UNITED STATES
                        SECURITIES & EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 1997       Commission file number 0-28174

                             The Lamaur Corporation
             (Exact name of registrant as specified in its charter)


                Delaware                                   68-0301547
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation of organization)                     Identification No.)

                One Lovell Avenue, Mill Valley, California 94941
               (Address of principal executive offices) (Zip Code)

        Registrant's telephone number, including area code (415) 380-8200

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

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

                          Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. [X] Yes [ ] 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.[X]

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant as of March 20, 1998 was approximately  $8.5 million.  This number is
calculated by excluding all shares held by directors,  Intertec  Holdings,  L.P.
and  DowBrands  Inc.  without  conceding  that all such  persons or entities are
affiliates of registrant.

As  of  March  20,  1998,  there  were  5,857,125   outstanding  shares  of  the
registrant's common stock, $.01 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE
  Part III: Portions of Proxy Statement for 1998 annual meeting of stockholders


<PAGE>

This report contains  forward looking  statements  within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange  Act of 1934,  as amended,  including  statements  regarding  sales and
marketing  plans for 1998,  plans  with  respect  to the  Company's  technology,
liquidity  and capital  resources  and  competition  in the  marketplace.  These
forward  looking  statements  involve risks and  uncertainties  that could cause
actual results to differ materially from the  forward-looking  statements.  Such
risks include  market  acceptance of the Company's  products,  effectiveness  of
recently adopted  initiatives,  competition,  the Company's ability to implement
appropriate  cost controls,  price changes by the Company or its competitors and
fluctuations in capital and operating results.


Item I.  BUSINESS

Overview

The Lamaur  Corporation (the "Company") was  incorporated  under the laws of the
State of Delaware on January 4, 1996. The Company's predecessor, Electronic Hair
Styling, Inc., was incorporated in the State of Washington on April 1, 1993 and,
effective  March 18, 1996,  it merged with the Company to  accomplish a Delaware
reincorporation.  Effective November 15, 1995, as a result of the acquisition of
the Personal Care  Division of DowBrands  L.P. (an affiliate of The Dow Chemical
Company),  the Company  became a successor  to a business  started in 1930 known
prior to its  acquisition by DowBrands in 1987 as Lamaur Inc. On March 26, 1997,
the Company changed its name to The Lamaur  Corporation.  The Company is a major
producer of personal hair care products in North America.

Through its Lamaur division based in Fridley,  Minnesota,  the Company develops,
formulates,  manufactures and markets personal hair care products, consisting of
shampoos,  conditioners,  hair sprays, permanent wave products and other styling
aids, for both the consumer and professional hair care markets. The Company also
contract  manufactures a variety of aerosol and other liquid  filling  products.
Corporate  functions,  including  corporate  development,   investor  relations,
science  and  technology,  financial  and legal  services,  are  managed  at the
Company's headquarters in Mill Valley, California.

The Company's products are distributed to consumer retail outlets,  professional
salons and specialty  shops.  The Company  believes it was among the ten largest
manufacturers  in the United  States in 1997 in three mass retail  categories of
hair care products - shampoos,  conditioners  and styling aids.  The Company has
conducted early stages of research and development of Electronic  Chemistry(TM),
a new hair  styling  concept  which  is  intended  to  combine  electronics  and
chemicals to create new products  designed to color,  style and  condition  hair
quickly,   without  the  damaging  side  effects  often  experienced  with  most
chemical-based hair styling products.

During 1997, based upon market research, all original retail brands that existed
at the time of the acquisition from DowBrands were re-staged consistent with the
Company's strategic shift to focus on higher margin brands.  Re-staging includes
repackaging,  reformulating  and  development of new marketing  strategies for a
brand.  In addition to the  re-staging,  the Company  launched into the naturals
product segment Willow Lake(R) and Apple Pectin(R)  Naturals,  brands of premium
priced  products  in the retail and salon  markets,  respectively.  The  Company
increased the number of exclusive  distributors  for the Pativa(R)  professional
brand from 15 to 23.

The Company's  product lines are sold through mass retail  outlets by its Retail
Group (the  "Retail  Group")  under the  premium-priced  Willow  Lake(R),  Perma
Soft(R) and Color Soft(TM),  mid-priced Salon Style(R) and value-priced Style(R)
and Style Natural Reflections(TM) brand names. Most product lines contain a wide
assortment of shampoos,  conditioners  and styling products  positioned  towards
distinct  consumer  segments.   In  addition,  a  full  line  of  high  quality,
premium-priced products including shampoos, conditioners, hair sprays, perms and
a variety of other styling aids are sold to the professional salon and specialty
shops  market by its Salon Group (the  "Salon  Group")  under the Nucleic  A(R),
Apple Pectin(R), Apple Pectin(R) Naturals,  Vita/E(R) and Pativa(R) brand names.
The Company also manufactures certain products, principally aerosol sprays, on a
contract basis for third parties (the "Custom Manufacturing Group").

Sales by the Retail Group during 1997 accounted for 63.9% of the Company's total
revenues,  and are made to mass  merchandisers,  food  stores,  drug  stores and
others by a  combination  of the  Company's  direct sales force and a network of
independent  brokers.  Sales  by the  Salon  Group to the  professional  market,
including  sales  to  distributors  who then  sell to  professional  salons  and
specialty  outlets,  are made  directly  by the  in-house  sales force and, to a
lesser degree in selected markets, by brokers.  During 1997, the Salon Group and
the Custom  Manufacturing  Group  accounted for 14.7% and 21.4% of the Company's
total revenues, respectively.

During 1997, the Company chose to focus the substantial portion of its marketing
efforts  to the  growing  naturals  product  segment of the  market.  Investment
spending on Willow Lake(R) during 1997 was approximately $20.8 million. Original
brands,  although re-staged,  experienced significant declines from the previous
year,  including  Salon  Style(R) down 53%,  Perma Soft(R) down 50% and Style(R)
down 26%. The decline of  approximately  $25.5  million for the original  retail
brands was partially offset by $25.1 million of new revenues from Willow Lake(R)
which have higher gross margins.

The Company's loss for 1997 of  approximately  $19.4 million was principally due
to increased  investment  spending  supporting new brands,  an increase of $19.9
million from the previous year,  and lower than expected  revenues from original
retail brands discussed above which had a negative impact on revenues, earnings,
overhead allocation and cash flow.

In November 1997, the  Manufacturing  Agreement  with  DowBrands  expired.  As a
result of the expired agreement and the operational results discussed above, the
Company   restructured  its  operations  by  eliminating  90  positions  in  the
production,  administrative and management areas and consolidated  manufacturing
from three to two shifts.

Approximately  $311,000  was  expended  for  Electronic  Chemistry(TM)  research
activities  during  1997  which  were  primarily   directed  towards  continuing
early-stage  coloring  and styling  experiments  with respect to the reaction of
hair samples to electronic signals. As a result of experimental work in 1997 the
Company  was able to file an  additional  patent  application  which  management
believes will further broaden the Company's proprietary position relative to the
application  of  Electronic  Chemistry(TM)  to  hair  care.  Because  of  budget
constraints the Company discontinued all activity related to advanced technology
development in December of 1997.  Until  sufficient  financial  resources can be
obtained from operations or from capital, efforts related to advanced technology
would be limited to completing  the  prosecution  of the Company  patents and to
exploring opportunities with prospective licensees.

At  December  31,  1997 the  Company was not in  compliance  with  certain  loan
covenants of its credit facility  Following the  restructuring  described above,
the Company re-negotiated the terms and covenants of the loan agreement.

On March 16, 1998,  the Company  announced  that it had retained the  investment
banking firm of McCabe, Mintz & Company,  L.L.P. to assist in evaluating various
strategic  alternatives seeking to enhance stockholder value. These alternatives
could include a sale of the Company, a business combination,  strategic alliance
or merger with a third party. The Company is evaluating opportunities to acquire
scale or be acquired by a larger entity which will be able to leverage the brand
equity the  Company  has  developed.  This  process is in an early  stage and no
assurance can be given as to whether any transaction  will be  consummated.  The
Company does not intend to comment  further  regarding  these matters unless and
until it determines to proceed with a particular transaction.


Industry Overview and Investment Considerations

Worldwide retail sales of chemical hair care products in 1995 were approximately
$26 billion,  of which  approximately  $4.6 billion  represented  sales in North
America.  It is  estimated  that by 2000,  worldwide  retail  sales of hair care
products will reach approximately $32.8 billion, with approximately $5.6 billion
attributable to sales in North America.

There have been changes in  consumers'  buying  patterns  toward  higher  priced
shampoos and conditioners and specialty niche products. In addition, the cost of
goods sold in the hair care products market has been rising steadily for several
years; however, intense competition hindered manufacturers and distributors from
passing  those  increases  on to  customers.  The  result has been an erosion in
profit margins among the industry's competitors generally,  although this effect
has been less  pronounced  in certain  market niches that are  characterized  by
premium pricing and fewer competitors.  Consequently, the hair care industry has
been  experiencing  both a  consolidation  in the  number of  competitors  and a
globalization in the marketing efforts. The Company believes that currently five
companies  (L'Oreal  S.A.,   Unilever,   N.V.  The  Procter  &  Gamble  Company,
Bristol-Myers   Squibb  Company,   and  Alberto  Culver  Company)   account  for
approximately 65% of worldwide sales in the hair care products industry.

The Company has a limited  operating history evolving from its development stage
in 1995 by acquiring the  operations of the Personal Care Division of DowBrands.
The Personal Care Division had experienced nine consecutive  years of losses and
even though new management  implemented a turnaround  strategy,  management does
not consider the  turnaround  to be complete and no assurance  can be given that
the Company will have earnings in 1998 or for future  periods.  The Company will
need additional  working capital to support  re-staged brand marketing  strategy
and to introduce new brands.  Additional  working  capital may not be available,
and the absence of such  working  capital  has had and could  continue to have a
material  adverse  impact on the Company.  The  Company's  Common Stock could be
subject to substantial volatility.

The loss of senior  management  could also have a material adverse effect on the
Company,  its results of operations,  its financial condition and its prospects.
In  addition,  the Company  will have a  dependence  on its  largest  customers,
including Wal-Mart and Sally Beauty Company.  Any significant change in sales to
these customers could materially effect the Company's performance. The Company's
new Electronic  Chemistry(TM)  technology and its underlying principles have not
been  commercially  developed,  and no assurance can be given that products will
ever be derived from the  technology  and if  successfully  developed  that such
products  will be  accepted  by the  market  or  would  comply  with  government
regulations.   Until  sufficient   financial  resources  can  be  obtained  from
operations  or from capital,  efforts  related to advanced  technology  would be
limited to completing the  prosecution  of the Company  patents and to exploring
opportunities with prospective licensees.


Products

The Company  formulates  and  manufactures  a broad  range of hair care  product
lines, consisting of approximately 90 products,  marketed under several distinct
brand names.  Product lines sold through  consumer retail outlets include Willow
Lake(R),  Perma Soft(R),  Color  Soft(TM),  Salon  Style(R),  Style(R) and Style
Natural  Reflections(TM)  brand  names  most of which are widely  recognized  by
retailers  and  consumers.  Most lines  contain a broad  assortment of shampoos,
conditioners and styling products and are positioned  toward a distinct consumer
segment.  Product  lines used by stylists  and sold by salons and beauty  supply
stores   throughout   the  United  States  and  in  Canada   include   shampoos,
conditioners,  hair  sprays,  perms and a variety of styling aids sold under the
Pativa(R),  Nucleic A(R),  Nucleic A Botanicals,  Apple Pectin(R),  Apple Pectin
Naturals and Vita/E(R) brand names. In addition,  the Company also  manufactures
products, principally aerosol sprays, under contract for third parties.


<PAGE>

The following table sets forth the Company's  principal brands and products sold
within each brand during 1997:


<TABLE>
                                                            Retail Brands

<CAPTION>
Brand                                            Shampoos and Conditioners                          Styling Aids and Perms
<S>                                   <C>                                                  <C>

Willow Lake(R)...................     Cherry Bark & Irish Moss Conditioning Shampoo;       Raspberry & Vitamin E Non-Aero Hair
                                      Citrus & Rosemary Shampoo; Lavender & Mint           Spray; White Lily & Jasmine Hair Spray;
                                      Shampoo;  Witch Hazel & Honeysuckle Shampoo;         Aloe & Clover Blossom Mousse; Rosehips
                                      Hops, Apricot & Almond Conditioner; Sunflower,       & Ivy Spray Gel; Orange Blossom & Clove
                                      Honey & Hibiscus Conditioner;  Vitamin E,            Spritz
                                      Carrot Extract & Milk Protein Conditioner
Perma Soft(R)....................     Revitalizing Shampoo, Moisturizing Shampoo,          Hair Sprays (aerosol and non-aerosol),
                                      Extra Body Shampoo, Shampoo Plus Conditioner,        Mousse, Gel, Frizz Control Cream
                                      Revitalizing Conditioner, Moisturizing
                                      Conditioner, Extra Body Conditioner,
                                      Moisturizing Mist Conditioner
Color Soft(TM)...................     Daily Cleansing Shampoo; Moisturizing Shampoo;       Aerosol Finishing Spray; Styling
                                      Clean Rinsing Conditioner; Moisturizing              Mousse; Spray Gel
                                      Conditioner; Spray-On Conditioner
Salon Style(R)...................     Moisture Potion(R) Shampoo, Therapy Shampoo,         Hair Sprays (aerosol and non-aerosol),
                                      Strengthening Shampoo, NutriShine Shampoo,           Spray Gel, Body Boost(R) Mousse
                                      Botanical Conditioner, Moisture Potion(R)
                                      Conditioner, Detangling Conditioner, Hydro
                                      Balance Deep Conditioner
Style(R).........................     Moisturizing Shampoo, Extra Body Shampoo,            Hair Sprays (aerosol and non-aerosol),
                                      Regular Shampoo, Strawberry Shampoo, Nourishing      Gel, Mousse, Dry Style(R) Hair Spray for
                                      Shampoo, Coconut & Papaya Shampoo, Rainwater         Men (aerosol)
                                      Shampoo; Moisturizing Conditioner, Extra Body
                                      Conditioner, Regular Conditioner, Strawberry
                                      Conditioner, Deep Conditioning Conditioner,
                                      Coconut & Papaya Conditioner; Rainwater
                                      Conditioner; Style Plus(R) Extra Conditioning
                                      Shampoo and Conditioner In-One
Style Natural Reflections(TM)....     Clarifying Shampoo; Volumizing Shampoo;
                                      Moisturizing Shampoo; Daily Finishing
                                      Conditioner; Volumizing Conditioner;
                                      Moisturizing Conditioner
</TABLE>

<TABLE>
                                                            Salon Brands

<CAPTION>
Brand                                            Shampoos and Conditioners                          Styling Aids and Perms
<S>                                   <C>                                                  <C>

Pativa(R)........................     Curl Cleanse Shampoo, Volumizing Cleanse             Mousse, Spritz, Design Creme,
                                      Shampoo, Moisturizing Cleanse Shampoo,               Alternative Wave (Normal), Alternative
                                      Purifying Cleanse, Curl Revitalizer                  Wave (Tinted), Sprae Concentrate Hair
                                      Conditioner, Leave-In Fortifier, Moisturizing        Spray
                                      Rinse, Purifying Rinse, Replenishing Hair
                                      Masque
Nucleic A(R).....................     Body Plus(R) Shampoo, Proteplex(R)Shampoos and       Botanical(TM) Hair Spray, Glaz(R) Gel
                                      Conditioner
Apple Pectin(R)..................     Shampoo and Conditioner, Moisturizing Shampoo,       Moisturizing Hair Spray, Acid Perm,
                                      ScentSates(TM) Shampoos and Conditioners, Apple      Apple Pectin Plus(R) Perm, Ten-Minute
                                      Pectin Plus(R) Shampoo and Conditioner in One         Wave, Ultra Hold Mousse, Styling Creme
Apple Pectin Naturals............     Witch Hazel & Honeysuckle Shampoo, Irish Moss &      Gel, Mousse, Spritz, Hair Spray
                                      Cherry Bark Shampoo; Rosemary & Grapefruit
                                      Shampoo; Hops, Apricots & Almonds Conditioner;
                                      Sunflower, Honey & Hibiscus Conditioner; Milk
                                      Protein, Carrot Extract & Vitamin E
                                      Conditioner; Peppermint & Lavender Bath & Body
                                      Wash
Vita/E(R)........................     Shampoo, Conditioners                                Perm, Hair Spray, Ultrahold Hair Spray,
                                                                                           Unscented Hair Spray, Maximum Hold Hair
                                                                                           Spray, Ultra-hold Concentrate Hair Spray

Other Salon Products.............     Lamaur(R) Moisturizing Shampoo, Lamaur Smoothing     Natural Woman(R) Hair Spray, CO-A(R)
                                      Shampoo, Bone Marrow(R) Conditioners                 Perm, CO-A Kinetics(R) Perm, Lamaur
                                                                                           Inception(R) Thio-Free Perm, Strata(R)

                                                                                           Perm, Gamma pHactor(R) Wave Set and
                                                                                           Concentrate, Beauti-Lac(R) Hair Spray,
                                                                                           Stylac(R) Hair Spray, Sprayage(R) Hair
                                                                                           Spray, Body Plus Mousse, Axiom(R) Perm,
                                                                                           Body for Sure(R) Perm, Lamaur
                                                                                           Straightening Balm, Lamaur Sealing
                                                                                           Spray, Lamaur Plus Styling Spray
</TABLE>



<PAGE>

Willow  Lake(R),  a new premium  priced  retail hair care  product of  shampoos,
conditioners  and styling aids is the Company's  newest entry in the  "naturals"
segment of the hair care category. During 1997, Willow Lake(R) became the number
two brand after Clairol(R) Herbal Essences(R) in the "naturals" product segment.

Perma  Soft(R),  which is a premium  priced retail  product line, is intended to
meet the needs of a segment of  consumers  who use  permanent  wave  products or
color treat their  hair.  During  1997,  as a result of market  research,  Perma
Soft(R) was reformulated for consumers who use perming products and a new brand,
Color  Soft(TM),  was developed and marketed for consumers who color treat their
hair.

Salon Style(R) is a line of mid-priced  shampoos,  conditioners and styling aids
targeted the salon  segment of the retail  market.  During 1997,  as a result of
market research,  selected  products in the Salon Style brand were  reformulated
and the entire brand was repackaged and repositioned.

Style(R) is the Company's  "value priced" brand,  intended for use by the entire
family.

Style Natural  Reflections(TM)  was launched in 1997 as a "mid-priced"  entry in
the fast growing "naturals" segment.

The Apple Pectin  Naturals  product line will further the Salon Group's sales of
"natural"  products into the  professional  market.  During 1997, as a result of
market  research the Company  developed  and  introduced a line of bath and body
products for sale in the salon industry, as well as styling and finishing items.

Apple Pectin(R) is based on the use of pectin from apples as a key ingredient in
the products.  Pectin is a natural  protein that  strengthens and conditions the
hair. The Apple  Pectin(R) line provides  stylists with shampoos,  conditioners,
styling products, and perms.

Pativa(R)  is a full  line of  professional  salon  shampoos,  conditioners  and
styling  products which includes an innovative  wave  technology that eliminates
the neutralizer step. The Pativa(R) line provides the Salon Group with a product
line distributed by exclusive dealers to full service salons.

Vita/E(R)  products contain vitamin E, a natural  antioxidant which protects the
hair and prevents color fading.

Nucleic A(R) is a full line of salon products that can be prescribed to meet any
hair care need.


The following table sets forth certain information  concerning the Company's net
sales by group in each of the last three fiscal years:

<TABLE>
<CAPTION>
(1)                                         1997                   1996                1995(2)
                                     ------------------     ------------------    ------------------
<S>                                  <C>          <C>       <C>         <C>       <C>         <C>

Retail...........................    $ 75,695      63.9%    $ 69,432     59.3%    $ 73,256     62.2%
Salon............................    $ 17,403      14.7%      16,833     14.4       16,947     14.4
Contract Manufacturing (3).......    $ 25,377      21.4%      30,818     26.3       27,563     23.4
                                     --------     ------    --------    ------    --------    ------

Total:...........................    $118,475     100.0%    $117,083    100.0%    $117,766    100.0%
                                     ========     ======    ========    ======    ========    ======


<FN>
(1)  Numbers are stated in thousands of dollars.
(2)  Includes sales of the Personal Care Division for the 11 months prior to the
     acquisition by the Company.
(3)  Contract  manufacturing sales included sales to DowBrands of $16.4 million,
     $22.2  million  and $21.4  million in each of the years  ended  December 31
     1997,  1996 and 1995,  respectively.  In November 1997,  the  Manufacturing
     Agreement with DowBrands expired.
</FN>
</TABLE>


Marketing and Distribution

The Company's  Retail Group sales are made to mass  merchandisers,  food stores,
drug stores and other  retail  outlets,  as well as to  wholesalers  who service
retail  outlets,  resulting in the  Company's  products  being sold in more than
60,000 retail outlets in North  America.  Sales for the Retail Group are carried
out through a  combination  of the  Company's  own sales  force and  independent
brokers.  Salon  Group  products  are  distributed  to  professional  salons and
specialty  shops through a network of  independent  distributors  managed by the
Company's direct sales force.

The Company currently  maintains more than 1,800 active customer accounts and in
1997 no customer other than  DowBrands and Wal-Mart  accounted for more than 10%
of the  Company's  total net sales in any of the last  three  years.  DowBrands,
whose manufacturing agreement has expired, accounted for 18%, 19% and 14% of the
Company's total net sales in each of 1995, 1996 and 1997, respectively. Wal-Mart
accounted for 18%, 17% and 15% of the Company's total net sales in each of 1995,
1996 and 1997, respectively.  The loss of sales to Wal-Mart or other significant
customers would have a material adverse effect on the business and operations of
the Company.  There are no  contractual  obligations  from any customers to make
continuing purchases from the Company.

The Company promotes sales of its products  utilizing  substantial  advertising,
consumer promotions and merchandising  support programs.  During the years ended
December 31, 1995,  1996 and 1997, the Company's  marketing  support expense was
approximately $23.8 million, $23.8 million and $43.7 million,  respectively. The
significant increase in these expenses in 1997 was principally due to the launch
of the Company's new premium-priced brand, Willow Lake(R).

The Company  anticipates a need to increase  expenditures in connection with its
marketing  activities  in  the  next  several  years,  and  expects  to  require
substantial cash resources to fund those  activities.  These activities  include
expanding  its product mix by  introducing  new products,  particularly  for the
Willow  Lake(R)  brand and  re-staging  certain  other  existing  products.  The
Company's  strategy in 1998 is to focus its limited resources to support the new
Willow Lake(R) brand and to provide  maintenance  promotional support behind the
original re-staged brands.


Research and Development

The  Company  continuously  engages  in  the  development  of new  products  and
improvements to its existing  formulations  and maintains  extensive  laboratory
facilities for those purposes.  The Company relies principally on the experience
of its staff in connection with formulating new products. The Company's research
and  technical  staff (14 persons at February 28,  1998) works  closely with the
Company's  sales and  marketing  groups to keep current with changes in consumer
tastes and new product  developments in the industry.  The Company  believes its
research and development  efforts are enhanced materially by the availability of
its on-site salon, which is fully equipped to permit the testing of new products
and  improvements  in conditions  that simulate  those  actually  encountered by
consumers.  The Company maintains  extensive  laboratory,  quality assurance and
quality control facilities.  Examples of products recently developed include the
Willow Lake(R) styling aids, Style Natural Reflections(TM),  and Apple Pectin(R)
Naturals bath and body products.

The  Company  believes  that  the  absence  of  any  fundamental  change  in the
technology underlying hair care products for several decades,  combined with the
substantial  global market for hair care products,  presents an opportunity  for
new  technologically  oriented products.  In the Company's view,  electronically
controlled  and managed hair styling  products  that use  chemicals  and provide
quick and convenient application can gain widespread consumer acceptance if they
are successfully  developed and properly marketed.  The Company's strategy is to
use licensed technology to develop a line of advanced hair styling products and,
if it is successful in doing so,  eventually  to compete  significantly  on that
basis.  There can be no  assurance,  however,  that the Company  will be able to
develop such  advanced hair styling  products or, if it does,  that they will be
commercially successful.

Approximately  $311,000  was  expended  for  Electronic  Chemistry(TM)  research
activities  during  1997  which  were  primarily   directed  towards  continuing
early-stage  coloring  and styling  experiments  with respect to the reaction of
hair samples to  electromagnetic  signals.  As a result of experimental  work in
1997  the  Company  was  able to file an  additional  patent  application  which
management  believes  will further  broaden the Company's  proprietary  position
relative to the application of Electronic Chemistry(TM) to hair care. Because of
budget  constraints the Company  discontinued  all activity  related to advanced
technology development in December of 1997. Until sufficient financial resources
can be obtained from  operations or from  capital,  efforts  related to advanced
technology  will be limited to completing the prosecution of the Company patents
and  to  exploring   opportunities  with  prospective   licensees.   Substantial
additional  research  and  development  will be  required  before any  prototype
product containing its licensed  technology could be delivered,  and the Company
believes  that the earliest any prototype  product might be introduced  would be
twelve  to  twenty-four  months  after  funding  is  restored.   The  timing  of
introduction  of its  first  commercial  product  will  also  depend on the time
required to obtain any required regulatory approvals. There can be no assurance,
however,  that the Company  will be able to develop such  advanced  hair styling
products or, if it does, that they will be commercially successful.


<PAGE>

Manufacturing and Supply

All the  Company's  manufacturing,  packaging  and  warehousing  operations  are
located in a 476,000 square foot facility in Fridley,  Minnesota. The production
area  comprises  135,000  square feet and includes  formula  compounding  areas,
quality control laboratories,  multiple fully-automated,  high speed aerosol and
liquid filling lines and state-of-the-art  packaging facilities. The compounding
or mixing department utilizes a combination of manual and fully-automated  batch
processing  systems.  A portion of the  aerosol  batching  is  controlled  by an
automated  computer-driven  blending  system  which has  significantly  improved
efficiencies and product  integrity.  The high speed  fully-automated  packaging
equipment used for both liquid filling and aerosol lines runs at speeds of up to
300  containers  per minute.  The Company  believes it is an industry  leader in
fully  automated hair care product  manufacturing.  The Company has  substantial
excess production capacity,  which it currently intends to utilize in connection
with any expansion of its contract manufacturing activities.

The Company maintains a strict internal control system to monitor the quality of
its  products.  The quality  control  laboratory is well equipped and capable of
conducting both micro and analytical testing. The Company also maintains product
liability insurance at levels it believes to be adequate.

Raw  materials  used  by  the  Company  are  principally  alcohol,  surfactants,
fragrances,  propellants and a wide variety of packaging materials and compounds
including  containers  such  as  aerosol  cans,  corrugated  boxes  and  plastic
containers,  container caps, tops, valves and labels, all of which are purchased
from outside  sources.  The  Company's  principal  raw  materials  and packaging
components are available from several domestic suppliers and it is not dependent
on the availability of supplies from any single source.  While at times the hair
care industry has experienced a shortage of raw materials of the types essential
to the Company's  business,  because the Company has  long-established  supplier
relationships and has developed alternative raw material suppliers,  it does not
anticipate  any  difficulty in obtaining  adequate  supplies of raw materials to
meet its needs. Similarly,  while the industry has from time to time experienced
raw material cost increases,  the Company  believes it has been and remains able
to purchase its requirements at competitive prices from sources that are readily
available.

The Company uses tank railcars to transport  certain high volume raw  materials.
Trucks are used to transfer smaller volume raw material  requirements as well as
packaging  components  such as  aerosol  cans,  plastic  bottles  and caps,  and
corrugated  shipping  containers.  A separate  tank farm for  above-ground  bulk
storage of  chemicals  and  aerosol  propellants  is  located in a secured  area
outside of the plant.

The Company maintains inventory of raw materials and packaging materials as well
as certain finished goods in its on-site warehouse that comprises 265,000 square
feet.  Finished goods  inventory is warehoused for  distribution  throughout the
United  States at the Company's  on-site  warehouse,  but products  produced for
third parties are in most cases  immediately  released to third party warehouses
and do not  remain  on  the  Fridley  site  as  inventory.  As  many  as  twelve
over-the-road  truck  trailers  can  be  loaded  and  unloaded  in  the  plant's
warehousing and shipping area at one time.

Contract  manufacturing  of household  cleaning and hair care aerosol sprays and
liquid products for third parties,  particularly  with respect to the production
of  aerosol  spray  products  utilizing  the  Company's   automated  high  speed
production  lines, has contributed 20% or more to Company's sales in each of the
last three years.  During  1997,  the  Company's  Manufacturing  Agreement  with
DowBrands  expired.  The  Company  recognizes  revenues  from  orders  only upon
shipment.


Government Regulation

The Company's manufacturing and packaging operations are subject to a wide range
of  federal,  state  and  local  regulations.   These  regulations  include  the
applicable cosmetic purity and labeling  requirements  prescribed by the Federal
Food,  Drug and Cosmetic  Act, the  applicable  labeling  provisions of the Fair
Packaging  and Labeling Act, the  discharge,  handling and disposal of hazardous
wastes regulations contained in applicable environmental laws, and the plant and
laboratory safety  requirements of various  applicable  occupational  safety and
health laws. Existing and future aerosol-based  products are also expected to be
subject to state and, possibly, federal standards relating to permissible levels
of volatile organic compounds.  The Company does not expect that compliance with
those standards will adversely affect its revenues or costs. The Company is also
subject to federal regulations concerning the content of its advertising,  trade
practices and certain other matters.

A Phase I environmental assessment of the Fridley facility was performed in late
1995. No environmental pollution was identified. The Company is not aware of any
environmental  pollution  or  liabilities  arising  out of any  past or  present
activities  of  either   DowBrands   Personal  Care  Division  or  the  Company.
Additionally,  DowBrands Inc. has agreed,  for a period of eight years (but only
until May 15,  1996,  with  respect  to  asbestos  related  matters,  if any) to
indemnify the Company  against  environmental  liabilities in excess of $150,000
arising  at  the  Fridley  facility  from  events  that  occurred  prior  to the
acquisition.

The Company  believes it has  complied in all material  respects  with regard to
governmental  regulations  applicable to it. To date, those regulations have not
materially restricted or impeded the Company's operations.

Regulatory  agencies  continue to monitor  activities  related to the  Company's
products, and no assurance can be given that additional regulatory  requirements
will not be developed.


Patents and Trademarks

The Company  markets its products  under a number of trademarks  and trade names
that are  registered in the United  States and several  foreign  countries.  The
Company  will  seek to  register  significant  marks  and  names  if and when it
commences  operations  or  marketing  activities  in  other  foreign  countries.
Principal trademarks of the Retail Group include Willow Lake(R),  Perma Soft(R),
Color Soft(TM), Salon Style(R), Style(R) and Style Natural Reflections(TM).  The
Salon Group trademarks include Pativa(R),  Nucleic A(R), Apple Pectin(R),  Apple
Pectin(R)  Naturals  and  Vita/E(R).  The Company  believes  its position in the
marketplace  is  significantly  dependent  upon the goodwill  engendered  by its
trademarks and trade names, and therefore considers  trademark  protection to be
material  to its  business.  Although  the Company  owns  certain  patents,  its
business is not  materially  dependent  upon any patent,  license,  franchise or
concession, whether owned by or licensed to the Company.

The Company  believes  that  protection  of its  proprietary  technology  (which
includes certain technology licensed from an affiliate) and know-how is critical
to the development of its business.  It seeks to protect its interests through a
combination of patent  protection and  confidentiality  agreements  with all its
critical employees,  as well as by limiting the availability of certain critical
information  to a small number of key  employees.  To date,  it has obtained the
rights,  pursuant to an exclusive license, to cosmetic hair care applications of
the  technology  reflected in a United States patent (No.  5,395,490,  issued to
Messrs.  Don Hoff and Joseph Stiley in March 1995,  and expiring in March 2012),
that  it  believes  is  important  to  the  protection  of the  core  technology
underlying  its  research  activities.  Mr. Hoff,  Chairman and Chief  Executive
Officer, and Mr. Stiley,  Director and one of the Company's  co-inventors of the
Electronic Chemistry(TM) technology,  are affiliates of the Company. The Company
believes  that the  patent,  which  contains  claims  relating  to the method of
applying   electronic   signals  at   frequencies   determined  by  the  natural
characteristics  of a material in order to alter certain molecular bonds in that
material,  provides broad coverage,  and hence significant  protection,  for its
proprietary technology; however, there can be no assurance that this will be the
case.  Moreover,  the  Company  currently  has  no  patent  protection  for  its
technology  outside the United States,  and may be unable to obtain even limited
protection for its proprietary technology in foreign countries.

During 1997,  the Company  applied for an additional  patent which  broadens the
coverage of the initial filing  described above to include the use of electronic
signals with surface polymers.

The Company believes that its current and anticipated business does not infringe
on any patent owned by others.


Competition

The markets for the  Company's  products are very  competitive  and sensitive to
changing  consumer needs and  preferences.  They are  characterized  by frequent
introductions of competitive  products,  often  accompanied by major advertising
and promotional activities.

The Company competes primarily on the basis of product quality, price, marketing
and  brand  name  recognition.  As a result  of  competitive  conditions  in the
industry,  which have adversely  affected profit margins,  and growing  consumer
demand for greater product  convenience and  performance,  the industry has been
experiencing  a  consolidation  and a  globalization  in the  activities  of its
members.  The hair care  products  market is dominated by large,  multi-national
corporations,  all of which compete with the Company and have greater  financial
and other resources than those of the Company. The Company believes it was among
the ten largest  manufacturers in the United States in 1997 of three mass retail
categories  of hair care  products - shampoos,  conditioners  and styling  aids.
Principal  competitors  include  The  Procter & Gamble  Company,  Unilever  N.V.
(Helene Curtis),  Bristol-Myers Squibb Company (Clairol), L'Oreal S.A. (Cosmair)
and Alberto-Culver  Company, and those of the Salon Group include  Bristol-Myers
Squibb Company (Clairol and Matrix), Nexxus, and Wella AG (Redken).


Personnel

The Company  employed 323 persons as of February 28, 1998. None of the Company's
employees is a member of a labor union.  The Company  considers its relationship
with its employees to be good.


Item 2. PROPERTIES

The Company  owns its facility in Fridley,  Minnesota,  near  Minneapolis.  This
facility contains administrative,  laboratory, production and warehousing areas.
The 476,000 square foot air  conditioned  facility is located on a 25 acre site,
and includes an  approximately  38,000 square foot office center that houses the
administrative  staff,  research  laboratories,  computer  services and the test
salon.  The Company  believes the facility,  which was  constructed  in 1969 and
improved  during  the 1980s at a total  cost in excess of $60  million,  is well
maintained  and  adequate  for its  contemplated  needs.  The Company has excess
production  capacity,  which it  intends  to utilize  for new  products  and for
possible expansion of its contract manufacturing activities.

At December 31, 1997, the Company  leased its 6,008 square foot office  facility
in Mill Valley,  California,  near San Francisco,  from Intertec,  a division of
Innovative Capital  Management,  Inc., a related party. The term of the lease is
for three years commencing October 1, 1996.


Item 3. LEGAL PROCEEDINGS

None.


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

None.


PART II

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

The  Company's  Common Stock is traded on the Nasdaq  National  Market under the
symbol  LMAR.  The  table  below  sets  forth the range of the high and low sale
prices,  as reported by the Nasdaq Stock Market.  Previous to March 26, 1997 the
Company traded under the symbol EHST.

                                   1997                       1996
                             -----------------          -----------------
                              High       Low             High       Low
     First Quarter           $4.250     $2.750
     Second Quarter           3.813      2.375          $8.250*    $5.250
     Third Quarter            3.500      2.500           6.000      3.750
     Fourth Quarter           2.938      1.500           4.875      3.125

*Includes  only the  period  May 23,  1996,  the first  trading  date  after the
 Company's initial public offering, to June 30, 1996.

As of March 20, 1998,  the number of holders of record of the  Company's  Common
Stock was 471 and the  number of holders  of record of the  Company's  Preferred
Stock was one. As for the Common Stock, this number does not include  beneficial
holders where shares are held of record by nominees.

Dividends  are payable with respect to the Series A Preferred  Stock only to the
extent (on an  as-converted  basis) that  dividends are declared  payable on the
Common  Stock.  The Series B  Preferred  Stock is entitled  to  cumulative  cash
dividends at the rate of 8.0% per annum,  payable quarterly ($400,000 annually).
As of  December  31,  1997 the  Company is $200,000 in arrears on the payment of
dividends  on its Series B  preferred  stock held by Dow.  The  preferred  stock
provides for an annual dividend of $400,000 payable quarterly.

The Company does not anticipate  paying any dividends on its Common Stock in the
foreseeable  future.  The  payment  of  future  dividends  will  depend  on  the
evaluation  by the  Company's  Board of  Directors  of such  factors as it deems
relevant at the time. Currently, the Board of Directors believes that all of the
Company's  earnings,  if any,  should be  retained  for the  development  of the
Company's  business.  In  addition,  payment of dividends on the Common Stock is
prohibited by the terms of the Norwest Credit Agreement and is restricted by the
terms of its Preferred Stock.

In March 1997,  the Company  issued  16,500 shares of Common Stock to Dominic J.
LaRosa upon exercise of a warrant. The exercise price was $3.03 per share. These
securities  were exempt from  registration  under Section 4(2) of the Securities
Act of 1933.

In May 1997,  the  Company  issued  36,526  shares to  Intertec  Holdings,  L.P.
pursuant to the terms of a Common Stock Purchase  Agreement.  The purchase price
was $8.00 per share.  These  securities  were  exempt  from  registration  under
Section 4(2) of the Securities Act of 1933.


<PAGE>

Item 6.   SELECTED FINANCIAL DATA

                             SELECTED FINANCIAL DATA
                      (In thousands, except per share data)

Set forth below is selected  financial  data with respect to the  statements  of
operations of the Company,  for the twelve months ended December 31, 1997, 1996,
1995,  1994 and for the period from April 1, 1993  (Inception)  to December  31,
1993,  and the balance  sheet data of the Company at December  31,  1997,  1996,
1995,  1994 and 1993. In addition,  set forth below is selected  financial  data
with respect to the pro forma  statement of  operations  for the Company for the
twelve months ended December 31, 1995.  Such data presents the combined  results
of operations of the Company as if the acquisition of the Personal Care Division
was  effective  as of January 1, 1995.  The pro forma  combined  financial  data
includes  all  adjustments  which the  Company  considers  necessary  for a fair
presentation,  in accordance with generally accepted accounting  principles,  of
its results of operations for that period. The pro forma combined financial data
does not purport to represent  what the Company's  results of  operations  would
actually have been had the acquisition in fact occurred on the indicated date or
to project the Company's results of operations for any future date or period.

In  addition,  included  below is selected  financial  data with  respect to the
statements  of  operations  for the Personal  Care  Division for the period from
January 1, 1995 to November 30, 1995 (the effective date of the  acquisition for
financial  reporting  purposes) and the years ended  December 31, 1994 and 1993,
and the balance  sheets of the Personal  Care  Division at December 31, 1994 and
1993.  Such  data  were  derived  from  the  Personal  Care  Division  financial
statements, certain of which are included herein.

<TABLE>
<CAPTION>
                                                       HISTORICAL                                         PROFORMA
----------------------------------------------------------------------------------------------------------------------------------
                                                      YEARS ENDED
                                                      DECEMBER 31,
                                   --------------------------------------------------
                                                                                             April 1, 1993
                                                                                            (INCEPTION) TO
                                     1997          1996        1995(1)         1994        DECEMBER 31, 1993     DECEMBER 31, 1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>           <C>           <C>           <C>           <C>                   <C>
SELECTED STATEMENTS
OF OPERATIONAL DATA:

Total Net Sales                    $118,475      $117,083      $  8,070      $   -             $   -                 $117,766
Cost of Goods Sold                  69, 626        70,215         5,656          -                 -                   71,395

Gross Margin                         48,849        46,868         2,414          -                 -                   46,371
Operating Expenses                   66,375        45,641         3,496           557             1,565                45,130
Write-Down of Assets                   -             -             -             -                 -                   11,000

Operating (Loss) Income             (17,526)        1,227        (1,082)         (557)              (40)               (9,759)
Interest Expense                     (2,236)       (1,386)         (300)          (59)                                 (1,554)
Other Income                            402           712          -             -                 -                      101

Net (Loss) Income                  $(19,360)     $    553      $ (1,382)     $   (616)         $ (1,605)             $(11,212)(2)
                                   =========     =========     =========     =========         =========             =========
Basic (Loss) Income Per
Common Share                         $(3.48)         $.07         $(.52)       $( .25)             (.78)               $(4.20)
                                   =========     =========     =========     =========         =========             =========

Average Number of Basic
Common Shares Outstanding(3)          5,685         4,557         2,667         2,498             2,070                 2,667

Diluted (Loss) Income Per
Common Share                         $(3.48)        $(.06)        $(.52)        $(.25)            $(.78)               $(4.20)

Average Number of Diluted
Common Share Outstanding(3)           5,685          5609          2667          2498             2,070                 2,667

BALANCE SHEET DATA:
Working Capital (Deficit)           $15,794        26,126        10,346         $(466)             $(27)
Total Assets                         58,326        61,566        42,967             6               134
Long Term Debt, less current
Portion                              24,046        14,473        20,350         1,000             1,000
Stockholders' Equity (Deficit)       10,949        30,252         6,594        (1,462)           (1,057)
</TABLE>


<PAGE>

<TABLE>
Financial Data of the Personal Care Division

<CAPTION>
                                                                           Years Ended December 31,
                                                                           ------------------------
                                                  Period from January
                                                  1, 1995 through
                                                  November 30, 1995          1994           1993
                                                  (4)
                                                  --------------------------------------------------
          <S>                                     <C>                      <C>            <C>
          Selected Statements of
          Operations Data:
          Total net sales....................          $ 109,696           $ 121,277      $ 112,031
          Cost of goods sold.................             67,088              71,735         71,061
                                                  --------------------------------------------------

          Gross Margin.......................             42,608              49,542         40,970
          Operating expenses.................             42,344              57,830         53,851
          Write-down of assets...............             11,000             120,100           -
                                                  --------------------------------------------------

          Operating income (loss)............            (10,736)           (128,388)       (12,881)
          Interest expense from Dow                       (1,603)             (5,805)        (6,643)
          Other income (expense), net                        101                 705            317

          Net loss                                     $ (12,238)          $(133,488)      $(19,207)
                                                  ==================================================
</TABLE>


<TABLE>
<CAPTION>
                                                              At December 31,
                                                       -----------------------------
                                                         1994                1993
                                                       ---------           ---------
     <S>                                               <C>                 <C>
     Selected Balance Sheet Data:
               Working capital...............          $  16,787           $  11,457
               Total assets..................             58,021             180,376
               Net invested capital..........             47,493             169,058

<FN>
(1) Includes the results of  operations  of the Personal  Care  Division for the
month of December 1995 following its acquisition by the Company.

(2)  Includes  an $11.0  million  write-down  of assets  required  to adjust the
carrying  value of the Personal  Care  Division to its net  realizable  value in
connection  with Dow's  decision  to sell the  Personal  Care  Division.  Future
significant  charges are not expected as assets and liabilities were recorded at
their  estimated  fair values at the date of the  Company's  acquisition  of the
Personal Care Division.

(3) In accordance  with SEC Staff  Accounting  Bulletin 98, when computing basic
and diluted  earnings per share,  all common stock,  options,  and warrants that
were issued for nominal consideration during periods prior to the initial public
offering  have  been  considered  as  outstanding  for  all  historical  periods
presented.

(4)  Results  of  operations  of  the  Personal  Care  Division   following  its
acquisition  by the  Company in  November  1995 are  included  in the results of
operations of the Company for the year ended December 31, 1995.
</FN>
</TABLE>


<PAGE>

Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

Historical Results of Operations

      Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Total  net sales for the year  ended  December  31,  1997 were  $118.5  million,
compared  with $117.1  million in 1996 an increase of 1.2%.  The increase in net
sales for the year ended  December  31,  1997 is  principally  due to sales from
Willow Lake(R) and ColorSoft(TM) the Company's  premium-priced  retail hair care
product  lines and Style Natural  Reflections(TM)  a mid priced retail hair care
product line. Willow Lake(R),  targeted for the Natural's segment and positioned
as "Nature's  Prescription for Beautiful Hair,"(TM) began shipping in the fourth
quarter of 1996.  Color  Soft(TM),  formulated  to retain color longer for color
treated  hair  began  shipping  in the  first  quarter  of 1997.  Style  Natural
Reflections(TM)  positioned  as a mid priced  brand in the  "Natural's"  segment
began  shipping in the third  quarter of 1997.  Sales growth of Willow  Lake(R),
Color  Soft(TM)  and  Style  Natural  Reflections(TM)  will  be  dependent  upon
competition from other brands,  consumer acceptance and marketing support behind
these brands.

Sales for the twelve months ended December 31, 1997 were  adversely  affected by
sales declines in the Company's established brands, Perma Soft(R),  Style(R) and
Salon Style(R),  and in contract  manufacturing,  principally  DowBrands.  Perma
Soft(R),  Style(R) and Salon  Style(R) have  continued to decline in sales since
management  began its  turnaround  efforts in the first  quarter of 1996.  Perma
Soft(R),  Style(R) and Salon Style(R) had sales  declines of $8.8 million,  $8.4
million and $8.3,  respectively during the twelve months ended December 31, 1997
as compared  with 1996.  Notwithstanding  re-staging  of the brands during 1997,
management  believes  sales of these  brands  will  continue to decline but at a
lesser rate.

Gross margin as a percentage  of net sales was 41.2% for the twelve months ended
December  31,1997  as  compared  with  40.0% for the same  period  in 1996.  The
improvement  in the gross  margin as a  percentage  of net sales for the  twelve
months ended  December 31, 1997 is due to a change in product mix resulting from
the Company's  strategic shift to focus on higher margin brands driven by Willow
Lake(R) and Color Soft(TM).

Selling, general, and administrative expenses (SG&A) were $66.4 million or 56.0%
of net sales for the twelve  months  ended  December  31, 1997 as compared  with
$45.6  million or 39.0% of net sales for the same period last year,  an increase
of  $20.8  million.  As  general  and  administrative   expenses  have  remained
relatively flat, the increase is principally attributable to increased marketing
expense of $19.9 million and fees to brokers in the Company's distribution chain
supporting  the  launch of Willow  Lake(R),  Color  Soft(TM)  and Style  Natural
Reflections(TM). As discussed in note 2 in the accompanying financial statement,
the Company plans to reduce its level of marketing  support in 1998 more in line
with 1996  spending  levels.  There can be no  assurance  concerning  the future
performance  of either or both of the Willow Lake(R) and Color Soft(TM) lines or
the  Company's  ability  to  attain  any  particular  level  of  sales  or to be
profitable in the future.

Interest expense  increased to $2.2 million for the twelve months ended December
31,  1997 as  compared  with $1.4  million in the same  period  last  year.  The
increase in interest expense during the twelve months ended December 31, 1997 is
attributable to higher  borrowings under the Company's  revolving line of credit
with Norwest Business Credit to support the Company's  working capital needs and
the increased  interest rate invoked by Norwest as a result of the Company being
out of compliance  with certain  financial  loan  covenants  during a portion of
1997.

Other income  decreased to $.4 million for the twelve months ended  December 31,
1997 as compared  with $.7 million for the same period in 1996.  The decrease in
other  income in 1997 is  principally  due to absence of a one-time  gain on the
sale of equipment that was realized in 1996.

Primarily   because  of  the  $19.9  million   increase  in  marketing   expense
attributable to the launch of new products and lower than expected revenues from
the  Company's  established  brands,  the net loss for the twelve  months  ended
December 31, 1997  increased to $19.4 million as compared with net income of $.6
million for the same period in 1996.


Pro Forma and Historical Results of Operations

The following table sets forth pro forma statement of operations  information in
dollars and as a percentage  of total net sales for the year ended  December 31,
1995, and the historical statement of operations information in dollars and as a
percentage  of total net sales for the year ended  December  31,  1996.  The pro
forma  information gives effect to the acquisition of the Personal Care Division
as if it had occurred at the beginning of each period. The pro forma information
is not necessarily indicative of future results of operations.


                                         YEARS ENDED DECEMBER 31,
                                              (In Thousands)
                            --------------------------------------------------
                                 HISTORICAL                    PRO FORMA
                              1996          %               1995          %
                            ---------     ------          ---------     ------
Total Net Sales             $117,083      100.0%          $117,766      100.0%
Cost of goods sold            70,215       60.0             71,395       60.6
                            ---------     ------          ---------     ------
Gross margin                  46,868       40.0             46,371       39.4
Operating expenses            45,641       39.0             45,130       38.3
Write-down of assets            -           -               11,000        9.4
                            ---------     ------          ---------     ------
Operating income (loss)        1,227        1.0             (9,759)      (8.3)
Other income (expense)
     Interest expense         (1,386)      (1.1)            (1,554)      (1.3)
     Other income                712         .6                101         .1
                            ---------     ------          ---------     ------

Net income (loss)                553         .5           $(11,212)      (9.5)
                            =========     ======          =========     ======


                    Year Ended December 31, 1996 (Historical)
              Compared to Year Ended December 31, 1995 (Pro Forma)

Total net sales of $117.1  million for the year ended December 31, 1996 declined
0.6% compared to pro forma net sales of $117.8 million in 1995. During 1996, the
Company  experienced  sales  growth  from its new product  line Willow  Lake(R),
contract  manufacturing  and its Style(R)  product line.  These  increases  were
offset by sales decreases in the Perma Soft(R) and Salon Style(R) product lines.

The Company's  management  implemented  a new  marketing  strategy that included
increasing  advertising that began in the quarter ended June 30, 1996,  intended
to stem the decline in Perma Soft(R) sales.  In addition to supporting the brand
with advertising, the Company is testing new line extensions designed to reverse
the decline in sales.

In  April  1995,  DowBrands  discontinued   advertising  of  Salon  Style(R)  in
conjunction  with the decision to sell the Personal  Care  Division.  During the
next ten months,  Salon Style(R) was not supported with any  advertising  funds.
Although  the  Company   reinstituted   a  marketing   campaign  which  included
advertising  in the first  quarter of 1996,  Salon  Style(R)  continued  to lose
market share. The Company is developing and expects to implement a new marketing
strategy for the Salon Style(R) brand in 1997.

In  November  1995,  the  Company  entered  into a  two-year  contract  in which
DowBrands  has agreed to  purchase  all of its future  requirements  for certain
products.  Contract  manufacturing  sales  for 1996  were  $30.8  million  which
included sales to DowBrands of $22.2 million or 18.9% of total net sales.

Gross margin as a percentage of sales was 40.0% for the year ended  December 31,
1996,  as compared with a pro forma gross margin of 39.4% for the same period in
1995.  The increase in gross margin  percentage is  attributable  to the product
cost savings which were realized  through  operating  efficiencies  and the high
gross margin  generated from the Willow Lake(R) product line that began shipping
in the fourth quarter of 1996.  The gross margin  percentage  improvements  were
partially  offset by an increase in sales of the  lower-margin  Style(R) line of
products and contract manufacturing, and a decrease in consumer retail purchases
of the higher margin Perma Soft(R) and Salon Style(R) product line.

Although  investment  was  necessary  in 1996  resulting  from the  takeover  of
operations  from  DowBrands  and  from  the   implementation  of  the  Company's
turnaround  strategy,  operating  expenses  of $45.6  million for the year ended
December  31,  1996,  were  relatively  unchanged  as  compared  with pro  forma
operating expenses of $45.1 million for the same period in 1995.

The $11.0 million write-down of assets by DowBrands in the first quarter of 1995
reflected  a further  adjustment  in the  carrying  value of the  Personal  Care
Division to its net realizable  value in connection  with DowBrands  decision to
sell the Personal Care Division.  Future significant charges are not expected as
all assets and  liabilities  were recorded at their  estimated fair value at the
date of the Company's acquisition of the Personal Care Division.

As a result of the foregoing  factors,  the operating  income for the year ended
December 31, 1996, was $1.2 million, as compared with a pro forma operating loss
of $9.8 million in the same period in 1995.  Excluding the write-down of assets,
the pro forma operating  income for the year ended December 31, 1995, would have
been $1.2 million.

Interest Expense of $1.4 million for the year ended December 31, 1996,  declined
10.8%  compared  to pro forma  Interest  Expense of $1.6  million  in 1995.  The
decrease was due to the additional cash available for working capital in 1996 as
a result of the Company's initial public offering in May 1996.

Other income for the year ended  December 31, 1996, was $0.7 million as compared
with $0.1 million for the same period in 1995.  This increase is attributable to
the  increase in interest  income from the  investment  of the  additional  cash
available as a result of the  Company's  initial  public  offering in the second
quarter of 1996, and gain on the sale of equipment.

As a result of the foregoing factors, net income for the year ended December 31,
1996,  was $0.6 million,  as compared with a pro forma net loss of $11.2 million
for the same period in 1995.


Liquidity and Capital Resources

The  Company's  net  working  capital at  December  31,  1997 was $15.8  million
compared to $26.1  million at December 31, 1996.  This  decrease is due in large
part to the net  loss of  $19.4  million  incurred  in  1997.  The  loss in 1997
required  increased  borrowings  under  the  Company's  revolving  and term loan
facility  with Norwest  Business  Credit.  As of December 31, 1997,  the amounts
outstanding under Company's  revolving and term loan facility were $17.7 million
and $6.2  million,  respectively  as compared with $9.8 million and $4.8 million
respectively as of December 31, 1996.

In May 1997, the Company  increased its revolving credit line from $14.0 million
to $20.0  million  and its term loan from $6.0  million to $7.0  million,  for a
total credit facility of $27.0 million with the lender. The interest rate on the
loans are  variable  and are tied to Norwest  Bank's base rate which at December
31, 1997 was 8.5%. At December 31, 1997, the Company was out of compliance  with
certain financial loan covenants.

In March 1998,  Norwest  Business Credit amended the Company's loan agreement in
conjunction with providing the waiver to the Company. The amendment provides for
restructuring  financial  covenants on the credit  facility and  increasing  the
interest  rate on the  revolver  from  1.5% to 2.5%  above  the  base  rate  and
increasing the interest rate on the term loan from 1.75% to 2.75% above the base
rate. The interest rates on the revolver and the term loan are currently 11% and
11.25%, respectively. In addition, Norwest lowered the advance rates on eligible
receivable by 5% and eligible  inventory by 6%. The term loan  requires  monthly
principal payments of $116,666.

The  revolving  line of credit and term loan with  Norwest are secured by all of
the assets of the Company and are payable in full by November 15, 2000.

Total accounts payable  exceeding their normal payment terms were  approximately
$7.0 million as of December 31, 1997.  Major trade creditors and other creditors
have  extended  their  "normal"  terms to allow  time  for the  Company  to make
payments.  To date the  Company has been able to make  timely  shipments  to its
customers.  As of  December  31,  1997 the Company is $200,000 in arrears on the
payment of dividends on its Series B preferred  stock held by Dow. The preferred
stocks provide for an annual dividend of $400,000 payable quarterly.

In 1997 the  Company  supported  the  launch  of Willow  Lake(R)  as well as the
introduction  of other new  products  by a major  marketing  campaign  including
advertising and consumer promotions.  In addition the Company also increased its
inventory levels.  The major marketing  campaign and increased  inventory levels
were funded from the Company's working capital line. The Company plans to reduce
its  marketing  spending and reduce its  inventory  levels in 1998.  The Company
currently  plans to resume  advertising in the second half of 1998. This will be
dependent  upon  available  working  capital.  No  assurance  can be made of the
Company's ability to attain any particular level of sales or to be profitable in
the  future  as  a  result  of  the  reduced  marketing  and  timing  of  future
advertising.

The Company had been  operating  under a two year  manufacturing  contract  with
DowBrands  that  expired by its terms in November  1997.  In October  1997,  Dow
Chemical  announced  that it had sold  DowBrands.  The Company had revenues from
DowBrands  of $16.4  million  for the year  ended  December  31,  1997 and $22.2
million in 1996. In addition to covering the costs associated with the DowBrands
business,  the Company's earnings from the DowBrands contract were sufficient to
cover certain other fixed costs.  The Company has reduced  certain  direct labor
associated with the loss of the DowBrands business.

Based upon the results of operations  for the year ended  December 31, 1997, and
the uncertain level of operations during the next twelve months, the Company can
give no assurance that it will be able to meet its working  capital needs during
this  period.  Therefore,  the  Company  believes  it could  require  additional
financing in the  foreseeable  future.  The Company cannot predict  whether such
financing  will be in the form of equity or debt and cannot assure whether or on
what terms any such  financing  will be  available  to the  Company.  Should the
Company be unable to obtain additional funding on terms reasonably acceptable to
it, the  Company's  operations  could be  curtailed  and its  business  could be
materially adversely affected.


Year 2000 Compliance

The Year 2000 Issue is the result of potential problems with computer systems or
any equipment  with computer chips that use dates where the date has been stored
as just two digits  (e.g.  97 for 1997).  On January 1, 2000,  any clock or date
recording mechanism including date sensitive software which uses only two digits
to  represent  the year,  may  recognize a date using 00 as the year 1900 rather
than the year 2000.  This could  result in a system  failure or  miscalculations
causing  disruption of  operations,  including  among other things,  a temporary
inability  to  process  transactions,   send  invoices,  or  engage  in  similar
activities.

The  Company  determined  that  it  would  be  required  to  replace  or  modify
significant  portions of its business  application software so that its computer
systems would properly utilize dates beyond December 31, 1999. As a result,  the
Company is currently in the early stages of implementing an upgraded  version of
its business  application  software that has been produced and tested to be Year
2000  compliant.  The Company  will  primarily  utilize  internal  resources  to
implement,  replace and test  software and related  assets  affected by the Year
2000 Issue.  The Company expects to complete the majority of its  implementation
efforts by December  31, 1998  leaving  adequate  time to assess and correct any
significant  issues that may materialize.  The total cost of the upgrade will be
funded through  operating  budgets and is not expected to have a material impact
on the operations, cash flows, or financial condition of the Company, taken as a
whole, in future periods.

In 1998, the Company also plans to initiate  formal  communications  with all of
its  significant  suppliers and large customers to determine the extent to which
the Company is vulnerable to those third parties  failure to remediate their own
Year 2000 Issues.  However, these efforts are secondary to the Company's primary
focus of  upgrading  its own business  application  software by its December 31,
1998 deadline  date. The Company can give no guarantee that the systems of other
companies on which the Company's  systems rely will be converted on time or that
a failure to convert by another  company or a  conversion  that is  incompatible
with the  Company's  systems,  would not have a material  adverse  effect on the
Company.

The  costs of the  project  and the  timetable  in which  the  Company  plans to
complete the Year 2000 compliance  requirements  are based on management's  best
estimates,  which were derived utilizing  numerous  assumptions of future events
including  the  continued   availability  of  certain  resources,   third  party
modification  plans and other factors.  However,  there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
these  plans.  Specific  factors  that  might  cause such  material  differences
include,  but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.


NEW ACCOUNTING PRONOUNCEMENTS

REPORTING COMPREHENSIVE INCOME

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 130 (SFAS 130),  "Reporting  Comprehensive
Income,",  which will be effective  for the Company  beginning  January 1, 1998.
SFAS 130 requires the disclosure of  comprehensive  income and its components in
the general-purpose financial statements. For the years ended December 31, 1997,
1996,  1995,  the  Company  did not  engage in  transactions  related to foreign
currency  translation,  unrealized  gains  in  securities,  or  minimum  pension
liability  adjustments.  Accordingly,  Lamaur anticipates that SFAS 130 will not
have a significant impact on its current comprehensive income disclosures.


DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

In June 1997,  the  Financial  Accounting  Standards  Board Issued  Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise  and Related  Information,"  which will be effective  for the Company
beginning  January  1, 1998.  SFAS 131  redefines  how  operating  segments  are
determined  and  requires   disclosure  of  certain  financial  and  descriptive
information about a company's operating  segments.  LaMaur has not yet completed
its  analysis  of  operating  segments  on  which  it will  report.  However,  a
preliminary  analysis has  concluded  that the current  reportable  segments are
consistent with the "management approach" methodology outlined in SFAS 131.


ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE

In March 1998, the American  Institute of Certified  Public  Accountants  issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed  or  Obtained  for  Internal  Use." This SOP  requires  that  entities
capitalize  certain  internal-use  software costs once certain criteria are met.
The  provisions  of the SOP are  effective  for  fiscal  years  beginning  after
December  15,  1998,  and the  adoption by the Company is not expected to have a
material effect on results of operations or financial position.


Inflation

The impact of inflation on operations  has not been  significant in the past few
years due to the relatively low inflation that has been  experienced  throughout
the United  States.  Raw material  costs,  labor costs,  and interest  costs are
important  components  of the Company's  costs.  Increased  operating  costs are
reflected  in its  products  pricing  with any  limitations  on price  increases
determined by the marketplace.


SAFE HARBOR CAUTIONARY STATEMENT

Statements in this report  regarding the Company's  outlook for its business and
their respective markets, such as projections of future performance,  statements
of  management's  plans and  objectives,  forecasts  of market  trends and other
matters, are forward-looking statements, some of which may be identified by such
words or phrases as "will likely  result," "are  expected to," "will  continue,"
"outlook," "is anticipated,"  "estimate,"  "project" or similar expressions.  No
assurance can be given that the results in any forward-looking statement will be
achieved and actual results could be affected by one or more factors which could
cause them to differ  materially.  For these statements,  the Company claims the
protection of the safe harbor for  forward-looking  statements  contained in the
Private Securities Litigation Reform Act of 1995.


Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Not yet applicable.


<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          Index to Financial Statements

                                                                            Page
                                                                            ----

     THE LAMAUR CORPORATION
     Independent Auditors' Report..........................................  F-1
     Balance Sheets for the Years Ended December 31, 1997 and 1996.........  F-2
     Statements of Operations for the Years Ended December 31, 1997,
          1996 and 1995....................................................  F-3
     Statements of Changes in Stockholders' Equity for the Years Ended
          December 31, 1997, 1996 and 1995.................................  F-4
     Statements of Cash Flows for the Years Ended December 31, 1997,
          1996 and 1995....................................................  F-5
     Notes to Financial Statements.........................................  F-6
     PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
     Independent Auditors' Report.......................................... F-16
     Statement of Operations for the Period from January 1, 1995 to
          November 30, 1995................................................ F-17
     Statement of Net Invested Capital for the Period from January 1,
          1995 to November 30, 1995........................................ F-18
     Statement of Cash Flows for the Period from January 1, 1995 to
          November 30, 1995................................................ F-19
     Notes to Financial Statements......................................... F-20


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

Not applicable.


<PAGE>

PART III

Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

Incorporated by reference from the Company's 1998 Proxy Statement.


Item 11. EXECUTIVE COMPENSATION

Incorporated by reference from the Company's 1998 Proxy Statement.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Company's 1998 Proxy Statement.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Company's 1998 Proxy Statement.


<PAGE>

PART IV

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

(a)  Financial Statements and Schedules - See index in Item 8.
(b)  Reports on Form 8-K. None.
(c)  List of Exhibits.


Exhibit Number                     Description
--------------                     -----------

         *2.1  Asset Purchase Agreement,  dated as of November 15, 1995, between
               DowBrands, Inc. and Registrant.
         *2.2  Plan of Merger, dated March 15, 1996.
         *3.1  Restated Certificate of Incorporation of the Registrant.
         *3.2  By-Laws of the Registrant.
        **3.3  Certificate    of   Amendment   of   Restated    Certificate   of
               Incorporation.
         *4.1  Restated   Certificate   of   Incorporation   of  the  Registrant
               (incorporated by reference to Exhibits 3.1 and 3.3 hereof).
         *4.2  Specimen Copy of Stock Certificate for shares of Common Stock.
         *4.3  Form of Warrant issued to the Representatives.
         *4.4  Form of Common Stock Purchase Warrant, dated as of November 1995,
               issued to certain investors.
         *4.5  Registration  Rights  Agreement,  dated as of November  15, 1995,
               between Dow and Registrant.
         *4.6  Form of  Registration  Rights  Agreement  between  Registrant and
               certain holders of Registrant Common Stock.
        *10.1  License  Agreement by and between  Registrant  and Intertec Ltd.,
               dated May 5, 1993.
        *10.2  Credit and  Security  Agreement,  dated as of November  16, 1995,
               between Registrant and Norwest Business Credit, Inc.
       **10.3  First Amendment to Credit  Agreement,  Second Amendment to Credit
               Agreement,  Amendment  Agreement  and Third  Amendment  to Credit
               Agreement between Registrant and Norwest Business Credit, Inc.
      ***10.4  Amended  Credit and Security  Agreement  between  Registrant  and
               Norwest Business Credit, Inc.
     ****10.5  First Amendment to Amended Credit and Security  Agreement between
               Registrant and Norwest Business Credit, Inc.
         10.6  Second  Amendment  to Amended and  Restated  Credit and  Security
               Agreement between Registrant and Norwest Business Credit, Inc.
         10.7  Third  Amendment  to Amended  and  Restated  Credit and  Security
               Agreement and Waiver of Defaults  between  Registrant and Norwest
               Business Credit, Inc.
        *10.8  Manufacturing  Agreement  between  DowBrands L.P. and Registrant,
               dated November 16, 1995.
        *10.9  1996 Stock Incentive Plan of the Registrant.
       *10.10  1996 Stock Incentive Plan for Non-Employee Directors and Advisory
               Board Members of the Registrant.
       *10.11  Employment  Agreement between Registrant and Don G. Hoff, made as
               of June 1, 1994, and modified as of November 6, 1995.
      **10.12  1996 Non-Qualified Stock Option Plan of the Registrant.
      **10.13  Sublease  dated October 1, 1996 between  Registrant and Intertec,
               Ltd.
        10.14  Form of Employee Severance Agreement
        10.15  Memorandum  from the  Company  to  Dominic J LaRosa re  Insurance
               Coverage
   *****10.16  1997 Stock Plan
         23.1  Consent of Deloitte & Touche LLP.
         27.1  Financial Data Schedule

        *99.1  U.S. Patent Number 5,395,490, issued March 7, 1995, registered to
               Don G. Hoff and Joseph F.  Stiley,  III, for a method of treating
               materials  by  the  application  of  electromagnetic   energy  at
               resonant absorption frequencies.

          99.2 Restated  Financial  Data Schedule with respect to 6 month period
               ended June 30, 1996, 9 month period ended September 30, 1996, and
               12 month period ended December 31, 1996

          99.3 Restated  Financial  Data  Schedule wit respect to 3 month period
               ended March 31,  1997,  6 month  period ended June 30, 1997 and 9
               month period ended September 30, 1997


               *Incorporated  by  reference  from  the  Form  S-1   Registration
                    Statement (File No. 333-2722).
               **Incorporated by reference  from Annual  Report on Form 10-K for
                    fiscal year ended 12/31/96
               ***Incorporated by reference from  Quarterly  Report on Form 10-Q
                    for quarter ended 6/30/97
               ****Incorporated by reference from Quarterly  Report on Form 10-Q
                    for quarter ended 9/30/97
               *****Incorporated by reference to Form S-8 Registration Statement
                    (File No. 333-26811)

<PAGE>

1.   SIGNATURES

Pursuant to the  requirements  of Section 13 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 30, 1998                          THE LAMAUR CORPORATION
                                    --------------------------------------------
                                                    (Registrant)


                                    By:              /s/ DON G. HOFF
                                    --------------------------------------------
                                    Don G. Hoff, Chairman of the Board and Chief
                                    Executive Officer


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

        Signature                          Title                       Date
        ---------                          -----                       ----


     /s/ DON G. HOFF
-------------------------
       Don G. Hoff          Chairman of the Board and Chief       March 30, 1998
                            Executive Officer
                            (Principal Executive Officer)


   /s/ JOHN D. HELLMANN
-------------------------
    John D. Hellmann        Vice President, Chief Financial       March 30, 1998
                            Officer
                            (Principal Financial and Accounting
                            (Officer)


    /s/ DOMINIC LaROSA
-------------------------
    Dominic J. LaRosa       President and CEO - Lamaur            March 30, 1998
                            and Director


 /s/ HAROLD M. COPPERMAN
-------------------------
   Harold M. Copperman      Director                              March 30, 1998


  /s/ GERALD A. EPPNER
-------------------------
    Gerald A. Eppner        Director                              March 30, 1998


    /s/ PAUL E. DEAN
-------------------------
      Paul E. Dean          Director                              March 30, 1998


    /s/ PERRY D. HOFF
-------------------------
      Perry D. Hoff         Director                              March 30, 1998


  /s/ JOSEPH F. STILEY
-------------------------
  Joseph F. Stiley, III     Director                              March 30, 1998
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


The Lamaur Corporation:

     We have audited the accompanying  balance sheets of The Lamaur Corporation,
formerly  Electronic  Hair Styling,  Inc., (the  "Company"),  as of December 31,
1997, and 1996, and the related statements of operations,  stockholders'  equity
and cash flows for each of the three  years in the  period  ended  December  31,
1997.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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


Deloitte & Touche LLP
San Francisco, California
March 31, 1998


<PAGE>
                             THE LAMAUR CORPORATION
                                 BALANCE SHEETS
                 (In thousands, except share and per share data)

                                                           December 31,

ASSETS                                                   1997         1996

Current Assets:
     Cash and cash equivalents                       $    6,465    $   12,081
     Receivables from DowBrands (Note 12)                   741         1,450
     Accounts receivable, net (Note 4)                   15,943        17,214
     Inventories (Note 5)                                15,523        11,699
     Prepaid expenses and other current assets              453           523
         Total Current Assets                            39,125        42,967
Property, Plant and Equipment, Net (Note 6)              19,131        18,475
Other Assets                                                 70           124
     Total Assets                                     $  58,326    $   61,566

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

     Accounts payable                                   14,592     $   6,724
     Accrued expenses                                    4,666         4,637
     Accrued salaries, wages and employee-related        2,211         2,458
     expenses                                            1,612         1,272
     Current portion of long-term debt (Note 7)            250         1,750
     Payables to related parties (Note 12)

         Total Current Liabilities                       23,331        16,841

     Long-Term Debt (Note 7)                             23,546        13,723
     Related Party Obligations (Note 12)                    500           750
     Commitments and Contingencies (Note 14)

     Stockholders' Equity (Note 8):
       Preferred stock, $.01 par value, 4,000,000
         shares authorized:
       Series A Preferred  stock,  $.01 par value,
         1,000,000  shares issued and
         outstanding at December 31, 1997 and 1996.
         ($10.0 million liquidation preference)           8,500         8,500

       Series B  Preferred  stock,  $.01 par value,
         763,500  shares  issued and
         outstanding at December 31, 1997 and 1996.
         ($5.0 million liquidation preference)            5,000         5,000

       Common stock, $.01 par value, 12,000,000 shares
         authorized, 5,747,544 and 5,603,395 shares
         issued and outstanding at December 31, 1997
         and 1996, respectively                              57            56

       Additional paid-in-capital                        19,852        19,796

       Stock subscriptions receivable                       (50)          (50)

       Accumulated deficit                              (22,410)      (3,050)

         Total Stockholders' Equity                      10,949        30,252

         Total Liabilities and Stockholders' Equity  $   58,326    $   61,566

                                    See notes to financial statements
                                                   F-2


<PAGE>


                                              THE LAMAUR CORPORATION
                                             STATEMENTS OF OPERATIONS
                                       (In thousands, except per share data)


<TABLE>
<CAPTION>

                                                                Years Ended
                                                                December 31,
<S>                                                  <C>           <C>         <C>

                                                        1997         1996        1995


Net Sales..........................................   $102,104     $ 94,912     $ 6,426


Net Sales to DowBrands (Note 12)...................     16,371       22,171       1,644


Total Net Sales (Note 1)...........................    118,475      117,083       8,070


Cost of Goods Sold.................................     69,626       70,215       5,656


Gross Margin.......................................     48,849       46,868       2,414


Selling, General and Administrative Expenses.......     66,375       45,641       3,496


Operating (Loss) Income............................    (17,526)       1,227      (1,082)


Interest Expense...................................     (2,236)      (1,386)       (300)

Interest and Other Income..........................        402          712          --


Net (Loss) Income..................................    (19,360)         553      (1,382)


Dividends on Series B Preferred Stock..............       (400)        (233)         --


Net (Loss) Income Available to Common Shareholders.   $(19,760)    $    320    $ (1,382)


Basic (Loss) Income per Common Share...............  $      (3.48)    $   0.07    $  (0.52)


Average Number of Basic Common Shares Outstanding..      5,685        4,557       2,667


Diluted (Loss) Income per Common Share.............  $       (3.48)    $   0.06    $  (0.52)


Average Number of Diluted Common Shares Outstanding
                                                         5,685        5,609       2,667
</TABLE>


                                         See notes to financial statements
                                                        F-3

<PAGE>


                             THE LAMAUR CORPORATION
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              For the Years Ended December 31, 1997, 1996 and 1995
                                 (In thousands)


<TABLE>
<CAPTION>

                                Series A          Series B                            Additional  Stock
                            Preferred Stock   Preferred Stock      Common Stock       Paid-In     Subscriptions  Accumulated
                            Shares    Amount  Shares     Amount    Shares   Amount    Capital     Receivable       Deficit   Total

<S>                          <C>    <C>         <C>    <C>        <C>      <C>       <C>          <C>        <C>            <C>
--------------------------
    Balance,
    December 31, 1994           -    $   -       -      $   -     2,498     $   25   $   734       $   -      $   (2,221)   $(1,462)
--------------------------

Issuance of Series A
preferred stock             1,000    8,500       -          -         -        -         -             -             -       8,500
--------------------------

Issuance of common stock
for cash                        -        -       -          -       135        1       214             -             -        215
--------------------------

Issuance of common stock
for services                    -        -       -          -       156        1       236             -             -        237
--------------------------

Issuance of common stock
for stock subscriptions         -        -       -          -        73        1        99          (100)            -          -
--------------------------

Grants of  non-cash stock
option credits                  -        -       -          -         -        -       311             -             -        311
--------------------------

Conversion of notes
payable to common stock         -        -       -          -        83        1       124             -             -        125

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

Reduction of stock
subscriptions receivable        -        -       -          -         -        -         -            50             -         50
--------------------------

Net loss                        -        -       -          -         -        -         -             -        (1,382)      (1,382)
--------------------------

    Balance
    December 31, 1995       1,000    8,500       -          -     2,945       29     1,718           (50)       (3,603)      6,594
--------------------------

Issuance of Series B
preferred stock                 -        -     764      5,000         -        -         -             -             -       5,000
--------------------------

Issuance of common stock        -        -       -          -     2,643       26     18,086            -             -      18,112
--------------------------

Grants of non-cash stock
option credits                  -        -       -          -         -        -       132             -             -         132
--------------------------

Stock grants to employees       -        -       -          -        15        1        93             -             -          94
--------------------------

Dividends on preferred
stock                           -        -       -          -         -        -      (233)            -             -         (233)
--------------------------

Net income                      -        -       -          -         -        -         -             -           553         553
--------------------------

    Balance
    December 31, 1996       1,000    8,500     764      5,000     5,603       56     19,796          (50)       (3,050)      30,252
--------------------------

Issuance of common stock
                                -        -       -          -       145        1       456             -             -        457
--------------------------

Dividends on preferred
stock                           -        -       -          -         -        -      (400)            -             -       (400)
--------------------------

Net loss                        -        -       -          -         -        -         -             -       (19,360)     (19,360)
--------------------------

    Balance
    December 31, 1997       1,000    $8,500    764     $5,000     5,748      $57     $19,852       $ (50)     $(22,410)      $10,949
--------------------------
</TABLE>


                        See notes to financial statements
                                       F4


<PAGE>
                             THE LAMAUR CORPORATION
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                                                1997         1996        1995
<S>                                                           <C>          <C>        <C>

Cash Flows From Operating Activities:

Net (loss) income..........................................   $ (19,360)   $     553   $  (1,382)

     Adjustments  to reconcile  net (loss) income
     to net cash (used in) provided
     by operating activities:

         Noncash credits for services......................           -          132         213

         Issuance of common stock for services.............           -           94          52

         Utilization of DowBrands credits..................      (1,500)      (1,500)          -

         Loss (gain) on disposal of assets.................          41         (214)          -

         Depreciation and amortization.....................       1,697        1,365         144

         Effect of changes in:

              Receivables..................................       1,980       (5,985)      3,779

              Inventories..................................      (3,824)        (559)        528

              Other assets.................................          39         (177)        (94)

              Payables.....................................       7,868          999      (2,643)

              Accrued expenses.............................        (218)        (478)      1,273


         Net cash (used in) provided by operating
         activities........................................     (13,277)      (5,770)      1,870


Cash Flows From Investing Activities:

     Additions to property, plant and equipment............      (1,236)      (3,110)       (128)

     Proceeds from sale of property, plant and equipment...          16          225           -

     Acquisition of PCD....................................           -            -     (13,689)


         Net cash used in investing activities.............      (1,220)      (2,885)    (13,817)


Cash Flows From Financing Activities:

     Revolving credit agreement, net.......................       7,837        1,764       8,050

     Borrowings of long-term debt..........................       2,738            -       6,465

     Repayments of long-term debt..........................      (1,751)      (1,445)       (300)

     Proceeds from sales of common stock, net..............         457       18,112          68

     Payment of preferred dividends........................        (400)         (33)          -


         Net cash provided by financing activities                8,881       18,398      14,283


Net (Decrease) Increase in Cash and Cash Equivalents.......      (5,616)       9,743       2,336

Cash and Cash Equivalents at Beginning of Period...........      12,081        2,338           2

Cash and Cash Equivalents at End of Period.................   $   6,465    $  12,081   $   2,338



Supplemental Disclosures of Cash Flow Information:


     Cash paid during period for interest..................   $   2,315    $   1,186  $        -

     Noncash investing and financing activities:

         Capital lease obligations entered into............       1,088          401           -

         Dividends payable preferred stock.................         200          200         100

         Common stock issued for subscriptions receivable..
                                                                      -            -         125

         Conversion or convertible subordinated note into
         stock.............................................           -        5,000           -


     Acquisition of PCD (Note 1):

         Issuance of preferred stock.......................           -            -       8,500

         Issuance of convertible subordinated note.........           -            -       5,000

         Issuance of DowBrands credits.....................           -            -       3,000

         Common stock issued for acquisition-related
         services..........................................           -            -         185

         Reduction of subscription receivable through
         services performed................................           -            -          50

</TABLE>

                        See notes to financial statements
                                       F 5



<PAGE>

                             THE LAMAUR CORPORATION
--------------------------------------------------------------------------------

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


1.   ORGANIZATION AND OPERATIONS

     Effective March 26, 1997, Electronic Hair Styling, Inc. changed its name to
The Lamaur Corporation (the "Company"). The Company, a Delaware corporation,  is
the successor to Electronic Hair Styling,  Inc.,  which was  incorporated in the
State of Washington on April 1, 1993 (the  "Predecessor").  Effective  March 18,
1996, Predecessor merged with and into its wholly-owned subsidiary, the Company.
In connection with the merger, the Company issued .660 shares of common stock in
exchange for each issued and outstanding share of Predecessor  common stock. The
accompanying Company financial statements,  which are substantially identical to
Predecessor's  financial  statements  for  periods  prior  to the  merger,  give
retroactive effect to the merger.

     The Company  develops,  formulates,  manufactures and markets personal hair
care products, consisting of shampoos, conditioners, hair sprays, permanent wave
products and other styling aids,  for both consumer and  professional  hair care
markets.  The  Company  is also  engaged  in the early  stages of  research  and
development  with  respect to a new hair  styling  concept  which is intended to
combine  electronics  and  chemicals to create new  products  designed to color,
style and  condition  hair  quickly,  without the damaging  side  effects  often
experienced with most chemical-based hair styling products. The Company licensed
the technology from Intertec Ltd., which is the sole limited partner of Intertec
Holdings, L.P., the principal stockholder of the Company (see Note 12). Prior to
the acquisition discussed below, the Company was a development stage company.

     Effective  November 15,  1995,  the  Company  acquired  certain  assets and
liabilities of the Personal Care Division of DowBrands L.P.  ("PCD").  DowBrands
L.P. is a limited  partnership  whose  managing  partner is  DowBrands  Inc.,  a
wholly-owned subsidiary of The Dow Chemical Company (collectively  "DowBrands").
PCD, which was renamed Lamaur after the acquisition, develops, manufactures, and
markets hair care products.  The acquisition was accounted for as a purchase and
did not result in any goodwill.  The total  purchase  price,  including  related
acquisition costs, was $30.2 million. The acquisition was accounted for as if it
occurred on November 30, 1995, and the Company's  financial  statements  include
the results of PCD effective December 1, 1995.

     The following  unaudited pro forma  summary  results of operations  for the
year ended  December 31, 1995,  gives effect to the  acquisition of PCD as if it
had occurred at the  beginning of 1995.  The pro forma results do not purport to
reflect the results of  operations  which would have  actually  occurred had the
combination  been  effective  on the date  indicated  or which  may occur in the
future.

                                                             1995
                                                        (In thousands
                                                       except per share
                                                            amount

Total net sales.....................................        $117,766

Net loss............................................         (11,212)

Net loss per share..................................         (2.74)


2.   MANAGEMENT'S PLANS REGARDING OPERATING LOSSES

     In 1997, the Company incurred a net loss of approximately $19.4 million and
negative cash flows from operating activities of approximately $13.3 million. In
addition, the Company was not in compliance with certain covenants of its credit
facility  at various  measurement  dates  during  1997.  The  lender  waived the
covenants  and amended  the  agreement  subsequent  to year end.  The  Company's
ability  to  continue  operations  is  dependent  on  its  ability  to  generate
sufficient  cash flow to meet its obligations as they become due, to comply with
the  terms  and  conditions  of the  amended  financing  agreements,  to  obtain
additional  financing or refinancing as may be required,  and ultimately  attain
sales and operating  levels to support its cost  structure.  Management's  plans
regarding  operating  losses  and its plans  concerning  the above  matters  are
presented below.

     In  conjunction  with the  introduction  of the  Willow  Lake(R)  and Color
Soft(TM) product lines, the Company  increased its promotional  spending in 1997
to $43.7 million from $23.8  million in 1996.  The Company plans to decrease its
promotional spending by approximately $20.0 million in 1998.

     In 1998,  the  Company  also plans to reduce  operating  costs and  improve
operating margins through  workforce  reductions which have been implemented and
delays in expenditures related to the development of its electronic  technology.
Approximately  90 positions in the  production,  administrative,  and management
areas were  eliminated in early 1998.  Further,  manufacturing  operations  were
consolidated from three to two shifts.

     As of December  31,  1997,  the  Company's  principal  sources of liquidity
included cash and cash  equivalents  of  approximately  $6.5  million,  accounts
receivable of approximately $16.7 million and inventories of approximately $15.5
million.  In 1998, the Company plans to reduce its excess inventory  balances in
order to enhance  liquidity.  As  discussed  in Note 7, the Company  amended its
financing  agreement  and related  covenants in March 1998.  Management  is also
investigating the possibility of obtaining additional sources of financing.  The
Company believes that its anticipated funds from operations and existing sources
of liquidity,  combined with its amended credit facility agreement, will satisfy
the Company's projected working capital requirements for 1998.


3.   SIGNIFICANT ACCOUNTING POLICIES

     Use of Estimates - The  preparation  of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period.  Significant  accounting estimates reflected in the
Company's  financial  statements  include the allowances for doubtful  accounts,
sales returns and cash discounts,  inventory  valuation reserve,  accrued coupon
redemption  reserve,   accrued  market  development  reserve,  accrued  employee
benefits,   and  employee  stock  option  and  stock  purchase  plan  pro  forma
disclosures. Actual results could differ from those estimates.

     Cash and Cash  Equivalents  -  Certain  balances  are held in a  collateral
account with the  Company's  lender (Note 7). After  residing in the account for
one day, such balances are applied  against the Company's  revolving  debt.  The
Company  considers all investments with an original  maturity of three months or
less on their acquisition date to be cash equivalents. These investments consist
of A1+/P1 rated commercial paper and U.S. Treasuries which were $6.2 million and
$11.5 million at December 31, 1997 and 1996,  respectively.  The U.S. Treasuries
at December 31, 1997  represent  restricted  securities  which are maintained as
collateral  in support of the  revolving  line of credit with  Norwest  Business
Credit (Note 7).

     Accounts Receivable, net includes an allowance for doubtful accounts.

     Receivables  from  DowBrands   represent   amounts  due  under  a  contract
manufacturing agreement (Note 12).

     Inventories are stated at the lower of weighted average cost or market.

     Property, Plant, and Equipment is recorded at cost and is being depreciated
using the  straight-line  method over the estimated  useful lives of the related
assets which range from 20 to 50 years for buildings and  improvements  and 3 to
10  years  for  machinery  and  equipment.  In 1996,  the  Company  adopted  the
provisions  of  Statement of Financial  Accounting  Standards  ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS 121  establishes  recognition of impairment  losses when a
company no longer expects to recover the carrying  value of a long-lived  asset.
The effect of adopting SFAS 121 was not material.

     Income Tax - Amounts in the  financial  statements  related to income taxes
are  calculated  using the  principles of SFAS No. 109,  "Accounting  for Income
Taxes."  Under  SFAS 109,  prepaid  and  deferred  taxes  reflect  the impact of
temporary  differences between the amounts of assets and liabilities  recognized
for financial  reporting purposes and the amounts recognized for tax purposes as
well as tax credit  carryforwards and loss  carryforwards.  These deferred taxes
are  measured by applying  currently  enacted tax rates.  A valuation  allowance
reduces  deferred  tax  assets as future  profits  are not yet  predictable  and
utilization of deferred tax assets are not determinable.

     Stock  Based  Compensation  - In 1996 the  Company  adopted  SFAS No.  123,
"Accounting for Stock-Based Compensation." As permitted under this standard, the
Company will continue to apply the  recognition  and  measurement  principles of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" to its stock option and other  stock-based  employee  compensation
awards.  The  disclosure of the pro forma net income and pro forma  earnings per
share as if the fair value  method of SFAS 123 had been  applied can be found in
Note 9.

     Earnings Per Share - In 1997,  the Company  adopted  Statement of Financial
Accounting  Standard No. 128, "Earnings Per Share." SFAS 128 requires disclosure
of Basic and Diluted  Earnings per Share (EPS).  Basic EPS is  calculated  using
income  available  to common  shareholders  divided by the  weighted  average of
common shares  outstanding  during the year. Diluted EPS is similar to Basic EPS
except that the  weighted  average  common  shares  outstanding  is increased to
include the number of additional  common shares that would have been outstanding
if the dilutive potential common shares,  such as options,  had been issued. The
treasury  stock method is used to calculate  dilutive  shares which  reduces the
gross  number of dilutive  shares by the number of shares  purchasable  from the
proceeds of the options  assumed to be  exercised.  All prior year  Earnings per
Share have been restated in accordance with the provisions of SFAS 128. Adoption
of  SFAS  128 did not  have a  material  effect  on the  Company's  historically
disclosed  Earnings per Share.  See Note 9 for more  information  regarding  the
Earnings Per Share calculations.

     Concentration  of  Credit  Risk - The  Company  sells the  majority  of its
products to large U.S.  retailers.  Excluding  sales to DowBrands,  sales to the
Company's  largest  customer were $18.4 million and $19.1  million,  in 1997 and
1996,  respectively.  No other customer accounted for more than 10% of total net
sales in 1997 or 1996. The Company  performs  ongoing credit  evaluations of its
customers  and  generally  does not require  collateral.  The Company  maintains
reserves for potential credit losses, which have been insignificant.

     Fair  Value  of  Financial  Instruments  -  Generally  accepted  accounting
principles  require  the  disclosure  of the  fair  value of  certain  financial
instruments,  whether or not  recognized in the balance  sheet,  for which it is
practicable  to estimate  fair  value.  The  Company  estimated  the fair values
presented below using appropriate valuation methodologies and market information
available as of year end. Considerable judgment is required to develop estimates
of fair value, and the estimates presented aren't necessarily  indicative of the
amounts that the Company could realize in a current market exchange.  The use of
different market assumptions or estimation  methodologies  could have a material
effect on the  estimated  fair  values.  Additionally,  these fair  values  were
estimated  at  year  end,  and  current  estimates  of  fair  value  may  differ
significantly from the amounts presented.

     The following  methods and assumptions were used to estimate the fair value
of each class of financial instruments:

          Accounts Receivable,  Accounts Payable and Short-Term Borrowings - The
          carrying amount of these items approximates fair value.

          Debt - To  estimate  the fair  value of debt the  Company  uses  those
          interest rates that are currently available to it for issuance of debt
          with similar terms and remaining maturities.  At December 31, 1997 and
          1996, the carrying value of debt approximated fair value.

     Reclassifications  - Certain prior year amounts have been  reclassified  in
the  accompanying  financial  statements  in  order  to  conform  with  the 1997
presentation.


4.   ACCOUNTS RECEIVABLE

     Accounts Receivable include the following:


                                                          December 31,
                                                       1997          1996

                                                      (In thousands)

 Accounts receivable trade......................... $16,259        $17,380

 Non-trade accounts receivable.....................     519            391

 Allowance for doubtful accounts and returns.......    (835)          (557)

      Total........................................ $15,943        $17,214

     Write-offs of accounts receivable were $21,000, $55,000, and $3,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.


5.   INVENTORIES

     Inventories include the following:


                                             December 31,
                                           1997         1996
                                          (In thousands)

  Finished goods........................$ 9,233       $ 7,324

  Work in process.......................     93           118

  Raw materials.........................  6,197         4,257

       Total............................$15,523       $11,699


6.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following:

                                                     December 31,
                                                  1997          1996
                                                    (In thousands)

 Land and land improvements.................    $ 1,662        $ 1,662

 Buildings and improvements.................      5,290          5,253

 Machinery and equipment....................     14,822         12,120

 Construction in progress...................        398            883

      Total.................................     22,172         19,918

 Less accumulated depreciation.............      (3,041)        (1,443)

      Total................................     $19,131        $18,475



7.   LONG-TERM DEBT

     Long-term debt includes the following:

                                                      December 31,
                                                  1997          1996
                                                    (In thousands)

  Revolving loan.............................  $17,651        $ 9,814

  Term loan..................................    6,222          4,800

  Obligations under capital leases...........    1,285            381

       Total.................................   25,158         14,995

  Less current portion.......................   (1,612)        (1,272)

       Long-term portion.....................  $23,546        $13,723


     In May 1997,  the Company  entered into an Amended and Restated  Credit and
Security  Agreement with Norwest  Business Credit (the "Lender").  The Amendment
provides  for an increase  in the credit  facility  from $20.0  million to $27.0
million,  and extends the  termination  date to November 15, 2000.  The facility
consists of a $20 million revolving line of credit and a $7.0 million term loan.

     Under the terms of the revolving line of credit,  the company can borrow up
to $20  million  or a lesser  amount as  determined  by the  borrowing  base (as
defined in the loan agreement,  comprising a percentage of eligible  receivables
and  inventory).  The loan  provides  that the Lender will advance  funds to the
Company subject to the terms and conditions of the loan agreement and amendments
thereto and as long as the Company maintains $1.0 million of availability  under
its revolving line of credit. If availability is less than $1.0 million advances
are at the Lender's discretion. Availability as defined under the loan agreement
is borrowing  base minus the  outstanding  balance under the  revolving  line of
credit,  minus letters of credit  outstanding At December 31, 1997 and 1996, the
annual  interest  rates  were 12% and  8.75%,  respectively.  As a result of the
Company being out of  compliance  with certain  financial  loan  covenants,  the
Lender  invoked a 2% default rate on the revolving line during a portion of 1997
which was still in effect at December 31, 1997.

     The term loan provides for monthly  installments of $116,666 plus interest.
At December 31, 1997 and 1996,  the annual  interest  rates were 12.25% and 9.0%
respectively.  As a result of the Company being out of  compliance  with certain
financial loan covenants,  the Lender invoked a 2% default rate on the term loan
during a portion of 1997 which was still in effect at December 31, 1997.

     Both  credit  facilities  are  secured by  virtually  all the assets of the
Company.  Additionally, the credit facilities prohibit the payment of dividends,
restrict the Company's ability to incur additional  indebtedness and require the
Company to comply with  certain  financial  covenants  regarding  profitability,
minimum net worth, leverage, capital expenditures and cash flow.

     As a result of the losses  during 1997,  the Company was out of  compliance
with certain  financial loan covenants at various  measurement  dates throughout
the year.  The Company has  received a waiver from the Lender in regard to these
covenants.  In addition to receiving a waiver,  the Company  entered into a loan
amendment with Norwest  Business  Credit in March 1998. The amendment  increases
the annual  interest  rates by 1% on both the revolving  line of credit and term
loan to 11% and 11.25%,  respectively.  In addition,  advance  rates on accounts
receivable  and  certain   eligible   inventory  were  reduced  by  5%  and  6%,
respectively.

     The  obligations  under capital  leases are at fixed interest rates ranging
from 4.9% to 20.2% and are  collateralized  by equipment  and a letter of credit
for $319,000.  Machinery and equipment under capital leases were $1,290,000 (net
of  $172,000  of  accumulated  depreciation)  and  $395,000  (net of  $6,000  of
accumulated  depreciation)  as of  December  31,  1997 and  1996,  respectively.
Minimum  payments  on  noncancellable   operating  leases  obligations  are  for
buildings, autos and office equipment. Rent expense for the years ended December
31, 1997,  1996 and 1995 were  approximately  $380,000,  $150,000 and  $187,000,
respectively.

     Future  minimum  principal  payments on long-term  debt,  capital lease and
noncancellable operating lease obligations are as follows:

<TABLE>
<CAPTION>

                                                        Principal Payments on        Minimum Payments on Operating
                                                     Long-Term Debt and Capital            Lease Obligations
                   Year Ending                            Lease Obligations
<S>                                                <C>                              <C>

1998                                                         $   1,612              $    272
1999                                                             1,629              $    197
2000                                                            21,302              $     33
2001                                                               212                     6
2002                                                               149                     -
2003 and thereafter                                                254                     -

Total minimum principal payments                             $  25,158              $    508
                                                            ==========              ==========
</TABLE>



8.   STOCKHOLDERS' EQUITY

     Effective May 22, 1996, the Company  completed its initial public  offering
of 2,600,000 shares of its common stock. Net proceeds to the Company  aggregated
approximately  $18.1 million.  As of the closing date of the offering,  the $5.0
million  convertible note with DowBrands converted into 763,500 shares of Series
B preferred stock (see below).

     Preferred Stock - The Company has authorized  4,000,000  shares of $.01 par
value  preferred  stock,  the  terms of  which  are  established  at the time of
issuance by the Board of Directors. In connection with the acquisition described
in Note 1, the  Company  issued  one  million  shares  of  Series A  convertible
preferred stock ("Series A Preferred"). The Series A Preferred has a liquidation
preference  of  $10.00  per  share or $10.0  million  in the  aggregate  and has
dividend and voting rights equal to common stock on an as-converted  basis. Each
share of Series A  Preferred is convertible  into .660 shares of common stock at
the option of the holder;  however, if the trading price of the common equals or
exceeds  $21.21 per share for a 30-day  trading  period,  the  Company may force
conversion.

     Also in connection with the  acquisition,  the Company's Board of Directors
authorized  763,500  shares of Series B convertible  preferred  stock ("Series B
Preferred")  which was issued in May 1996,  upon  conversion  of a $5.0  million
DowBrands   Convertible  Note.  Series B  Preferred  bears  an  8.0%  per  annum
cumulative dividend,  payable quarterly,  has a liquidation  preference of $6.55
per share or $5.0 million in the aggregate, has dividend and voting rights equal
to common stock on an as-converted basis, and is redeemable at face value at the
option of the  Company in $1.0  million  increments  at any time.  Each share of
Series B Preferred is convertible into .660 shares of common stock at the option
of the holder;  however,  if the trading  price of the common  equals or exceeds
$21.21 per share for a 30-day trading period,  the Company may force conversion.
At December 31, 1997,  the Company was in arrears on its  September and December
quarterly dividend payments, totaling $200,000 on the Series B Preferred Stock.

     Fixed Stock  Option Plans - The Company  maintains  four fixed stock option
plans for employees,  consultants,  directors and advisory board members.  These
plans are the 1997 Stock Plan, 1996 Stock Incentive Plan, the 1996  Nonstatutory
Stock  Option Plan and the Stock  Option  Plan for  Non-Employee  Directors  and
Advisory Board Members. In connection with Predecessor's merger with the Company
(Note 1), all of  Predecessor's  outstanding  stock  options were assumed by the
Company  under  the 1996  Stock  Incentive  Plan or The  Stock  Option  Plan for
Non-Employee  Directors and Advisory  Board  Members.  Stock options under these
plans are issued at an option price not less than market value on date of grant.
Total shares authorized under these four plans are 863,799,  528,201, 45,300 and
150,000,  respectively.  Total shares  available  for grant under the 1997 Stock
Plan and the Stock Option Plan for  Non-Employee  Directors  and Advisory  Board
Members  were  260,549  and  51,000,  respectively.  No  additional  shares were
available for grant under the 1996 Stock Incentive Plan or the 1996 Nonstatutory
Stock  Option Plan.  Options  granted to directors  and advisory  board  members
generally vest one year from the date of grant, and options currently granted to
employees and  consultants  generally  vest annually over three years.  The 1996
Stock Incentive Plan also provides for the issuance of stock appreciation rights
and restricted stock, none of which have been granted as of December 31, 1997.

     A summary of changes in common stock options during 1995, 1996, and 1997 is
as follows:

<TABLE>
<CAPTION>

                                                                    Number of              Weighted Average
                                                                      Shares                 Share Price
                                                                   ------------            -----------------
<S>                                                               <C>                           <C>
Outstanding at December 31, 1994                                     122,100                    $1.52
Granted (average fair value of $1.04)                                623,700                     3.08
Canceled                                                             (9,900)                     1.52

Outstanding at December 31, 1995                                     735,900                     2.84
Granted (average fair value of $2.33)                              1,036,050                     4.61
Canceled                                                           (416,650)                     1.64
Exercised                                                           (42,900)                     1.64

Outstanding at December 31, 1996                                   1,312,400                     3.35
Granted (average fair value of $2,99)                              656,950                     2.37
Canceled                                                           (673,799)                     3.95
Exercised                                                           (56,100)                     2.76

Outstanding at December 31, 1997                                   1,239,451                    $2.53
                                                                   ==========
</TABLE>


     During 1997,  587,000 options were canceled at exercise prices ranging from
$3.03 to $4.25 per share and reissued at $2.25 per share.  During 1996,  340,350
options were canceled at exercise  prices  ranging from $6.06 to $8.00 per share
and reissued at $4.25 per share.  The reissued  shares are included in the above
table.  Options  exercisable  at  December 31,  1997 and 1996,  were 751,599 and
526,300,  respectively.  The following table  summarizes  information  about the
three equity incentive plans at December 31, 1997:

<TABLE>
<CAPTION>

                             Options Outstanding                                        Options Exercisable
--------------------------------------------------------------------------------    -------------------------------------
                                         Weighted-Average
                                            Remaining
Range of Exercise                         Contractual          Weighted-Average                       Weighted-Average
    Prices              Number            Life (in years)       Exercise Price          Number          Exercise Price
--------------------------------------------------------------------------------    --------------------------------------
<S>    <C>                   <C>                <C>                <C>                <C>               <C>
       $1.50 - 2.25            902,882           8.98               $2.00                613,303         $1.88

        2.50 - 3.03             58,868           8.39                2.96                 36,168          3.03

        3.13 - 4.38            277,701           8.75                4.17                102,128          4.25
                              ---------                                                  --------
                              1,239,451                                                  751,599
                              ==========                                                 ==========
</TABLE>



     Employee  Stock  Purchase  Plan - In 1997,  the  Company  adopted  the 1997
Employee  Stock  Purchase  Plan.  Under the terms of the plan,  the  Company  is
authorized  to issue up to  400,000  shares  of  common  stock to its  full-time
employees, nearly all of whom are eligible to participate.  Employees can choose
to have up to 20% of  their  annual  base  earnings  withheld  to  purchase  the
Company's  common  stock.  The  purchase  price of the  stock is 85% of the fair
market value of a share of the Company's  common stock on the enrollment date or
on the  exercise  date,  whichever  is  lower.  Approximately  49%  of  eligible
employees participated in the Plan at December 31, 1997. The Company sold 34,833
shares to employees in 1997.

     The Company applies APB No. 25,  "Accounting for Stock Issued to Employees"
and related  interpretations  in accounting for its fixed stock option plans and
stock purchase plan.  Accordingly,  no compensation cost has been recognized for
these  stock-based  compensation  plans. Had compensation cost for the Company's
stock-based  compensation  plans been determined  based on the fair value at the
grant dates for awards under those plans  consistent with the method of SFAS No.
123,  "Accounting  for Stock-Based  Compensation,"  the Company's net income and
earnings  per share would have been reduced to the pro forma  amounts  indicated
below:

<TABLE>
<CAPTION>

                                                                                   1997             1996            1995

                                                                                          In thousands, except
                                                                                         per share amounts)
<S>                                                    <C>                         <C>              <C>           <C>


Net (loss) income:                                      *As reported               $(19,360)           $553       $(1,382)
                                                        Pro forma                  $(20,413)         $(142)       $(1,479)
Basic (loss) income per Common Share:
                                                        As reported                  $(3.48)          $0.07       $(0.52)
                                                        Pro forma                    $(3.66)        $(0.08)       $(0.55)
Diluted (loss) income per Common Share:
                                                        As reported                  $(3.48)          $0.06       $(0.52)
                                                        Pro forma                    $(3.66)        $(0.08)       $(0.55)


</TABLE>

     In determining  the above pro forma amounts under SFAS 123, fair values for
the fixed  stock  option  plans  are  estimated  on the date of grant  using the
Black-Scholes  pricing model,  with the following  weighted-average  assumptions
used for grants in 1997 and 1996,  respectively:  expected volatility of 77% and
65%, risk-free  interest rates of 5.9% and 6.4%,  expected lives of 6.5 years in
both years,  and no expected  dividends.  The assumptions  and proforma  effects
underlying  the Employee  Stock  Purchase  Plan are  immaterial to the financial
statements  at December 31, 1997.  The effects of applying  SFAS 123 in this pro
forma disclosure are not indicative of future amounts.

     Employee Stock Plan - In November  1995,  the Company  adopted the Employee
Stock Plan for the  purpose of issuing up to an  aggregate  of 16,500  shares to
former DowBrands employees at no cost to the employees. As of December 31, 1996,
15,575 shares were issued pursuant to this plan and had an immaterial  impact on
the Company's financial  statements.  No other grants have been issued under the
plan.

     Noncash Credits - Certain of the Company's  employees and consultants  have
received a portion of their salary or fees, respectively, in the form of noncash
credits which may be applied to 80% of the exercise price of options  granted to
them.  Such  credits,  $132,000  and  $651,000  at  December  31, 1996 and 1995,
respectively,  have  been  recorded  as  expense  or  cost  of  acquisition  and
additional paid-in capital as the related salary or consulting fees were earned.
The Company ceased issuing any additional noncash credits at December 31, 1996.

     Stock  Subscription  Receivable - In 1995, the Company issued 66,000 shares
of common stock for two 6% notes receivable of $50,000 each, due August 1996 and
July  2001,  respectively,  or 30 days  after  the  sale of such  common  stock,
whichever is earlier.

     Warrants - In November 1995, the Company  borrowed  $225,000 from employees
and  stockholders.  The borrowings were repaid in February 1996 with interest at
12% (Note 12). In addition,  the lenders  received  warrants to purchase  74,250
shares of common stock at $3.03 per share.  The warrants  became  exercisable in
May, 1996 and expire in November, 1998.


9.   EARNINGS PER SHARE
<TABLE>
<CAPTION>


                                                              -------------- ----------- -----------
                                                                  1997          1996        1995
                                                              (In thousands, except per share data)
-------------------------------------------------------------
<S>                                                         <C>              <C>           <C>

Net (Loss) Income.                                            $ (19,360)       $  $553     $(1,382)
Less: Dividends on Series B Preferred Stock                        (400)       $  (233)        -

Net (Loss) Income Available to Common Shareholders            $ (19,760)       $   320     $(1,382)

Basic Earnings per Share:
   Average Number of Basic Common Shares Outstanding              5,685          4,557       2,667
Basic (Loss) Income per Common Share                          $   (3.48)         0.07    $   (0.52)

Dilutive Earnings per Share:
   Weighted Average Shares
       Outstanding                                                 5,685          4,557       2,667
       Dilutive Shares Issuable in Connection with:
         Conversion of Series A Preferred Stock                      -              660        -
         Stock Plans                                                 -              998        -
       Less: Shares Purchasable with proceeds from stock             -             (606)       -
       plans
   Average Number of Diluted common Shares Outstanding             5,685          5,609       2,667
Diluted (Loss) Income per Common Share                          $  (3.48)      $   0.06   $   (0.52)
-------------------------------------------------------------
</TABLE>


     Options to  purchase  706,500  shares of common  stock at range of $4.25 to
$4.75 per share were  outstanding as of December 31, 1996, but were not included
in the computation of diluted  earnings per share because the options'  exercise
price was greater  than the average  market  price of the common  shares.  These
options  will  expire in 2006.  At  December  31,  1997,  the  number of options
outstanding decreased by 72,949 from 1996.


10.  EMPLOYEE BENEFIT PLANS

     The  Company  established  an  Employee  Savings  Plan  (401k)  during 1996
covering substantially all employees.  Company contributions to this plan are at
the  discretion of the Board of Directors,  subject to certain  limitations.  No
contributions  were  made by the  Company  to the plan  during  the year  ending
December 31, 1997 and 1996, respectively.

     The  Company  does  not  provide  other  post-retirement  benefits  to  its
employees.


11.  INCOME TAXES

     The  (benefit)  provision for income taxes has been offset by the change in
the valuation  allowance for the years ended  December 31, 1997,  1996 and 1995.
the Company's net operating losses could not be carried back, future profits are
not yet predictable, and utilization of deferred tax assets is not determinable.

     A  reconciliation  of the provision for income taxes to the amount computed
using U.S. federal statutory rates is as follows:


                                        1997        1996        1995
                                               (In thousands)

(Benefit) provision for income
at U.S. federal statutory rates......  $(6,582)       $188       $(470)
Other items............................    488          63          19
Change in valuation allowance..........  6,094        (251)        451
Provision for income tax...............  $   -      $    -      $    -


     The  significant  components of deferred income taxes as of December 31 are
as follows:

                                                          --------- -----------
                                                           1997        1996
                                                            (In thousands)

Tax effects of:
   Current deferred tax assets and liabilities:
       Accounts Receivable, principally due to reserves...   $ 317       $212
       Inventories, partially due to additional costs
          capitalized for tax purposes....................     482        336
       Employee benefits..................................     389        316
       Other (includes contingencies, other assets and
          other accruals).................................     (25)       (86)
                                                             1,163        778

   Long-term deferred tax assets and liabilities:
       License fee........................................     285        380
       Tax credits........................................     110        297
       Federal and state operating loss...................   7,534      1,089
       Property, Plant and equipment......................  (1,222)      (768)
                                                             6,707        998
     Gross deferred tax assets............................   7,870      1,776
     Valuation allowance..................................  (7,870)    (1,776)

Net deferred taxes........................................   $   -      $   -

     Due to the  Company's net  operating  losses,  the Company has not paid any
income taxes. The Company has accumulated approximately $22.2 million of federal
and state operating loss  carryforwards  (NOLs) at December 31, 1997. These NOLs
expire periodically between the years 2008 and 2012.


<PAGE>

12.  RELATED PARTY TRANSACTIONS

     Related party obligations include the following:

                                                           December 31,
                                                    --------------------------
                                                      1997              1996
                                                    --------          --------
                                                          (In thousands)
     Promissory note for license rights........     $   750           $ 1,000
     DowBrands purchase credits................        -                1,500
                                                    --------          --------

     Total                                              750             2,500
     Less current portion......................        (250)           (1,750)
                                                    --------          --------

     Long-term portion.........................     $   500           $   750

     Promissory  Note  - In May  1993,  the  Company  licensed  its  proprietary
technology from Intertec Ltd., a limited partnership controlled by the Company's
Chairman of the Board,  pursuant to an exclusive 30-year,  nonassignable license
agreement  (the  "License  Agreement").  According  to the terms of the  License
Agreement,  the Company is  required to pay a  $1.0 million  license  fee,  plus
royalties,  to  Intertec  Holdings,  L.P.  as agent  for  Intertec  Ltd.  Due to
uncertainty regarding recoverability from future operations, the license fee was
expensed in 1993.  A note for the license  fee  ("Intertec  Note") is payable in
four equal annual  installments of $250,000.  The first  installment was made in
May, 1997. Interest, at 5.5%, is payable in arrears on the date each installment
of principal is due.  The Company will pay a royalty to Intertec  Ltd.  equal to
(i) 1.0% of the Company's  proceeds from any direct sales made by the Company of
products,  instruments or components using, or derived from, the technology, and
(ii) 1.0% of the  "revenue  base" of the  Company's  sublicensees.  The "revenue
base" is the proceeds  received by the  sublicensees for their sales of products
using  the  technology.  This  royalty  declines  in steps as the  revenue  base
increases,  ultimately declining to 0.4% when cumulative sales from all products
using the Company's  technology reach  $10.0 billion.  No royalty fees have been
paid to date.

     Stock  Purchase  Agreement  - In March,  1996,  the  Company  and  Intertec
Holdings,  L.P.  entered  into a stock  purchase  agreement  pursuant  to  which
Intertec  Holdings,  L.P.  agreed to purchase from the Company,  and the Company
agreed to sell to Intertec  Holdings,  L.P.  shares of common stock at $8.00 per
share. The aggregate  number of shares of common stock which Intertec  Holdings,
L.P.  is required to purchase  is 146,107  shares.  Intertec  Holdings,  L.P. is
obligated,  subject to there being no event of default under the Company's  loan
agreements and certain other  conditions,  to purchase and pay for the shares in
four equal annual  installments.  In May,  1997,  Intertec  purchased  the first
installment  of 36,526 shares of the Company's  common stock at $8.00 per share.
The deferred purchase price under the stock purchase  agreement accrues interest
from and after  May,  1996 at 5.5% per  annum,  payable  with each  installment.
Intertec Holdings,  L.P. may elect to accelerate one or more purchases under the
stock  purchase  agreement on 30 days' prior notice to the Company.  The Company
may,  at any  time or from  time to time,  terminate  Intertec  Holding,  L.P.'s
purchase  rights with  respect to one or more of the  installments,  on 10 days'
prior notice to Intertec Holdings, L.P.

     DowBrands  Purchase Credits - In connection with the acquisition  described
in Note 1,  DowBrands  agreed to purchase 100% of its  requirements  for certain
DowBrands products from the Company for a period of two years beginning November
16, 1995. In connection with this  requirements  agreement,  DowBrands agreed to
accept,  as part of the  purchase  price,  $3 million  in  credits to be applied
against future purchases. These credits were issued to DowBrands each quarter in
the amount of $375,000  until the credits were fully used.  At December 31, 1997
and 1996,  $0 and $1.5  million of such  credits  were  classified  as currently
payable.  Revenues from this arrangement totaled $16.4 million and $22.2 million
for the years ended  December  31,  1997 and 1996,  respectively.  Services  are
priced  based on direct  material and labor costs  incurred  plus an agreed upon
profit margin.

     Short-term  Borrowings - In November,  1995, the Company borrowed  $225,000
from employees and  stockholders.  The borrowings were repaid in February,  1996
with interest at 12%. The lenders received warrants to purchase 74,250 shares of
common stock (Note 8).

     Leases - The Company  leases its offices and certain  office  equipment  in
Mill Valley,  California,  from Innovative  Capital  Management,  Inc.,  (ICM) a
related party,  under a  noncancellable  lease expiring in September,  1999 with
monthly  rentals  of  $10,786.  The  Company's  Chairman  of the Board and Chief
Executive  Officer  and his  family  own 100% of the  outstanding  stock of ICM.
Rental expense was $121,919, $99,975, and $90,156 for the years ended 1997, 1996
and 1995, respectively.

     Legal  Fees -  During  1997  and  1996,  the  Company  paid  legal  fees of
approximately  $5,000  and  $676,000,  respectively,  to a law  firm in  which a
Director  of the  Company  is a  partner.  The legal  fees  related  to  general
services, the acquisition of PCD, and the Company's initial public offering.


13.  LEGAL PROCEEDINGS

     The Company is a party to a number of other legal proceedings none of which
are for substantial  amounts. It is of the opinion of management that any losses
in  connection  with  these  matters  will not  have a  material  effect  on the
Company's net income, financial position or liquidity.


14.   COMMITMENTS AND CONTINGENCIES

     The Company has entered into various  purchase  and sales  commitments  and
obligations in the ordinary course of business which management does not believe
will have a material  adverse  effect on its  financial  position  or results of
operations.


<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Dow Chemical Company:

     We have  audited the  accompanying  statement  of  operations  of PCD,  the
Personal Care Division of DowBrands L.P.,  ("PCD"), a limited  partnership whose
managing  partner  is  DowBrands  Inc.,  a wholly  owned  subsidiary  of The Dow
Chemical Company, for the period from January 1, 1995 to November 30,  1995, and
the related  statements  of net  invested  capital and cash flows for the period
then  ended.  These  financial   statements  are  the  responsibility  of  PCD's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

     In our opinion,  such financial  statements present fairly, in all material
respects,  the results of operations of PCD for the period from January 1,  1995
to November 30, 1995 and the changes in its net invested capital, and cash flows
for the period then ended,  in conformity  with  generally  accepted  accounting
principles.

     The accompanying  financial statements have been prepared from the separate
records maintained by PCD and may not be indicative of the conditions that would
have  existed  or the  results  of  operations  if PCD had been  operated  as an
unaffiliated  company. As discussed in Note 1, Statement of Financial Accounting
Standards No. 109 requires that the consolidated  amount of current and deferred
tax expenses for a group that files a consolidated tax return be allocated among
members of the group when those members issue separate financial statements.  On
the basis that PCD is a  division  and not a separate  subsidiary,  current  and
deferred income taxes have not been provided for in the  accompanying  financial
statements.

DELOITTE & TOUCHE LLP
San Francisco, California
January 26, 1996


<PAGE>

                PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
                             STATEMENT OF OPERATIONS
                Period From January 1, 1995 to November 30, 1995

                                                           Period from
                                                           January 1,
                                                             1995 to
                                                          November 30,
                                                              1995
                                                          -------------
                                                          (In thousands)

          Net Sales to DowBrands.....................       $ 19,783
          Net Sales to Others........................         89,913
                                                            ---------
          Total Net Sales............................        109,696
          Cost of Goods Sold.........................         67,088
                                                            ---------
          Gross Margin...............................         42,608
          Operating Expenses.........................         42,344
          Write-down of Assets.......................         11,000
                                                            ---------
          Operating Loss.............................        (10,736)
          Other:
             Interest expense from Dow...............         (1,603)
             Other income, net.......................            101
                                                            ---------
                Total other..........................         (1,502)
                                                            ---------
          Net Loss...................................       $(12,238)
                                                            =========

                       See notes to financial statements.


<PAGE>

                PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
                        STATEMENT OF NET INVESTED CAPITAL
                Period From January 1, 1995 to November 30, 1995


                                                      Period From
                                                    January 1, 1995
                                                    to November 30,
                                                         1995
                                                    ---------------
                                                    (In thousands)

          Net invested capital, beginning of
             period......................             $ 47,493
          Net loss for the period........              (12,238)
          Net capital invested by (returned to)
             Dow.........................               (3,489)
                                                      ---------
          Net invested capital, end of period         $ 31,766
                                                      =========

                      See notes to financial statements.


<PAGE>

                PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
                             STATEMENT OF CASH FLOWS
                Period From January 1, 1995 to November 30, 1995

                                                                Period From
                                                              January 1, 1995
                                                            to November 30, 1995
                                                            --------------------
                                                               (In thousands)

Cash Flows From Operating Activities:
Net loss.............................................            $(12,238)
Adjustments to reconcile net loss to net cash provided by
   (used in) by operating activities:................
   Write-down of assets..............................              11,000
   Depreciation......................................               2,010
   Goodwill amortization.............................                -
  Changes in:
      Accounts receivable............................               2,009
      Inventories....................................                 792
      Prepaid expenses and other.....................                 215
      Accounts payable and accrued expenses..........                 268
                                                                 ---------
        Net cash provided by (used in) operating activities         4,056
                                                                 ---------
Cash Flows Used In Investing Activities:.............
   Additions to property, plant, and equipment.......              (1,011)
   Other.............................................                 444
        Net cash used in investing activities........                (567)
                                                                 ---------
Cash Flows From Financing Activities:
   Net capital invested by (returned to) Dow.........              (3,489)
                                                                 ---------
Net Change in Cash...................................
Cash at Beginning of Period..........................                   1
                                                                 ---------
Cash at End of Period................................            $      1
                                                                 =========

                        See notes to financial statements


<PAGE>

                PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
                          NOTES TO FINANCIAL STATEMENTS
                Period From January 1, 1995 to November 30, 1995


1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     Business -  PCD, the Personal Care Division of DowBrands L.P.,  ("PCD"),  a
limited  partnership  whose managing  partner is DowBrands  Inc., a wholly owned
subsidiary  of  The  Dow  Chemical  Company  (collectively   "Dow"),   develops,
manufactures and markets hair care products.

     Effective November 15,  1995, pursuant to an Asset Purchase Agreement,  Dow
sold  substantially  all of the assets and liabilities of PCD to Electronic Hair
Styling, Inc.  (the  "Company") for $28.8 million  comprised of $12.3 million in
cash, a $5.0 million 8.0% subordinated note (convertible into Series B preferred
stock), $8.5 million in Series A convertible preferred stock and $3.0 million in
credits  to be  issued  to Dow  for  future  purchases.  Through  its  Series  A
convertible  preferred  stock  holdings,  Dow will maintain an  approximate  17%
ownership  interest in the voting equity of the Company.  The sale was accounted
for as if it occurred on November 30, 1995.

     Basis of  Presentation  - The  accompanying  financial  statements  present
operations, net invested capital and cash flows of PCD on a historical basis. In
1987,  DowBrands L.P. acquired PCD's predecessor for approximately $183 million.
As a result of this  acquisition,  Dow's new  accounting  basis,  determined  in
accordance with the purchase method of accounting, was "pushed-down" to PCD and,
accordingly,  the assets and  liabilities  of PCD were adjusted to reflect their
fair values.  The excess of Dow's cost of PCD over the  estimated  fair value of
net assets  acquired was recorded as goodwill  and was being  amortized  over 40
years.  During 1994, in  contemplation  of Dow's sale of PCD, Dow wrote down its
investment in PCD by approximately $120 million.  This write-down was applied to
PCD's unamortized goodwill of $117 million and to property,  plant and equipment
of $3 million.  In 1995 the proposed buyer withdrew its offer.  During 1995, Dow
further wrote down its investment in PCD by an additional $11 million, which was
recorded as a reduction of property, plant and equipment.

     Relationship with Dow - PCD uses certain resources and administrative staff
of Dow,  including  accounting,  legal,  tax,  treasury,  data processing,  risk
management,  human resources and corporate  relations.  PCD is charged a fee for
these  services  at an amount that Dow  estimates  to be based on actual time or
costs incurred. These charges were $733,500 for the period from January 1,  1995
to November 30, 1995 and are included in operating expenses.

     In addition,  PCD is charged  interest by Dow on an imputed  amount of debt
required to fund Dow's total capital  investment  in PCD. Such interest  charges
were $1,603,000 for the period from January 1, 1995 to November 30, 1995.

     Income Taxes - Statement of Financial Accounting Standards No. 109 requires
that the  consolidated  amount of current and  deferred  tax expense for a group
that files a consolidated tax return be allocated among the members of the group
when those members issue separate financial statements.  However,  management of
PCD believes that such requirement applies only to separate financial statements
of  subsidiaries  and  since  PCD  is a  division  of  Dow  and  not a  separate
subsidiary,  current and deferred income taxes have not been provided for in the
accompanying financial statements.

     Concentration  of Credit Risk - PCD sells the  majority of its  products to
large U.S.  retailers.  Excluding sales to Dow, sales to PCD's largest  customer
were $19.7 million for the period from January 1, 1995 to November 30,  1995. No
other  customer  accounted  for more  than 10% of net sales in any  period.  PCD
performs  ongoing  credit  evaluations  of its customers and generally  does not
require  collateral.  PCD maintains reserves for potential credit losses,  which
have been insignificant.

2.   RELATED PARTY TRANSACTIONS

     PCD  provides  contract  packaging  and  manufacturing  services  for  Dow.
Revenues  from  this  arrangement   totaled  $19,783,000  for  the  period  from
January 1,  1995 to  November 30,  1995.  Services  are  priced  based on direct
material and labor costs incurred plus an agreed upon profit margin.


3.   EMPLOYEE BENEFIT PLANS

     Through November 15,  1995, PCD's employees were eligible to participate in
Dow's retirement,  401(k) and  postretirement  health and welfare benefit plans.
Contributions   to  the  plans  by  PCD  on  behalf  of  PCD's   employees  were
approximately  $1,432,000 for the period from  January 1,  1995 to  November 30,
1995.


4.   COMMITMENTS AND CONTINGENCIES

     PCD has various purchase and sales commitments and obligations entered into
in the ordinary course of business which management does not believe will have a
material adverse effect on PCD's financial statements.