2,724,621, and $2,500,101 for the year ended December 31, 1997, the
nine  months  ended  December  31,  1996,  and the year  ended  March 31,  1996,
respectively.

On January  14,  1998,  the Company  announced  the  planned  relocation  of its
administrative  headquarters from the Kentwood,  Michigan distribution center to
new office  space  located in  Indianapolis,  Indiana that will be leased by the
Company from LDI. The Company anticipates  incurring  relocation and integration
costs in 1998 in conjunction  with the  combination of certain stores and moving
of administrative functions.


<PAGE>

9.  CONTINGENCIES AND COMMITMENTS (continued)

The Company is dependent on four main  suppliers  for the purchases of the paint
and related  supplies that it  distributes.  A loss of one of the suppliers or a
disruption in the supply of the products  provided could have a material adverse
effect on the Company's  operating results.  The suppliers also provide purchase
discounts,  prompt  payment  discounts,   extended  terms  and  other  incentive
programs. To the extent these programs are changed or terminated, there could be
a material adverse impact to the Company.

The Company has three  agreements  with warehouse  suppliers for the purchase of
certain  paint and non-paint  supplies in specified  geographic  locations.  The
agreements provide for aggregate  specified minimum purchases of $8.1 million in
1998,  $7.8 million in 1999 and 2000,  and $2.8 million in 2001,  2002 and 2003.
The agreements expire in 1999, 2000, and 2003.

FinishMaster  is not involved in any material  legal  actions as of December 31,
1997.


10.  SUBSEQUENT EVENT

On February 16, 1998, the Company,  AutoPaints and LDI entered into an Agreement
and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger
Agreement,  which is  subject to the  approval  of the  Company's  shareholders,
AutoPaints  will merge with and into the Company,  and the Company will issue an
additional  1,542,416  shares of the common  stock of the  Company  to LDI.  The
Company  will also seek  shareholder  approval  for an increase in the number of
authorized  common  shares from 10 million to 25 million  shares.  The financial
position,  results  of  operations  and cash flows of  AutoPaints  have not been
reflected in the consolidated  financial statements of FinishMaster as of or for
the year ended December 31, 1997.

On March 27, 1998 the  Company  entered  into a  subordinated  revolving  credit
agreement  with LDI for $10.0  million to fund working  capital and  acquisition
needs.  Principal is due March 27, 1999.  Interest  rates and payment  dates are
variable based upon interest options selected by management.  The interest rates
are 2.25% over LIBOR or 1.0% over prime in the case of floating  rate  advances.
Holders of subordinated  debt are expressly made subordinate in right of payment
of all senior indebtedness.




<PAGE>



                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

                                 (In Thousands)


<TABLE>
<CAPTION>
----------------------------------------- ---------------- --------------------------------- ------------------ -----------------
                     COL. A                   COL. B                    COL. C                    COL. D             COL. E
----------------------------------------- ---------------- --------------------------------- ------------------ -----------------
                                                                      ADDITIONS
                                                           ---------------------------------

                                                                              Charged to
                                            Balance at       Charged to          Other
                                           Beginning of       Costs and       Accounts--     Deductions--DescribeBalance at End
                   DESCRIPTION                Period          Expenses         Describe                            of Period
----------------------------------------- ---------------- ---------------- ---------------- ------------------ -----------------
<S>                                               <C>                <C>         <C>              <C>                   <C>   
Year ended December 31, 1997:
       Allowance for doubtful accounts            $  700             $859        $1,758  (A)      $1,070  (B)           $2,247
                                                  ------             ----        ------           ------                ------

Nine months ended December 31, 1996:
       Allowance for doubtful accounts            $  350             $798                           $448  (B)             $700
                                                  ------             ----                           ----                  ----

Year ended March 31, 1996:
       Allowance for doubtful accounts            $  260             $548                           $458  (B)             $350
                                                  ------             ----                           ----                  ----
</TABLE>


(A) Represents allowance for doubtful accounts from acquisition.  (B) Represents
uncollectible accounts written off, less recoveries.






<PAGE>



                        FINISHMASTER, INC. AND SUBSIDIARY
                           ANNUAL REPORT ON FORM 10-K

EXHIBITS


                                  EXHIBIT LIST

    Exhibit No.   Description of Document                               Page

         2.1*     Agreement  and  Plan  of  Merger,  dated  as of
                  October 14,  1997,  by and among  FinishMaster,
                  Inc., FMST Acquisition Corporation and Thompson
                  PBE, Inc. (incorporated by reference to Exhibit
                  (c)(2) of Schedule  14D-1  previously  filed by
                  FMST  Acquisition  Corporation  on October  21,
                  1997).


         2.2      Agreement  and Plan of Merger,  dated  February
                  16, 1998, by and among FinishMaster,  Inc., LDI
                  AutoPaints, Inc. and Lacy Distribution, Inc.

         3.1*     Articles  of   Incorporation  of  FinishMaster,
                  Inc., an Indiana corporation  (previously filed
                  with Form 10-K dated March 31, 1997)

         3.2*     Bylaws  of   FinishMaster,   Inc.,  an  Indiana
                  corporation  (previously  filed  with Form 10-K
                  dated March 31, 1997)

         10.1     FinishMaster,  Inc.  Stock Option Plan (Amended
                  and Restated as of April 30, 1997)

         10.2     Agreement  dated as of March  1,  1998  between
                  FinishMaster,  Inc.  and LDI  AutoPaints,  Inc.
                  respecting      certain      management     and
                  administrative functions

         21       Subsidiaries of the Registrant

         23       Consent of Independent Auditors

         27.1     Financial Data Schedule

         99(a)*   Credit  Agreement,  dated  as of  November  19,
                  1997,    among    FinishMaster,    Inc.,    the
                  Institutions  from Time to Time Parties Thereto
                  as  Lenders  and  NBD  Bank,   N.A.,  as  Agent
                  (previously  filed with Form 8-K dated December
                  3, 1997)

         99(b)*   Subordinated   Note  Agreement,   dated  as  of
                  November 19, 1997, by and between FinishMaster,
                  Inc. and LDI, Ltd.  (previously filed with Form
                  8-K dated December 3, 1997)

         99(c)    First  Amendment  to  Credit   Agreement  dated
                  December 10, 1997

         99(d)    Second  Amendment  to  Credit  Agreement  dated
                  March 27, 1998

         99(e)    Credit  Agreement  dated March 27, 1998 between
                  FinishMaster, Inc. and LDI, Ltd.

------------------
*   Previously filed