<PAGE>

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1999
                                       REGISTRATION STATEMENT NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
                     DIPLOMAT DIRECT MARKETING CORPORATION
                  (NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                       <C>                                       <C>
                DELAWARE                                    5137                                   13-3727399
        (STATE OF INCORPORATION)                (PRIMARY STANDARD INDUSTRIAL                (IRS EMPLOYER I.D. NO.)
                                                  CLASSIFICATION CODE NO.)
</TABLE>

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

<TABLE>
<S>                                                             <C>
                                                                                 WARREN H. GOLDEN, PRESIDENT
                                                                            DIPLOMAT DIRECT MARKETING CORPORATION
                      414 ALFRED AVENUE                                               414 ALFRED AVENUE
                  TEANECK, NEW JERSEY 07666                                       TEANECK, NEW JERSEY 07666
                       (201) 833-4450                                                  (201) 833-4450
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)     (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
</TABLE>

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

                                   Copies to:

<TABLE>
<S>                                                             <C>
                    JAY M. KAPLOWITZ, ESQ.                                       MICHAEL D. DIGIOVANNA, ESQ.
              GERSTEN, SAVAGE & KAPLOWITZ, LLP                                   PARKER DURYEE ROSOFF & HAFT
                     101 EAST 52ND STREET                                              529 FIFTH AVENUE
                   NEW YORK, NEW YORK 10022                                        NEW YORK, NEW YORK 10017
                       (212) 752-9700                                                  (212) 599-0500
</TABLE>

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

     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.

     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:  /x/

     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

     If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
                            ------------------------

                        CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
                                                                         PROPOSED
                                                   NUMBER OF SHARES    MAXIMUM OFFERING       PROPOSED
              TITLE OF EACH CLASS                      TO BE            PRICE PER          MAXIMUM AGGREGATE     AMOUNT OF
         OF SECURITIES BEING REGISTERED            REGISTERED(1)         SHARE(2)          OFFERING PRICE(2)    REGISTRATION FEE
<S>                                                <C>                 <C>                 <C>                  <C>
Common Stock....................................       2,185,000              4.375             9,559,375           2,657.51
Common Stock for Selling Security Holders.......         970,939              4.375             4,247,858           1,180.91
Representative's Warrants.......................              --                 --                    --
Common Stock underlying Representative's
Warrants(3).....................................         190,000              4.375               831,250             231.09
Total Registration Fee..........................       3,345,939                 --            14,638,483           4,069.51
</TABLE>

(1) The number of shares being registered gives effect to the one-for-five
    reverse stock split to be effective upon the Registration Statement being
    declared effective including the shares that may be sold if the
    over-allotment option is exercised.

(2) Estimated solely for the purpose of computing the registration fee pursuant
    to Rule 457(c) under the Securities Act of 1933, as amended, based on the
    average of the high and low sales prices of the Registrant's common stock on
    The Nasdaq SmallCap Market for the five days preceding and including June 8,
    1999 multiplied by five (5) which gives effect to the one-for-five reverse
    stock split to be effective upon the Registration Statement being declared
    effective. This is the same fee that would have been paid had the Registrant
    not given effect to the reverse stock split.

(3) Determined in accordance with Rule 457(g)(2).
                            ------------------------

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                EXPLANATORY NOTE

     This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering by Diplomat Direct Marketing Corporation of
shares of common stock (the "Prospectus") and (ii) one to be used in connection
with the sale of shares of common stock currently outstanding or issuable upon
exercise of warrants by certain selling security holders (the "Selling Security
Holder Prospectus"). The Prospectus and the Selling Security Holder Prospectus
will be identical in all respects except for the alternate pages for the Selling
Security Holder Prospectus included herein which are labeled "Alternative Page
for Selling Security Holder Prospectus."



<PAGE>

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement that is filed with
the Securities and Exchange Commission is declared effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.

                      SUBJECT TO COMPLETION JUNE 11, 1999

PROSPECTUS

                                1,900,000 SHARES

                     DIPLOMAT DIRECT MARKETING CORPORATION

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

     This is a secondary offering of Diplomat Direct Marketing Corporation. We
are selling 1,900,000 shares of our common stock. The underwriter may also
purchase up to an additional 285,000 shares from us at the public offering
price, less the underwriting discount, within 30 days to cover any
over-allotments.

     Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"DIPL". On June   , 1999, the last reported sale price of our common stock on
Nasdaq was $               .

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

     INVESTING IN OUR COMMON STOCK IS RISKY. PLEASE SEE RISK FACTORS COMMENCING
ON PAGE 5.

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

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

[CAPTION]
<TABLE>
                                          PRICE TO                UNDERWRITING              PROCEEDS TO
                                           PUBLIC                   DISCOUNT                  DIPLOMAT
<S>                                     <C>                       <C>                       <C>
Per Share.......................           $                         $                         $
Total...........................        $                         $                         $
</TABLE>

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

                          DONALD & CO. SECURITIES INC.

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

                  THE DATE OF THIS PROSPECTUS IS JUNE   , 1999

<PAGE>

     You should rely only on the information contained in this prospectus. To
understand this offering fully, you should read this entire prospectus
carefully, including the financial statements and notes. We have included a
brief overview of the most significant aspects of the offering itself in the
Prospectus Summary. However, individual sections of the prospectus are not
complete and do not contain all of the information that you should consider
before investing in our common stock. We have not, and the underwriter has not,
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of the common stock.

     Unless otherwise indicated, all reference to "Diplomat", "us", "our" and
"we" refer to Diplomat Direct Marketing Corporation and its subsidiaries Lew
Magram Ltd., Brownstone Holdings, Inc., Ecology Kids, Inc. and Diplomat
Holdings, Inc.

     Diplomat Direct Marketing(Trademark), Lew Magram(Registered), Brownstone
Studio(Registered) and Ecology Kids(Registered) are trademarks of Diplomat.
Other trademarks appearing in this prospectus are the property of their
respective owners.

<PAGE>

                               PROSPECTUS SUMMARY

     This summary does not contain all of the information that may be important.
You should read the detailed information appearing elsewhere in this prospectus.

     Except where stated otherwise, the information contained in this prospectus
assumes a 1-for-5 reverse split of our common stock and the conversion or
exchange of the outstanding shares of preferred stock into 3,077,794 shares of
common stock both to be completed immediately before the date of this
prospectus, but does not assume that the over-allotment option is exercised.

                                  OUR BUSINESS

     We are a prominent specialty retailer of quality women's fashion apparel
and accessories sold through mail order catalogs, and we recently commenced
sales on the Internet. Currently, we target niche markets through our two
distinctive catalogs, Lew Magram and Brownstone Studio. Lew Magram was
established in 1948 as a men's clothier but by 1984 had converted its catalog to
solely offer women's apparel designed to appeal to fashion-oriented women.
Brownstone Studio, established in 1974, offers a broad range of fashions to the
affluent, more mature women. We generally publish 10 Lew Magram catalog editions
per year and nine Brownstone catalog editions per year. Each catalog includes
300 to 500 products and our annual circulation is over 45 million catalogs per
year. With the recent introduction of electronic commerce on the Internet, we
believe as a catalog marketer that we are well positioned to increase our market
penetration at a lower cost on the Internet. We believe that catalog consumers
are the ideal Internet customers because they are accustomed to purchasing
fashion merchandise from a non-store medium. In January 1999 we began offering
our products online at Catalogcity.com and in February, 1999 signed a joint
venture with Fashionmall.com, Inc. to build several websites leveraging our
fashion design capabilities, brand name and customer base with Fashionmall.com's
Internet presence and expertise. We are also a wholesaler of apparel and
accessories for babies and toddlers to mass merchandisers such as Kids "R" Us,
Wal-Mart, Target and Walgreens, under the brand name "Ecology Kids".

     We have an experienced management team with over 150 years in the catalog
business, unique product lines and well-integrated infrastructure and
fulfillment capabilities. Over our history, we have compiled a wealth of
information with respect to our customers' buying patterns. By managing this
information, we can tailor the content of our catalogs, target catalog
distribution to particular customers, offer an expanded range of products to
certain customers, and test new products. Our database includes over 5 million
names of which 3.8 million are customers and 1.2 are gift recepients and catalog
inquirers.

     We are currently creating and designing our own e-commerce websites for
each of Lew Magram and Brownstone Studio. These websites will be interactive,
allow for online product purchases from the catalogs and provide content areas
which we believe will be of interest to our existing and prospective customers.
With our accumulated information on existing customers and the information we
expect to obtain through our Internet sites, we believe we will be able to
customize each website in accordance with the preferences of the respective
target markets. These are intended to be the primary websites to offer our
products in addition to the Catalogcity.com and Fashionmall.com websites.

     Lew Magram products are marketed to fashion-conscious, value-oriented,
middle- and upper-income customers and career women. The Lew Magram customers
spend on average $160 per order. The Lew Magram catalog contains active wear,
career apparel, separates, outdoor wear, formal wear and footwear for a cross
range of lifestyles and women. Much of Lew Magram's apparel carries our brand
label but we do carry other labels as well, both in our apparel and footware
lines.

     Brownstone Studio merchandise is marketed to affluent, sophisticated and
mature women. The Brownstone Studio customer on average spends $140 per order.
The Brownstone Studio catalog contains both classic and modern fashion apparel,
footwear, accessories and some intimate apparel. Brownstone Studio offers a
broad range of sizes in stylish merchandise which, we believe, are not readily
available to our customers in the retail market place.

     Diplomat's principal executive offices are located at 414 Alfred Avenue,
Teaneck, New Jersey 07666. The phone number is (201) 833-4450.

                                       1

<PAGE>

                                  OUR STRATEGY

     By implementing our operating strategy, we intend to capitalize on our
competitive strengths to increase sales to both existing and new customers and
continue to develop efficiencies. We also intend to expand our core business
through our growth strategy. The key elements of our strategies are as follows:

Operating Strategy

o Increase ability to fulfill orders through improved capitalization

o Reduce costs and increase operational efficiencies through improved liquidity

o Leverage and expand our proprietary customer database by managing the
  information obtained from our customers

o Increase brand awareness

Growth Strategy

o Expand through diversifying product lines

o Implement our e-commerce strategy

o Form strategic relationships

o Expand Ecology Kids line of business

o Expand through acquiring complementary businesses

                                  OUR INDUSTRY

     In recent years, retailing in the United States has been characterized by a
shift to non-store sales through such media as printed catalogs, broadcast home
shopping channels and the Internet. According to the Direct Marketing
Association ("DMA"), an industry trade group, catalog sales are estimated to be
$93.27 billion for 1999, representing 3.3% of overall retail sales. The DMA
expects catalog sales to increase to $125 billion by 2004. The expected growth
for catalog sales is approximately 6.1% per year for the next five years.
According to the investment banking firm Gruppo, Levey, Incorporated, direct
marketing sales in the women's apparel category accounted for $8.4 billion in
1997. A DMA survey done in the first quarter of 1999 showed that women account
for 69.8% of all catalog sales, and women's apparel is the largest catalog
category representing 64% of all catalog purchases. In 1998, nearly 70% of the
women who shop via catalog made a purchase within that year. We believe that
direct marketing apparel sales to women will continue to grow, due to the
convenience and time savings afforded by catalog and recently introduced
e-commerce shopping. The U.S. Census Bureau is projecting the 35-64 year old
female population to grow 20.8% from 1995 to 2005. This is an attractive target
group for catalog distributors and e-commerce vendors such as ourselves,
particularly because more than 50 million women are in the work force and
therefore may have significant discretionary income.

  Moving into e-commerce

     International Data Corporation, a leading provider of information
technology data, projects worldwide commerce revenue on the Internet to increase
from $4.3 billion for 1997 to $11.0 billion in 1999 and to increase to
$84.2 billion by 2004. It is expected that online shopping will increase at a
rate of 50% per annum. Jupiter Communications LLC, a media research firm,
estimates that women accounted for 45% of all web users as of January 1998
accounting for 25% of all Internet sales and are estimated to account for 47% of
Internet sales by the year 2000. Forrester Research, Inc. a renowned independent
consumer and technology research firm, reported that women make 67% of all
household purchase decisions. According to a DMA study done in 1999, 43% of
their member companies are selling online and 49% of those are generating a
profit from online shopping. As a result of these factors, we believe that
apparel sales will be a major component of Internet commerce, and that women
will become a highly targeted customer for online stores and advertisers.

                                       2
<PAGE>

                                  THE OFFERING

<TABLE>
<S>                                         <C>
Common Stock Offered by Diplomat..........  1,900,000 shares

Common Stock Outstanding Prior to the
  Offering(1).............................  6,233,855 shares

Common Stock Outstanding After the
  Offering(1).............................  8,133,855 shares

Use of Proceeds...........................  Repayment of indebtedness, redemption of preferred stock, develop
                                            Internet business, and general corporate purposes including possible
                                            consolidation of operations into a new facility and possible
                                            acquisitions

Risk Factors..............................  An investment in our shares involves a high degree of risk. See "Risk
                                            Factors" commencing on page 5

Common Stock Symbol.......................  Nasdaq SmallCap Market: DIPL
</TABLE>

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

(1) Based on shares outstanding as of June 1, 1999 after giving effect to the
    conversion or exchange of 478,573 shares of preferred stock and the 1-for-5
    reverse stock split. Excludes shares issuable upon the exercise of options,
    warrants and the over-allotment option.

                                       3
<PAGE>

                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

     The following selected historical financial data as of September 30, 1998,
September 30, 1997, September 30, 1996, December 31, 1995 and December 31, 1994
and for the periods then ended are derived from the audited financial
statements. The selected financial data as of March 31, 1999 and March 31, 1998
and for the six months ended March 31, 1999 and March 31, 1998 are derived from
the unaudited financial statements of Diplomat included in this prospectus. Such
unaudited data includes, in management's opinion, all normal recurring
adjustments necessary to present fairly the results of operations and financial
position of Diplomat for such periods. Results from interim periods are not
necessarily indicative of the results to be expected for an entire fiscal year.
The data should be read in conjunction with the financial statements, related
notes, "Management's Discussion and Analysis of Diplomat's Financial Condition
and Results of Operations," and other financial information included in this
prospectus.

     The following table summarizes the financial data for our business.
<TABLE>
<CAPTION>

                                                                                                    NINE MONTHS
                                                       SIX MONTHS ENDED         YEAR ENDED             ENDED         YEAR ENDED
                                                          MARCH 31,            SEPTEMBER 30,        SEPTEMBER 30,    DECEMBER 31,
                                                    --------------------   ----------------------   -------------   ------------
                                                     1999       1998(2)    1998(2)      1997(1)        1996(3)       1995   1994
                                                    ------     ---------   -------     ---------    -------------   ------ ------
                                                         (UNAUDITED)
<S>                                                 <C>        <C>         <C>         <C>          <C>              <C>    <C>
DIPLOMAT'S CONSOLIDATED INCOME STATEMENT DATA:
Net sales.......................................... 41,581       36,516      74,586       17,468           7,449     11,301  10,279
Gross margin....................................... 20,642       19,486      40,152        8,744              57      4,388   4,390
(Loss) on discontinued operations(3)...............    (37)      (2,072)     (2,322)        (296)         (1,150)        --      --
(Loss) income from continuing operations
  before income taxes.............................. (4,341)       1,773       1,260        1,262          (6,057)      (721)   (439)
Net income (loss).................................. (4,379)        (299)     (1,063)       1,106          (7,225)      (721)   (439)
Net income (loss) per common share from
  continuing operations--basic.....................  (0.40)       (0.05)       0.08         0.19           (1.34)     (0.16)  (0.11)
Net income (loss) per common share from
  continuing operations--diluted...................  (0.40)        0.10        0.08         0.19           (1.34)     (0.16)  (0.11)
Net income (loss) per common share--basic
  and diluted......................................  (0.40)       (0.02)      (0.13)        0.14           (1.59)     (0.16)  (0.11)
</TABLE>

<TABLE>
<CAPTION>

                                                           MARCH 31, 1999                  SEPTEMBER 30,         DECEMBER 31,
                                                        --------------------   -----------------------------    --------------
                                                        PRO FORMA(4)  ACTUAL    1998(2)    1997(1)   1996(3)    1995     1994
                                                        ------------  ------   ---------   -------   ------     -----   ------
<S>                                                     <C>           <C>      <C>         <C>       <C>        <C>
DIPLOMAT'S CONSOLIDATED BALANCE SHEET DATA:
Total assets.........................................      55,642     50,142     50,959     33,013    4,848     8,654    8,071
Total liabilities(5).................................      32,866     34,866     34,625     18,945    6,144     5,128    4,452
Working capital (deficiency).........................         128     (5,372)    (4,662)    (3,375)  (3,145)    3,162    3,154
Long-term debt less current maturities...............       4,267      6,267      6,384      1,155    1,047     2,061    1,993
Stockholders' equity.................................      22,372     14,869     16,334     14,068    2,523     3,526    3,619
</TABLE>

<TABLE>
<CAPTION>

                                                           MARCH 31, 1999                  SEPTEMBER 30,         DECEMBER 31,
                                                        --------------------   -----------------------------    --------------
                                                        PRO FORMA(4)  ACTUAL    1998(2)    1997(1)   1996(3)    1995     1994
                                                        ------------  ------   ---------   -------   ------     -----   ------
<S>                                                     <C>           <C>      <C>         <C>       <C>        <C>
OTHER DATA:
E(L)BITDA(6).........................................     (2,255)     3,295      4,625      2,444    (5,143)     (21)     240
</TABLE>

------------------
(1) On February 19, 1998, Diplomat closed on the acquisition of Lew Magram, Ltd.
    For accounting purposes, the acquisition was effected as of July 1, 1997.
    The acquisition was accounted for as a purchase.

(2) On October 30, 1997, Diplomat acquired out of bankruptcy all the assets of
    Jean Grayson's Brownstone Studios, Inc. The acquisition was accounted for as
    a purchase.

(3) On February 6, 1996, Diplomat completed the acquisition of Biobottoms, Inc.
    The acquisition was accounted for as a purchase. On April 17, 1998, Diplomat
    sold substantially all of the assets and certain of the liabilities of
    Biobottoms, Inc.

(4) Reflects the receipt of the net proceeds of approximately $8,000,000 (after
    deducting the underwriting discount, commissions and estimated offering
    expenses), the repayment of Finova debentures of $2,000,000 and redemption
    of preferred stock of $500,000. This does not reflect the payment of
    $2,000,000 to First Source Financial LLC which will be paid out of the
    proceeds of this offering.

(5) Does not reflect the First Source Financial transaction which closed on
    May 12, 1999.

(6) E(L)BITDA is defined as earnings (loss) from continuing operations before
    income taxes, interest expense, depreciation and amortization. We believe
    that the presentation of E(L)BITDA facilitates an investor's understanding
    of our operations. E(L)BITDA should not be considered by an investor as an
    alternative to net income as an indicator of the operating performance or to
    cash flows as a measure of liquidity. E(L)BITDA is not used in the
    presentation of financial statements prepared in accordance with generally
    accepted accounting principles and may not be comparable to similarly titled
    measurements reported by other companies.

                                       4

<PAGE>

                                  RISK FACTORS

     You should carefully consider the following factors before deciding to
invest in the shares. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us,
or that we consider immaterial or that are similar to those faced by other
companies in one or more of the same lines of business, may also impair our
business operations. The following risks could materially harm our business,
financial condition or future results. If that occurs, the trading price of our
common stock could decline, and you could lose all or part of your investment.

     This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus. Please also refer to "Forward looking information may not be
realized" on page 10.

RISKS PARTICULAR TO DIPLOMAT

     We have had operating losses in the past and may not be able to operate
profitably in the future.  During the fiscal years ended September 30, 1998 and
1997 and the nine months ended September 30, 1996, we reported a net loss to
common stockholders of approximately $1.4 million (including net losses from
discontinued operations of $2.3 million), net income to common stockholders of
approximately $800,000, and a net loss to common stockholders of approximately
$7.2 million, respectively. For the six months ended March 31, 1999, we had a
net loss of approximately $4.8 million. We may not be able to operate profitably
in the future. In addition, we will record an imputed dividend of approximately
$2,000,000 resulting from the conversion or exchange of preferred stock which
will be offset by an increase to paid-in-capital. The imputed dividend will
result in a reduction in the net income, or in an increase in the loss,
allocable to the common stockholders for the year ended September 30, 1999.

     Our inadequate working capital has caused, and may continue to cause,
inadequate availability of credit from vendors, cash reserves to be held by our
credit card processors for merchandise refunds, and delays in printing and
delivering catalogs.  Our lack of working capital has resulted in a reluctance
of certain key creditors to extend us adequate credit. Because of this
inadequate credit, we have been unable to fulfill our orders in a timely manner,
resulting in substantial back orders and delayed payment of our obligations. The
inability to ship goods on a timely basis has resulted in increased customer
order cancellations, higher than normal returns of goods, damage to our
reputation and loss of repeat buyers. We may not be successful in securing
additional vendor credit and improving shipment of merchandise in the future. If
we cannot get additional vendor credit, we may continue to incur substantial
losses. Our credit card processors have established a $500,000 reserve against
any future non-payment of credit card refunds. We cannot assure that this
reserve will be released in the near future or that it will not be increased in
the event the number of returns increases. Finally, we have not been able to pay
our printers in a timely manner to ensure timely printing and delivery of our
catalogs. Because of these delays, we have reduced our catalog circulation
during the current fiscal year.

     We may need additional working capital.  While we believe the proceeds of
this offering will alleviate our working capital shortage and allow us to
establish our presence on the Internet, this shortage may arise in the future
particularly if vendors do not extend us sufficient credit. In addition, our
growth strategy may require substantial additional capital investment. We may
require capital for

     o financing additional inventory for new product lines;

     o obtaining new facilities;

     o further developing our Internet presence;

     o developing strategic relationships; and

     o financing acquisitions.

     To the extent that the proceeds of this offering, cash generated internally
and cash available under the First Source Financial LLP loan facility are not
sufficient to provide the capital required for such purposes and to fund future
operations, we will require additional debt and/or equity financing in order to
provide such capital. Such financing, however, may not be available or, if
available, may not be on terms satisfactory to

                                       5
<PAGE>

us. If we fail to obtain sufficient additional capital in the future, we may not
be able to implement our business strategy. If we are able to obtain additional
debt financing, we may incur increased interest and amortization expense,
increased leverage, increased exposure to competitive pressures and increased
exposure to economic downturns. If we are able to obtain equity financing, such
financing may dilute the equity interest of our existing stockholders.

     Our business may continue to be affected by our substantial leverage, our
restrictions under loan covenants, and security interests which we have granted
in our assets.  We have a significant amount of debt. Our debt service
obligations could have material adverse consequences to our security holders. We
have approximately $19.6 million of loans before payments contemplated by this
offering to reduce outstanding loans, of which $12.5 million is owed to First
Source under our new loan facility and $5 million is owed under debentures sold
in June 1998 to Finova Mezzanine Capital, formerly known as Tandem Capital. Both
the First Source loan facility and Finova debentures impose restrictions on us
including limiting our payment of dividends.

     The level of our indebtedness and debt covenants could have important
consequences to us and our stockholders including, but not limited to, the
following:

     o our ability to obtain additional financing in the future may be impaired;

     o a significant portion of our cash flow from operations must be dedicated
       to the payment of principal and interest on our indebtedness, thereby
       reducing the funds available to us for our operations;

     o the First Source loan facility bears interest at variable rates, which
       could result in higher interest expense in the event of increases in
       interest rates;

     o the First Source loan facility and Finova debentures contain financial
       and restrictive covenants, which if not complied with, may result in an
       event of default by us which, if not cured or waived, could have a
       material adverse effect on us;

     o we may be substantially more leveraged than certain of our competitors,
       which may place us at a competitive disadvantage; and

     o our substantial debt may limit our flexibility to adjust to changing
       market conditions, reduce our ability to withstand competitive pressures
       and make us more vulnerable to a downturn in general economic conditions
       or our business.

     Our ability to make scheduled payments and comply with our debt covenants
or to refinance our debt obligations will depend upon our future financial and
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond our
control. Cash flow from operations and other capital resources may not be
sufficient for payment of our debt in the future. In the absence of such
operating results and resources, we could face substantial liquidity problems
and might be required to dispose of material assets or operations to meet our
debt service and other obligations. If we are unable to pay our debt, we may be
required to take actions such as reducing or delaying planned expansion and
capital expenditures, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital. We can not predict whether
any of these actions could be effected on satisfactory terms, if at all.

     All of our assets, except for our Stony Point real estate, which is also
subject to mortgages, are pledged as collateral to secure the First Source loan
facility and Finova debentures. Unless these security interests are released,
such assets will not be available to secure future indebtedness, and as such may
adversely affect our ability to borrow money in the future. Moreover, in the
event of a default by us on any of our obligations, including with respect to
the financial covenants contained in the First Source loan facility and Finova
debentures, such lender could foreclose on our assets.

     Our Stony Point real estate is subject to two mortgage liens. We owe
approximately $600,000 on the junior mortgage, which is due but has been
extended to July 9, 1999 by the lender. We are currently seeking to refinance
these mortgages but may not be able to do so. If we cannot refinance the junior
mortgage by July 9, 1999, we must pay the junior mortgage lender or be in
default. Default by us on either mortgage lien

                                       6
<PAGE>

could result in the loss of our real estate and also result in default under the
First Source loan facility and Finova debentures.

     We are dependent on our vendors and the loss of certain vendors or
increases in the costs of postage, paper or printing could substantially hurt
our operations.  We depend on the United Parcel Service and the United States
Post Office to timely deliver our merchandise to our customers. These package
delivery services each account for about one-half of our merchandise shipping. A
work stoppage or strike by either delivery service would have a material adverse
effect on us. Postal rates and paper and printing costs affect the cost of our
order fulfillment and catalog and promotional mailings. We rely heavily on
discounts from the basic United States Postal Service rate structure, such as
discounts for bulk mailings and pre-sorting by zip code and carrier routes. Like
others in the catalog industry, we pass on a significant portion of our shipping
and handling expenses directly to our customers, but we do not directly pass on
the costs of preparing and mailing catalogs and other promotional materials.
Historically, we have not entered into long-term contracts for our paper
purchases. Consequently, we could be subject to an increase in paper costs.
Significant increases in postal rates or paper or printing costs could have a
material adverse effect on our business, particularly if we are unable to pass
on such increases directly to our customers or to offset such increases by
either raising prices or reducing other costs.

     Our broad range of merchandise requires that we maintain relationships with
many manufacturing sources and suppliers. Although we believe that we have
established satisfactory relationships with our principal manufacturing sources,
we do not have long-term contracts. Our inability to source quality goods in a
timely manner at favorable prices could adversely affect us.

     We have not developed our websites.  To date, we have not hosted our
catalogs on our own websites, nor do we have any experience in the e-commerce
industry. We have not yet tested our e-commerce concept, and cannot be sure that
once launched, our e-commerce objectives will be achieved. We have entered into
a letter of intent with Fashionmall.com, Inc. to develop niche Internet stores
offering our products, however, we have not yet entered into a definitive
agreement with them. In the event that we do not reach a definitive agreement,
it may take some time for us to find an alternative candidate. This would delay
implementing our Internet strategy, which is a core part of our growth program.

     We may be liable for unused merchandise credits.  Because of our policy of
periodically writing off into income unused merchandise credits from the Lew
Magram and Brownstone Studio catalogs, we may be liable for future claims on
such amounts previously written off. The amounts written off into income for
1997 and 1998 were $742,000 and $3,398,000, respectively.

     We need to recruit and retain additional personnel.  We will require
additional personnel in order to implement our growth strategy and support
expanded operations, especially in implementing our e-commerce strategy.
Accordingly, we will need to recruit and retain additional operating, finance
and other personnel. There can be no assurance, that we will succeed in
recruiting and retaining the requisite qualified personnel as and when needed.

     We are dependent on our key personnel.  We depend upon our senior
management team as a whole, led by Warren H. Golden, our president and chief
executive officer, and Stephanie Sobel, our executive vice president, to
successfully implement our business strategy. We do not currently maintain key
man life insurance on either of these two officers.

     We may not be able to acquire companies or develop strategic
relationships.  We may encounter substantial competition in our efforts to
identify and acquire appropriate acquisition candidates, which could have the
effect of increasing prices for acquisitions. We may also be unable to identify
strategic partners on terms that will be favorable to us, which would prevent us
from pursuing certain business opportunities, especially in the e-commerce area.
There can be no assurance that we will succeed in identifying appropriate
acquisition candidates, or strategic partners, or that we will be able to
acquire any acquisition candidate that we do identify on terms that are
acceptable to us.

     We may incur significant costs to integrate our new operations if
acquired.  If we make an acquisition, we intend to focus substantial efforts on
its efficient integration, the elimination of duplicative costs and the

                                       7
<PAGE>

reduction of overhead. There can be no assurance, however, that we will be
successful in these efforts or that these efforts may not in certain
circumstances adversely affect existing operations.

RISKS PARTICULAR TO OUR INDUSTRY

     We may not be able to adjust to changing consumer preferences.  The apparel
industry is cyclical. Purchases of apparel and related merchandise tend to
decline during recessionary periods and also may decline at other times. We may
not be able to achieve growth in revenues or earnings or become profitable in
the future. Further, a recession in the general economy or uncertainties
regarding future economic prospects could affect consumer spending habits and
have an adverse effect on our results of operations. Apparel sales have
historically been dependent, in part, upon discretionary consumer spending which
is affected by general economic conditions, consumer confidence, availability of
consumer credit and other factors beyond our control.

     Our performance is subject to risks associated with changing fashion and
our ability to deliver fashion that is in demand in a timely manner. We believe
that our success depends in substantial part on our ability to originate and
define product and fashion trends as well as to anticipate, gauge and react to
changing consumer demands in a timely manner. We may not continue to be
successful in this regard. If we misjudge fashion trends or consumer
preferences, or if there is a downturn in discretionary consumer spending, our
business could be adversely affected.

     Internet security concerns could hinder our e-commerce strategy.  The need
to securely transmit confidential information over the Internet has been a
significant barrier to electronic commerce and communications over the Internet.
Any well-publicized compromise of security could deter people from using the
Internet or using it to conduct transactions that involve transmitting
confidential information. We may incur significant costs to protect against the
threat of security breaches or to alleviate problems caused by such breaches.

     There is competition for Internet based businesses targeting women.  The
number of websites competing for the attention and patronage of women on the
Internet has increased and will continue to increase. We will be competing with
online apparel stores and online community sites which are targeting women. Many
of these sites have an established presence on the Internet or have financial
resources that are greater than ours. An inability to attract women fitting our
customer profile to our Internet site would adversely affect our Internet
strategy and could result in a loss of or negate any investment in our website
development.

     Our industry is competitive.  The women's apparel industry is highly
competitive. We compete with traditional department-store retailers, as well as
specialty apparel and accessory retailers. We also compete with other direct
marketers, some of which may specifically target our customers. Many of our
competitors are larger and have substantially greater financial, distribution
and marketing resources than we do.

     There are few barriers to entry in the women's apparel market. Other
catalogers, store-based retailers and apparel manufacturers may enter this
market. We also could face competition from manufacturers of women's apparel,
including our current vendors, who could market their products directly to
retail customers or make their products more readily available in retail stores
or through other catalogs. In addition, competitors could enter into exclusive
distribution arrangements with our vendors and deny us access to their products.
Increased competition could result in pricing pressures, increased marketing
expenditures and loss of market share, and could have a material adverse effect
on us.

     We expect that the direct marketing industry will be affected by
technological changes in distribution and marketing methods, such as on-line
catalogs, retail kiosks and Internet shopping. We believe that our long term
success will depend, in part, on our ability to adapt to new technologies and to
respond to competitive demands. We may need to incur substantial capital
expenditures to adapt to new technologies. We may not be able to remain
competitive in response to technological changes.

     If the computer systems we rely upon are not Year 2000 compliant, our
business may be adversely affected. Many currently installed computer systems
and software products are coded to accept only two-digit entries in the date
code field. Our computer equipment and software and devices with embedded
technology

                                       8
<PAGE>

that are date-sensitive 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 disruptions of operations, including, among other things, a temporary
inability to process transactions. There can be no assurance that our computer
systems contain all necessary date code changes, or that, in the year 2000, our
computer systems will be compatible with third-party software that may be
integrated or used in conjunction with our computer systems.

     There can be no assurance that the computer systems of our suppliers or
shippers will be year 2000 compliant. The failure of our computer systems or
those of our suppliers, service producers, or shippers to be year 2000 compliant
could have a material adverse effect on our business, financial condition,
results of operations or prospects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."

RISKS PARTICULAR TO OUR OFFERING

     We are controlled by our principal stockholder who may have a possible
conflict of interest with us.  Our principal stockholder, the Rubin Family
Irrevocable Stock Trust, the grantor of which is Robert M. Rubin, our Chairman
of the Board, has invested in excess of $12,000,000 and beneficially owns
approximately 47% of our voting stock. As such, this stockholder is able to
effectively exercise control over the outcome of all matters submitted to the
stockholders for approval, including the election of our directors, and as a
result controls our affairs and management. Neither our certificate of
incorporation nor our bylaws provide stockholders with cumulative voting rights.

     Although Mr. Rubin has disclaimed beneficial ownership of the Trust's
interest in us, there can be no assurance that Mr. Rubin's relationships with us
will not give rise to conflicts with respect to future transactions by us. If
such conflicts arise, they may not be resolved in our favor.

     The market price for our common stock may be depressed when shares become
eligible for future sale.  The market price of our common stock could decline as
a result of sales of a substantial number of shares of our common stock in the
market after this offering, or the perception that such sales could occur. Such
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. After this offering,
we will have approximately 8.2 million outstanding shares of common stock.
Including the 1,900,000 shares being offered hereby, and up to an additional
285,000 shares that may be issued to cover the underwriters' over-allotment,
approximately 3.6 million shares will be freely tradeable.

     Our directors, officers and principal stockholder who hold an aggregate of
approximately 4.2 million shares together with the holders of options to
purchase approximately 550,000 shares of common stock have entered into lock-up
agreements pursuant to which they have agreed that they will not sell, directly
or indirectly, any shares of common stock without the prior written consent of
Donald for a period of one year from the date of this prospectus. For one year
thereafter, these persons may not sell more than 25% of their Diplomat shares in
any three month period without the representative's consent.

     Our debt covenants may make a takeover difficult.  The First Source loan
facility and Finova debentures contain covenants against certain changes in
control without prior consent. The First Source loan facility prohibits a change
in ownership of more than 50% of our voting stock, the removal or non-removal of
2/3 of our board or the resignation or termination of any two of Jonathan
Rosenberg, Warren H. Golden or Stephanie Sobel other than for cause without
First Source's consent. The Finova debentures prohibit termination or
resignation of any two of Jonathan Rosenberg, Warren H. Golden or Robert M.
Rubin other than for cause without Finova's consent. Resignation or termination
without cause of any of the other three individuals would violate these
covenants. Violation of these covenants triggers an event of default effectively
preventing a takeover without these lenders' consent.

     We could be delisted from the Nasdaq Stock Market.  The Nasdaq Stock Market
requires that, to maintain their continued listing, companies must have net
tangible assets of at least $2 million, market capitalization of at least
$35 million, or net income of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years. We did
not meet any of the three alternatives as

                                       9
<PAGE>

of March 31, 1999. Although as of the date of this prospectus we have more than
$2 million of net tangible assets, we cannot assure you that Nasdaq will not
seek to delist us.

     Forward looking information may not be realized.  To the extent that the
information presented in this prospectus discusses financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements are forward-looking. Although we
believe that the expectations reflected in these forward-looking statements are
based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements. These include, among others:

     o the availability of vendor credit;

     o the successful expansion of product lines in our catalogs;

     o consumer acceptance of our new products;

     o price pressures and other competitive factors leading to a decrease in
       anticipated revenues and gross profit margins; and

     o a downturn in general economic conditions.

     When considering such forward-looking statements, you should keep in mind
the risk factors and other cautionary statements in this prospectus.

                      WHERE YOU CAN FIND MORE INFORMATION

     We file annual, quarterly and special reports, proxy statements, and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. We are listed on the
Nasdaq SmallCap Market. Our periodic reports, proxy statements, and other
information can be inspected at the offices of Nasdaq at 1735 K Street, NW,
Washington, DC, 20006, including our:

     o Annual Report on Form 10-K for the year ended September 30, 1998; and

     o Quarterly Reports on Form 10-Q for the quarters ended December 31, 1998
       and March 31, 1999.

     You may obtain a copy of these filings, without charge, by writing or
calling us at:

                            Diplomat Direct Marketing Corporation
                            414 Alfred Avenue
                            Teaneck, New Jersey 07666
                            (201) 833-4450

     If you would like to request these filings from us, please do so at least
five business days before you have to make an investment decision.

     You should rely only on the information provided in this prospectus. We
have not authorized anyone else to provide you with different information. We
are not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other then the date on the front page.

                                       10
<PAGE>

                                USE OF PROCEEDS

     We estimate that the net proceeds to us from the sale of the 1,900,000
shares of common stock will be approximately $8 million. "Net proceeds" are what
we expect to receive after paying the underwriting discount and other expenses
of the offering. For the purpose of estimating net proceeds, we are assuming
that the public offering price will be $5.00 per share.

     We intend to use the net proceeds from the sale of the shares as follows:

     o $4.5 million to repay a portion of the outstanding balances due under the
       Finova debentures and the First Source loan facility and to redeem a
       portion of our redeemable preferred stock;

     o $600,000 to be used for creating, designing, integrating into operations
       and operating the Lew Magram and Brownstone Studio interactive websites;
       and

     o the balance, including any proceeds from the sale of over-allotment
       shares, to fund general corporate purposes, including possible
       consolidation of operations into new facilities and possible
       acquisitions.

     We reserve the right to reallocate proceeds to different uses if, in
management's view, the needs of the business so require. In addition, a large
portion of the proceeds is allocated to discretionary purposes. We are
restricted under the First Source loan facility from redeeming the Finova
debentures or our preferred stock. The intended use of proceeds or redemption of
any preferred stock or other debentures may be limited by First Source.

     We believe that the net proceeds of this offering, together with available
funds on hand, cash flow from operations and assuming our receipt of additional
vendor credit, will be sufficient to satisfy our current working capital
requirements for at least 12 months following this offering. Such belief is
based upon certain assumptions including assumptions as to our contemplated
operations, obtaining sufficient vendor credit, and economic and industry
conditions. We cannot be certain that such resources will be sufficient for such
purpose. Furthermore, if we were to obtain a new facility or make significant
acquisitions for cash, we would require additional capital. In addition,
contingencies may arise that may require us to obtain additional capital. We
cannot be certain that we will be able to obtain such capital on favorable terms
or at all. Pending use of the net proceeds of this offering, we intend to invest
the net proceeds in short-term, interest-bearing, investment grade securities.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."

                                       11

<PAGE>

                          PRICE RANGE OF COMMON STOCK

     Our common stock is traded on The Nasdaq SmallCap Market under the symbol
"DIPL." The following table sets forth, for the two most recent fiscal years and
the first two quarters of fiscal year 1999, the high and low bid prices per
share of the common stock as reported by Nasdaq for each quarter. The prices
represent inter-dealer quotations without adjustments for mark-ups, mark-downs
or commission and may not represent actual transactions. These prices are not
adjusted to reflect the 1-for-5 reverse stock split or the conversion or
exchange of convertible preferred stock.

<TABLE>
<CAPTION>
                                                                                                    HIGH      LOW
                                                                                                    ----      ----
<S>                                                                                                 <C>       <C>
Fiscal 1997
  First Quarter..................................................................................     2          7/8
  Second Quarter.................................................................................     2 3/8      7/8
  Third Quarter..................................................................................     3 1/2     1 5/8
  Fourth Quarter.................................................................................     3 5/8     2 5/8

Fiscal 1998
  First Quarter..................................................................................     4 11/32   3 1/4
  Second Quarter.................................................................................     4 3/16    2 11/16
  Third Quarter..................................................................................     3 3/4     2
  Fourth Quarter.................................................................................     2 1/2     3 1/32

Fiscal 1999
  First Quarter..................................................................................     2 13/32   1 9/16
  Second Quarter.................................................................................     2 15/32   1
</TABLE>

     As of May 21, 1999, there were approximately 139 holders of record of the
15,780,310 outstanding shares of our common stock without giving effect to the
1-for-5 reverse stock split or conversion of convertible preferred stock. On
June 8, 1999, the last sales price for our common stock as reported on the
Nasdaq SmallCap Market was 7/8 without giving effect to the 1-for-5 reverse
stock split or conversion or exchange of preferred stock.

                                DIVIDEND POLICY

     Since June 1992, we have never paid or declared dividends on our common
stock. The payment of cash dividends, if any, in the future is within the
discretion of our Board of Directors and will depend upon our earnings, capital
requirements, financial condition and other relevant factors. Our existing loan
agreements with our lenders generally restrict our ability to pay dividends or
make other distributions on our common stock without their prior approval. We
intend, for the foreseeable future, to retain future earnings for use in our
business.

                                       12

<PAGE>

                                 CAPITALIZATION

     The following table sets forth:

     o our capitalization as of March 31, 1999, excluding shares of common stock
       issuable upon exercise of options and warrants and upon conversion of
       convertible preferred stock, under the column "Actual";

     o our capitalization after giving effect to the conversion or exchange of
       478,573 shares of preferred stock and the 1-for-5 reverse split of our
       common stock under the column "Pro Forma". This column also reflects the
       imputed dividend of approximately $2,000,000 resulting from the
       conversion of the Rubin Family Irrevocable Stock Trust preferred stock
       (see "Certain Transactions"). The imputed dividend will result in a
       reduction in the net income, or in an increase in the loss, allocable to
       the common stockholders for the year ended September 30, 1999; and

     o our capitalization after giving effect to the conversion or exchange of
       preferred stock and the 1-for-5 reverse split of our common stock, and
       after giving effect to the sale of 1,900,000 shares of common stock
       offered hereby (after deducting underwriting discount, commissions and
       estimated offering expenses) and the $2 million repayment of Finova
       debentures and $500,000 redemption of preferred stock under the column
       "As Adjusted".

     The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                                                     MARCH 31, 1999
                                                                        -----------------------------------------
                                                                          ACTUAL        PRO FORMA     AS ADJUSTED
                                                                        -----------    -----------    -----------
<S>                                                                     <C>            <C>            <C>
Current maturities of long-term debt.................................   $   847,793    $   847,793    $   847,793
                                                                        -----------    -----------    -----------
Long-term debt less current maturities...............................     6,266,835      6,266,835      4,266,835
                                                                        -----------    -----------    -----------
Stockholders' equity:
  Preferred stock, $.01 par value; 1,000,000 shares authorized
     478,573 shares issued and outstanding actual; 5,000 shares
     issued and outstanding pro forma; and 0 shares issued and
     outstanding as adjusted.........................................         4,785              0              0
  Common stock, $.0001 par value; 50,000,000 shares authorized,
     12,608,399 shares issued and outstanding actual; 6,233,855
     shares issued and outstanding pro forma; and 8,133,855 shares
     issued and outstanding as adjusted..............................         1,257            624            814
  Additional paid-in capital.........................................    29,179,976     31,185,394     38,726,397
  Accumulated deficit................................................   (14,316,812)   (16,355,282)   (16,355,282)
     Total stockholders' equity......................................    14,869,206     14,830,736     22,371,929
                                                                        -----------    -----------    -----------
     Total capitalization............................................    21,983,834     21,945,364     27,556,557
                                                                        -----------    -----------    -----------
                                                                        -----------    -----------    -----------
</TABLE>

                                       13

<PAGE>

                            SELECTED FINANCIAL DATA

     Diplomat's selected consolidated financial data presented below for the
years ended September 30, 1998 and September 30, 1997, the nine months ended
September 30, 1996, and the years ended December 31, 1995 and December 31, 1994
have been derived from Diplomat's audited consolidated financial statements. The
selected financial data of Lew Magram Ltd. presented below for the six months
ended June 30, 1997, the year ended January 4, 1997, the six months ended
December 30, 1995, the year ended July 1, 1995 and the year ended July 1, 1994
have been derived from Lew Magram Ltd.'s financial statements. Diplomat's
selected consolidated financial data presented below for the six months ended
March 31, 1999 and March 31, 1998 are derived from Diplomat's unaudited
consolidated financial statements.

     For financial accounting reporting purposes, we effectively acquired Lew
Magram Ltd. on July 1, 1997, and Lew Magram Ltd. is considered, for financial
accounting reporting purposes, as the predecessor issuer. The information
contained in the selected consolidated financial data is qualified by reference
to, and should be read in conjunction with, the Management's Discussion and
Analysis of Financial Condition and Results of Operations, the consolidated
financial statements and notes thereto, and other financial information
appearing elsewhere in this prospectus. Percentages are percent of net sales.

     We believe that the unaudited financial statements from which we derived
the unaudited statement of operations and balance sheet information presented
below were prepared on a basis consistent with our audited consolidated
financial statements and include all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of our financial
position for the unaudited statement of operations periods and the unaudited
balance sheet dates indicated below. Results for the six month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the complete 1999 fiscal year.

     The per share figures are not adjusted to reflect the 1-for-5 reverse stock
split or conversion or exchange of the preferred stock.

                    DIPLOMAT'S CONSOLIDATED INCOME STATEMENT DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                                                        NINE MONTHS    YEAR ENDED
                                            SIX MONTHS ENDED                    YEAR ENDED                 ENDED        DECEMBER
                                               MARCH 31,                       SEPTEMBER 30,           SEPTEMBER 30,       31,
                                    --------------------------------   -----------------------------   -------------   -----------
                                      1999       %     1998(2)   %     1998(2)    %     1997(1)   %    1996(3)    %     1995    %
                                    ----------  ----   -------  ----   -------  -----   -------  ---   -------   ---   ------  ---
                                              (UNAUDITED)
<S>                                 <C>         <C>    <C>      <C>    <C>      <C>     <C>      <C>   <C>       <C>   <C>     <C>
Net sales.........................    41,581     100   36,516    100   74,586     100   17,468   100     7,449   100   11,301  100
Gross margin......................    20,642      50   19,486     53   40,152      54    8,744    50        57     1    4,388   39
SG&A expenses.....................    23,933      58   17,071     51   37,537      50    7,061    40     3,672    49    4,409   39
(Loss) income from continuing
  operations before income taxes..    (4,341)    (10)   1,773      5    1,260       2    1,262     7    (6,057)  (81)    (721)  (6)
Net income (loss).................    (4,379)    (11)    (299)    (1)  (1,063)     (1)   1,106     6    (7,225)  (97)    (721)  (6)
Net income (loss) per common share
  from continuing
  operations--basic...............     (0.40)            0.16            0.08             0.19           (1.34)         (0.16)
Net income (loss) per common share
  from continuing
  operations--diluted.............     (0.31)            0.10            0.08             0.19           (1.34)         (0.16)
Net income (loss) per common
  share--basic....................     (0.40)           (0.02)          (0.13)            0.14           (1.59)         (0.16)
Net income (loss) per common
  share--diluted..................     (0.31)           (0.02)          (0.13)            0.14           (1.59)         (0.16)

OTHER DATA
E(L)BITDA(4)......................    (2,255)     (5)   3,295     10    4,625       6    2,444    14    (4,143)  (69)     (21)  --

<CAPTION>

                                     YEAR ENDED
                                    ------------
                                     1994     %
                                    -------  ---

<S>                                <C>       <C>
Net sales.........................   10,279  100
Gross margin......................    4,390   43
SG&A expenses.....................    4,129   41
(Loss) income from continuing
  operations before income taxes..     (439)  (4)
Net income (loss).................     (439)  (4)
Net income (loss) per common share
  from continuing
  operations--basic...............    (0.11)
Net income (loss) per common share
  from continuing
  operations--diluted.............    (0.11)
Net income (loss) per common
  share--basic....................    (0.11)
Net income (loss) per common
  share--diluted..................    (0.11)
OTHER DATA
E(L)BITDA(4)......................      240    2
</TABLE>

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

(1) On February 19, 1998, we closed on the acquisition of Lew Magram, Ltd. For
    accounting purposes, the acquisiton was effected as of July 1, 1997. The
    acquisition was accounted for as a purchase.

                                              (Footnotes continued on next page)

                                       14
<PAGE>

(Footnotes continued from previous page)

(2) On October 30, 1997, we acquired out of bankruptcy all the assets of Jean
    Grayson's Brownstone Studios, Inc. The acquisition was accounted for as a
    purchase.

(3) On February 6, 1996, we completed the acquisition of Biobottoms, Inc. The
    acquisition was accounted for as a purchase. On April 17, 1998, we sold
    substantially all of the assets and certain of the liabilities of
    Biobottoms, Inc.

(4) E(L)BITDA is defined as earning (loss) before income taxes, interest
    expense, depreciation and amortization. We believe that the presentation of
    E(L)BITDA facilitates an investor's understanding of our operations.
    E(L)BITDA should not be considered by an investor as an alternative to net
    income as an indicator of our operating performance or to cash flows as a
    measure of liquidity. E(L)BITDA is not used in the presentation of financial
    statements prepared in accordance with generally accepted accounting
    principles and may not be comparable to similarly titled measurements
    reported by other companies.

               DIPLOMAT'S CONSOLIDATED BALANCE SHEET DATA (000'S)

<TABLE>
<CAPTION>
                                               MARCH 31,               SEPTEMBER 30,             DECEMBER 30,
                                            ----------------    ----------------------------    ---------------
                                             1999      1998      1998        1997      1996      1995     1994
                                            ------    ------    ------      ------    ------    ------    -----
                                              (UNAUDITED)
<S>                                         <C>       <C>       <C>         <C>       <C>       <C>       <C>
Total assets.............................   50,142    46,482    50,959      33,013     4,848     8,654    8,071
Total liabilities........................   34,866    28,669    34,625      18,945     6,144     5,128    4,452
Working capital (deficiency).............   (5,372)   (5,539)   (4,662)     (3,375)   (3,145)    3,162    3,154
Long term debt...........................    6,267     1,077     6,384       1,155     1,047     2,061    1,993
Stockholders' equity.....................   14,869    17,813    16,334      14,068     2,523     3,526    3,619
</TABLE>

                LEW MAGRAM LTD.'S INCOME STATEMENT DATA (000'S)

<TABLE>
<CAPTION>
                                       SIX MONTHS ENDED    YEAR ENDED    SIX MONTHS ENDED    YEAR ENDED    YEAR ENDED
                                           JUNE 30,        JANUARY 4,       DECEMBER 30,       JULY 1,       JULY 2,
                                             1997             1997             1995             1995          1994
                                       ----------------    ----------    ----------------    ----------    ----------
<S>                                    <C>                 <C>           <C>                 <C>           <C>
Net sales...........................        19,643           51,927           23,145           57,616        49,680
Gross margin........................         7,682           26,815           11,941           28,883        26,501
Net income (loss) from continuing
  operations........................        (6,988)          (1,482)            (761)          (2,107)        2,239
(Loss) income before income taxes...        (7,206)            (790)            (480)          (1,485)        2,755
Net (loss) income...................        (7,276)            (790)            (465)          (1,494)        2,636
</TABLE>

                                       15

<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
prospectus. In addition to the information contained herein the following
discussion contains forward looking statements that involve certain risks and
uncertainties which may cause our actual results in future periods to differ
materially from forecasted results. See "Risk Factors--Forward looking
information may not be realized."

     We are a prominent specialty retailer of quality women's fashion apparel
and accessories sold through mail order catalogs and we recently commenced sales
on the Internet. Currently, we target niche markets through our two distinctive
catalogs, Lew Magram, designed to appeal to fashion-oriented women, and
Brownstone Studio, designed to appeal to a broad range of fashions for the
affluent and mature women. We recently acquired the Lew Magram and Brownstone
Studio catalogs. We acquired out of bankruptcy all of the assets of Jean
Grayson's Brownstone Studios, Inc. on October 30, 1997. We completed the
acquisition of Lew Magram Ltd. on February 19, 1998. We effectively took control
over Lew Magram in July 1997.

     We also manufacture and distribute, primarily to major mass merchandisers,
cloth diapers, diaper covers, layettes, infant and child travel products and
other infant accessories marketed primarily under the Ecology Kids name. On
April 17, 1998, we sold substantially all of the assets of our wholly owned
subsidiary Biobottoms, Inc. for $2,270,000 in cash and notes and $5,749,000 in
assumption of liabilities.

     We are currently experiencing significant delays in fulfilling merchandise
orders. This is a result of our difficulty in obtaining timely shipment of
inventory from our vendors to meet customer demand. Some of our vendors and
their lending institutions have been reluctant to extend credit to us in such
amounts and upon such terms as to support timely delivery of inventory as needed
to meet orders. This reluctance is principally a result of our working capital
being insufficient to satisfy vendors. Our inability to timely deliver
merchandise has resulted in increased order cancellations, which, for the last
18 months have been approximately 25% of demand compared to 10% as the industry
standard. As a result, we have recognized increased charges in the second
quarter of fiscal 1999 for the write-off catalog expenditures disproportionate
to the net sales realized for the quarter and projected for next quarter. We
have recently restructured our asset based credit facility to improve our
working capital position, which we anticipate will strengthen our ability to
obtain improved credit availability on more favorable terms, timely deliver
merchandise to its customers, reduce order cancellations, and improve initial
customer response. It is too early, however, to determine whether such
additional capital will yield such results.

RESULTS OF OPERATIONS

COMPARISON OF OUR SIX MONTHS ENDED MARCH 31, 1999 TO OUR SIX MONTHS ENDED
MARCH 31, 1998

  Net Sales

     Consolidated net sales from continuing operations for the six months ended
March 31, 1999, increased by 14% to $41.6 million from $36.5 million for the six
months ended March 31, 1998. This sales increase was primarily because we owned
Brownstone for less than six months and the absence of revenue while we were
sourcing vendors to supply Brownstone after the acquisition for the six months
ended March 31, 1998. Brownstone accounted for sales of $16.1 million for the
six months ended March 31, 1999 compared to $7.7 million for the six months
ended March 31, 1998. Net sales for Lew Magram decreased by approximately
$2.1 million due to increased order cancellations and sellouts as a result of
our inability to timely ship merchandise in this period. Also, Ecology Kids
sales decreased by approximately $1.2 million due to our inability to ship
merchandise in a timely fashion to our customers.

     We believe additional vendor credit will allow us to decrease our customer
cancellation rate resulting in additional net sales for which the expenses of
catalog distribution and order taking have been incurred.

                                       16
<PAGE>

  Gross Profit

     Consolidated gross profit from continuing operations increased by 6% from
$19.5 million for the six months ended March 31, 1998 to $20.6 million for the
six months ended March 31, 1999, primarily as a result of increase sales from
Brownstone. However, gross profit from continuing operations as a percentage of
net sales decreased from 53% for the six months ended March 31, 1998 to 50% for
the six months ended March 31, 1999 due to a decrease in margins. This decrease
was primarily a result of a higher proportion of clearance merchandise sales due
to an increase in returns of late delivered merchandise resulting from our
inability to obtain vendor credit.

  Selling, General and Administrative Expenses

     Selling, general and administrative expenses from continuing operations as
a percentage of net sales increased from 53% for the six months ended March 31,
1998 to 58% for the six months ended March 31, 1999. The increase in expenses is
attributable to the increase in catalog production costs in this period which
are typically written off over the sales life of the catalog. The life of the
catalog in this period was reduced as a result of our inability to mail books
over a normal catalog schedule. For the six months ended March 31, 1999, these
costs were $14.5 million as compared to $9.6 million for the six months ended
March 31, 1998.

     Other operating expenses as a percent of net sales increased for the six
months ended March 31, 1999 as compared to the six months ended March 31, 1998,
due primarily to an increase in amortization of intangibles in connection with
the Brownstone acquisition of approximately $180,000, as well as an increase of
approximately $400,000 in interest expense primarily due to the Finova
debentures.

  Income (Loss) from Continuing Operations

     Loss from continuing operations before income taxes for the six months
ended March 31, 1999 was approximately $4.3 million as compared to income from
continuing operations of $1.8 million for the six months ended March 31, 1998
primarily due to the increase in catalog production costs chargeable to that
period and to lower margins attributable to unshipped backorders.

  Net Income (Loss)

     Net loss for the six months ended March 31, 1999 was approximately
$4.4 million, as compared to net loss for the six months ended March 31, 1998 of
$299,000. This difference included the loss in 1998 from the discontinued
Biobottoms operations of approximately $2.1 million.

COMPARISON OF OUR FISCAL YEAR 1998 TO OUR FISCAL YEAR 1997

  Net Sales

     Consolidated net sales from continuing operations for fiscal year 1998
increased by 327% to $74.6 million from $17.5 million in fiscal year 1997. This
significant sales growth was primarily due to the acquisition of Lew Magram,
Ltd. effective July 1, 1997, and the acquisition of the assets of Jean Grayson's
Brownstone Studio out of bankruptcy as of October 30, 1997. These two new
subsidiaries accounted for sales of $68.8 million in 1998.

     Maintaining the prior circulation of both acquired catalogs while
streamlining catalog and operational expenses allowed us to be profitable in the
year of acquisition where both companies suffered substantial losses in the year
preceding acquisition. Unfortunately, we lost the opportunity in 1998 to even
further increase sales and profits in this segment of the business due to
excessive customer order cancellations caused by inadequate credit which limited
timely delivery of merchandise.

  Gross Profit

     Consolidated gross profit from continuing operations increased by 359% from
$8.7 million in 1997 to $40.2 million in 1998 primarily as a result of our
acquisitions. Gross profit from continuing operations as a percentage of net
sales increased from 50% in 1997 to 54% in 1998 due to the higher margins
generally available in the women's apparel catalog marketplace.

                                       17
<PAGE>

  Selling, General and Administrative Expenses

     Operating expenses net of other income but before depreciation,
amortization and interest from continuing operations as a percent of net sales
increased from 40% for 1997 to 50% for 1998. A major increase in expenses for
the year is attributable to the increase in the catalog production costs which
are typically written off over the sales life of the catalog. In 1998 these
costs were $21.1 million or 28% of net sales. As noted above, order
cancellations resulted in lost net sales and an inflated catalog cost
relationship.

     Other operating expenses as a percent of net sales increased in 1998 due
primarily to an increase in depreciation and amortization of tangible and
intangible assets as well as interest expense.

  Income from Continuing Operations

     Income from continuing operations before income taxes for 1998 was
approximately $1.3 million and was approximately the same as that of 1997,
despite a period of consolidation and re-structuring to assimilate the newly
acquired women's apparel catalog businesses.

COMPARISON OF OUR FISCAL YEAR 1997 TO OUR FISCAL YEAR 1996

     These results of operations compare the twelve months ended September 30,
1997 with the nine months ended September 30, 1996.

  Net Sales

     Consolidated net sales from continuing operations for fiscal year 1997 of
$17.5 million increased $10.0 million or 135% from fiscal year 1996 of $7.5
million, as a result of the Lew Magram sales of $10.6 million from July 1, 1997.
Diplomat took effective control of Lew Magram on July 1, 1997 even though the
acquisition was not completed until February 19, 1998.

  Gross Profit

     Gross profit in 1996 was essentially non-existent due to inventory write
downs while restructuring, and rose to 50% in 1997 due to normal Ecology Kids
operations and increased margins made available in the last fiscal quarter due
to the Lew Magram acquisition.

  Selling, General and Administrative Expenses

     Operating expenses from continuing operations were very high in 1996 due to
restructuring costs. These expenses normalized as a percentage of net sales to
40% in 1997 due to normal operations of Ecology Kids and expenses applicable to
Lew Magram for the final quarter.

     Interest expense decreased from $0.7 million in 1996 to $0.4 million in
1997 as a result of the conversion of debt to preferred stock by a principal
stockholder.

  Income from Continuing Operations

     The net income from continuing operations for 1997 was approximately
$1.4 million as compared to a net loss of approximately $6.1 million for 1996.

     At September 30, 1997, we recorded deferred tax assets of $1.3 million. The
full utilization of such deferred tax assets is dependent upon our realizing
taxable income in future years. The total amount of future taxable income
necessary for utilizing such deferred tax assets will be approximately $3.4
million. Based on the current year's operations, such realization would take
approximately six years.

COMPARISON OF LEW MAGRAM LTD.'S SIX MONTHS ENDED JUNE 30, 1997 TO YEAR ENDED
JANUARY 4, 1997

  Net sales

     Lew Magram Ltd. had begun to feel the effects of insufficient working
capital. Net sales decreased from $51.9 million, which was a full year to $19.6
million, which was a six month period, due to Lew Magram's inability to purchase
all of the merchandise needed for timely delivery to customers.

                                       18
<PAGE>

  Gross Profit

     Gross profit as a percent of net sales decreased from 52% to 39% primarily
due to the premium Lew Magram Ltd. paid for some merchandise which could not be
delivered in a timely manner at normal prices, as well as the need to clear
excess inventory, once delivered, at lesser margins.

  Selling, General and Administrative Expenses

     Selling general and administrative expenses net of other income as a
percent of net sales increased from 55% to 75%. This increase is a result of Lew
Magram Ltd.'s inability to timely ship merchandise resulting in increased
returns or failure to ship merchandise at all resulting in cancellations while
it was still incurring the catalog production and operating expenses to mail
catalogs and take and maintain catalog orders.

  Net Loss

     Net loss increased from $0.8 million to $7.3 million, or, as a percent of
net sales increased from 2% to 37%.

LIQUIDITY AND CAPITAL RESOURCES

     Our principal source of working capital has historically been asset based
loan facilities provided by Congress Financial Corporation. On May 12, 1999, we
entered into a Secured Credit Agreement with First Source Financial LLP
providing us with a $17 million asset based loan facility replacing our existing
asset based loan facilities provided by Congress.

     The First Source loan facility provides us with a $13 million revolving
loan with an interest rate at prime plus 1 1/2%, a $3 million three year term
loan with an interest rate at prime plus 2% and a $1 million three year term
loan with an interest rate at prime plus 2% increasing to prime plus 3% on
November 15, 1999. We may convert any or all of the loans to a LIBOR (London
interbank offer rate)-based rate. The revolving loan may be converted to LIBOR
plus 3 1/4%, the $3 million term loan may be converted to LIBOR plus 4% and the
$1 million term loan may be converted to LIBOR plus 4% increasing to LIBOR plus
5% on November 15, 1999.

     The loan facility is secured by substantially all of our assets, a personal
guarantee by Robert M. Rubin, our Chairman of the Board, up to $1 million and an
additional $1 million cash collateral deposit by Mr. Rubin.

     The amount of funds available for us to borrow under the revolving loan is
based on a percentage of our inventory and qualified receivables plus 100% of
Mr. Rubin's cash collateral. As of May 12, 1999, the aggregate availability
under the revolving loan was approximately $8.5 million.

     Under the Secured Credit Agreement, we are obligated to comply with
numerous covenants including (i) providing current information to First Source;
(ii) maintaining corporate status, books and records and minimum insurance;
(iii) complying with tax and other laws and regulations; (iv) maintaining our
real estate; (v) maintaining a minimum net worth of $14 million increasing
periodically to $16.5 million; (vi) maintaining an interest coverage ratio of 2
to 1; and (vii) maintaining a fixed charge coverage ratio of 1.1 to 1.

     We are also prohibited, except under certain circumstances, to (i) redeem
any of our outstanding common or preferred stock; (ii) prepay any subsidiary's
debt; (iii) pay dividends on our common stock; (iv) make investments in other
companies; (v) acquire other companies; (vi) amend our charter; (vii) engage in
other types of businesses; (viii) engage in transactions with our officers,
directors, control persons and other affiliates; (ix) incur debt other than debt
in the ordinary course of business and purchase money debt of more than
$1 million; (x) create any liens against our property with certain exceptions;
(xi) move our assets; (xii) sell our assets other than in the ordinary course of
business; (xiii) hire management consultants; (xiv) make capital expenditures in
excess of $500,000 per year; or (xv) incur lease obligations in excess of
$1.5 million per year.

                                       19
<PAGE>

     The loan facility will terminate and the loans become due and payable in
the event of a default. Events of default include, with limited exceptions,
(i) failure to pay any of the loans when due, (ii) failure to pay any other
debts when due; (iii) breach of certain material agreements; (iv) insolvency;
(v) breach of any guaranty under the loan facility; (vi) breach of a covenant in
the loan facility; (vii) breach of a representation in the loan facility; (viii)
change to our pension plan; (ix) breach of any of the other agreements delivered
in connection with the loan facility; (x) suffering judgments or levies of more
than $50,000; (xi) destruction of our assets representing more than 15% of our
revenues; (xii) any event resulting in any lien securing the loan facility to
cease to have a first priority position; or (xiii) a change in control. A change
in control includes (i) more than one-half of our voting stock is transferred;
(ii) two-thirds of our board is removed or not re-elected; or (iii) any two of
Jonathan Rosenberg, Warren H. Golden or Stephanie Sobel resigns or is terminated
without cause.

     On June 29, 1998, we issued $5,000,000 principal amount of our 12%
subordinated secured debentures to Finova Mezzanine Capital, formerly known as
Sirrom Capital Corporation, d/b/a Tandem Capital. The debentures are due June
29, 2003, and bear interest at 12%, payable quarterly. The debentures are
secured by all of our personal property and include certain restrictive
covenants, including restrictions on dividends and distributions, additional
debt financing and transactions between us and our affiliates. We also issued
warrants in connection with the issuance of the debentures. At the time of the
loan, we issued a warrant to purchase up to 208,300 shares of our common stock
exercisable at $2.35 per share for five years. The exercise price is to be
adjusted downward if our common stock price is below this exercise price to an
exercise price equal to the greater of 80% of the market price on June 29, 1999
or $2.00 per share. Because the debentures were outstanding on February 28,
1999, we issued an additional warrant to purchase 416,600 shares of common stock
exercisable at $1.59 per share for five years. After giving effect to the
1-for-5 reverse stock split Finova has warrants to purchase 41,660 shares at
$11.75 per share and 83,320 shares at $7.95 per share. Finova will also receive
40,000 warrants each June 29 commencing in 1999 while the debentures remain
outstanding.

     We, however, continue to experience working capital shortages and require
additional capital resources to fund our existing operations. We have borrowed
the maximum amounts available under the First Source loan facility as of the
date hereof and there is no unused loan availability. We are pursuing a number
of financing alternatives, although there can be no assurance that such efforts
will result in necessary financing or that the terms of such financing will be
on terms favorable to us or our stockholders. The failure to secure additional
working capital could materially adversely affect our business and financial
condition. Insufficient working capital may require us to alter operations
significantly.

     We have signed a non-binding letter of intent to purchase new facilities in
Clifton, New Jersey. The facility, which is approximately 160,000 square feet,
would provide us with warehouse and office facilities to consolidate our
operations currently located in Teaneck, New Jersey, and Stony Point, New York
and a portion of our New York City operations. The purchase price for this
facility would be approximately $5.6 million. If we take this facility, we
estimate the cost to consolidate operations would be $1 million. We have not yet
determined whether we will purchase this facility.

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

SEASONALITY

     Our business does not follow the seasonal pattern typical of the retail
apparel industry, but is, instead, more closely related to the timing and
distribution of catalog mailings. Through 1997 there were significant variations
in our seasonal sales volume with the largest volume period being first quarter,
ending December 31. In 1998, the Lew Magram and Brownstone acquisitions helped
to spread out the volume evenly throughout the year since mail order volume
varies only in proportion to the orders generated and merchandise shipped.
Accordingly, we are now less susceptible to seasonable variations. The combined
net sales of Lew Magram, Brownstone and Ecology Kids for each quarter of the
fiscal years ended

                                       20
<PAGE>

September 30, 1996, September 30, 1997, and September 30, 1998, presented as a
percentage of net sales for each such year, were as follows:

                           PERCENTAGE OF ANNUAL SALES

<TABLE>
<CAPTION>
                                                                    FIRST      SECOND     THIRD      FOURTH
FISCAL YEAR                                                         QUARTER    QUARTER    QUARTER    QUARTER
-----------                                                         -------    -------    -------    -------
<S>                                                                 <C>        <C>        <C>        <C>
September 30, 1996...............................................     27%        24%        30%        19%
September 30, 1997...............................................     33%        25%        24%        18%
September 30, 1998...............................................     24%        23%        28%        25%
</TABLE>

INFLATION

     There was no significant impact on our operations as a result of inflation
during fiscal year 1996, fiscal year 1997 or fiscal year 1998.

YEAR 2000

  Year 2000 Compliance

     Beginning in the Year 2000, the data fields coded in some software products
and computer systems will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such Year 2000 requirements. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance issues.

  State of Readiness

     We have developed a remediation plan for the Year 2000 issue that involves
identification, assessment and testing of the equipment and systems affected:

     o an assessment of information technology (IT) equipment and systems has
       been done;

     o an assessment of non-information technology (non-IT) embedded systems
       such as telephones, voice mail and building security systems has been
       completed; and

     o the readiness of significant third party vendors and suppliers of
       services is being analyzed.

     The evaluation, which is expected to be completed by December 1999, covers
the following phases:

     o development of an inventory of all IT equipment and systems and non-IT
       systems that are potentially affected (100% complete);

     o determination of those systems that require repair or replacement (70%
       complete);

     o repair or replacement of those systems (25% complete); and

     o creation of contingency plans in the event of Year 2000 failures (25%
       complete).

     To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs have been
reviewed, and are not considered to be date sensitive to the Year 2000. Based on
this evaluation, we do not believe that our systems and programs present Year
2000 issues, and generally believe that we will be Year 2000 compliant.

     Although we believe that we will be Year 2000 compliant, third party
equipment and software is used that may not be Year 2000 compliant. An
evaluation of the Year 2000 compliance of the third party products used in our
internal systems and major vendors have begun, but we are unable to predict the
extent to which:

     o the Year 2000 issue will affect suppliers; or

     o we would be vulnerable to the suppliers' failure to remediate any Year
       2000 issues on a timely basis.

     All our vendors and suppliers have been placed in a priority category
according to their importance to our business. Letters will be sent to all
vendors and suppliers with an operating impact seeking details of the

                                       21
<PAGE>

status of their Year 2000 program. Vendor and supplier readiness is being
assessed and tracked. Vendors have generally indicated that they are making best
efforts toward Year 2000 compliance. We expect to have certification that all
vendors and suppliers with an operating impact are Year 2000 compliant by
December 1999. Plans are being developed to ensure continued availability of
service through alternate channels in the event that satisfactory commitments
are not received from vendors and suppliers with an operating impact. For the
highest priority vendors and suppliers, where business risk warrants it, we are
planning to conduct, in the third quarter, an integration test of Y2K compliance
where specific dates are simulated. These vendors and suppliers include
merchandise suppliers such as Call Center Services, Convergys Group,
CommercialWare, Inc. and Clairicom and package delivery services such as United
Parcel Service and the United States Postal Service. The failure of one of these
highest priority vendors or suppliers to convert its systems on a timely basis
or in a manner compatible with our systems could cause us to incur unanticipated
expenses to remedy any problems and could adversely affect its business. In
addition, the software and hardware products used by affiliate Web sites,
advertisers, customers, governmental agencies, public utilities,
telecommunication companies and others, may not be Year 2000 compliant. If these
products are not Year 2000 compliant, customers' ability to use our Web site may
be disrupted.

  Costs to Address Year 2000 Compliance

     To date, we have incurred approximately $100,000 in connection with
identifying or evaluating Year 2000 compliance issues. Most of these expenses
have related to the opportunity cost of time evaluating software, the current
versions of our products and Year 2000 compliance matters generally. We expect
that our future Year 2000 costs will be approximately $250,000 and will be
funded out of cash on hand. However, the full impact of the Year 2000 issues
cannot be determined at this time. The failure by certain third parties to
address their Year 2000 issues on a timely basis could adversely affect our
business.

  Contingency Plan

     We have not yet completed our Year 2000 contingency plans. Such plans
include, but are not limited to, using alternative suppliers and establishing
contingent supply arrangements. We expect to have such plans in place by the end
of December 1999. The worst case scenario related to Year 2000 issues would
involve a major shutdown of the telecommunication companies, which would result
in the loss of our principal revenue source until the shutdown was resolved.

NEW ACCOUNTING STANDARDS

     We adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS 130 did not have any effect on our
financial statements.

     We adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," which establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of enterprises
about which separate financial information is available that is evaluted
regularly by our management in deciding how to allocate resources and in
assessing performance. The adoption of SFAS 131 did not have any effect on our
financial statements.

     Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments. We have not in the past nor do
we anticipate that we will engage in transactions involving derivative
instruments which will impact our financial statements.

                                       22

<PAGE>

                                    BUSINESS

     We are a prominent specialty retailer of quality women's fashion apparel
and accessories sold through mail order catalogs, and we recently commenced
sales on the Internet. Currently, we target niche markets through our two
distinctive catalogs, Lew Magram and Brownstone Studio. Lew Magram was
established in 1948 as a men's clothier but by 1984 had converted its catalog to
solely offer women's apparel designed to appeal to fashion-oriented women.
Brownstone Studio, established in 1974, offers a broad range of fashions to the
affluent, more mature women. We generally publish 10 Lew Magram catalog editions
per year and nine Brownstone catalog editions per year. Each catalog includes
300 to 500 products and our annual circulation is over 45 million catalogs per
year. With the recent introduction of electronic commerce on the Internet, we
believe as a catalog marketer that we are well positioned to increase our market
penetration at a lower cost on the Internet. We believe that catalog consumers
are the ideal Internet customers because they are accustomed to purchasing
fashion merchandise from a non-store medium. In January 1999 we began offering
our products online at Catalogcity.com and in February, 1999 signed a joint
venture with Fashionmall.com, Inc. to build several websites leveraging our
fashion design capabilities, brand name and customer base with Fashionmall.com's
Internet presence and expertise. We are also a wholesaler of apparel and
accessories for babies and toddlers to mass merchandisers such as Kids "R" Us,
Wal-Mart, Target and Walgreens, under the brand name "Ecology Kids".

     We have an experienced management team with over 150 years in the catalog
business, unique product lines and well-integrated infrastructure and
fulfillment capabilities. Over our history, we have compiled a wealth of
information with respect to our customers' buying patterns. By managing this
information, we can tailor the content of our catalogs, target catalog
distribution to particular customers, offer an expanded range of products to
certain customers, and test new products. Our database includes over 5 million
names of which 3.8 million are customers and 1.2 million are gift recepients and
catalog inquirers.

     We are currently creating and designing our own e-commerce websites for
each of Lew Magram and Brownstone Studio. These websites will be interactive,
allow for online product purchases from the catalogs and provide content areas
which we believe will be of interest to our existing and prospective customers.
With our accumulated information on existing customers and the information we
expect to obtain through our Internet sites, we believe we will be able to
customize each website in accordance with the preferences of the respective
target markets. These are intended to be the primary websites to offer our
products in addition to the Catalogcity.com and Fashionmall.com websites.

     Lew Magram products are marketed to fashion-conscious, value-oriented,
middle- and upper-income and above customers and career women. The Lew Magram
customers spend on average $160 per order. The Lew Magram catalog contains
active wear, career apparel, separates, outdoor wear, footwear and formal wear
for a cross range of lifestyles and women. Much of Lew Magram's apparel carries
our brand label but we do carry other labels as well, both in our apparel and
footware lines.

     Brownstone Studio merchandise is marketed to affluent, sophisticated and
mature women. The Brownstone Studio customer on average spends $140 per order.
The Brownstone Studio catalog contains both classic and modern fashion apparel,
footwear, accessories and some intimate apparel. Brownstone Studio offers a
broad range of sizes in stylish merchandise which, we believe, are not readily
available to our customers in the retail market place.

                                       23
<PAGE>

                                  OUR STRATEGY

     We intend to capitalize on our competitive strengths to increase sales to
both existing and new customers and continue to develop operating efficiencies.
The key elements of our strategy are as follows:

BUSINESS STRATEGY

  Increase ability to fulfill orders through improved capitalization

     We have invested significant capital to acquire the businesses of Lew
Magram and Brownstone Studio. We have been unable to realize all of the benefits
of these investments because a substantial amount of the assets acquired have
been treated as goodwill, an intangible asset. As a result, vendors have been
reluctant to extend us the credit necessary to fully realize the potential of
these acquisitions. The completion of this offering will provide the tangible
net worth necessary to obtain vendor credit to increase our inventory levels to
meet expected customer demand and reduce merchandise returns and order
cancellations. We believe our improved capital structure will also enable us to
accelerate fulfillment of customer orders, expand merchandise offerings within
each catalog, expand our proprietary Lew Magram and Brownstone Studio Frequent
Buyers Club loyalty programs and offer other promotions to prospective
customers. We believe that these efforts will increase revenues from our current
customers and also attract new customers.

  Reduce costs and increase operational efficiencies through improved liquidity

     We believe the additional capital generated from this offering will allow
us to take advantage of discounts and flexible payment terms from vendors and
service providers, increase the number of vendors available to us, reduce our
fulfillment cost per order, reduce customer service costs and reduce interest
expense. We intend to operate more efficiently by maximizing use of our in-house
capabilities, improving inventory management, better utilizing our warehouse
space, reducing the number of shipments required to fulfill customer orders and
reducing the use of outside services.

  Leverage and expand proprietary customer database

     We intend to leverage our proprietary customer database through statistical
modeling and market segmentation techniques. This will enable us to increase our
customer response rate, the dollar amount of purchases per catalog mailed and
the gross profit margin per catalog. We intend to expand our proprietary
customer database by test marketing to specific target audiences which we
believe meet the criteria of our traditional customer base.

  Increase brand awareness

     We intend to increase brand awareness by expanding the assortment of
available products under the Lew Magram and Brownstone Studio private labels,
increasing merchandise categories offered in each catalog, providing exclusive
product offerings tailored to specific customer profiles and increasing the
usage of our branded private label credit cards. We also intend to utilize our
planned e-commerce Internet sites, our strategic relationships with
Fashionmall.com, Inc. and Catalogcity.com and other strategic alliances to
increase our brand awareness.

GROWTH STRATEGY

  Expand through diversifying product lines

     We plan to diversify our current Lew Magram and Brownstone Studio product
offerings through the addition of complementary product lines which we believe
will be of interest to our target markets. These product lines will be added
over time and will be subject to the results of our in-house test marketing
programs, some of which will be performed through the Internet, to determine
customer acceptance on additional items before they are included as a regular
segment of our catalogs and online stores. Complementary products which we may
add include cosmetics, fragrances, jewelry and additional fashion accessories.
We believe that the addition of new product lines to our Lew Magram and
Brownstone Studio

                                       24
<PAGE>

catalogs will lead to additional sales to our regular customers and create a
greater level of buying interest from prospective customers. We expect that this
will further enhance our brand names by broadening the range of products with
which they are associated.

  Expansion of Ecology Kids line of business

     We recently entered into a licensing agreement with Warner Bros. to market
and distribute a line of Baby Looney Tunes swimsuits. We are attempting to
locate other licensing partners for products in our Ecology Kids line to
increase the marketability of these products. In addition, we are continuing to
develop a prototype of a business-to-business catalog for the direct marketing
of the Ecology Kids product line to our wholesale customers. We believe that a
well designed business-to-business catalog will allow us to use our existing
infrastructure to build our Ecology Kids operation. We also expect to launch our
Ecology Kids products on the Internet through strategic relationships with
online baby stores and as specialty features on our Lew Magram and Brownstone
Studio websites, as well as to wholesale customers on a business-to-business
format.

  Expand through purchasing complementary businesses

     We intend to continue to pursue strategic acquisitions of additional
businesses which complement our current businesses. Our primary focus will be
catalogs that expand our current customer profile, introduce new product
offerings and generate greater operational efficiencies. In addition, we may
seek to purchase catalogs offering products that are compatible with our Lew
Magram and Brownstone Studios product lines, such as additional accessories,
cosmetics, fragrances or jewelry. We also may seek to acquire businesses that
are compatible with Ecology Kids and expand the range of products offered to our
extensive customer base, although such businesses or products have not yet been
identified.

INTERNET STRATEGY

     We believe that catalog consumers are logical customers for Internet
commerce because they are accustomed to purchasing fashion products from a
non-store medium. We anticipate that a substantial portion of our existing
customer base will in the future become Internet consumers of our Lew Magram and
Brownstone product offerings. We also believe that our extensive experience with
the presentation of fashion products in an appealing format will help us to
design unique, attractive websites for Lew Magram and Brownstone. The Internet
provides us the opportunity to market our products to a substantially greater
audience than we would otherwise have access to, at a relatively low cost. The
technology available through the Internet provides the customer the ability to
visualize products, colors and styles according to her individual preferences,
and track order status. The Internet also allows us to communicate directly with
our customers through personalized communications and customized product
offerings. This enables us to react to changing business conditions, alter
merchandise selection, pricing and presentation on a virtually real-time basis
without of being subject to catalog lead times.

     We believe the Internet will ultimately allow us to significantly reduce
our largest non-merchandise expenses such as catalog printing costs, postage and
customer communications. These costs represented more than 35% of our revenues
for the fiscal year ended September 30, 1998. We can also use the Internet as a
lower cost and a more efficient method of testing new products, new product
lines, special events and promotions and increasing access to prospective
customers.

  Our e-commerce sites

     Our objective is to build a branded e-commerce site for each of Lew Magram
and Brownstone Studio. Each website will attempt to capture the look and feel of
its target market, offering customers shopping and order processing
capabilities, as well as offering additional interactive and community features
such as travel guides, personal shopping capabilities, daily planners and gift
registries. We also intend to augment our mail order customer profile database
through information we obtain through our Internet sites. We believe this data
will make our website communities attractive destinations for other vendors and
e-commerce companies that want access to our customers. The Internet should also
increase brand identity as we cross market

                                       25
<PAGE>

through strategic relationships and online marketing efforts. Cross marketing
should increase as we add product categories such as cosmetics, fragrances and
additional fashion accessories. We believe that leveraging our existing
distribution center and customer service center will support our online
fulfillment performance and compliment our e-mail customer service.

  Strategic relationships

     We recently entered into a letter of intent to form a joint venture with
Fashionmall.com, Inc. (Nasdaq: "FASH"), one of the leading apparel shopping
destinations on the Internet. As part of our agreement, we have escrowed
$500,000 for the purpose of creating an on line presence with other retailers
for specific product offerings such as women's large size apparel.
Fashionmall.com will build and maintain the website, prominently position the
site within its on-line mall, and link our Lew Magram and Brownstone Studio
websites directly to their mall. We have also entered into an agreement with
Catalogcity.com, the largest online catalog destination on the Internet, to
access the Lew Magram and Brownstone Studio catalogs over the Internet. We
intend to develop other strategic relationships relating to our Internet
strategy.

                                  OUR INDUSTRY

     In recent years, retailing in the United States has been characterized by a
shift to non-store sales through such media as printed catalogs, broadcast home
shopping channels and the Internet. According to the DMA, catalog sales are
estimated to be $93.27 billion for 1999, representing 3.3% of overall retail
sales. The DMA expects catalog sales to increase to $125 billion by 2004. The
expected growth for catalog sales is approximately 6.1% per year for the next
five years. According to the investment banking firm Gruppo, Levey,
Incorporated, direct marketing sales in the women's apparel category accounted
for $8.4 billion in 1997. A DMA survey done in the first quarter of 1999 showed
that women account for 69.8% of all catalog sales, and women's apparel is the
largest catalog category representing 64% of all catalog purchases. In 1998,
nearly 70% of the women who shop via catalog made a purchase within that year.
We believe that direct marketing apparel sales to women will continue to grow,
due to the convenience and time savings afforded by catalog and recently
introduced e-commerce shopping. The U.S. Census Bureau is projecting the 35-64
year old female population to grow 20.8% from 1995 to 2005. This is an
attractive target group for catalog distributors and e-commerce vendors such as
ourselves, particularly because in excess of 50 million women are in the work
force and therefore may have material discretionary income.

MOVING INTO E-COMMERCE

     International Data Corporation projects worldwide commerce revenue on the
Internet to increase from $4.3 billion for 1997 to $11.0 billion in 1999 and is
expected to increase to $84.2 billion by 2004. It is expected that online
shopping will increase at a rate of 50% per annum. Jupiter Communications
estimated that women accounted for 45% of all web users as of January 1998
accounting for 25% of all Internet sales and are expected to account for 47% of
Internet sales by the year 2000. Forrester Research reported that women make 67%
of all household purchase decisions. According to a DMA study done in 1999, 43%
of their member companies are selling online and 49% of those are generating a
profit from online shopping. As a result of these factors, we believe that
apparel sales will be a major component of Internet commerce and that women will
become a highly targeted customer for online stores and advertisers.

                                   OUR BRANDS

     We currently offer our products through three operating
subsidiaries--direct mail catalog and Internet retail sales of apparel under the
Lew Magram and Brownstone Studio brands and sales of apparel and accessories for
infants and toddlers to mass merchandisers under the Ecology Kids tradename. For
financial information on the operations of our lines of business, see our
consolidated financial statements commencing on page F-1 and the notes thereto.

                                       26
<PAGE>

LEW MAGRAM

     Lew Magram is a leading catalog for stylish career women. Founded in 1948
as a men's clothier, by 1984 Lew Magram converted its catalog to become a
premier women's apparel direct marketer. We began managing the operations of Lew
Magram in July 1997 and completed the acquisition of its assets in
February 1998. We offer our Lew Magram customers unique, fashionable, affordable
women's apparel and accessories, including active wear, career apparel,
separates, outdoor wear and dressy wear that is selected to appeal to a
cross-range of lifestyles and women. Our Lew Magram proprietary database
contains approximately 2.2 million names, of whom 1.6 million are customers,
550,000 are gift recipients and catalog inquirers.

     Based on information we regularly gather from our customers, we believe our
typical Lew Magram customer is about 40 years old, works outside the home on
either a full or part-time basis, is well educated, lives in a single family
home, and has a household income of approximately $60,000 per year. Our Lew
Magram customer base is both fashion conscious and value oriented. A particular
niche for our Lew Magram catalog is career suits and dresses. This apparel is
offered in the newest styles, colors and fabrics at prices geared toward the
target customer. As this customer has a busy social and professional life, she
also looks to Lew Magram as a source to provide her with her "day to dinner" and
special occasion dressing needs. In addition, we believe Lew Magram is renowned
in the catalog industry for having a premier selection of leather and suede
sportswear and outerwear at competitive prices. We have also recently expanded
our size offerings for certain products. Based on positive response from our
customers, we believe this represents a growth opportunity.

     The average order from the Lew Magram catalog for fiscal years 1997 and
1998 was $158 and $160, respectively. Our database includes more than 500,000
customers who have made at least two purchases from Lew Magram. In addition to
accepting all major credit cards, Lew Magram also sells its merchandise through
a private label credit card which was launched in 1993. Approximately 110,000
people have the Lew Magram credit card, which accounts for approximately 25% of
Lew Magram's sales.

BROWNSTONE STUDIO

     Since 1974, "Jean Grayson's Brownstone Studio" and "Studio Collection" have
been among the largest direct catalog marketers of upscale mature women's
apparel in the United States. We believe this is due principally to superior
merchandising to our target customers, focusing on high quality presentation in
our catalogs, frequently utilizing location shots to display our merchandise in
an appropriate mood and tone, and providing a large and unique selection of
merchandise, including larger sizes which our customers often have difficulty
purchasing elsewhere.

     Brownstone has chosen to focus on a relatively narrow but rapidly growing
segment of the consumer catalog market--upscale mature women's fashions--in
order to develop a strong image and identity with our customers. On Brownstone's
proprietary customer list, 79% are age 55 and older. According to American
Demographics magazine, there were approximately 17 million women between the
ages of 50 and 64 in 1997. Also according to American Demographics, the portion
of the US female population ages 50 and over is forecast to increase from
33 million in 1997 to 52 million in 2010. Brownstone seeks to increase market
share in this growing segment of the consumer market. Approximately 49% of
Brownstone's customers have annual household income of $50,000 or more, and
about 86% own their own home.

     Our Brownstone proprietary customer database contains approximately 2.8
million names, of whom 2.2 million are customers, 180,000 are gift recipients
and 420,000 are catalog inquirers. For the Fall 1997 season, Jean Grayson's
Brownstone Studio, Inc. was not operational and, as a result, incurred damage to
its customer base. We have since begun recirculating and have had positive
customer response. In addition, we introduced the Brownstone Studio private
label credit card in September 1998. We mailed a total of approximately
22 million Brownstone catalogs in ten different issues during fiscal year 1998,
with an average order value of approximately $140, and we plan to mail a similar
number in 1999. By strengthening customer relations with Brownstone customers,
we believe that we can improve initial customer response and increase average
orders for the Brownstone catalogs.

                                       27
<PAGE>

ECOLOGY KIDS

     Our Ecology Kids subsidiary designs, develops, markets and distributes
apparel and accessories for infants and toddlers, such as bathing suits, infant
sleepwear, bedding, garment bags, teething rings and other related products. We
contract manufacture most of our products and the remainder is either assembled
or produced within our own facility at Stony Point, New York. These products are
sold directly to general mass merchandisers, toy retailers, selected chain
stores and independent retail stores. We create customized point-of-purchase
displays for our customers, which include broad selections of branded products
in a variety of categories. We develop uniform packaging with branded product
identification designed to promote a theme of one-stop shopping for all infant
needs.

     We believe that customer service is an important component of our Ecology
Kids marketing strategy and tends to be a significant factor in gaining access
to large chain store accounts. As a result, we design our service strategy to
assist those chain stores through the development of improved packaging, product
mix, display, and pricing strategies and effective promotional programs.

     We market our Ecology Kids products directly through an internal sales
force and to a lesser extent through independent sales organizations, which are
given principal responsibility for maintaining accounts in specific geographic
regions. Due to a change in the retail marketplace, Ecology Kids has experienced
a reduction in the number of retail accounts from prior periods, with an
increased emphasis on mass merchandisers and chain stores. We have approximately
500 retail accounts consisting primarily of mass merchandisers and toy
retailers, and, less significantly, drug store chains, catalog showrooms, mail
order operations and food store chains. In addition to American Drug Stores,
Burlington Coat Factory, Eckerd Drugs, Kids "R" Us, Publix Supermarkets, Toys
"R" Us and Wal-Mart, customers include Target Stores, Walgreen Drug, and
Winn-Dixie Supermarkets.

     We have recently entered into an agreement with Warner Bros. to market and
distribute a line of products with the Warner Bros. Baby Looney Toons
characters. We are currently developing wholesale direct marketing of Ecology
Kids products through catalog offerings, utilizing our direct marketing
expertise.

                             OUR CATALOG OPERATIONS

PROPRIETARY CUSTOMER DATABASE

     We have developed our proprietary customer database over many years through
a variety of techniques, including referrals, gift certificates, catalog
requesters, customers from other mailing lists who have made a purchase and
targeted classified advertising. We have found that our database generates a
greater response rate than purchased or rented mailing lists. Our database
currently includes approximately five million names, of which approximately 3.8
million are customers who have made at least one purchase from us and
approximately 1.2 million are catalog inquirers and gift recipients.

     We use traditional mail order techniques to grow our catalog businesses by
mailing catalogs to a combination of names on our customer file and prospect
lists. We employ industry standard segmentation techniques for mailing our
catalogs to names on our proprietary customer database. Typical mailing criteria
include recency of purchase, frequency of purchase and monetary value of the
customer's purchase. This allows us to assign the segmented names to the
appropriate number of mailings as well as the appropriate promotions and page
counts. We use third party providers for merge and file services and maintaining
our customer list rental files. Our best prospects are sourced from other mail
order companies in the women's apparel market. Recent successes with cooperative
databases offer additional sources of economical names. Typically, one third to
one-half of our catalog mailings are to prospect names.

     As is common throughout the direct mail industry, we routinely exchange
names with our competitors and rent our list to our competitors and other
businesses. Approximately two-thirds of prospects to whom our catalogs were
mailed in 1998 were obtained on an exchange basis, requiring no cash outlay by
us. Income from list rentals has been over $1 million in each of the last three
years.

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<PAGE>

CATALOG CONFIGURATION

     We believe we are an industry leader in efficiency of catalog
configuration. Most catalogers mail a single edition of their book per mailing,
along with perhaps a few different covers or a signature change for a remail. We
utilize selective binding in order to mail multiple versions of our catalogs. In
the Lew Magram catalog, a typical book would comprise one large assemblage of
pages in common to the entire mailing, plus an additional supplemental set of
pages to a narrower targeted audience, plus one or two other supplements to yet
a narrower audience, plus perhaps a clearance supplement. Any of these parts
might appear in any drop of a book, depending on a number of variables, such as
testing, prospect mailing and special offerings to holders of our proprietary
credit cards, all selectively bound and mailed as parts of a greater whole. This
technique is used to a lesser degree for Brownstone.

MARKETING

     Our primary means of marketing is through distribution of our catalogs. Our
marketing department uses certain industry criteria to plan our distribution,
including our overall circulation, number of pages in each book, gross demand
(before returns and cancellations), cost per book, dollars per book, cost per
page per book and dollars per page per book. These enable us to prepare our
annual budget and forecast actual contribution dollars to overhead and profit.
The following table illustrates our results for fiscal year 1998:

<TABLE>
<CAPTION>
                                                                         LEW MAGRAM     BROWNSTONE STUDIO
                                                                         -----------    -----------------
<S>                                                                      <C>            <C>
Circulation...........................................................    27,490,000         22,111,000
Average Pages Per Book................................................          68.5               74.0
Gross Demand..........................................................   $    76,635      $      63,660
Cost Per Book.........................................................   $      0.56      $        0.59
Dollars Per Book......................................................   $      2.79      $        2.88
Cost Per Page Per Book................................................   $    0.0082      $      0.0080
Dollars Per Page Per Book.............................................   $    0.0406      $      0.0389
</TABLE>

     Our marketing department uses various special promotions to increase
revenues. For example, we have instituted our private label credit card, which
provides deferred payment plans, accelerated shipping and toll free customer
service. The average private label credit card customer typically spends 25% to
30% more than our other customers. Credit card billing inserts with special
promotions have also generated significant customer response. We also use
"bounceback catalogs", which are catalogs delivered with a customer's
merchandise delivery, accompanied by short-term discount offers, to generate
additional revenues. We also deliver other materials with customers' merchandise
packages, such as clearance merchandise offer inserts and other retailers'
offerings. We have recently introduced a point system, similar to the airline
industry's frequent flyer miles, which allows customers to earn gift
certificates for purchases on our proprietary credit card. Our marketing team is
also devoting time and attention to the use of data base marketing to launch our
new e-commerce business.

MERCHANDISING

  Merchandise Selection Process

     The merchandise selection process for our Lew Magram and Brownstone
catalogs takes into account the following factors:

     o Same season performance for the prior year, which analysis includes the
       overall success of a given category, the performance of new versus repeat
       items, space productivity, price point and best and worst selling items;

     o Current sales trends on all the above criteria plus an overview from the
       marketing department on current customer database productivity, customer
       profile trends, circulation and mail date plans; and

                                       29
<PAGE>

     o A trend and fashion direction presentation highlighting the most
       important and customer-appropriate styles, colors and fabrics for the
       upcoming season.

     Our merchandising staff actively considers 1,500 to 2,000 new products in a
given season to develop an exclusive assortment of styles that reflects the
customer's taste at prices she can afford.

     Most of our merchandise is sold under our Lew Magram and Brownstone Studio
brand names. The remainder are branded products from other design houses and
market sources. We purchase from over 300 vendors, with no one vendor
representing more than 10% of our sales volume. As we increase the amount and
type of merchandise offered in our catalogs, we anticipate that we will increase
the number of vendors we use, thereby reducing reliance on any particular
vendor.

  Creative Processes

     Our in-house creative team designs the Lew Magram and Brownstone catalogs
and controls all aspects of their preparation. This in-house capability allows
us the flexibility to direct the production schedule and reduce production lead
time and costs. Once the merchandise is decided upon for an upcoming catalog, we
begin to photograph the merchandise, sometimes on location at exotic
destinations. We utilize the latest computer technology to modify features of
products offered such as changing a dress color, narrowing a waist, changing the
model's shoes or sleeve length. By utilizing ISDN high-speed transmission,
changes are immediately accessible to all parties allowing for last minute
adjustments. Once finalized, the print file is transmitted to the printer. We
can complete a catalog, from the finish of photography through printing, in
about two to four weeks.

  Quality Control

     Every item selected undergoes a rigorous quality control review that
addresses the fit, styling, quality, and construction of the merchandise. Our
technical design team works with our product specialists to fit each garment on
a live model in advance of production. Upon our receipt of the goods, they are
once again inspected and fit before they are shipped to the customer.

  Operations

     The primary components of the Lew Magram and Brownstone integrated
operations are its call center services, merchandise returns, distribution and
fulfillment, inventory management, and management information systems.

CALL CENTER SERVICES

     Customer orders are received at our call center by phone, fax and mail.
Approximately 87% of all orders are placed by phone; the balance is received by
mail and fax. We provide our customers with 24-hour, seven-days-a-week,
toll-free telephone access for placing orders through voice activation or key
pad depression. Customer service representatives process orders directly into
our management information system, which provides customer information and order
history, product specifications, available substitutes and accessories, expected
ship date and order number. To capitalize on each customer contact, we provide
telemarketing services to other retailers and are compensated with a fee for
each such customer contact. In May 1999, we entered into such a strategic
relationship with Magazine Direct, Inc., a leading magazine subscription agency,
for a joint marketing program through which our call center representatives
offer discount magazine subscriptions to our customers. This generates income to
us based on the number of subscriptions obtained. In addition, Magazine Direct
pays for all calls in which a solicitation is made, which we believe will result
in significant cost savings for us.

     Our call center operates on a system with over 160 incoming and outgoing
telephone lines. Approximately 5,000 calls are received per day in our Teaneck,
New Jersey facility. We currently have 84 in-house phone stations which operate
on weekdays from 8:00 a.m. to 10:30 p.m., Eastern Time, with abbreviated
schedules on weekends and holidays. The call center is supported by two outside
service bureaus which handle overflow orders and orders placed when our in-house
call center is closed. Our system

                                       30
<PAGE>

processes orders in approximately two to four minutes, depending upon the nature
of the order and whether the customer is a first-time or repeat customer. Our
telephone system automatically routes calls to the overflow centers after twenty
seconds if no in-house customer service representative is available and our
voice recognition unit allows customers to access status of orders or item
availability without involvement of an operator. We have recently renegotiated
our toll-free telephone rates, reducing these costs by approximately 30%.

MERCHANDISE RETURNS

     We have a liberal return policy allowing customers to return regular-priced
merchandise for a full refund within 60 days of receiving the merchandise.
Customers may return sale-priced items for merchandise credits which are good
for one year and are redeemable for our merchandise only. Certain sales of
discounted merchandise are final. Over 95% of returned items are either replaced
in inventory for future sale, generally after minimal refurbishing, or returned
to their vendors.

DISTRIBUTION AND FULFILLMENT

     Our distribution center in Teaneck, New Jersey is integrated with our order
entry system, enabling us to fulfill orders for in-stock merchandise in a timely
manner. Once a customer's telephone order is accepted, our management
information system forwards the order to our distribution center, where all
necessary distribution and shipping documents are printed to facilitate
processing. Shipped orders are bar-coded and scanned and the merchandise ship
date and weight are entered automatically into the customer order history file
and to create United Parcel Service and United States Postal Service billing
information. Our system also employs "least cost routing" which automatically
determines the most cost effective means of shipping merchandise. Each shipment
is packed in a corrugated box with customized tissue paper and sealed with an
embossed foil seal with the Lew Magram or Brownstone logo. Each shipment also
contains a current catalog, a thank-you note which is a turnaround postcard
inviting customer comments, and a packing slip.

     A majority of orders for in-stock merchandise are shipped within 48 hours.
Customers generally receive their merchandise within three to five business days
after shipping. Credit card customers receive their merchandise within two days.
Approximately one-half of our products are shipped through the United Parcel
Service and one-half through the United States Postal Service.

INVENTORY MANAGEMENT

     We attempt to maintain sufficient quantities by size and color of each item
in our inventory to fill projected orders within the shortest possible lead
time. Our management information system enables our marketing department to
forecast four catalogs simultaneously within each catalog title and make
constant adjustments to update selling curves and needs by item. When overstocks
do occur, we use the following process for their liquidation:

     o Strong selling items are re-introduced in the catalogs at a 10-20%
       discount;

     o Items that have reached the end of their selling-life cycle are eligible
       for sales inserts inside of our regular-priced catalogs, at markdowns of
       35%-60%;

     o Smaller quantities can be liquidated at a very low-cost, high-return
       manner through the use of package inserts;

     o Items that are not in significant quantity to be placed in a catalog or
       package inserts are sent to our outlet stores located in Teaneck and
       Secaucus, New Jersey, and are sold at a 30-70% discount; and

     o Merchandise that is not sold in the stores is sold to a liquidator to
       recover approximately 15-20% of the cost.

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<PAGE>

MANAGEMENT INFORMATION SYSTEMS

     Our mail order operations are supported by a leading mail order software
for order-taking, shipping, credit card authorization, billing, inventory
control and maintenance of online perpetual inventory. Lew Magram was one of six
development partners involved with the development of this software program. The
software program operates on an IBM AS400. The system has recently been upgraded
and is Year 2000 compliant, and we believe that it will adequately provide for
future growth and expansion.

GOVERNMENTAL REGULATION

     Our direct marketing business and the catalog industry in general are
subject to regulation by a variety of state and federal laws relating to, among
other things, advertising, imports and sales taxes. The U.S. Federal Trade
Commission regulates our advertising and trade practices and the Consumer
Product Safety Commission has issued regulations governing the safety of our
products. We are also subject to Department of Treasury customs regulations with
respect to goods that it directly imports, including customs duties, quotas and
other import restrictions.

     As a seller of infants products, we are subject to laws and regulations
administered by various states and the Federal Trade Commission. As a seller of
bedding products, we are also required to maintain licenses in the various
states where it conducts business. These licenses subject us to compliance with
a variety of laws and regulations regarding the labeling and cleanliness of its
infants products. In addition, we have all of our bedding products produced to
the upholstered product specifications required by the flammability laws of the
State of California, which we believe to be the most stringent in the United
States. We believe that we comply with applicable laws and applicable
regulations in all material respects.

INTELLECTUAL PROPERTY

     Our success depends, in part, upon the continued development of strong
brand identification for our catalogs and products. We have registered trademark
protection for the names Ecology Kids, Lew Magram, Jean Grayson's Brownstone
Studio, and Studio Collection among other trademarks, as well as many supporting
trade names. We may apply to register other trademarks as we deem appropriate.

COMPETITION

     The markets in which Lew Magram and Brownstone participate are highly
competitive. These markets are served by a number of catalog companies and
retailers including traditional department stores, discount retailers, and
specialty chains. We compete generally in the retail women's apparel market and,
more specifically, the direct mail catalog market, with such companies as
Brylane, Inc., DM Management, Inc., Lands-End, Inc., Delias, Inc. and Coldwater
Creek, Inc. Lew Magram directly competes with catalog retailers that target the
market for women ages 35 to 55, which include J. Jill, Spiegel, Victoria's
Secret, Chadwick's of Boston and Clifford & Wills. Brownstone directly competes
with catalog retailers which target the mature women's market, which include
Talbot's, Nicole Somers, Damon's & Draper's, Papillon, as well as specialty
store catalogs such as Nordstrom's, Saks and Nieman Marcus. Many of our
competitors have substantially greater resources, name recognition and market
share than Lew Magram and Brownstone. In the e-commerce area we will compete
with companies or sites which are primarily focused on targeting women online
such as iVillage.com, Women.com networks, a joint venture between Women.com
networks and The Hearst Corp., Microsoft Corporation's womencentral.msn.com,
condenet.com and Oxygen Media's Web sites, as well as all apparel companies that
sell women's clothing to our target markets on the Internet. Our competitive
advantage is the combination of our experienced marketing team, talented
merchandising and operational efficiencies. We believe that we can maintain and
improve our competitive position in the market by utilizing our proprietary
customer database, soliciting new customers, identifying distinct fashion trends
and continuing to address the needs and fashion tastes of our customers and
leveraging this core business on the Internet.

     The infant products industry is highly competitive. Ecology Kids faces
substantial competition in each of its product lines. Ecology Kids competes in a
variety of segments within these product categories, including diapers. Ecology
Kids competes by focusing on product quality, promotions, name recognition and
service.

                                       32
<PAGE>

Many of Ecology Kids competitors have substantially greater resources, name
recognition and market share than Ecology Kids.

EMPLOYEES

     As of May 21, 1999, we had approximately 348 full-time and 71 part-time
employees. Of these employees, nine were senior executives of Diplomat, two of
which were employed by Ecology Kids, and two of which were employed by Lew
Magram and Brownstone. Lew Magram, Brownstone and Ecology Kids had 51 employees
related to marketing and merchandising (including store employees), 221 in its
call center, 125 in operations and distribution, and 39 in other administrative
positions. None of our employees are represented by a labor union. We consider
relations with our employees to be good.

PROPERTIES

     Our executive offices and Lew Magram and Brownstone operations are located
at 414 Alfred Avenue, Teaneck, New Jersey, where we lease approximately
72,000 square feet of warehouse and office space. Total fixed monthly charges
are approximately $52,000 subject to annual escalation clauses. The lease
expires in August 2001, subject to a three-year renewal option. We also lease
approximately 11,000 square feet in the Garment District in New York City at
$19,000 per month for its Lew Magram and Brownstone operations.

     We own our warehouse and distribution facilities for Ecology Kids, which is
located at 25 Kay Fries Drive, Stony Point, New York. We pay approximately
$26,000 per month for both mortgage payments and real estate taxes on its Stony
Point facilities. We also operate two retail stores, one located at its Teaneck
facility and one located in Secaucus, New Jersey. The Secaucus store is
approximately 4,300 square feet. Monthly rent and other fixed charges are
approximately $5,000.

     We are currently seeking larger facilities to expand our warehousing
capability and consolidate most of our operations. We have signed a non-binding
letter of intent to purchase office and warehouse facilities in Clifton, New
Jersey. This facility which is approximately 160,000 square feet, would be
sufficient to consolidate our operations in Teaneck, New Jersey and Stony Point,
New York and a portion of our New York City operations. The purchase price for
this facility would be $5.6 million, most of which would be financed. We have
not yet determined whether we will purchase this facility.

LEGAL PROCEEDINGS

     In September 1996, Diplomat was named as one of several defendants in an
action brought by Richard Tracy and Anne Tracy in Rockland County Supreme Court.
Mr. Tracy alleges that the defendants' negligent maintenance of a railroad
crossing adjacent to our property caused him to collide with a train. Mr. Tracy
is seeking $10,000,000 in damages for his injuries, and Mrs. Tracy is seeking an
additional $1,000,000 in damages for loss of Mr. Tracy's services. Our insurance
carrier is currently defending this action. We believe that this claim is
without merit and we intend to defend vigorously against it. The ultimate
outcome of this matter cannot presently be determined, and, accordingly, no
provision for liability has been made in the accompanying financial statements.

     In March 1998, Paul Russo filed a complaint against Diplomat alleging that
he is entitled to the Unit Purchase Option granted by Diplomat as part of our
initial public offering in November 1993. Mr. Russo demands unspecified
compensatory and punitive damages. Although Diplomat does not dispute that it
granted the Unit Purchase Option as part of its initial public offering, it has
not yet been determined that Mr. Russo is entitled to the Unit Purchase Option
or the number of Diplomat's shares which may be purchased under the Unit
Purchase Option.

     Other than the above claims, we have no notice of any pending material
litigation.

                                       33

<PAGE>

                                   MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL

     The following table sets forth certain information about our directors,
executive officers and key personnel:

<TABLE>
<CAPTION>
NAME                                          AGE    POSITION
----                                          ---    --------
<S>                                           <C>    <C>
Robert M. Rubin............................   58     Chairman of the Board
Warren H. Golden...........................   57     Chief Executive Officer, President and Director
Stephanie Sobel............................   38     Executive Vice President and Director
Mark J. McSweeney..........................   41     Chief Financial Officer
Jeffrey Ayes...............................   44     Chief Operating Officer
Julia Aryeh................................   32     Chief Strategic Officer, Secretary and Director
Sherry Dolin-Shikora.......................   50     Vice President of Creative Services
Robert Kramer..............................   45     Vice President of Marketing
Kenneth Grossman...........................   55     Divisional President of Brownstone
Irving Magram..............................   48     Divisional President of Lew Magram
Stuart A. Leiderman........................   55     Divisional President of Ecology Kids and Director
Howard Katz................................   56     Director
David Abel.................................   57     Director
</TABLE>

DIRECTORS AND EXECUTIVE OFFICERS

     Robert M. Rubin has served as a Director since June 1992 and has been
Chairman since November 1996. Since December 5, 1995, Mr. Rubin has been a
Director of Help at Home, Inc., a public company engaged in the business of
providing homemaker and general housekeeping services to elderly and disabled
persons at home. Since 1997, Mr. Rubin has been Chairman of the Board of IDF
International, Inc., a company that specializes in civil engineering for federal
and state government projects. In October 1996, Mr. Rubin became a director of
Med-Emerg International Inc., an operator of nursing homes and related
healthcare services. Mr. Rubin has served as a Director of Western Power and
Equipment Corporation, a construction equipment distributor, since November 20,
1992. Between November 20, 1992 and March 7 1993, Mr. Rubin served as Chief
Executive Officer of Western Power. Since October 1990, Mr. Rubin has served as
the Chairman of the Board and Chief Executive Officer of American United Global
Inc., a telecommunications and software company. Mr. Rubin was formerly a
Director and Vice Chairman, and is a minority stockholder of American Complex
Care, Incorporated, a public company which provided on-site health care
services, including intradermal infusion therapies. In April 1995, the principal
operating subsidiaries of American Complex petitioned in the Circuit Court of
Broward County, Florida for an assignment for the benefit of creditors. Until
1997, Mr. Rubin was also Chairman, Chief Executive Officer and a principal
stockholder of ERD Waste Corp., a public company specializing in the management
and disposal of municipal solid waste, industrial and commercial nonhazardous
solid waste and hazardous waste. In September 1997, ERD Waste Corp. filed for
protection under Chapter 11 of the Bankruptcy Code.

     Warren H. Golden was appointed our Chief Executive Officer and President in
May 1999 and had been Executive Vice President, Chief Operating Officer and a
Director of Diplomat since February 1998. Mr. Golden had been with Lew Magram
since 1991 as its Executive Vice President. From 1989 to 1991, Mr. Golden was
with S.C. Corporation, most recently as President. From 1983 to 1989, he was
Vice President of Operations, Chief Financial Officer and Treasurer of Honeybee,
Inc. Prior thereto, Mr. Golden was Senior Vice President, Operations and
Control, for Plymouth Shops, a New York apparel retailer. Mr. Golden is a
graduate of Long Island University.

     Stephanie Sobel was appointed as Executive Vice President in May 1999 and
held the position of Senior Vice President of Merchandising for Diplomat since
February 1998. Ms. Sobel was Senior Vice President of

                                       34
<PAGE>

Merchandising at Lew Magram from 1995 to February 1998 and, prior to that, at
Honeybee Inc., a store retailer and cataloger of women's apparel, also in New
York City, where she worked for five years. Prior to that she had two years of
buying experience at Macy's New York and was a graduate of the management
training program at Abraham & Straus Department Stores. Ms. Sobel graduated from
Cornell University in 1982 with a degree in Arts & Sciences.

     Mark J. McSweeney has been Chief Financial Officer since May 1999. From
1998 to 1999, he was Executive Vice President with Atlantic Rancher Co., an
upscale men's apparel cataloger. From 1990 to 1998 he was with New England Serum
Co., a business to business and consumer multi-title cataloger of pet supplies,
as its Vice President of Finance/Administration. From 1986-1990, he was
Controller with Woodcraft Supply Corp., a woodworking tool cataloger. From 1982
to 1986, he was with Markline Co., Inc, a consumer electronics cataloger as its
controller. Mr. McSweeney is a graduate of Suffolk University, Boston, MA.

     Jeffrey Ayes has been Chief Operating Officer since May 1999. Prior to that
he was Vice President of Operations and is responsible for the daily operations
of MIS, Distribution, Human Resources and the Customer Telemarketing Center.
From 1976 to 1985 he occupied various positions at Hoffritz for Cutlery, most
recently as Advertising and Catalog Manager. He joined Lew Magram in 1985.
Mr. Ayes holds a B.A. from the University of Hartford.

     Julia Aryeh has been the Chief Strategic Officer since February 1999 and
was appointed Secretary in May 1999. From 1996 through February 1999, Ms. Aryeh
was a Vice President of Investment Banking at Josephthal and Co. Inc. where she
acted as our financial advisor from April 1998 until joining Diplomat. Prior to
Josephthal, Ms. Aryeh practiced securities and corporate law at the Law Firm of
Shereff Friedman Hoffman & Goodman LLP from January 1995 through January 1996.
Prior to that Ms. Aryeh practiced securities law at the law firm of Kelly Drye &
Warren from July 1992 through December 1994.

     Sherry Dolin-Shikora has been Lew Magram's Vice President of Creative
Services since 1988. Prior to that, she served as Director of Retail and Catalog
Advertising and Marketing for Coward Shoe. She spent a number of years with
consumer advertising agencies specializing in the casino/hotel industry, where
she was Account Supervisor, as well as Radio and TV Copywriter and Producer.
Ms. Dolan has a Master's Degree in Literature from Temple University in
Philadelphia.

     Robert A. Kramer joined Lew Magram in 1991 as Marketing Manager and became
Vice President in 1993. From 1976 to 1986, he held numerous merchandising
positions at Saks Fifth Avenue, including management, buying, and catalog
administration. During his next four years, he was Circulation Manager, then
Marketing Manager for the cataloger Comfortably Yours. He was educated at
Washington University, St. Louis.

     Kenneth Grossman founded the Brownstone Studio catalog in 1972 and served
as its president until October 1997. Mr. Grossman became divisional President of
Diplomat's Brownstone subsidiary when Brownstone acquired the assets of Wilroy
Inc. and Jean Grayson's Brownstone Studio, Inc. in October 1997. Mr. Grossman
holds a bachelors degree from Princeton University and a law degree from New
York University Law School.

     Irving Magram joined Lew Magram, Ltd. in 1971 and became Vice President in
1980. From 1981 to 1984, he directed the metamorphosis of Lew Magram Ltd. from
retailer and catalog marketer of exclusively men's wear to that of exclusively
women's wear. Diplomat acquired Lew Magram Ltd. in July 1997. He received his
bachelors degree from American University in Washington, DC.

     Stuart A. Leiderman was appointed as Divisional President of Ecology Kids,
Inc. in October 1998. Previously to that date he served as Executive Vice
President of Sales and Marketing since July 1989, and has been a Director of
Diplomat since June 1992. From 1985 to 1989, Mr. Leiderman was a Divisional Vice
President for Hasbro, Inc., Playskool Baby Division, a company engaged primarily
in the development, sales and marketing of toys.

     Howard Katz has been a Director since October 1996. Mr. Katz has been
Executive Vice President of American United Global, Inc. since April 15, 1996.
From December 1995 through April 15, 1996 Mr. Katz was a consultant for and from
January, 1994 through December, 1995 held various executive positions,

                                       35
<PAGE>

including Chief Financial Officer with National Fiber Network (a fiber optics
telecommunications company). From January 1991 through December 1993 Mr. Katz
was the President of Katlaw Construction Corporation, a company that provides
general contractor services to foreign embassies and foreign missions located in
the United States.

     David Abel has been a Director since May 1998. Mr. Abel has been president
of United Realty since its inception in 1972, an industrial and commercial real
estate company. Mr. Abel has served as a director of numerous companies, and is
currently a director of M.S. Farrell Holdings, Inc. and Innapharma, Inc.
Mr. Abel is a member of the Society of Industrial Realtors and The Commercial
Industrial Brokers Society. Mr. Abel received his BA from the Bernard Baruch
School of Business in 1962.

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No member of Diplomat's Compensation Committee is a current or former
officer or employee of Diplomat. Robert Rubin, a member of the Compensation
Committee, has made substantial equity and debt investments in Diplomat, has
personally guaranteed a portion of the First Source loan facility, was a
controlling stockholder of Lew Magram, Ltd. immediately prior to the acquisition
by Diplomat, and has a consulting agreement with Diplomat. See "Certain
Transactions."

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     To our knowledge, no officers, directors, beneficial owner of more than ten
percent of any class of our equity securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended, or any other person subject
to Section 16 of the Exchange Act with respect to Diplomat, failed to file on a
timely basis reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year, which ended September 30, 1998.

                                       36
<PAGE>

EXECUTIVE COMPENSATION

     The following table sets forth certain information regarding compensation
paid by Diplomat during each of the last three fiscal years to our Chief
Executive Officer and to each of our four most highly compensated executive
officers who earned in excess of $100,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                      LONG TERM COMPENSATION
                                                           ANNUAL                ---------------------------------
                                                        COMPENSATION                              SECURITIES
                                                    ---------------------        OTHER ANNUAL     UNDERLYING
NAME AND PRINCIPAL POSITION                           YEAR       SALARY          COMPENSATION    OPTIONS/SARS (#)
---------------------------                         -------   -----------        ------------    ----------------
<S>                                                 <C>       <C>                <C>             <C>
Warren H. Golden
  Executive Vice President, COO...................  9/30/98       245,387                  0                0
                                                    9/30/97        50,000(1)               0                0
Stephanie Sobel
  Senior Vice President--Merchandising............  9/30/98       193,025                  0                0
                                                    9/30/97        43,125(1)               0                0
Irving Magram
  Divisional President--Lew Magram................  9/30/98       245,387                  0                0
                                                    9/30/97        50,000(1)               0                0
Kenneth Grossman
  Divisional President--Brownstone................  9/30/98       183,502                  0           70,000
Jonathan Rosenberg(2)
  President, CEO..................................  9/30/98       225,000                  0                0
                                                    9/30/97       190,769                  0                0
                                                    9/30/96       130,804                  0                0
Sheldon R. Rose(3)................................  9/30/96       159,375                  0                0
</TABLE>

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

(1) Salaries for Irving Magram, Warren H. Golden, and Stephanie Sobel for the
    fiscal year ending September 30, 1997 are included only for the period from
    July 1, 1997, the effective date Diplomat acquired Lew Magram, Ltd., through
    September 30, 1997. Prior to the acquisition of Lew Magram Ltd. on July 1,
    1997, their annual salaries were as follows: Irving Magram, $300,000; Warren
    H. Golden, $287,500; Stephanie Sobel, $172,500.

(2) Mr. Rosenberg served as President and Chief Executive Officer from November
    1996 to May 1999. In May 1999, Mr. Rosenberg left Diplomat and is entitled
    to six months salary, payable weekly, as part of his severance arrangement.

(3) Mr. Rose resigned as President and Chief Executive Officer in November 1996.

OPTION GRANTS IN LAST FISCAL YEAR

     The following table sets forth information concerning stock options granted
to each of the executives named in the Summary Compensation Table for the fiscal
year ending September 30, 1998:
<TABLE>
<CAPTION>
                                              PERCENTAGE OF
                                                TOTAL OF                                    POTENTIAL REALIZABLE VALUE
                                NUMBER OF       OPTIONS                                     AT ASSUMED ANNUAL RATES OF
                                 SHARES       GRANTED TO                                     STOCK PRICE APPRECIATION
                               UNDERLYING      EMPLOYEES         EXERCISE                        FOR OPTION TERM(1)
                                OPTIONS       DURING FISCAL     PRICE PER     EXPIRATION    --------------------------
NAME                            GRANTED           YEAR            SHARE          DATE            5%             10%
---------------------------    ----------     -------------     ---------     ----------    --------------------------
<S>                            <C>            <C>               <C>           <C>           <C>              <C>
Kenneth Grossman(2)........      70,000          50%              13.75         3/24/03      $266,000        $588,000
</TABLE>

                                       37

                                                       (Footnotes on next page)
<PAGE>

(Footnotes from previous page)

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

(1) The amounts shown in these columns represent the potential realizable values
    using the options granted and the exercise price. The assumed rates of stock
    price appreciation are set by the Securities and Exchange Commission's
    executive compensation disclosure rules and are not intended to forecast
    appreciation of the common stock.

(2) Of the options granted to Kenneth Grossman, 20,000 are exercisable over a
    four year period subject to Brownstone reaching certain earnings criteria,
    and 50,000 options are exercisable over time, of which 20,000 are currently
    exercisable. Excludes 70,000 options granted to Joan Grossman, Kenneth
    Grossman's wife and an employee of Brownstone, which options are on the same
    terms as the options granted to Kenneth Grossman.

FISCAL YEAR-END OPTION VALUES

     As of September 30, 1998, no options have been exercised by the executives
named in the Summary Compensation Table. The following table sets forth certain
information concerning the number of shares covered by both exercisable and
unexercisable stock options as of September 30, 1998. Also reported are values
of "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and the fair market
value of our common stock as of September 30, 1998.

<TABLE>
<CAPTION>
                                                       NUMBER OF SHARES SUBJECT TO            VALUE OF IN-THE-MONEY
                                                         UNEXERCISED OPTIONS AT              OPTIONS AT FISCAL YEAR
                                                             FISCAL YEAR-END                         END(1)
                                                      -----------------------------       -----------------------------
NAME                                                  EXERCISABLE     UNEXERCISABLE       EXERCISABLE     UNEXERCISABLE
--------------------------------------------------    -----------     -------------       -----------     -------------
<S>                                                   <C>             <C>                 <C>             <C>
Jonathan Rosenberg(2).............................       43,000           26,000            $18,750          $12,500
Kenneth Grossman..................................       20,000           50,000                  0                0
</TABLE>

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

(1) Based on the closing bid price of our common stock of $1.125 per share on
    September 30, 1998 multipled by five to give effect to the 1-for-5 reverse
    stock split.

(2) As part of Mr. Rosenberg's severance agreement (entered into subsequent to
    September 30, 1998), all of his options become immediately exercisable,
    contain a cashless exercise feature and the underlying stock has
    registration rights.

EMPLOYMENT AGREEMENTS

     Warren H. Golden has an employment agreement with us which provides that
Mr. Golden will be employed as Diplomat's Chief Operations Officer and Executive
Vice President and Lew Magram's Executive Vice President, subject to annual
renewals, at an annual salary of $235,000 subject to certain periodic increases
based on performance. The employment agreement, which terminates in February
2001, may only be earlier terminated by us for cause as defined in the
agreement. Mr. Golden was appointed as Diplomat's Chief Executive Officer and
President on May 21, 1999.

     Irving Magram has an employment agreement with us which provides that
Mr. Magram will be employed as Divisional President of Lew Magram, subject to
annual renewals, at an annual salary of $235,000 subject to certain periodic
increases based on performance. The employment agreement, which terminates in
February, 2001, may only be earlier terminated by us for cause as defined in the
agreement.

     Stephanie Sobel has an employment agreement with us which provides that
Ms. Sobel will be employed as our Senior Vice President of Merchandising,
subject to annual renewals, at an annual salary of $187,500 subject to certain
periodic increases based on performance. The employment agreement, which
terminates in February, 2001, may only be earlier terminated by us for cause as
defined in the agreement. Ms. Sobel was appointed as Diplomat's Executive Vice
President on May 21, 1999.

     In accordance with their respective employment agreements, Messrs. Golden
and Magram and Ms. Sobel will also receive cash bonuses based on Lew Magram
meeting certain profitability criteria. The maximum

                                       38
<PAGE>

aggregate cash payment to Messrs. Golden and Magram and Ms. Sobel under this
bonus arrangement is $185,000 per year.

     Julia Aryeh has an employment agreement with us which provides that
Ms. Aryeh will be employed as our Chief Strategic Officer and Secretary, subject
to annual renewals, at an annual salary of $200,000 subject to certain periodic
increases based on performance. The employment agreement, which terminates in
February, 2002, may only be earlier terminated by us for cause as defined in the
agreement.

     Kenneth S. Grossman has an employment agreement with us which provides that
Mr. Grossman is employed as Brownstone's Divisional President at an annual
salary of $200,000, plus certain other benefits, including an annual bonus of up
to $250,000 based on Brownstone meeting certain income criteria. Mr. Grossman's
agreement also provides for Mr. Grossman to receive $10,000 per year for
merchandise consulting. The employment agreement, which terminates in October
2002, may only be earlier terminated by us for cause as defined in the
agreement.

     Each of the foregoing employment agreements contain a provision prohibiting
such employee from competing with us for one year after the employee terminates
his or her position with us or our subsidiaries other than for cause, as defined
in the respective employment agreement.

     Robert M. Rubin, Chairman of the Board, has a financial consulting
agreement with us pursuant to which Mr. Rubin is paid $200,000 per annum. The
agreement terminates in December, 2002.

     On May 21, 1999, Diplomat entered into a severance agreement with Jonathan
Rosenberg. The agreement provides that Mr. Rosenberg will be paid six months
severance equal to $112,500 plus twelve months of health and other benefits. The
agreement terminated Mr. Rosenberg's employment agreement which would have
expired on February 15, 2002. Mr. Rosenberg resigned as Chief Executive Officer,
President and Director on May 21, 1999.

STOCK OPTION PLANS

  1998 Stock Option Plan

     Our 1998 stock option plan was adopted by the Board of Directors in
February 1998 and approved by the stockholders in May 1998. Under the 1998 plan,
we are authorized to issue options to purchase up to 240,000 shares of common
stock. All officers and other employees and as well as other persons who perform
significant services for or on behalf of us are eligible to participate in the
1998 plan.

     We may grant under the 1998 plan both incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
stock options that do not qualify for incentive treatment under the Code.

     The exercise price of each incentive stock option under the plan will be
determined by the committee, but will be not less than 100% of the fair market
value of common stock on the date of grant (or 110% in the case of an employee
who at the time owns more than 10% of the total combined voting power of all
classes of capital stock). The nonstatutory option exercise price will be
determined by the Committee, but will not be less than 85% of the common stock
on the date of grant.

     In the discretion of the committee and upon receipt of all regulatory
approvals, an optionee may be permitted to utilize a cashless exercise deliver
as payment in whole or in part of the exercise price certificates for shares of
common stock (valued for this purpose at its fair market value on the day of
exercise) or other property.

     An incentive stock option granted under the plan may not be exercisable
after the expiration of ten years from the date it is granted. Without limiting
the generality of the foregoing, the committee may provide in the stock option
agreement that the option subject thereto expires 30 days following the
termination of employment for any reason other than death or disability or
twelve months following a termination of employment for disability or death;
provided, however, that in no event shall any option granted under the plan be
exercised after the expiration date of such option set forth in the applicable
stock option agreement.

                                       39
<PAGE>

     If the outstanding shares of common stock are changed into, or under the
plan, exchanged for cash or different number of kind of shares or securities of
the company or another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse-stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment will be made by the committee in
the number and kind of shares as to which options may be granted. In the event
of such change or exchange, other than for shares or securities or of another
corporation or by reason of reorganization, the committee will also make a
corresponding adjustment in the number or kind of shares, and the exercise price
per share allocated to unexercised options or portions thereof, of options which
have been granted prior to such change. Any such adjustment, however, will be
made without change in the total price applicable to the unexercised portion of
the option but with a corresponding adjustment in the price for each share
(except for any change in the aggregate price resulting from rounding-off of
share quantities or prices).

     Under the plan, we have outstanding options to purchase an aggregate of
240,000 shares of common stock, 140,000 of which are exercisable at $13.75 per
share and 100,000 of which are exercisable at $5.00, all of which are held by
our employees. Options to purchase 40,000 shares of common stock become
exercisable upon Brownstone meeting certain minimum net income. The remaining
outstanding options become exercisable over four years.

  1992 Stock Option Plan

     Our 1992 stock option plan provides for the issuance of up to 40,000 shares
of common stock. The terms of the plan are substantially similar to the 1998
Plan. We have outstanding options to purchase an aggregate of 26,000 shares,
exercisable at $7.50 per share, all of which are held by affiliates or employees
of Diplomat at the time of grant.

  August 1996 Stock Option Plan

     We also established a stock option plan providing for the issuance of
options to purchase up to 300,000 shares of common stock to our directors,
officers, key employees and consultants. To date, we have granted directors,
officers and key employees an aggregate of 30,000 nonstatutory options at an
exercise price of $12.50 per share. Excluding the fact that options granted
under the plan cannot qualify as incentive stock options, the terms of the
August 1996 Plan are substantially similar to the 1998 Plan.

  November 1996 Stock Option Plan

     Under our November 1996 stock option plan, options to purchase up to
300,000 shares of common stock may be granted to employees, officers, directors
and other persons who provide services to us. As of March 31, 1999, 294,000 of
such options have been granted and are exercisable at an exercise price of
$5.00, of which options to purchase 124,000 shares of common stock expired on
June 17, 1998, 130,000 are exercisable at $11.88 and 10,000 are exercisable at
$5.00. The options to be granted under the plan may be designated as incentive
stock options or nonstatutory options. Other than the fact that officers and
directors who currently own more than 5% of the issued and outstanding stock are
not eligible to participate in the plan, the terms of the November 1996 plan are
substantially similar to the 1998 plan.

EMPLOYEE BENEFIT PLANS

  Employee Pension Plan

     In 1985, we instituted a pension plan, which is a defined benefit pension
plan maintained for all employees. Benefits are payable based on 60% of average
compensation for the three highest paid consecutive years of service, reduced
for less than 29 years of service retirement. The pension plan is funded as
required by the Employee Retirement Income Security Act of 1974 and does not
require employee contributions. Full vesting occurs immediately upon joining the
plan. As of February 1993, the pension plan was curtailed and no additional
pension benefits will accrue.

                                       40
<PAGE>

  Profit Sharing and 401(k) Plans

     Lew Magram has a profit sharing program established on April 1, 1981. On
July 1, 1993, Lew Magram amended the Plan to include 401(k) provisions. All
employees servicing either the Lew Magram or Brownstone subsidiaries are invited
to participate in the plan after the required waiting period and while they work
the minimum hours required. Lew Magram and Brownstone match employee 401(k)
contribution on the basis of 25% of the employee's first 5% of 401(k)
withholdings. As of December 31, 1998, the entire plan had assets of
approximately $2.3 million. Benefits vest on a 5-year schedule. Vesting and
eligibility for matching requires the employee to be employed as of the last day
of each plan year.

     We also have a 401(k) plan in effect for employees of the Ecology Kids
subsidiary, which was established on January 1, 1997. As of December 31, 1998,
the plan had assets of approximately $175,000.

DIRECTORS' COMPENSATION AND COMMITTEES

     In May 1997, we issued to Howard Katz options to purchase up to 10,000
shares of common stock. The options are exercisable at $11.90 per share and
terminate in 2001. In June 1998, we issued David Abel options to purchase 10,000
shares of Common Stock at $15.63 per share which options terminate in May 2003.
The options were granted in connection with each of Messrs. Katz, Fredericks and
Abel agreeing to serve on the Board of Directors. Mr. Fredericks resigned as a
director effective December 31, 1998. We have not paid and do not presently
propose to pay compensation to any director for acting in such capacity, except
for the grant of options described above and nominal sums for attending meetings
and reimbursement for reasonable out-of-pocket expenses in attending those
meetings.

     We have three formal committees; the Audit Committee, which consists of
Mark J. McSweeney, David Abel and Howard B. Katz; the Compensation Committee,
which consists of Robert M. Rubin, Howard Katz and David Abel; and the Corporate
Governance Compliance Committee, which consists of Warren H. Golden and Robert
M. Rubin. We do not currently have a stock option committee or a nominating
committee.

     The functions of the Audit Committee include: (i) recommending for approval
by the Board of Directors a firm of certified public accountants whose duty it
will be to audit our financial statements for the fiscal year in which they are
appointed, and (ii) to monitor the effectiveness of the audit effort, our
internal financial and accounting organization and controls and financial
reporting. The Audit Committee will also consider various capital and investment
matters.

     The Compensation Committee is responsible for establishing compensation
arrangements for officers and directors, reviewing benefit plans and
administering each of our stock option plans.

     The Corporate Governance Compliance Committee is responsible for reviewing
us on an ongoing basis regarding compliance with the corporate governance
standards, including Nasdaq rules and standards.

     The Board of Directors does not have a standing nominating committee.
Nominations for election to the Board of Directors may be made by the Board of
Directors, or by any shareholder entitled to vote for the election of directors.

     Special meetings may be held from time to time to consider matters for
which approval of the Board of Directors is desirable or is required by law. The
Board of Directors met once during fiscal 1998 and acted on numerous matters by
written consent. The Audit, Compensation and Corporate Governance Compliance
Committees did not meet during fiscal 1998.

EXECUTIVES' COMPENSATION POLICIES

     Compensation of our executives is intended to attract, retain and award
persons who are essential to the corporate enterprise. The fundamental policy of
our executive compensation program is to offer competitive compensation to
executives that appropriately rewards the individual executive's contribution to
corporate performance. The Board of Directors utilizes subjective criteria for
evaluation of individual performance and relies substantially on the executives
in doing so. The Board focuses on two primary components of our executives
compensation program, each of which is intended to reflect individual and
corporate performance: base salary compensation and long-term incentive
compensation.

                                       41
<PAGE>

     Executives' base salaries are determined primarily by reference to
compensation packages for similarly situated executives of companies of similar
size or in comparable lines of business with whom we expect to compete for
executive talent and with reference to revenues, gross profits and other
financial criteria. The Board also assesses subjective qualitative factors to
discern a particular executive's relative value to the corporate enterprise in
establishing base salaries.

     It is the Board's philosophy that significant stock ownership by management
creates a powerful incentive for executives to build long-term shareholder
value. Accordingly, the Board believes that an integral component of executive
compensation is the award of equity-based compensation, which is intended to
align executives' long-term interests with those of our shareholders. Awards of
stock options to executives have historically been at then-current market
prices. The Board believes that option grants should be considered on an annual
basis.

PERFORMANCE GRAPH

     Below is the line graph comparing the yearly percentage change in our
common stockholders' return with the Nasdaq Stock Market (U.S.) Index and the
Nasdaq Non-Financial Index from our initial public offering in November 1993
through September 1998.


                                 [LINE GRAPH]


<TABLE>
<CAPTION>
                                                                                 CUMULATIVE TOTAL RETURN
                                                                   ----------------------------------------------------
                                                                   11/4/93     9/94     9/95     9/96     9/97     9/98
                                                                   -------     ----     ----     ----     ----     ----
<S>                                                                <C>         <C>      <C>      <C>      <C>      <C>
Diplomat Direct Marketing Corporation..........................      100        162       64       27       62       23
NASDAQ Stock Market (U.S.).....................................      100         99      136      162      222      227
NASDAQ Non-Financial...........................................      100         96      134      157      211      213
</TABLE>

                                       42

<PAGE>

                             PRINCIPAL STOCKHOLDERS

     The following table sets forth, as of May 21, 1999, except as otherwise
provided, information with respect to beneficial ownership of the common stock
by (i) each director, (ii) each current executive officer named in the Summary
Compensation Table under "Management", (iii) the executive officers and
directors as a group and (iv) each person known to us who beneficially owns 5%
or more of the outstanding shares of our common stock. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities and includes shares of common stock issuable upon conversion or
exchange of outstanding preferred stock, or subject to options, or warrants
exercisable or convertible within 60 days and after giving effect to the 1-for-5
reverse stock split. The percentage of stock outstanding for each stockholder is
calculated by dividing (i) the number of shares of common stock deemed to be
beneficially held by such stockholder as of May 21, 1999 by (ii) the sum of (A)
the number of shares of common stock outstanding as of May 21, 1999 plus (B) the
number of shares issuable upon exercise of options or warrants held by such
stockholder which were exercisable as of May 21, 1999 or which will become
exercisable within 60 days after May 21, 1999. Unless otherwise indicated, each
of the stockholders has sole voting and investment power with respect to the
shares beneficially owned. Unless otherwise indicated, the address of each
person listed below is c/o Diplomat Direct Marketing Corporation, 414 Alfred
Avenue, Teaneck, New Jersey 07666.

<TABLE>
<CAPTION>
                                                                                               PERCENTAGE    PERCENTAGE
                                                                         NUMBER OF SHARES      BEFORE         AFTER
NAME AND ADDRESS                                                         BENEFICIALLY OWNED    OFFERING      OFFERING
----------------                                                         ------------------    ----------    ----------
<S>                                                                      <C>                   <C>           <C>
The Rubin Family Irrevocable
  Stock Trust U/A dated April 30, 1997(1) ............................        3,846,161             62%           47%
  18 Pinetree Drive
  Great Neck, New York 11024
Irving Magram.........................................................          186,660              3%            2%
Warren H. Golden(2)...................................................           93,707              2%            1%
Stuart Leiderman(3)...................................................           65,600              *             *
Stephanie Sobel(4)....................................................           51,854              *             *
Kenneth Grossman(5)...................................................           40,000              *             *
Julia Aryeh(6)........................................................           25,000              *             *
Howard Katz(7)........................................................           21,667              *             *
David Abel(8).........................................................            4,000              *             *
Robert M. Rubin(1)....................................................                0              0             0
All officers and directors as a group (9 persons).....................          468,488              7%            6%
</TABLE>

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

*     less than one percent

(1)   Robert M. Rubin, the Chairman of the Board, is the spouse of the Trust's
      co-trustee and parent of the Trust's beneficiaries and may be deemed to be
      a beneficial owner of these shares. Mr. Rubin disclaims beneficial
      ownership of these shares.

(2)   Represents (i) 83,707 shares of common stock currently owned and 10,000
      shares of common stock issuable upon exercise of currently exercisable
      options granted under the November 1996 stock option plan. Mr. Golden also
      has additional options to purchase 30,000 shares of common stock which are
      not currently exercisable and not exercisable in the next 60 days.

(3)   Represents 53,600 shares of common stock currently owned, and 12,000
      shares of common stock issuable upon exercise of currently exercisable
      options granted under the November 1996 stock option plan. Mr. Leiderman
      also has additional options to purchase 8,000 shares of common stock which
      are not currently exercisable and will not become exercisable in the next
      60 days.

                                              (Footnotes continued on next page)

                                       43
<PAGE>

(Footnotes continued from previous page)

(4)   Represents 41,854 shares of common stock currently owned and 10,000
      shares of common stock issuable upon exercise of currently exercisable
      options granted under the November 1996 stock option plan. Ms. Sobel also
      has additional options to purchase 30,000 shares of common stock which are
      not currently exercisable and will not become exercisable in the next 60
      days.

(5)   Represents 20,000 shares of common stock issuable upon exercise of
      currently exercisable options granted under the 1998 stock option plan,
      and 20,000 shares of common stock issuable upon exercise of currently
      exercisable options granted under the 1998 stock option plan to Joan
      Grossman, Kenneth Grossman's wife and an employee of Brownstone. Each of
      Kenneth Grossman and Joan Grossman has an additional 30,000 options under
      the 1998 stock option plan which are not currently exercisable and will
      not become exercisable in the next 60 days, and an additional 20,000
      options under the 1998 stock option plan which are not currently
      exercisable and will become exercisable only upon Brownstone meeting
      certain minimum earnings criteria which, at the present, have not been
      achieved.

(6)   Represents 25,000 shares of common stock issuable upon exercise of
      currently exercisable options granted pursuant to the 1998 stock option
      plan. Ms. Aryeh also has an additional 75,000 options which are not
      currently exercisable and will not become exercisable within the next 60
      days.

(7)   Represents 21,667 shares of common stock issuable upon exercise of
      currently exercisable options granted pursuant to the November 1996 stock
      option plan. Mr. Katz also has an additional 3,333 options which are not
      currently exercisable and will not become exercisable within the next 60
      days.

(8)   Represents 4,000 of 10,000 shares of common stock issuable upon exercise
      of currently exercisable options, which have vested to date, granted
      pursuant to the November 1996 stock option plan.

                                       44

<PAGE>

                              CERTAIN TRANSACTIONS

     Unless otherwise stated, the following information does not give effect to
the conversion or exchange of preferred stock or the 1-for-5 reverse split of
our common stock.

     We have a financial consulting agreement with Robert M. Rubin, Chairman of
the Board, providing for the payment to him of $200,000 per annum. Mr. Rubin
consults with us on financial management and long term planning matters,
including consideration of acquisitions. The agreement terminates in December
2000.

     In February 1996, Mr. Rubin loaned us $2,353,500 to be used as part of the
acquisition price of Biobottoms, Inc. which we sold in April 1998. In connection
with such loan, we issued Mr. Rubin 100,000 shares of our Series A Preferred
Stock, convertible into 1,000,000 shares of common stock at the option of
Mr. Rubin. Mr. Rubin transferred the shares to the Rubin Family Irrevocable
Stock Trust which converted the Series A Preferred Stock in November 1998.

     On September 9, 1996, we entered into an arrangement with Gersten, Savage,
Kaplowitz & Fredericks, LLP which provided that Gersten Savage will provide
certain legal and consulting services to us over an extended period of time. As
compensation for its services, certain individual members of Gersten Savage
received an aggregate of 350,000 shares of common stock and options to purchase
an aggregate of 150,000 shares of common stock at $2.50 per share. Of such
securities, 157,500 shares of common stock and 67,500 options were issued to
Wesley C. Fredericks, who was a Director and resigned on December 31, 1998.

     We issued to Mr. Rubin an aggregate of 550,000 shares of common stock in
consideration of Mr. Rubin's waiver of certain compensation owed to him and for
restructuring certain debt owed to him, waiving certain defaults and providing
an additional loan to us in the aggregate amount of $600,000.

     As of September 30, 1996, the $600,000 loan was converted into 60,000
shares of Series C Preferred Stock. The Series C Preferred Stock, which has a
liquidation value of $10.00 per share, is convertible into common stock at 75%
of the current market price based on the average closing price for the common
stock for the 10 days preceding the conversion. Each share of Series C Preferred
Stock entitles the holder to 10 votes per share. The Series C Preferred Stock
pays an annual dividend of 9%, based on the per share liquidation value. In the
event that the dividend, which is payable monthly, is not paid for three
consecutive months, the holder is entitled to an additional 100,000 shares of
common stock for each month that the dividend is not paid. Mr. Rubin transferred
the shares to the Trust.

     As of September 30, 1996, Mr. Rubin converted an aggregate of approximately
$2,900,000 in outstanding debt into an aggregate of 290,000 shares of Series B
Preferred Stock. The Series B Preferred Stock, which has a liquidation value of
$10 per share, is convertible into common stock at 75% of the current market
price based on the average closing price for the common stock for the 10 days
preceding the conversion. In addition, each share of Series B Preferred Stock
entitles the holder thereof to 10 votes per share. The Series B Preferred Stock
pays an annual dividend of 9%, based on the per share liquidation value. In the
event that the dividend, which is payable monthly, is not paid for three
consecutive months, the holder is entitled to an additional 100,000 shares of
common stock for each month that the dividend is not paid. Mr. Rubin transferred
the shares to the Trust.

     In November 1996, we issued an aggregate of 1,060,000 options to 35
employees, including two executive officers and one outside director, pursuant
to the November 1996 stock option plan. The options are exercisable at $1.00 per
share, vest over a period of five years, and expire ten years from the date of
grant, if not sooner due to termination or death of the employee. Options to
acquire 620,000 shares were granted to certain employees of Biobottoms Inc.,
which we subsequently sold, and expired in July, 1998.

     In March 1997, we issued 52,217 shares of common stock to Mr. Rubin in lieu
of the dividend payments due under the Series B and Series C Preferred Stock, as
well as for an adjustment in consulting fees, for the period from January 1,
1997 through March 31, 1997. In May 1999, we issued 150,000 shares of common
stock in lieu of the dividend payments due under the Series B and Series C
Preferred Stock.

                                       45
<PAGE>

     In May 1997, we issued 200,000 shares of common stock to Mr. Rubin in
consideration of Mr. Rubin extending loans to us as well as extending a personal
guarantee to Congress in connection with our loan facilities.

     In May 1997, Robert Rubin and Jay Kaplowitz acquired for $2 million all of
the outstanding senior convertible preferred stock of Lew Magram Ltd., which was
convertible into one-half of the outstanding common stock of Lew Magram Ltd.
after giving effect to the conversion. The purpose for the investment was to
provide Lew Magram Ltd. with sufficient working capital to maintain operations
until Diplomat and Lew Magram Ltd. could reach an agreement for the acquisition
by Diplomat of Lew Magram. In December 1997, Diplomat entered into an Agreement
and Plan of Merger with Lew Magram Ltd., Robert Rubin, Jay Kaplowitz, Irving
Magram, Warren Golden and Stephanie Sobel, all of the shareholders of Lew Magram
Ltd. Simultaneous with the closing of the merger on February 19, 1998, Lew
Magram Ltd. merged with Magram Acquisition Corp. resulting in Lew Magram
becoming a wholly owned subsidiary of Diplomat. Prior to the closing Messrs.
Magram and Golden and Ms. Sobel owned all of the outstanding common stock of Lew
Magram Ltd. and Messrs. Rubin and Kaplowitz owned all of the outstanding senior
convertible preferred stock of Lew Magram Ltd. At the closing of the Merger,
Diplomat issued 95,000 shares of the Series D Preferred Stock to each of the Lew
Magram Ltd. shareholders of which Mr. Rubin received 46,253 shares, Mr. Magram
received 24,999 shares (excluding 2,497 shares sold to third parties who
converted the shares to common stock), Mr. Kaplowitz received 5,417 shares,
Mr. Golden received 10,556 shares, and Ms. Sobel received 5,278 shares. In
addition, Mr. Magram, Mr. Golden and Ms. Sobel received 100,000, 66,667 and
33,333 shares of Diplomat's common stock, respectively, excluding 50,000 shares
of Diplomat's common stock issued to their counsel at the closing. Each share of
Diplomat's Series D Preferred Stock is convertible into 33 1/3 shares of
Diplomat's common stock. Each of the Lew Magram Ltd. shareholders have agreed to
indemnify Diplomat for any material breach of the representations made by Lew
Magram Ltd. in the Merger Agreement limited to $9,500,000 and which claims for
indemnification must be brought within one year of the closing date of the
Merger. Messrs. Rubin and Kaplowitz assigned to Diplomat their rights to any
claim either of them may have for breach of any warranty made by Lew Magram Ltd.
in the May 1997 Senior Convertible Preferred Stock Purchase Agreement in return
for a release of their indemnification obligations under the Merger Agreement.
Mr. Rubin transferred his shares to the Trust. All of the Series D Preferred
Stock was converted in May 1999.

     In September 1997, Robert Rubin and Jay Kaplowitz advanced an aggregate of
$2,205,000 for the financing of Jean Grayson's Brownstone Studio, Inc. prior to
the purchase by Diplomat, as well as for working capital.

     In October 1997, in part to raise capital for our acquisition of
substantially all of the assets of Brownstone out of bankruptcy, we completed a
private offering of our securities which raised $3,630,000 from accredited
investors. The private placement consisted of units, each unit consisting of ten
shares of Series E Preferred Stock and 7,500 shares of common stock at a
purchase price of $10,000 per unit. As a result, we issued an aggregate of 3,630
shares of Series E Preferred Stock and 2,608,750 shares of common stock. Robert
Rubin and Jay Kaplowitz purchased an aggregate of 220.5 of the units for
$2,205,000, the proceeds of which repaid the $2,205,000 advance by Messrs. Rubin
and Kaplowitz made in September 1997. Mr. Rubin transferred his shares to the
Trust. In April 1999, an additional 75 shares of Series E Preferred Stock and
38,470 shares of common stock were issued to a shareholder.

     In March, 1999, Diplomat issued 32,440 Series F Preferred Stock plus
346,027 shares of common stock for an aggregate amount of $3,244,000. Of this
amount, 5,000 shares of Series F Preferred Stock and 53,333 shares of common
stock were issued to an investor for a cash contribution of $500,000, which the
Series F Preferred Stock shall be redeemed out of the proceeds of this offering.
17,200 shares of Series F Preferred Stock and 183,467 shares of common stock
were issued to the Trust for a cash contribution of $1.72 million. Mr. Rubin
received 10,240 shares of Series F Preferred Stock and 109,227 shares of common
stock for (i) converting his $200,000 principle amount loan, (ii) converting his
$500,000 loan in connection with the Fashionmall.com advance, and (iii)
advancing $324,000 directly to Diplomat's catalog printer. Mr. Rubin transferred
his shares to the Trust.

                                       46
<PAGE>

     Our principal working capital credit facility was provided by Congress
Financial Corporation. The lines of credit between Congress and us were
personally guaranteed by Mr. Rubin up to an aggregate amount of approximately
$1,000,000. In addition, Mr. Rubin provided cash collateral in the amount of $1
million and Jay Kaplowitz provided cash collateral in the amount of $100,000 to
increase availability under the Congress credit facility. Mr. Kaplowitz received
an option to purchase 100,000 shares of common stock with an exercise price of
$1.00 per share.

     We refinanced our asset based loan facility in May, 1999. We obtained a
$17 million loan facility from First Source Financial LLP and terminated the
Congress credit facilities. Mr. Rubin provided a guaranty to First Source of
$2 million which includes a $1 million cash collateral. Mr. Rubin received
50,000 shares of common stock for the First Source guaranty. Mr. Rubin
transferred these shares to the Trust.

     In June 1999, we entered into an agreement with our principal stockholder,
The Rubin Family Irrevocable Stock Trust, to convert or exchange all of the
preferred shares owned by the Trust into our common stock other than the
Series D Preferred Stock which was already converted as described above. The
conversion becomes effective immediately prior to the date of this prospectus.
The Trust has agreed to convert all of the Series B Preferred Stock and Series C
Preferred Stock at a formula derived by dividing the total liquidation value of
such preferred shares ($3,500,000) by $.65 per share for a total of 5,384,615
shares of common stock. The terms of the Series B Preferred Stock and Series C
Preferred Stock provided that such preferred shares were to convert at 75% of
the current market price based on the average closing price of the common stock
for the 10 days preceding the conversion (which would have been $0.6525 on that
date, resulting in an issuance of 5,363,985 shares of common stock, a difference
of 20,630 shares of common stock). The additional shares of common stock issued
upon conversion of such preferred shares was consideration for the early
conversion of such preferred shares by the Trust and for surrendering certain
rights and privileges of owning the preferred shares. The holders of the Series
E Preferred Stock have been granted a limited opportunity to convert their
shares into common stock at a formula derived by dividing the total liquidation
value of such preferred shares ($3,705,000) by $.90 per share. The terms of the
Series E Preferred Stock provided that such preferred shares were not
convertible. The exchange offer of shares of common stock for the Series E
Preferred Stock was consideration for the holders to surrender certain rights
and privileges of owning the preferred shares. Of the total shares to be issued
upon conversion of all of the Series E Preferred Stock, which is 4,116,667, the
Trust will receive 2,005,556 shares. The Trust has agreed to exchange for common
stock all of the shares of the Series F Preferred Stock at a formula derived by
dividing the total liquidation value of such preferred shares ($2,744,000) by
$.50 per share. The terms of the Series F Preferred Stock provided that such
preferred shares were not convertible. The agreement to the exchange of common
stock for the Series F Preferred Stock was consideration for the Trust giving up
certain rights and privileges of owning the preferred shares. We intend to
redeem for cash the remaining $500,000 of Series F Preferred Stock. We are
paying in common stock accrued and unpaid dividends on the Series E Preferred
Stock and Series F Preferred Stock. Of the total 399,690 shares of common stock
being issued in lieu of cash dividends, the Trust will receive 224,192 shares.
The conversion of the preferred shares of the Trust where the conversion price
is less than that of the original terms, or in the case of preferred shares
which were not convertible when issued where the conversion price is less than
the offering price, will result in an imputed dividend to the Trust of
approximately $2,000,000 based upon an offering price of $4.375 per common
share.

                                       47

<PAGE>

                           DESCRIPTION OF SECURITIES

     The following description of certain matters relating to our securities
does not purport to be complete and is subject in all respects to applicable
Delaware law and to the provisions of our certificate of incorporation, as
amended, and bylaws, and the underwriting agreement between us and Donald,
copies of all which have been filed with the SEC as exhibits to the registration
statement of with this prospectus is a part.

GENERAL

     We are authorized by the certificate of incorporation to issue an aggregate
of 50,000,000 shares of common stock, $.0001 par value per share, and up to
1,000,000 shares of preferred stock, $.01 par value per share. Immediately prior
to this offering, an aggregate of 6,233,855 shares of common stock and 5,000
shares of Series F Preferred Stock were issued and outstanding. All outstanding
shares of common stock are of the same class and have equal rights and
attributes.

COMMON STOCK

     We are authorized to issue 50,000,000 shares of, common stock, $.0001 par
value per share. As of the date of this prospectus, there are 6,233,855 shares
of common stock outstanding. Each share of common stock entitles the holder
thereof to one vote on all matters submitted to a vote of the shareholders.
Since the holders of common stock do not have cumulative voting rights, holders
of more than 50% of the outstanding shares can elect all of the directors and
holders of the remaining shares by themselves cannot elect any directors. The
holders of common stock do not have preemptive rights or rights to convert their
common stock into other securities. Holders of common stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. In the event of our liquidation,
dissolution or winding up, holders of the common stock outstanding and to be
outstanding upon completion of this offering are and will be fully paid and
nonassessable.

PREFERRED STOCK

     Our certificate of incorporation authorizes the issuance of up to 1,000,000
shares of preferred stock the rights, privileges and preferences of which may be
designated by the Board of Directors from time to time. We currently have
outstanding 5,000 shares of Series F Preferred Stock, which we intend to redeem
for $500,000 from the proceeds of this offering. Preferred stock may be issued
in the future in connection with acquisitions, financings or such other matters
as the Board of Directors deems to be appropriate. In the event that any such
shares of preferred stock shall be issued, a certificate of designation, setting
forth the series of such preferred stock and the relative rights, privileges and
designations with respect thereto, shall be filed with the Secretary of State of
the State of Delaware. The effect of such preferred stock is that our Board of
Directors alone may authorize the issuance of preferred stock which could have
the effect of making more difficult or discouraging an attempt to obtain control
of us by means of a merger, tender offer, proxy contest or other means.

WARRANTS

     We have outstanding warrants and other non-plan options to purchase up to
330,980 shares of our common stock. The exercise prices of these warrants are
$5.00 to $6.99 to purchase 45,000 shares of common stock, $7.00 to $8.99 to
purchase 109,320 shares of common stock, $9.00 to $11.99 to purchase 45,000
shares of common stock, $12.00 to $14.99 to purchase 51,660 shares of common
stock, and $15.00 or more to purchase 80,000 shares of common stock.

DELAWARE ANTI-TAKEOVER LAW

     Section 203 of the Delaware General Corporation Law generally prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless
(i) the corporation has elected in its original certificate of incorporation not
to be governed by the Delaware anti-takeover law (we have not made such an
election), (ii) prior to such date the Board of Directors of the

                                       48
<PAGE>

corporation approved either the business combination or the transaction in which
the person became an interested stockholder, (iii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the outstanding voting stock of
the corporation excluding shares owned by directors who are also officers of the
corporation and by certain employee stock plans, (iv) on or after such date the
business combination is approved by the Board of Directors of the corporation
and by the affirmative vote of at least 66 3/4% of the outstanding voting stock
of the corporation that is not owned by the interested stockholder, or (v) the
majority of the corporation's stockholders adopt an amendment to the
corporation's certificate of incorporation electing not to be governed by the
Delaware anti-takeover law, such amendment not being effective for 12 months
following its adoption and not applicable to any business combination between
the corporation and a stockholder who became an interested stockholder after its
adoption. A "business combination" generally includes mergers, asset sales and
similar transactions between the corporation and the interested stockholder, and
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of the corporation's voting stock or who is an
affiliate or associate of the corporation and, together with his affiliates and
associates, has owned 15% or more of the corporation's voting stock within three
years.

PERSONAL LIABILITY OF DIRECTORS

     The Delaware General Corporation Law permits Delaware corporations to
eliminate or limit the personal liability of a director to the corporation for
monetary damages arising from certain breaches of fiduciary duties as a
director. Our certificate of incorporation includes such a provision eliminating
the personal liability of directors to us and our shareholders for monetary
damages for any breach of fiduciary duty as a director, except (i) any breach of
a director's duty of loyalty to us or our stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for any transaction from which the director derived an
improper personal benefit; or (iv) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law. Directors are also not insulated from
liability for claims arising under the federal securities laws. The foregoing
provisions of our certificate of incorporation may reduce the likelihood of
derivative litigation against directors for breaches of their fiduciary duties,
even though such an action, if successful, might otherwise have benefitted us
and our shareholders.

     Our certificate of incorporation also provides that we shall indemnify its
directors, officers and agents to the fullest extent permitted by the Delaware
General Corporation Law. We have directors' and officers' liability insurance in
the aggregate amount of $5 million. Furthermore, we may enter into indemnity
agreements with its directors and officers for the indemnification of and
advancing of expenses to such persons to the fullest extent permitted by law.

TRANSFER AGENT

     The transfer agent for our common stock is North American Transfer & Trust
Company.

                                       49
<PAGE>

                           SHARES ELIGIBLE FOR FUTURE SALE

     Upon the consummation of this offering, we will have 8,133,855 shares of
common stock outstanding. In addition, we have reserved for issuance 880,000
shares upon the exercise of options eligible for grant under the our stock
option plans, 592,000 of which have been granted and are currently outstanding.
The 1,900,000 shares of common stock registered hereby will be freely tradeable
without restriction or further registration under the Act, except for any shares
purchased or held by our affiliates (in general, a person who has a control
relationship with us), which will be subject to the limitations of Rule 144
adopted under the Act. Of the shares of common stock to be issued and
outstanding after this offering, approximately 4.9 million shares of common
stock are "restricted securities" as that term is defined under Rule 144, and
may not be sold unless registered under the Act or exempted therefrom. Of these
4.9 million shares, 970,939 are being registered along with the shares in this
offering. These 970,939 shares are subject to a one year lock up as described
below. Certain of the foregoing "restricted securities" are now eligible to be
sold in accordance with the exemptive provisions and the volume limitations of
Rule 144.

     In general, under Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
us, who for at least one year has beneficially owned restricted securities
acquired directly or indirectly from us or an affiliate of us in a private
transaction is entitled to sell in brokerage transactions within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
total number of outstanding shares of the same class, or (ii) if the stock is
quoted on a national securities exchange, the average weekly trading volume in
the stock during the four calendar weeks preceding the day notice is given to
the SEC with respect to such sale. A person who is not an affiliate and has not
been an affiliate of us for at least three months immediately preceding the sale
and who has beneficially owned restricted securities for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to any of
the limitations described above.

     Our officers, directors and controlling stockholder have agreed that,
subject to certain exceptions, that they will not, without the prior written
consent of Donald, directly or indirectly, sell or otherwise dispose of any
shares of common stock or securities convertible into or exercisable for common
stock for one year from the date of this prospectus. Upon expiration of the
lock-up period all of the shares of common stock subject to such lock-up
agreements will be eligible for sale under Rule 144 subject to volume and other
restrictions of Rule 144. These persons, however, have agreed not to sell more
than 25% of their Diplomat shares in any three month period without Donald's
consent after the one year lock-up period.

     Future sales of common stock by certain of the present stockholders, under
Rule 144, may have a depressive effect on the price of our common stock.

                                       50

<PAGE>

                                  UNDERWRITING

     We have entered into an underwriting agreement with the underwriters named
below. Donald & Co. Securities Inc. is acting as representative of the
underwriters.

     The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:

UNDERWRITER                                             NUMBER OF SHARES
-----------                                             ----------------
Donald & Co. Securities Inc.........................
                                                            ---------
          Total.....................................        1,900,000
                                                            ---------
                                                            ---------

     This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.

     The representative has advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $       per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $       per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.

     We have granted the representative an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the representative to purchase a maximum of 285,000 additional shares
from us to cover over allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $       , the total proceeds to us will be $       .

     The following table provides information regarding the amount of the
discount to be received by the underwriters.

<TABLE>
<CAPTION>
                                                 TOTAL WITHOUT EXERCISE OF    TOTAL WITH FULL EXERCISE OF
                                    PER SHARE      OVER-ALLOTMENT OPTION         OVER-ALLOTMENT OPTION
                                    ---------    -------------------------    ---------------------------
<S>                                <C>           <C>                          <C>
                                   $                  $                             $
</TABLE>

     We will pay all of the total expenses of the offering, which we estimate
will be approximately $       . In addition we will pay to Donald $       for
its expenses of which we have paid $15,000.

     We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.

     Our officers, directors and controlling stockholder have agreed that,
subject to certain exceptions, that they will not, without the prior written
consent of Donald, directly or indirectly, sell or otherwise dispose of any
shares of common stock or securities convertible into or exercisable for common
stock for one year from the date of this prospectus. Upon expiration of the
lock-up period all of the shares of common stock subject to such lock-up
agreements will be eligible for sale under Rule 144 subject to volume and other
restrictions of Rule 144. These persons, however, have agreed not to sell more
than 25% of their Diplomat shares in any three month period without Donald's
consent after the one year lock-up period.

     We and our principal stockholders, officers and directors will grant to
Donald a one (1) year right of first refusal to have Donald sell securities
under future public and private offerings of any non bank debt or equity
securities of our or our subsidiaries, by us, our subsidiaries, our affiliates,
and/or principal stockholders, officers and directors, except for issuances or
sales to employees pursuant to our stock option plan.

                                       51
<PAGE>

     In addition for a two year period we will not sell securities to raise
money or issue any options or warrants below the then current market price
without Donald's consent.

     We and Donald will enter into a financial consulting agreement providing
for Donald or its designee to act as financial consultant to us for a twelve
month period for a fee of $24,000 payable at a rate of $2,000 per month.

     We have granted Donald for a period ending on           ,      the right to
have Donald's designee present at meetings of the Board and each of its
committees subject to our right to exclude such designee under certain
circumstances. The designee will be entitled to the same notices and
communications sent by us as we gave to our directors and will attend directors'
and committees' meetings, but will not be entitled to vote thereat. Such
designee will also be entitled to receive the same compensation payable to
directors as members of the Board and its committees and all reasonable expenses
in attending such meetings. As of the date of this Prospectus no designee has
been selected.

     In connection with this offering, we have agreed to sell to Donald, for
nominal consideration, warrants to purchase up to an aggregate of 190,000 shares
of common stock exercisable initially at $       per share of common stock for a
period of four years beginning one year from the date hereof. These warrants
contain antidilution provisions providing for adjustment of the exercise price
upon the occurrence of certain events, including (i) the issuance of common
stock, or securities exercisable or convertible into common stock, at a price
less than the exercise price and (ii) any recapitalization, reclassification,
stock dividend, stock split, stock combination or similar transaction. In
addition, the warrants grant to the holders rights commencing one year from the
date of this prospectus to have common stock to be issued upon exercise of the
warrants registered under the Securities Act. These rights include the right to
require us to register these shares for a four year period and the right to
include these shares for a six year period in a registration statement filed by
us.

     Rules of the Securities and Exchange Commission may limit the ability of
the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the following rules:

     o Stabilizing transactions--The representatives may make bids or purchases
       for the purpose of pegging, fixing or maintaining the price of shares, so
       long as stabilizing bids do not exceed a specified maximum.

     o Over-allotments and syndicate covering transactions--The underwriters may
       create a short position in the shares by selling more shares than are set
       forth on the cover page of this prospectus. If a short position is
       created in connection with the offering, the representatives may engage
       in syndicate covering transactions by purchasing shares in the open
       market. The representatives may also elect to reduce any short position
       by exercising all or part of the over-allotment option.

     Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of such transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.

     Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq Small Cap Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.

     o Penalty bids--If the representative purchases shares in the open market
       in a stabilizing transaction or syndicate covering transaction, they may
       reclaim a selling concession from the underwriters and selling group
       members who sold those shares as part of this offering.

     In June 1998 Donald received a fee for introducing us to Tandem Capital
which purchased $5,000,000 of our subordinated debentures. For the introduction
Donald was paid a fee of $50,000 paid in installments and received warrants to
purchase 10,000 shares of Diplomat's common stock exercisable at $12.125 per
share. Donald will also receive fees of $40,000 in connection with our new debt
financing with First Source.

                                       52
<PAGE>

                                    LEGAL MATTERS

     The validity of the shares offered will be passed upon for Diplomat by
Gersten, Savage & Kaplowitz, LLP, 101 East 52nd Street, New York, New York
10022. Certain members of Gersten, Savage own approximately 250,000 shares of
common stock and options to purchase approximately 70,000 shares of common
stock. Certain legal matters in connection with the offering will be passed upon
for the underwriters by Parker Duryee Rosoff & Haft, 529 Fifth Avenue, New York,
New York 10022.

                                    EXPERTS

     The financial statements of Diplomat Direct Marketing Corporation as of and
for the year ended September 30, 1998 included in this prospectus and in the
registration statement have been audited by BDO Seidman, LLP, independent
certified public accountants, as set forth in their report appearing elsewhere
herein and in the registration statement, and is included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.

     The financial statements of Diplomat Direct Marketing Corporation as of and
for the two years ended September 30, 1997 and 1996 included in this prospectus
and in the registration statement have been audited by Feldman Sherb Ehlrich
& Co., P.C., independent certified public accountants as set forth in their
report appearing elsewhere herein and in the registration statement, and is
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.

     The financial statements of Lew Magram Ltd. as of and for the year ended
January 4, 1997 included in this prospectus and in the registration statement
have been audited by BDO Seidman, LLP, independent certified public accountants,
as set forth in their report appearing elsewhere herein and in the registration
statement, and is included in reliance upon such report given upon the authority
of said firm as experts in auditing and accounting.

     The financial statements of Lew Magram Ltd. as of and for the six months
ended June 30, 1997 included in this prospectus and in the registration
statement have been audited by Feldman Sherb Ehrlich & Co., P.C., independent
certified public accountants, as set forth in their report appearing elsewhere
herein and in the registration statement, and is included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.

     The financial statements of Jean Grayson's Brownstone Studio, Inc. as of
December 31, 1996 and December 31, 1995 and for the years then ended included in
this prospectus and in the registration statement have been audited by Feldman
Sherb Ehlrich & Co., P.C., independent certified public accountants as set forth
in their report appearing elsewhere herein and in the registration statement,
and is included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.

                 INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

     Our certificate of incorporation and by-laws provide that we shall
indemnify to the fullest extent permitted by Delaware law any person whom we may
indemnify thereunder, including our directors, officers, employees and agents.
Such indemnification (other than as ordered by a court) shall be made by us only
upon a determination that indemnification is proper in the circumstances because
the individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination shall
be made by a majority vote of a quorum consisting of disinterested directors, or
by independent legal counsel or by the stockholders. In addition, the
certificate of incorporation provides for the elimination, to the extent
permitted by Delaware law, of personal liability of directors to us and our
shareholders for monetary damages for breach of fiduciary duty as directors.

     We have obtained directors and officers insurance with $5 million coverage.
The policy insures directors and officers against unindemnified losses arising
from certain wrongful acts in their capacities and would reimburse us for such
loss for which we have lawfully indemnified the directors and officers.

     Insofar as indemnification for liabilities arising under the Act may be
provided to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the Act
and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless, in the opinion of our counsel, the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by us is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

                                       53

<PAGE>

                              FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                                   <C>
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
Reports of Independent Certified Public Accountants................................................     F-2 - F-3
Consolidated Balance Sheets as of March 31, 1999 (unaudited) September 30, 1998 and 1997...........           F-4
Consolidated Statements of Operations for the six months ended March 31, 1999 and 1998 (unaudited)
  and the fiscal years ended September 30, 1998, 1997 and 1996.....................................           F-5
Consolidated Statements of Changes in Stockholders' Equity for the six months ended March 31, 1999
  (unaudited) and the fiscal years ended September 30, 1998, 1997 and 1996.........................           F-6
Consolidated Statements of Cash Flows for the six months ended March 31, 1999 and 1998 (unaudited)
  and the fiscal years ended September 30, 1998, 1997 and 1996.....................................           F-7
Notes to Consolidated Financial Statements.........................................................    F-8 - F-25

LEW MAGRAM LTD.
Reports of Independent Certified Public Accountants................................................   F-26 - F-27
Statements of Operations for the six months ended June 30, 1997 and for the fiscal year ended
  January 4, 1997..................................................................................          F-28
Statements of Cash Flows for the six months ended June 30, 1997 and for the fiscal year ended
  January 4, 1997..................................................................................          F-29
Notes to Financial Statements......................................................................   F-30 - F-31

JEAN GRAYSON'S BROWNSTONE STUDIO, INC.
Report of Independent Certified Public Accountants.................................................          F-33
Balance Sheets as of December 31, 1996 and 1995....................................................          F-34
Statement of Operations for the years ended December 31, 1996 and 1995.............................          F-35
Statement of Cash Flows for the years ended December 31, 1996 and 1995.............................          F-36
Notes to Financial Statements......................................................................   F-37 - F-40
</TABLE>

                                      F-1

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Diplomat Direct Marketing Corporation

We have audited the accompanying consolidated balance sheet of Diplomat Direct
Marketing Corporation and Subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diplomat Direct
Marketing Corporation and Subsidiaries as of September 30, 1998, and the results
of their operaitons and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.

/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP

New York, New York
January 30, 1999

                                      F-2
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of Diplomat Direct
Marketing Corporation and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year ended September 30, 1997 and the nine months ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above, as
restated for the adjustments disclosed in Note 3(b), present fairly, in all
material respects, the financial position of Diplomat Direct Marketing
Corporation and Subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for the year ended September 30, 1997 and the
nine months ended September 30, 1996, in conformity with generally accepted
accounting principles.

/s/ FELDMAN SHERB EHRLICH & CO., P.C.
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants

New York, New York
  January 13, 1998,
  except for Note 3(a),
  which is as of February 19, 1998,
  and Note 3(b),
  which is as of January 30, 1999

                                      F-3

<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        MARCH 31,           SEPTEMBER 30,
                                                                       -----------    --------------------------
                                                                          1999           1998           1997
                                                                       -----------    -----------    -----------
                                                                       (UNAUDITED)
<S>                                                                    <C>            <C>            <C>
                               ASSETS
Current:
  Cash and cash equivalents.........................................   $   310,613    $   322,778    $    59,750
  Accounts receivable, net of allowance of $172,001, $204,196, and
     $147,001.......................................................     2,372,660      1,921,209      1,585,840
  Inventories.......................................................    11,768,919     11,066,380      6,354,619
  Net assets held for sale..........................................            --             --      3,254,010
  Prepaid catalogs..................................................     6,359,778      8,051,651      1,534,830
  Prepaid expenses..................................................     1,755,647      1,379,567      1,143,848
  Other current assets..............................................       659,268        837,946        482,738
                                                                       -----------    -----------    -----------
  Total current assets..............................................    23,226,885     23,579,531     14,415,635
                                                                       -----------    -----------    -----------
  Property and equipment, net.......................................     3,859,914      4,176,903      3,092,736
                                                                       -----------    -----------    -----------

  Other assets:
     Goodwill, net of amortization of $592,778, $345,435 and
       $199,000.....................................................    14,340,015     14,587,358      9,945,930
     Customer list, net of amortization of $1,300,000,
       $900,000 and $125,000........................................     6,700,000      7,100,000      4,875,000
     Note receivable................................................       870,000        870,000             --
     Other..........................................................     1,145,090        645,091        683,586
                                                                       -----------    -----------    -----------
  Total other assets................................................    23,055,105     23,202,449     15,504,516
                                                                       -----------    -----------    -----------
                                                                       $50,141,904    $50,958,883    $33,012,887
                                                                       -----------    -----------    -----------
                                                                       -----------    -----------    -----------
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.............................   $16,007,527    $18,469,136    $12,366,083
  Loans payable--officers...........................................        25,000        225,000        235,000
  Loans payable--Congress Financial Corp............................     7,813,023      5,504,371      3,083,896
  Open prepaid orders...............................................       805,086      1,211,165        335,948
  Outstanding merchandise credit....................................     3,100,344      1,892,148        945,313
  Current maturities of long-term debt..............................       847,793        939,816        823,918
                                                                       -----------    -----------    -----------
Total current liabilities...........................................    28,598,773     28,241,636     17,790,158
                                                                       -----------    -----------    -----------
Long-term debt, less current maturities.............................     6,266,835      6,383,585      1,154,645
                                                                       -----------    -----------    -----------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $.01 par value--shares authorized 1,000,000;
     issued and outstanding 478,573, 546,133 and 545,000
     (Liquidation value of $16,380,000).............................         4,785          5,461          5,450
  Common stock, $.0001 par value--shares authorized 50,000,000;
     issued and outstanding 12,608,399, 11,162,372 and 8,304,150....         1,257          1,112            829
  Additional paid-in capital........................................    29,179,976     25,835,445     22,144,478
  Accumulated deficit...............................................   (14,316,812)    (9,508,356)    (8,082,673)
                                                                       -----------    -----------    -----------
Total stockholders' equity..........................................    14,869,206     16,333,662     14,068,084
                                                                       -----------    -----------    -----------
                                                                       $50,141,904    $50,958,883    $33,012,887
                                                                       -----------    -----------    -----------
                                                                       -----------    -----------    -----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                              SIX MONTHS ENDED                    YEAR ENDED           NINE MONTHS ENDED
                                                  MARCH 31,                      SEPTEMBER 30,           SEPTEMBER 30,
                                     -----------------------------------   -------------------------   -----------------
                                          1999               1998             1998          1997            1996
                                     ----------------   ----------------   -----------   -----------   -----------------
                                                 (UNAUDITED)
<S>                                  <C>                <C>                <C>           <C>           <C>
Net sales..........................    $ 41,580,537       $ 36,515,628     $74,585,592   $17,468,066      $ 7,448,778
Cost of goods sold.................      20,938,435         17,029,324      34,433,297     8,724,030        7,392,265
                                       ------------       ------------     -----------   -----------      -----------
  Gross profit.....................      20,642,102         19,486,304      40,152,295     8,744,036           56,513
Selling, general and administrative
  expenses.........................      23,933,263         17,070,661      37,537,372     7,060,658        3,672,133
Restructuring and reorganization
  costs............................              --                 --              --            --        1,738,975
                                       ------------       ------------     -----------   -----------      -----------
  Operating income (loss)..........      (3,291,161)         2,415,643       2,614,923     1,683,378       (5,354,595)
Interest expense...................      (1,050,159)          (642,249)     (1,355,324)     (421,233)        (702,474)
                                       ------------       ------------     -----------   -----------      -----------
  Income (loss) before income tax
     (expense) benefit.............      (4,341,320)         1,773,394       1,259,599     1,262,145       (6,057,069)
Income tax (expense) benefit.......              --                 --              --       140,000          (17,353)
                                       ------------       ------------     -----------   -----------      -----------
  Income (loss) from continuing
     operations....................      (4,341,320)         1,773,394       1,259,599     1,402,145       (6,074,422)
Loss on discontinued operations
  (net of $453,000 gain on sale
  assets in 1998)..................         (37,386)        (2,072,098)     (2,322,392)     (295,633)      (1,150,478)
                                       ------------       ------------     -----------   -----------      -----------
Net income (loss)..................      (4,378,706)          (298,704)     (1,062,793)    1,106,512       (7,224,900)
Preferred stock dividends..........        (429,750)          (157,500)       (362,890)     (288,892)              --
                                       ------------       ------------     -----------   -----------      -----------
Net income (loss) to common
  stockholders.....................    $ (4,808,456)      $   (456,204)    $(1,425,683)  $   817,620      $(7,224,900)
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
Per common share--basic and diluted
  Net income (loss) from continuing
     operations....................    $      (0.40)      $       0.10     $      0.08   $      0.19      $     (1.34)
  Net income (loss) from
     discontinued operations.......    $       0.00       $      (0.12)    $     (0.21)  $     (0.05)     $     (0.25)
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
Net income (loss)--basic and
  diluted per common share.........    $      (0.40)      $      (0.02)    $     (0.13)  $      0.14      $     (1.59)
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
Average number of shares used in
  computation (basic and
  diluted).........................      11,884,247          9,941,023      10,717,628     5,892,454        4,549,525
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED),
                    YEARS ENDED SEPTEMBER 30, 1998 AND 1997
                    AND NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
                                          COMMON STOCK        PREFERRED STOCK     ADDITIONAL
                                       -------------------   ------------------     PAID-IN     ACCUMULATED
                                         SHARES     AMOUNT    SHARES    AMOUNT      CAPITAL       DEFICIT         TOTAL
                                       ----------   ------   --------   -------   -----------   ------------   -----------
<S>                                    <C>          <C>      <C>        <C>       <C>           <C>            <C>
Balance, December 30, 1995............  4,493,525   $ 458          --   $    --   $ 5,201,441   $ (1,675,393)  $ 3,526,506
  Exercise of options, issuance of
     500,000 shares of common stock
     par .0001........................    500,000      50          --        --       474,950             --       475,000
  Issuance of common stock............    550,000      55          --        --       399,945             --       400,000
  Issuance of preferred stock.........         --      --     450,000     4,500     4,095,500             --     4,100,000
  Net loss............................         --      --          --        --            --     (7,224,900)   (7,224,900)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance, September 30, 1996...........  5,543,525     563     450,000     4,500    10,171,836     (8,900,293)    1,276,606
  Private placements..................  1,250,000     125          --        --     2,174,875             --     2,175,000
  Exercise of warrants................    500,000      50          --        --       499,950             --       500,000
  Issuance of shares..................    708,408      63          --        --       515,747             --       515,810
  Preferred and common stock issued
     for Magram acquisition...........    250,000      24      95,000       950     8,690,694             --     8,691,668
  Common stock issued for Preferred
     stock dividend...................     52,217       4          --        --        91,376             --        91,380
  Net income..........................         --      --          --        --            --      1,106,512     1,106,512
  Preferred stock dividends...........         --      --          --        --            --       (288,892)     (288,892)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance, September 30, 1997...........  8,304,150     829     545,000     5,450    22,144,478     (8,082,673)   14,068,084
  Private placements..................  2,722,500     272       3,630        36     3,619,711             --     3,620,019
  Exercise of options.................     35,000       2          --        --        64,341             --        64,343
  Common stock issued for Brownstone
     acquisition......................     17,500       1          --        --         6,898             --         6,899
  Net loss............................         --      --          --        --            --     (1,062,793)   (1,062,793)
  Conversion of Series D preferred....     83,222       8      (2,497)      (25)           17             --            --
  Preferred stock dividends...........         --      --          --        --            --       (362,890)     (362,890)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance, September 30, 1998........... 11,162,372   1,112     546,133     5,461    25,835,445     (9,508,356)   16,333,662
  Period ended March 31, 1999
     (unaudited)
  Private Placement...................    446,027      45      32,440       324     3,343,631                    3,344,000
  Net Loss............................         --      --          --        --            --     (4,378,706)   (4,378,706)
  Conversion of Series A preferred....  1,000,000     100    (100,000)   (1,000)          900
  Preferred stock dividends...........         --      --          --        --            --       (429,750)     (429,750)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance March 31, 1999 (Unaudited).... 12,608,399   $1,257    478,573   $ 4,785   $29,179,976   $(14,316,812)  $14,869,206
                                       ----------   ------   --------   -------   -----------   ------------   -----------
                                       ----------   ------   --------   -------   -----------   ------------   -----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                                                 NINE MONTHS
                                                        SIX MONTHS ENDED                 YEAR ENDED                 ENDED
                                                           MARCH 31,                    SEPTEMBER 30,           SEPTEMBER 30,
                                                   --------------------------   -----------------------------   -------------
                                                      1999          1998            1998            1997            1996
                                                   -----------   ------------   -------------   -------------   -------------
                                                   (UNAUDITED)   (UNAUDITED)
<S>                                                <C>           <C>            <C>             <C>             <C>
Cash flows from operating activities:
  Net income (loss)..............................  $(4,378,706)     (298,704)    $(1,062,793)    $ 1,106,512     $(7,224,900)
  Adjustments to reconcile net income (loss) to
    net cash used in operating activities........
    Amortization.................................      647,343       477,826       1,245,435         375,333              --
    Depreciation.................................      389,167       401,802         765,107         384,857         211,237
    Issuance of stock for expenses...............           --            --              --          91,380         400,000
    Gain on sale of Biobottoms...................           --            --        (453,000)             --              --
    Changes in assets and liabilities:
      (Increase) decrease in accounts
         receivable..............................     (451,451)   (2,192,733)        264,631         297,154        (282,507)
      (Increase) decrease in inventories.........     (702,539)   (3,972,465)     (1,897,761)     (3,076,019)      2,551,187
      (Increase) decrease in prepaid expenses....     (376,080)      (57,125)       (235,719)        512,723       1,041,372
      (Increase) decrease in prepaid catalogs....    1,691,873    (1,911,148)     (6,516,821)     (1,982,124)       (641,132)
      (Increase) decrease in current assets......           --            --        (355,208)       (205,824)        702,866
      (Increase) decrease in other assets........     (321,321)   (2,656,946)        (38,495)        (92,373)        500,202
      (Increase) decrease in assets held for
         sale....................................           --     3,254,010              --              --              --
      Increase (decrease) in accounts payable and
         accrued expenses........................   (2,258,064)   (3,612,371)     (5,057,623)     (1,998,570)      2,054,897
      Increase (decrease) in outstanding
         merchandise credits.....................    1,208,196     8,296,234         946,835         748,083              --
      Increase (decrease) in prepaid orders......     (406,079)    1,108,677         575,217          22,130              --
                                                   -----------    ----------     -----------     -----------     -----------
Net cash used in operating activities............   (4,957,661)   (1,162,943)    (11,820,195)     (3,816,738)       (686,778)
                                                   -----------    ----------     -----------     -----------     -----------
Cash flows from investing activities:
  Proceeds from sale of Biobottoms...............           --            --       3,707,010              --              --
  Cash paid for Biobottoms, Inc. (net of cash
    acquired)....................................           --            --              --              --      (2,899,211)
  Acquisition of subsidiary assets...............           --    (4,764,240)             --              --              --
  Cash acquired in Magram acquisition............           --            --              --       2,051,007              --
  Purchase of trademark..........................           --      (664,311)             --         (75,000)             --
  Purchase of property and equipment.............      (72,178)           --      (2,049,274)       (189,780)       (211,096)
  Note Receivable................................           --            --        (870,000)             --              --
                                                   -----------    ----------     -----------     -----------     -----------
Net cash provided by (used in) investing
  activities.....................................      (72,178)   (5,428,551)        787,736       1,786,227      (3,110,307)
                                                   -----------    ----------     -----------     -----------     -----------
Cash flows from financing activities:
  Proceeds of loans..............................           --            --       5,000,000              --         450,000
  Increase (decrease) in long term debt and loans
    payable......................................     (408,773)     (159,748)        228,940              --              --
  Revolving credit loans.........................    2,308,652     4,399,085       2,745,075        (735,145)        583,650
  Preferred stock dividends paid.................     (429,750)     (205,390)       (362,890)       (288,892)             --
  Issuance of preferred and common stock.........    3,547,545     3,941,294       3,684,362       3,190,809         475,000
  Borrowings from stockholder....................           --            --              --       1,435,000       2,620,000
  Repayment of long-term debt and loan payables..           --            --              --      (1,580,769)       (393,678)
                                                   -----------    ----------     -----------     -----------     -----------
Net cash provided by financing activities........    5,017,674     7,975,241      11,295,487       2,021,003       3,734,972
                                                   -----------    ----------     -----------     -----------     -----------
Net decrease in cash and cash equivalents........      (12,165)    1,383,747         263,028          (9,508)        (62,113)
Cash and cash equivalents, beginning of period...      322,778        59,750          59,750          69,258         131,371
                                                   -----------    ----------     -----------     -----------     -----------
Cash and cash equivalents, end of period.........  $   310,613    $1,443,497     $   322,778     $    59,750     $    69,258
                                                   -----------    ----------     -----------     -----------     -----------
                                                   -----------    ----------     -----------     -----------     -----------
Supplemental disclosures of cash flow
  information:
Cash paid during the period for:
  Interest.......................................  $ 1,050,159    $  642,249     $ 1,500,676     $   764,000     $   706,000
                                                   -----------    ----------     -----------     -----------     -----------
                                                   -----------    ----------     -----------     -----------     -----------
  Income taxes...................................           --            --              --              --              --
                                                   -----------    ----------     -----------     -----------     -----------
                                                   -----------    ----------     -----------     -----------     -----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a) The consolidated financial statements include the accounts of Diplomat
Direct Marketing Corporation (the "Company") and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.

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

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

     (d) The Company follows Statement of Financial Accounting Standards
("SFAS") No. 109 for income taxes. Pursuant to SFAS No. 109, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse.

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

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

     (g) Computation of Earnings Per Common Share.

     Basic earnings per share has been computed using the weighted average
number of shares of common stock outstanding. Diluted earnings per share
includes the assumed excercise of stock options using the treasury stock method
that could potentially dilute earnings per share. In all periods presented,
there were no differences between basic and diluted income (loss) per common
share because the assumed exercise of stock options was anti-dilutive. The
assumed exercise of stock options could potentially dilute basic earnings per
share amounts in the future.

     (h) Long-lived assets, primarily property and equipment, goodwill and
customer lists are periodically reviewed by management to determine if there has
been a permanent impairment in their value by evaluating various factors,
including current and projected operating results. Based on this assessment,
management concluded that at March 31, 1999 the Company's long-lived assets were
fully realizable.

     (i) The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments. Long-term debt has been
recorded at its face value which approximates its fair value based on its term
and interest rate.

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

     (k) Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period in
which related revenues are expected to be realized, generally three to six
months. Advertising costs, principally the amortization of such prepaid catalog
costs attributable to continuing operations, included in the accompanying
statement of operations were $14,500,000 for the six months ended March 31,
1999, $20,974,673 for the year ended September 30, 1998, $3,102,588 for the year
ended September 30, 1997 and none for the nine months ended September 30, 1996.

     (l) Interim Financial Statements. The consolidated financial statements as
of March 31, 1999 and for the six months ended March 31, 1999 and 1998 are
presented as unaudited. In the opinion of management, these

                                      F-8
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

financial statements include all adjustments necessary to present fairly the
information set forth therein. These adjustments consist solely of normal
recurring accruals. The interim results of operations for the six months ended
March 31, 1999 and 1998 are not necessarily indicative of the results to be
expected for the full year or for any other interim period.

     (m) Revenue is recognized at the time merchandise is shipped to customers.
Proceeds received for merchandise not yet shipped are reflected as "prepaid
orders", a current liability.

     (n) The Company issues merchandise credits for certain returns of
merchandise sold with substantial discounts. Unused credits are periodically
written off into income.

     (o) New Accounting Standards

     The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The adoption of SFAS 130 did not have
any effect on the Company's financial statements.

     The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," which establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of enterprises
about which separate financial information is available that is evaluated
regularly by Management in deciding how to allocate resources and in assessing
performance. The adoption of SFAS 131 did not have any effect on the Company's
financial statements.

     Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for Derivative Instruments. The Company has not in the past
nor does it anticipate that it will engage in transactions involving Derivative
Instruments which will impact the Financial Statements.

2. BUSINESS

     The Company is engaged in two continuing lines of business and,
accordingly, its operations are classified into two business segments: mail
order catalog retail operations, and the manufacturing, marketing and
distribution of infants' accessories principally to mass merchants. In 1998, the
Company sold its Biobottoms subsidiary. The operations of that company have been
accounted for as a discontinued operations, see note 5.

     On November 12, 1996, the Company changed its reporting period to September
30. Effective October 1, 1996, the Company's subsidiaries report their results
of operations on a fifty-two/fifty-three week ending on the Saturday closest to
September 30.

3. ACQUISITION OF MAGRAM

     (a) On February 19, 1998, the Company (through its wholly-owned subsidiary,
Magram Acquisition Corp.) closed on the acquisition of Lew Magram, Ltd.
("Magram"), a New York corporation with a place of business in Teaneck, New
Jersey, which is in the business of mail order catalogue sales of women's
clothing. For accounting purposes, the acquisition was effected as of July 1,
1997, the date that the Company assumed effective control of Magram. The
acquisition was accounted for as a purchase and the consideration consisted of
the issuance of

                                      F-9
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

3. ACQUISITION OF MAGRAM--(CONTINUED)

95,000 shares of the Company's $.01 par value, Series D, convertible preferred
stock. The Series D preferred stock is convertible into 3,166,667 shares of the
Company's common stock (which assumes a market value of $4.00 per share). The
preferred stock does not pay any dividends, but participates with common in any
Company distributions. The preferred stock has a liquidation preference of $100
per share. An additional 250,000 shares of common stock were also given as
consideration to the sellers. The fair market value of the consideration was
approximately $8.7 million and acquisition costs were approximately $646,000.
The Company recorded the carryover basis for certain selling stockholders of
Magram who are also principal stockholders of the Company.

     The net fair market value of identifiable assets acquired was approximately
$6.9 million, and included customer lists valued at $5 million. The customer
lists are being amortized over a period of 10 years. Cost in excess of net
assets acquired amounted to approximately $10 million and is being amortized
over 25 years.

     (b) In January 1999, the Company, based upon historical information
developed in conjunction with the preparation of its September 30, 1998
financial statements, determined that certain liabilities of Magram were
understated as of July 1, 1997, and also at September 30, 1997. Such liabilities
included reserves for customer merchandise returns and credits and unrecorded
liabilities for purchased merchandise. Consequently, the accompanying
consolidated financial statements have been restated to reflect the above
adjustments. The effect of such restatement on the Company's consolidated
balance sheet and statement of operations as at and for the year ended
September 30, 1997 is as follows:

<TABLE>
<CAPTION>
                                               AS REPORTED    ADJUSTMENTS    RECLASSIFICATIONS(A)    AS RESTATED
                                               -----------    -----------    --------------------    -----------
                                                                        (000'S OMITTED)
<S>                                            <C>            <C>            <C>                     <C>
Current assets..............................     $17,066        $    --            $ (2,651)           $14,415
Property and equipment......................       3,465             --                (372)             3,093
Goodwill....................................      10,879          2,515              (3,448)             9,946
Other assets................................       5,604             --                 (45)             5,559
                                                 -------        -------            --------            -------
Total.......................................     $37,014        $ 2,515            $ (6,516)           $33,013
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
Current liabilities.........................     $21,490        $ 2,736            $ (6,436)           $17,790
Long-term debt..............................       1,235             --                 (80)             1,155
Stockholders' equity........................      14,289           (221)                 --             14,068
                                                 -------        -------            --------            -------
Total.......................................     $37,014        $ 2,515            $ (6,516)           $33,013
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
Net sales...................................     $35,147        $  (297)           $(17,382)           $17,468
Cost of goods sold..........................      16,665            (76)             (7,865)             8,724
                                                 -------        -------            --------            -------
Gross profit................................     $18,482        $  (221)           $ (9,517)           $ 8,744
                                                 -------        -------            --------            -------
Operating income............................     $ 1,761        $  (221)           $    143            $ 1,683
                                                 -------        -------            --------            -------
Net income..................................     $ 1,328        $  (221)           $     --            $ 1,107
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
Net income to common shareholders...........     $   964        $  (221)           $     74            $   817
                                                 -------        -------            --------            -------
Net income per share........................     $   .16                                                   .14
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
</TABLE>

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

(a) Reflects the discontinued Biobottoms assets and liabilities.

                                      F-10
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

3. ACQUISITION OF MAGRAM--(CONTINUED)

     The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Magram as if the acquisition had occurred at
the beginning of 1996, after giving effect to certain adjustments, including
amortization:

<TABLE>
<CAPTION>
                                                                                         NINE MONTHS ENDED
                                                                       YEAR ENDED          SEPTEMBER 30,
                                                                   SEPTEMBER 30, 1997          1996
                                                                   ------------------    -----------------
<S>                                                                <C>                   <C>
Net sales.......................................................      $ 55,382,211          $43,772,271
Net loss........................................................        (7,415,554)          (8,397,091)
Net loss per common share.......................................             (1.20)               (1.74)
                                                                      ------------          -----------
                                                                      ------------          -----------
</TABLE>

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

4. ACQUISITION OF BROWNSTONE

     On October 30, 1997, the Company acquired out of bankruptcy all the assets
of Jean Grayson's Brownstone Studios, Inc., a mail order catalog company for the
assumption of approximately $10,000,000 in liabilities and an option to the
owners of Jean Grayson's Brownstone Studios, Inc. to purchase 200,000 shares of
Diplomat common stock at $3.9375 (market value) for a period of three years. The
acquisition was accounted for as a purchase accordingly, the operating results
include the operations of Brownstone for the period November 1, 1997 through
October 3, 1998. The purchase price was allocated to assets acquired based on
their estimated fair value, including customer lists valued at $3,000,000 which
will be amortized on a straight line basis over ten years. This treatment
results in approximately $4,000,000 in cost in excess of net assets acquired
which will be amortized on a straight line basis over twenty five years. As a
result of this acquisition, the scope of the Company's business has expanded
into the mature women's apparel and accessories markets primarily through direct
mail catalog. Since Brownstone was in bankruptcy prior to its acquisition in
October 1997, presentation of pro forma financial information as if it had been
acquired October 1, 1996 would not be meaningful and, therefore, has not been
presented.

5. ACQUISITION AND SALE OF BIOBOTTOMS, INC. AND RELATED FINANCING

     (a) Acquisition of Biobottoms, Inc.

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

     The Company paid $2,500,000 for Biobottoms, $1,000,000 in cash and
$1,500,000 in the form of two promissory notes to Biobottoms' stockholders, each
in the amount of $750,000 ("Acquisition Notes"). The notes bore interest at 1%
over the prime rate as defined in the agreements. One such note was due six
months from the acquisition date and the second note was due in two equal
installments of $375,000, nine months and eighteen months after the date of
acquisition, respectively. The Company did not make the payments which were
required in August and November 1996. On December 9, 1996, the Company received
notification of the default from the former Biobottoms' stockholders, which
required that the Company cure the default on the notes within 270 days, or be
subject to enforcement action. On February 25, 1997, the former Biobottoms'
stockholders agreed not to initiate enforcement action under this or subsequent
defaults until not earlier than December 31, 1997. In connection with obtaining
this agreement, Diplomat agreed to pay the Biobottoms' stockholders ten
installments of $5,000 to be applied against the acquisition notes, commencing
on February 21, 1997 and to undertake to conduct a private placement of its
securities to raise funds for the remaining balance due on the acquisition
notes. In July 1997, the Company received proceeds from a private placement and
pursuant to an agreement with the Biobottoms' stockholders paid $1,500,000 in
full satisfaction of all amounts due under the acquisition notes, and also
amended its consulting agreement with the former stockholders to provide for

                                      F-11
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

5. ACQUISITION AND SALE OF BIOBOTTOMS, INC. AND RELATED FINANCING--(CONTINUED)

additional compensation of 29,204 shares each of the Company's common stock.
Additionally, the Company incurred costs related to the acquisition in the
amount of approximately $720,000. Of this amount, $600,000 represents the
estimated fair value of 100,000 shares of the Company's convertible Series A
preferred stock issued to a significant stockholder (who is also a member of the
Board of Directors), as a fee for his assistance in consummating the
acquisition. The Series A preferred shares were converted into 1,000,000 common
shares of the Company during November 1996.

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

     (b) Financing

     Simultaneously with the closing of the Biobottoms acquisition, the Company
and Biobottoms entered into a loan and subordinated security agreement with a
director and principal stockholder of the Company and an affiliate of such
individual pursuant to which the Company borrowed from such director and
principal stockholder and affiliate $2,353,100 and $450,000, respectively. The
loan from the director and principal stockholder was utilized to fund the
acquisition of Biobottoms in part. The loan from the affiliate has been utilized
for working capital purposes. Subject to an intercreditor agreement between the
Company's asset-based lender and other lenders, the $450,000 loan was paid in
full on May 4, 1997.

     In connection with such aforementioned loan by a director and principal
stockholder of the Company in the amount of $2,353,100, the Company issued
100,000 shares of its Series A preferred stock, which were convertible into
1,000,000 shares of common stock at the option of the director and principal
stockholder. The holder of such shares of preferred stock will have the right,
subject to a subordination and intercreditor agreement by and among Congress
Financial Corporation and others, during any period during which there shall be
an Event of Default under such loans, as such term is defined therein, to
designate a majority of the members of the Board of Directors of the Company.
Such right of designation will continue during the duration of any such Event of
Default.

     (c) Sale of Biobottoms

     On April 17, 1998, the Company entered into an Asset Purchase Agreement
(the "Agreement") with Genesis Direct Thirty-Four, LLC ("Buyer") in which the
Buyer purchased substantially all of the assets and assumed certain of the
liabilities of Biobottoms. The Buyer paid $2,270,000 in cash and a note and
assumed $5,749,000 in liabilities. The note is subject to reduction depending on
the net assets acquired as determined in a closing date balance sheet. If the
amount of the net value of acquired assets is less than negative $778,000 or the
accrued expenses and customer liabilities included in the assumed liabilities
exceed $828,877, the greater of such deficiencies will reduce the amount of the
note.

     The Company shall retain all claims for tax refunds, tax loss carryforwards
or carrybacks of tax credits of any kind applicable to the business of
Biobottoms prior to the closing of the asset sale. The Agreement further
specifies that certain intercompany and affiliated person liabilities will not
be assumed by the Buyer.

     Following is a summary of net assets and the results of operations of
Biobottoms:

<TABLE>
<CAPTION>
                                                                                       SEPTEMBER 30, 1997
                                                                                       ------------------
<S>                                                                                    <C>
Assets--current.....................................................................      $  5,904,579
  Property and Equipment............................................................           372,757
  Other.............................................................................         3,493,295
Liabilities--current................................................................        (6,435,512)
  Long-Term.........................................................................           (81,109)
                                                                                          ------------
Net assets to be disposed of........................................................      $  3,254,010
                                                                                          ------------
                                                                                          ------------
</TABLE>

                                      F-12

<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

5. ACQUISITION AND SALE OF BIOBOTTOMS, INC. AND RELATED FINANCING--(CONTINUED)

<TABLE>
<CAPTION>
                                                                           PERIODS ENDED
                                                             -----------------------------------------
                                                                1998           1997           1996
                                                             -----------    -----------    -----------
<S>                                                          <C>            <C>            <C>
Sales.....................................................   $ 7,539,651    $17,591,784    $11,774,023
                                                             -----------    -----------    -----------
Cost of sales.............................................     5,105,464      8,074,679      5,942,323
Operating expenses........................................     5,027,458      9,589,738      6,900,075
Interest..................................................       182,121        223,000         82,103
                                                             -----------    -----------    -----------
                                                              10,315,043     17,887,417     12,924,501
                                                             -----------    -----------    -----------
Net Loss..................................................   $(2,775,392)   $  (295,633)   $(1,150,478)
                                                             -----------    -----------    -----------
                                                             -----------    -----------    -----------
</TABLE>

6. RESTRUCTURING OF OPERATIONS

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

     As a result of the actions taken, the Company incurred restructuring
charges of approximately $1,739,000. The restructuring charges include
approximately $568,000 primarily for write-offs and other costs associated with
the discontinuance of various products and $771,000 for severance pay and
professional and consulting fees payable in connection with the restructuring
plan.

7. CONVERSION OF STOCKHOLDER DEBT AND ISSUANCE OF SERIES B & C PREFERRED STOCK

     Effective September 30, 1996, a significant stockholder and member of the
Company's Board of Directors converted $3,500,285 of indebtedness into 290,000
shares of Series B preferred stock of the Company and 60,000 shares of the
Company's Series C preferred stock. Both the Series B and C shares of preferred
stock have a liquidation preference of $10 per share ("Liquidation Value") and a
normal dividend of 9% of Liquidation Value payable monthly. Should the Company
not pay the dividends on either the Series B or C preferred stock for three
consecutive months, the holder will be entitled to receive 100,000 shares of the
Company's common stock for each month that the dividend has not been paid as a
penalty. The preferred stock, based on Liquidation Value, is convertible into
common stock of the Company at 75% of the average market value of the common
stock for the ten trading days immediately preceding the day of conversion. The
preferred stock also has voting rights equal to 3,500,000 shares of common stock
on all matters on which common stock votes, including election of directors. As
part of the consideration for the conversion, the holder was issued 500,000
shares of the Company's common stock. The issuance of the common stock was
valued at approximately $.80 per share, the estimated fair value of such shares
at the time of issuance.

     In September 1997, this significant stockholder loaned the Company an
additional $1.2 million, with interest at 9%.

                                      F-13
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

8. INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                              MARCH 31,           SEPTEMBER 30,
                                                              -----------    -------------------------
                                                                 1999           1998           1997
                                                              -----------    -----------    ----------
<S>                                                           <C>            <C>            <C>
Raw materials and packaging................................   $   397,930    $   371,573    $  375,510
Work-in-process............................................        50,511         54,892       365,333
Finished goods.............................................    11,320,478     10,639,915     5,613,776
                                                              -----------    -----------    ----------
                                                              $11,768,919    $11,066,380    $6,354,619
                                                              -----------    -----------    ----------
                                                              -----------    -----------    ----------
</TABLE>

9. PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                              MARCH 31,           SEPTEMBER 30,
                                                              -----------    -------------------------
                                                                 1999           1998           1997
                                                              -----------    -----------    ----------
<S>                                                           <C>            <C>            <C>
Land.......................................................   $   420,000    $   420,000    $  420,000
Building...................................................     1,517,600      1,517,600     1,517,600
Equipment..................................................     6,087,580      5,757,682     6,132,117
                                                              -----------    -----------    ----------
                                                                8,025,180      7,695,282     8,069,717
Less: Accumulated depreciation.............................    (4,165,266)    (3,518,379)   (4,976,981)
                                                              -----------    -----------    ----------
                                                              $ 3,859,914    $ 4,176,903    $3,092,736
                                                              -----------    -----------    ----------
                                                              -----------    -----------    ----------
</TABLE>

10. OTHER ASSETS

<TABLE>
<CAPTION>
                                                              MARCH 31,           SEPTEMBER 30,
                                                              -----------    -------------------------
                                                                 1999           1998           1997
                                                              -----------    -----------    ----------
<S>                                                           <C>            <C>            <C>
Noncurrent deferred tax asset..............................   $   581,535    $   581,535    $  581,535
Other......................................................        63,555         63,556       102,051
Long-Term Investment(1)....................................       500,000             --            --
                                                              -----------    -----------    ----------
                                                              $ 1,145,090    $   645,091    $  683,586
                                                              -----------    -----------    ----------
                                                              -----------    -----------    ----------
</TABLE>

------------------
(1) In February 1999, the Company signed a joint venture with Fashionmall.com,
    Inc. to build several websites and contributed $500,000 in cash to the joint
    venture.

11. REVOLVING CREDIT AGREEMENTS

     (a) In April 1994, the Company entered into an agreement with Congress
Financial Corporation which has been extended to July 2000, providing the
Company with a maximum $3,000,000 secured line of credit to be used for loans
and trade letters of credit. The loans are secured by substantially all of the
Company's personal property, including without limitation, accounts receivable,
inventory and trademarks. The interest rate on loans is two percent (2%) above
the prime rate announced by Core States Bank. The credit agreement contains
restrictions relating to the payment of dividends. Additionally, prior to
amendment, the Company was required to maintain a minimum of $3,500,000 in
stockholders' equity and a minimum of $4,500,000 of working capital (excluding
the Congress loan and certain subordinated debt). At September 30, 1996, the
Company was not in compliance with these financial covenants, however, Congress
continued to extend the Company credit under the terms of the original
agreement. On February 25, 1997, the violations were waived by Congress, and the
Company and Congress agreed on revised financial covenants. Under the revised
agreement, the stockholders' equity and working capital minimums (excluding the
Congress loan and certain subordinated debt) were reduced to $750,000 and
$500,000, respectively, and was increased during the fiscal year ending
September 30, 1997 to

                                      F-14
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

11. REVOLVING CREDIT AGREEMENTS--(CONTINUED)

($250,000) and $1,500,000, respectively. The Company has received waivers for
its failure to comply with the reporting and financial requirements of the
Agreement through September 30, 1998, and is currently negotiating revised
financial covenants to reflect the current corporate structure.

     (b) Under the terms of the credit agreement, the Company could borrow up to
85% (reduced to 80% in the third quarter of 1997) of the amount of eligible
accounts receivable (as defined in the agreement), not to exceed the maximum
credit. In February 1995, the agreement was amended to adjust the formula used
to determine the amount available for revolving loans by including therein an
amount based upon eligible inventory not to exceed $750,000.

     (c) As of October 30, 1997, Brownstone entered into a loan agreement which
expires in February 2000 with Congress providing Brownstone with a maximum
$5,500,000 secured line of credit to be used for loans and trade letters of
credit. The line of credit is secured by all of the assets of Brownstone and
guaranteed by the Company and Magram. The interest rate is two percent (2%)
above the prime rate announced by Core States Bank. The loan agreement provides
for certain restrictive covenants, including restrictions on Brownstone's debt
financing, dividends and distributions, and transactions with the Company and
its subsidiaries. The loan agreement also requires Brownstone maintain a net
worth (excluding debt subordinated to the Congress loan) of $300,000 until
June 30, 1998, and $500,000 thereafter. The Company has received waivers for its
failure to comply with the reporting and financial requirements through
September 30, 1998.

     (d) Prior to the acquisition of Magram, Magram had entered into a loan
agreement, dated as of August 13, 1996, which expires in July 1999, with
Congress providing Magram with a maximum of $5,000,000 secured line of credit to
be used for loans and trade letters of credit. The line of credit is secured by
all of the assets of Magram and guaranteed by the Company and Brownstone. The
interest rate is one and one-half percent (1 1/2%) above the prime rate
announced by Core States Bank. The loan agreement provides for certain
restrictive covenants, including restrictions on Magram's debt financing,
dividends and distributions and transactions with the Company and its
subsidiaries. The loan agreement also requires Magram maintain working capital
of at least $1,500,000 and net worth (excluding debt subordinated to the
Congress loan) of $1,600,000. Upon the acquisition of Lew Magram, these
covenants were waived by Congress, and the Company and Congress are currently
negotiating revised contracts.

     The lines of credit between Congress and each of the Company, Brownstone
and Magram are guaranteed by a principal shareholder and director up to an
aggregate maximum amount of $1,000,000.

     On May 12, 1999, the Company entered into a Secured Credit Agreement with
First Source Financial LLP providing a $17 million asset based loan facility
replacing the existing asset based loan facilities provided by Congress.

     The First Source loan facility provides a $13 million revolving loan with
an interest rate at prime plus 1 1/2%, a $3 million three year term loan with an
interest rate at prime plus 2% and a $1 million three year term loan with an
interest rate at prime plus 2% increasing to prime plus 3% on November 15, 1999.
The loan facility is secured by substantially all of the Company's assets, a
personal guarantee by Robert M. Rubin, the Company's Chairman of the Board, up
to $1 million and an additional $1 million cash collateral deposit by
Mr. Rubin.

     The amount of funds available to borrow under the revolving loan is based
on a percentage of the Company's inventory and qualified receivables plus 100%
of Mr. Rubin's cash collateral. As of May 12, 1999, the aggregate availability
under the revolving loan was approximately $8.5 million.

                                      F-15
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

12. LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                 MARCH 31,          SEPTEMBER 30,
                                                                 ----------    ------------------------
                                                                    1999          1998          1997
                                                                 ----------    ----------    ----------
<S>                                                              <C>           <C>           <C>
12% subordinated debenture due June 2003(a)...................   $5,000,000    $5,000,000    $       --
Note payable--bank, payable in monthly installments of $10,018
  which includes interest at 8.375% due August 2010. The note
  is collateralized by land and building and is guaranteed by
  a former stockholder........................................      890,813       911,877       952,806
Note payable--bank, payable in monthly installments of $7,201
  which includes interest at 12%. The note is collateralized
  by land and buildings and is cosigned by a former
  stockholder(b)..............................................      534,027       544,811       564,540
Equipment loans--payable in monthly installments..............      598,788       775,983       450,851
Other.........................................................       91,000        90,730        10,366
                                                                 ----------    ----------    ----------
                                                                  7,114,628     7,323,401     1,978,563
Less: Current maturities......................................      847,793       939,816       823,918
                                                                 ----------    ----------    ----------
Long-term debt................................................   $6,266,835    $6,383,585    $1,154,645
                                                                 ----------    ----------    ----------
                                                                 ----------    ----------    ----------
</TABLE>

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

(a) On June 29, 1998, the Company issued $5,000,000 principal amount of its 12%
    subordinated secured debentures to Finova Mezzanine Capital, Inc. (formerly
    known as Sirrom Capital Corporation, d/b/a Tandem Capital) ("Finova
    Debentures"). The debentures are due June 29, 2003, and bear interest at
    12%, payable quarterly. The Finova Debentures are secured by all of the
    personal property of the Company and its subsidiaries and includes certain
    restrictive covenants, including restrictions on dividends and
    distributions, additional debt financing and transaction with the Company
    and its subsidiaries. The Company also issued warrants in connection with
    the issuance of the Finova Debentures. The Company issued warrants to
    purchase up to 208,300 shares of its common stock exercisable at $2.35 for
    five years. The value of the warrants is immaterial and no original issue
    discount has been recorded. An additional 416,600 warrants will be issued on
    February 28, 1999 if the debenture is still outstanding at an exercise price
    equal to 80% of the average closing bid price for the twenty days prior to
    their issuance. An additional 200,000 warrants will be issued on each
    anniversary that the debenture is outstanding at an exercise price equal to
    80% of the average closing bid price for the twenty days prior to their
    issuance. The exercise price is to be adjusted downward if the Company's
    common stock price is below this exercise price to an exercise price equal
    to the greater of 80% of the market price or $2.00 per share.

(b) Full payment of this mortgage was due on January 26, 1997. The lender agreed
    to extend the mortgage to July 1999. The Company is in the process of
    refinancing the mortgage.

     The maturities of long-term debt are as follows:

<TABLE>
<S>                                                            <C>
1999........................................................   $  939,816
2000........................................................      367,743
2001........................................................      237,945
2002........................................................      166,217
2003........................................................    5,120,216
Thereafter..................................................      491,464
                                                               ----------
                                                               $7,323,401
                                                               ----------
                                                               ----------
</TABLE>

                                      F-16
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

13. STOCKHOLDERS' EQUITY

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

     (b) On November 4, 1998, 581,175 warrants to purchase shares of the
Company's common stock at $3.50 per share issued in connection with the
Company's initial public offering of its common stock expired.

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

     (d) In September 1996, the Company issued 500,000 common shares at $.95 per
share to previously unrelated investors from the exercise of warrants. Net
proceeds to the Company were $475,000.

     (e) In May 1997, pursuant to an agreement in 1996, the Company issued to a
principal shareholder and officer an aggregate of 550,000 shares of common stock
valued at $400,000 ($.75 per share) in consideration of his waiver of certain
compensation owed to him and for restructuring certain debt owed to him, waiving
certain defaults and providing an additional loan to the Company in the
aggregate amount of $600,000 during 1996.

     (f) In March 1997, the Company approved the issuance of 52,217 shares of
common stock to a principal shareholder and officer in lieu of the dividend
payments due under the Series B and Series C preferred stock.

     (g) On September 9, 1996, the Company entered into an agreement with
Gersten, Savage, Kaplowitz & Fredericks, LLP ("GSK&F") which provided that GSK&F
will provide certain legal and consulting services to the Company over an
extended prior of time. In 1997 as compensation for its services, certain
individual members of GSK&F received an aggregate of 350,000 shares of common
stock and options to purchase an aggregate of 150,000 shares of common stock at
$2.50 per share.

     (h) In November 1996, the Company issued an aggregate of 1,060,000 options
to 35 employees of the Company, including two executive officers and one outside
director, pursuant to the November 1996 Plan. The options are exercisable at
$1.00 per share, vest over a period of five years, and expire ten years from the
date of grant, if not sooner, due to termination or death of the employee.

     Options to purchase 520,000 shares expired on June 17, 1998 and 150,000
options were granted with an exercise price of $2.375.

     (i) In May 1997, the Company issued an aggregate of 150,000 options
pursuant to the November 1996 Plan, 50,000 of which were issued to Howard Katz,
a director of the Company, and 100,000 of which were issued to Mr. Fredericks in
connection with his agreement to become a member of the Company's Board of
Directors. Such options are exercisable at $1.875 per share.

     (j) In May 1997, the Company authorized the issuance of 200,000 shares of
common stock to a principal shareholder and officer in consideration of his
extending loans to the Company, as well as extending a personal guarantee to
Congress on behalf of the Company.

     (k) Between May and July 1997, the Company issued an aggregate of 100,000
and 58,408 shares of common stock in connection with the acquisitions of Magram
and Biobottoms. The shares were recorded at fair market value with a
corresponding increase in goodwill. During the same period options to acquire
200,000 shares of common stock were issued to six consultants. Of the 200,000
options, 50,000 are exercisable at $1.75 per share and 150,000 are exercisable
at $1.875 per share.

     (l) From May 1997 through September 1997, the Company sold 1,250,000 shares
of its common stock in a private placement of its securities in which it raised
$2,500,000. In addition to these shares, the Company issued

                                      F-17
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

13. STOCKHOLDERS' EQUITY--(CONTINUED)

to European Community Capital a placement agent's warrant exercisable to
purchase up to 200,000 shares of common stock at $3.3125 per share. The Company
issued an option to a principal of the common stock at $3.3125 per share. The
Company issued an option to a principal of the placement agent to purchase up to
100,000 shares of common stock at $2.00 per share.

     (m) In September 1997, a principal shareholder and officer made an
additional loan to the Company in the amount of $1,200,000.

     (n) In October 1997, in part to raise capital for the Company's acquisition
out of bankruptcy of the assets of Brownstone, the Company completed a private
offering of its securities which raised $3,620,000 from accredited investors.
The private placement consisted of units, each unit consisting of ten shares of
Series E preferred stock and 7,500 shares of common stock at a purchase price of
$10,000 per unit. As a result, the Company issued an aggregate of 3,630 shares
of Series E preferred stock and 2,722,500 shares of common stock.

     (o) On June 29, 1998, the Company completed the sale of subordinated
debentures to Finova Capital in the amount of $5,000,000 to be used for working
capital. In connection with the transaction, the Company issued warrants to
purchase 208,300 shares of common stock.

     (p) In March, 1999, the Company issued 32,440 shares of Series F Preferred
Stock plus 346,027 shares of common stock for an aggregate amount of $3,244,000.
Of this amount, 5,000 shares of Series F Preferred Stock and 53,333 shares of
common stock were issued to an investor for a cash contribution of $500,000
which the Series F Preferred Stock will be redeemed out of the proceeds of the
Company's proposed public offering (see Note 20). 17,200 shares of Series F
Preferred Stock and 183,467 shares of common stock were issued to a principal
stockholder for a cash contribution of $1.72 million.  A director of the Company
received 10,240 shares of Series F Preferred Stock and 109,227 shares of common
stock for converting loans and advances to the Company totaling $700,000 and
advancing $324,000 directly to a vendor of the Company.

     (q) In April 1999, the Company issued 75 shares of Series E Preferred Stock
and 38,470 shares of common stock were issued to a shareholder.

     At September 30, 1998 the components of the Preferred Stock were:

<TABLE>
<CAPTION>
                                                              SHARES                         PAR VALUE
                                                      ----------------------                 ---------    LIQUIDATION
                                                      ISSUED     OUTSTANDING    PER SHARE     TOTAL          VALUE
                                                      -------    -----------    ---------    ---------    -----------
<S>                                                   <C>        <C>            <C>          <C>          <C>
Series A(d)........................................   100,000      100,000        $ .01        1,000      $        --
Series B(a)........................................   290,000      290,000          .01        2,900        2,900,280
Series C(a)........................................    60,000       60,000          .01          600          600,000
Series D(b)........................................    95,000       92,503          .01          950        9,250,300
Series E(c)........................................     3,630        3,630          .01           36        3,630,000
                                                                                                          -----------
                                                                                                          $16,380,580
                                                                                                          -----------
                                                                                                          -----------
</TABLE>

------------------
(a) Convertible into common into common stock at 75% of "current market price"
    with a dividend of 9% of liquidation value and 10 votes per share.
(b) Shares issued in connection with the Magram acquisition (see Note 3(a)).
(c) Redeemable at the option of the Company with a dividend based on liquidation
    value of 6% increased to 12% if not redeemed by October 2000.
(d) Converted into 1,000,000 shares of common stock in November 1998.

                                      F-18
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

14. CONCENTRATIONS OF CREDIT RISK

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

15. NET SALES

     Two customers of Ecology Kids accounted for the following percentage of net
sales from continuing operations. No customer exceeded 10% of net sales in 1998
or the six months ended March 31, 1999.

                            PERCENTAGE OF NET SALES

<TABLE>
<CAPTION>
<S>                                                               <C>     <C>
Year ended September 30, 1997..................................    12       8
                                                                   --      --
                                                                   --      --
Nine months ended September 30, 1996...........................    11      40
                                                                   --      --
                                                                   --      --
</TABLE>

16. COMMITMENTS AND CONTINGENCIES

     (a) Sales Tax Audit

     In November 1997, Magram was served with a proposed assessment related to a
sales tax audit aggregating approximately $2.4 million (including penalties and
interest). This matter was settled for $350,000 and has been accrued at
October 3, 1998. The liability was recorded as of the acquisition date of
Magram.

     (b) Merchandise Credits

     Because of Magram's policy of periodically writing off into income unused
merchandise credits issued with the return of sale merchandise, it may be liable
for future claims on such amounts previously written off. The amounts written
off into income for 1997, 1998 and the six months ended March 31, 1999 were
$742,000, $3,398,000 and $2,021,780 respectively.

     (c) Employment Agreements

     In connection with the Magram acquisition, the Company entered into
three-year employment agreements with three former principals of Magram to serve
in executive capacities with the acquired company. Aggregate minimum annual
compensation under these agreements is $657,000 for the first two years and
$692,000 for the third year.

     In connection with the Brownstone acquisition in October 1997, the Company
entered into five-year employment agreements with two former principals of
Brownstone to serve in executive capacities with the Company. Aggregate minimum
annual compensation under these agreements is $372,500.

     During 1999, the Company entered into a three-year employment agreement
with an officer of the Company for a minimum of $200,000 a year.

     Robert M. Rubin, Chairman of the Board, has a financial consulting
agreement with the Company pursuant to which Mr. Rubin is paid $200,000 per
annum. The agreement terminates in December, 2002.

     On May 21, 1999, the Company entered into a severance agreement with
Jonathan Rosenberg. The agreement provides that Mr. Rosenberg will be paid six
months severance equal to $112,500 plus twelve months of health and other
benefits. The agreement terminated Mr. Rosenberg's employment agreement which
would have expired on February 15, 2002. Mr. Rosenberg resigned as Chief
Executive Officer, President and Director on May 21, 1999.

     (d) Leases

     The Company rents real and personal property under long-term lease
agreements which expire at various dates through August 2002. Although the lease
on the facility used in the Magram and Brownston operations will

                                      F-19
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

16. COMMITMENTS AND CONTINGENCIES--(CONTINUED)

expire in August 1999, the Company intends to exercise its option to extend to
2001. Future minimum rentals under noncancellable operating leases are as
follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING                                               AMOUNT
------------------                                             ----------
<S>                                                            <C>
1999........................................................   $  654,756
2000........................................................      663,996
2001........................................................      674,780
2002........................................................       78,736
                                                               ----------
                                                               $2,072,268
                                                               ----------
                                                               ----------
</TABLE>

     Rent expense amounted to approximately $890,000, $823,277, $0, $497,324 and
$346,747 for the years ended September 30, 1998, 1997, the nine months ended
September 30, 1996, and the six months ended March 31, 1999 and 1998,
respectively.

     (e) Litigation

     In September 1996, the Company was named as a defendant in an action
brought in the Supreme Court of New York. The plaintiff alleges that the
defendants' (including the Company) negligent maintenance of a railroad crossing
adjacent to the Company's property caused him to collide with a train. The
plaintiff is seeking $10,000,000 in damages for his injuries, and his spouse is
seeking an additional $1,000,000 in damages for loss of the plaintiff's
services. The Company and its insurance carrier intend to vigorously defend this
action. The ultimate outcome of the litigation cannot be presently determined.
The Company has $1,000,000 of insurance coverage which could be applied to any
liability posed by this matter.

     In March 1998, Paul Russo filed a complaint against Diplomat alleging that
he is entitled to the Unit Purchase Option granted by Diplomat as part of our
initial public offering in November 1993. Mr. Russo demands unspecified
compensatory and punitive damages. Although Diplomat does not dispute that it
granted the Unit Purchase Option as part of its initial public offering, it has
not yet been determined that Mr. Russo is entitled to the Unit Purchase Option
or the number of Diplomat's shares which may be purchased under the Unit
Purchase Option.

17. INCOME TAXES

     The following analyzes the deferred tax assets at March 31,1999,
September 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                       1999           1998           1997
                                                    -----------    -----------    -----------
<S>                                                 <C>            <C>            <C>
Net operating loss carryforward..................   $ 4,378,000    $ 3,485,000    $ 2,915,000
Depreciation.....................................       100,000        100,000        102,000
Inventory........................................     1,016,000      1,016,000      1,016,000
Other items......................................       164,000        164,000        164,000
                                                    -----------    -----------    -----------
                                                      5,858,000      4,765,000      4,197,000
Less: Valuation allowance........................    (4,296,000)    (3,403,000)    (2,835,000)
                                                    -----------    -----------    -----------
Deferred tax asset...............................   $ 1,362,000    $ 1,362,000    $ 1,362,000
                                                    -----------    -----------    -----------
                                                    -----------    -----------    -----------
</TABLE>

     A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred tax asset
reflects management's estimates of the amount which will be realized from future
profitability which can be predicted with reasonable certainty. The valuation
allowance was $2,835,000 at September 30, 1997, which represents a decrease of
$212,000 over the amount reported at September 30, 1996. The current portion of
the deferred tax asset amounts to $780,464, and is included with other current
assets. The long-term portion amounts to $581,536 and is included with other
assets. The increase in the deferred tax assets in 1998 was fully reserved.

                                      F-20
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

17. INCOME TAXES--(CONTINUED)

     As of September 30, 1998, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $7,300,000 which are available
to offset future Federal taxable income through 2009.

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

<TABLE>
<CAPTION>
                                                                  SIX MONTHS           YEAR ENDED
                                                                     ENDED           SEPTEMBER 30,
                                                                   MARCH 31,     ----------------------
                                                                     1999          1998         1997
                                                                  -----------    ---------    ---------
<S>                                                               <C>            <C>          <C>
Income tax benefit computed at statutory rate..................   $ 2,320,000    $ 568,000    $ 376,000
Tax benefit of net operating loss carryforward.................                         --     (376,000)
State tax benefit, net of Federal tax benefit..................                         --        1,567
Adjustment to valuation allowance..............................    (2,320,000)    (568,000)    (212,000)
                                                                  -----------    ---------    ---------
Income tax (benefit) as reported...............................   $        --    $      --    $(210,433)(1)
                                                                  -----------    ---------    ---------
                                                                  -----------    ---------    ---------
</TABLE>

------------------
(1) Includes amounts attributable to discontinued operations.

18. BUSINESS SEGMENT INFORMATION

     The Company is engaged in two lines of business, specialty catalog retail
and mass merchant manufacturing and distribution. Operations are conducted in
North America. The following is a summary by business segment:

<TABLE>
<CAPTION>
                                                                                       MASS MERCHANT
                                                                   SPECIALTY CATALOG   MANUFACTURING &
INFORMATION BY BUSINESS SEGMENT                                    RETAIL OPERATIONS   DISTRIBUTION         TOTAL
-------------------------------                                    -----------------   ---------------   -----------
<S>                                                                <C>                 <C>               <C>
MARCH 31, 1999
Net sales........................................................     $38,691,961        $ 2,888,576     $41,580,537
Cost of goods sold...............................................      19,115,262          1,823,173      20,938,435
                                                                      -----------        -----------     -----------
Gross profit.....................................................      19,576,699          1,065,403      20,642,102
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................      22,873,428          1,059,835      23,933,263
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $(3,296,729)       $     5,568     $(3,291,161)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $  (891,299)       $  (158,860)    $(1,050,159)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $(4,188,028)       $  (153,292)    $(4,341,320)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $44,652,892        $ 5,489,012     $50,141,904

MARCH 31, 1998
Net sales........................................................     $32,509,034        $ 4,006,594     $36,515,628
Cost of goods sold...............................................      14,654,574          2,374,750      17,029,324
                                                                      -----------        -----------     -----------
Gross profit.....................................................      17,854,480          1,631,844      19,486,304
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................      15,718,136          1,352,525      17,070,661
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $ 2,136,324        $   279,319     $ 2,415,643
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $  (451,920)       $  (190,329)    $  (642,249)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $ 1,684,404        $    88,990     $ 1,773,394
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $35,935,856        $10,546,108     $46,481,964
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
</TABLE>

                                      F-21
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

18. BUSINESS SEGMENT INFORMATION--(CONTINUED)

<TABLE>
<CAPTION>
                                                                                       MASS MERCHANT
                                                                   SPECIALTY CATALOG   MANUFACTURING &
INFORMATION BY BUSINESS SEGMENT                                    RETAIL OPERATIONS   DISTRIBUTION         TOTAL
-------------------------------                                    -----------------     -----------     -----------
SEPTEMBER 30, 1998
<S>                                                                <C>                 <C>               <C>
Net sales........................................................     $67,921,661        $ 6,663,931     $74,585,592
Cost of goods sold...............................................      30,248,309          4,184,988      34,433,297
                                                                      -----------        -----------     -----------
Gross profit.....................................................      37,673,352          2,478,943      40,152,295
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................      35,436,230          2,101,142      37,537,372
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $ 2,237,122        $   377,801     $ 2,614,923
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $(1,007,927)       $  (347,397)    $(1,355,324)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $ 1,229,195        $    30,404     $ 1,259,599
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $46,024,819        $ 4,934,064     $50,958,883
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
SEPTEMBER 30, 1997
Net sales........................................................     $10,575,342        $ 6,892,724     $17,468,066
Cost of goods sold...............................................       5,005,817          3,718,213       8,724,030
                                                                      -----------        -----------     -----------
Gross profit.....................................................       5,569,525          3,174,511       8,744,036
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................       5,322,581          1,738,077       7,060,658
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $   246,944        $ 1,436,434     $ 1,683,378
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $        --        $  (421,233)    $  (421,233)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $   246,944        $ 1,015,201     $ 1,262,145
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $27,597,554        $ 5,415,333     $33,012,887
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
SEPTEMBER 30, 1996
Net sales........................................................     $        --        $ 7,448,778     $ 7,448,778
                                                                      -----------        -----------     -----------
Cost of goods sold...............................................     $        --        $ 7,392,265     $ 7,392,265
                                                                      -----------        -----------     -----------
Gross profit.....................................................     $        --        $    56,513     $    56,513
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses:
  Selling, general & administrative expenses.....................              --          3,672,133       3,672,133
  Restructuring & reorganization costs...........................              --          1,738,975       1,738,975
                                                                      -----------        -----------     -----------
Total expenses...................................................              --          5,411,108       5,411,108
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $        --        $(5,354,595)    $(5,354,595)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $        --        $  (702,474)    $  (702,474)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $        --        $(6,057,069)    $(6,057,069)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $        --        $ 7,762,190     $ 7,762,190
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
</TABLE>

                                      F-22
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

19. STOCK OPTION PLANS

     The Company's 1992 Stock Option Plan ("1992 Stock Option Plan") provides
for the issuance of up to 200,000 shares of common stock upon exercise of
incentive stock options and is intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended ("Code").

     The 1992 Stock Option Plan may be administered by the Board of Directors or
by a stock option committee of the Board of Directors (the "Committee").
Incentive stock options are granted under the 1992 Stock Option Plan to
employees generally on the basis of the recipient's responsibilities and the
achievement of performance objectives. Subject to the limitations set forth in
the 1992 Stock Option Plan, the Board or the Committee has the authority to
determine when the options may be exercised and vest. Under the Plan, the per
share exercise price may not be less than the greater of 100% of the fair market
value of the shares on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting rights of the Company's
outstanding capital stock, the per share exercise price must be at least 110% of
the fair market value on the date of grant and the term may not be longer than
five years. As of this date, the Company has outstanding an aggregate of 130,000
stock options, exercisable at $1.50 per share, all of which are held by
affiliates or employees of the Company at the time of grant.

  August 1996 Stock Option Plan

     The Company also established a nonqualified stock option plan providing for
the issuance of up to 1,500,000 shares of common stock to its directors,
officers, key employees and consultants (the "August 1996 Plan"). To date, the
Company has granted directors, officers and key employees an aggregate of
150,000 incentive and nonqualified stock options, at an exercise price of $2.00
per share and 500,000 nonqualified stock options issued and exercised by a
consultant. Future grants could have an adverse effect on the market price of
the Company's securities.

  November 1996 Stock Option Plan

     Under the Company's November 1996 Incentive Stock Option Plan (the
"November 1996 Plan"), options to purchase a maximum of 1,500,000 shares of
common stock of the Company (subject to adjustments in the event of stock
splits, stock dividends, recapitalizations and other capital adjustments) may be
granted to employees, officers and directors of the Company and other persons
who provide services to the Company. 1,060,000 of such options have been granted
at an exercise price of $1.00, of which 620,000 options expired on June 17,
1998, 150,000 are exercisable at $2.375 and 50,000 are exercisable at $1.00. The
options to be granted under the November 1996 Plan are designated as incentive
stock options or nonincentive stock options by the Board of Directors which also
have discretion as to the persons to be granted options, the number of shares
subject to the options and terms of the option agreements. Only employees,
including officers and part-time employees of the Company, and nonemployee
directors, consultants and advisors and other persons who perform significant
service for or on behalf of the Company, may be granted incentive stock options;
officers and directors who currently own more than 5% of the issued and
outstanding stock are not eligible to participate in the November 1996 Plan.

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

  1998 Stock Option Plan

     The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Board of Directors in February, 1998 and approved by the stockholders in May,
1998. Under the 1998 Plan, the Company is authorized to issue options to
purchase up to 1,200,000 shares of common stock. All officers and other
employees of the Company and other persons who perform significant services for
or on behalf of the Company are eligible to participate in the 1998 Plan.

                                      F-23
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

19. STOCK OPTION PLANS--(CONTINUED)

     The Company may grant under the 1998 Plan both incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "code"), and stock options that do not
qualify for incentive treatment under the Code ("Nonstatutory Options").

     The Plan shall be administered by the Board of Directors of the Company
(the "board"), if each member is a "disinterested" person within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended
("Rule 16b-3"), or a committee (the "Committee") of two or more directors, each
of whom is a disinterested person.

     Subject to the provisions of the 1998 Plan, the Committee has the authority
to construe and interpret the 1998 Plan, to prescribe, adopt, amend and rescind
rules and regulations relating to the administrations of the 1998 Plan and to
make all other determinations necessary or advisable for its administration.
Subject to the limitations of the 1998 Plan, the Committee also selects from
among the eligible persons those individuals who will receive options, whether
an optionee will receive Incentive Stock Options or Nonstatutory Options, or
both, and the amount, price, restrictions and all other terms and provisions of
such options (which need not be identical).

     The exercise price of each Incentive Stock Option under the Option Plan
will be determined by the Committee, but will not be less than 100% of the "Fair
Market Value" (as defined in the 1998 Plan) of common stock on the date of grant
(or 110% in the case of an employee who at the time owns more than 10% of the
total combined voting power of all classes of capital stock of the Company). The
Nonstatutory Option exercise price will be determined by the Committee, but will
not be less than 85% of the common stock on the date of grant.

     Under the 1998 Plan, the Company has outstanding options to purchase an
aggregate of 700,000 shares of common stock exercisable at $2.75 per share, all
of which are held by employees of the Company. Options to purchase 200,000
shares of common stock become exercisable upon Brownstone meeting certain
minimum net income. These options will be recorded, when and if, the net income
assessments are met. The remaining outstanding options become exercisable over
four years.

     The following table is a summary of stock option information for 1996
through 1998:

<TABLE>
<CAPTION>
                                                                  OPTION        PRICE RANGE      AVERAGE
                                                                  SHARES         PER SHARE       PRICE
                                                                 ---------    ----------------   -------
<S>                                                              <C>          <C>                <C>
Outstanding 1/1/96............................................     130,000               $1.50    $1.50
  Granted.....................................................     650,000       $.95 to $2.50    $1.34
  Exercised...................................................     500,000                $.95    $ .95
  Forfeited...................................................           0                   0        0
                                                                 ---------    ----------------    -----
Outstanding 10/1/96...........................................     280,000      $1.50 to $2.50    $2.04
  Granted.....................................................   1,485,000     $1.00 to $3.125    $1.21
  Exercised...................................................           0                   0        0
  Forfeited...................................................           0                   0        0
                                                                 ---------    ----------------    -----
Outstanding 10/1/97...........................................   1,765,000     $1.00 to $3.125    $1.67
  Granted.....................................................     750,000      $1.00 to $2.75    $2.63
  Exercised...................................................      35,000      $1.75 to $1.85    $1.84
  Forfeited...................................................     620,000               $1.00    $1.00
                                                                 ---------    ----------------    -----
Outstanding 9/30/98...........................................   1,860,000     $1.00 to $3.125    $2.05
                                                                 ---------    ----------------    -----
                                                                 ---------    ----------------    -----
Exercisable at year-end
  9/30/96.....................................................     130,000               $1.50    $1.50
  9/30/97.....................................................     527,000     $1.00 to $3.125    $1.61
  9/30/98.....................................................     831,000     $1.00 to $3.125    $2.02
</TABLE>

                                      F-24
<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

19. STOCK OPTION PLANS--(CONTINUED)

  Available for future grants

<TABLE>
<CAPTION>
                                                                   1992     AUGUST 1996    NOVEMBER 1996     1998
                                                                   PLAN       PLAN            PLAN           PLAN
                                                                  ------    -----------    -------------    -------
<S>                                                               <C>       <C>            <C>              <C>
9/30/98........................................................   70,000      850,000         710,000       500,000
</TABLE>

     The following table summarizes information about stock options outstanding
at September 30, 1998.

<TABLE>
<S>                                                                           <C>
Range of Exercise prices:..................................................    $1.00 to $3.125
Outstanding options Number outstanding at September 30, 1998...............          1,860,000
Weighted average remaining contractual life (years)........................                3.5
Weighted average exercise price............................................              $2.05
Exercisable options Number outstanding at September 30, 1998...............            831,000
Weighted average exercise price............................................              $2.02
</TABLE>

     In fiscal 1997, the Company adopted the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". For disclosure purposes, the
fair value of options is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
stock options granted during the years ended September 30, 1998 and 1997 and
nine months ended September 30, 1996: annual dividends of $-0-; expected
volatility of 46.10% in 1988 and 94.99% in 1997; risk-free interest rate of 7%
and expected life of five years. The weighted average fair value of stock
options granted during the years ended September 30, 1998 and 1997 and nine
months ended September 30, 1996 was $1.51, $1.17 and $1.48, respectively. If the
Company had recognized compensation cost for stock options in accordance with
SFAS No. 123, the Company's pro forma net loss and net loss per share would have
been $2,257,683 and $ .21 per share and $550,088 and $.09 per share for the
years ended September 30, 1998 and 1997 and $8,298,400 and $1.82 per share for
the nine months ended September 30, 1996.

20. SUBSEQUENT EVENTS

     The Company intends to raise an additional $9 million in equity capital
upon the completion of an offering. The proceeds from the sale of the shares are
intended to be used as follows:

     o $4.5 million to repay a portion of the outstanding balances due under the
       Finova debentures ($2,000,000) and the First Source loan facility
       ($2,000,000) and to redeem a portion of the Company's redeemable
       preferred stock ($500,000);

     o $600,000 to be used for creating, designing, integrating into operations
       and operating the Lew Magram and Brownstone Studio interactive websites;
       and

     o the balance, including any proceeds from the sale of over-allotment
       shares, to fund general corporate purposes, including possible
       consolidation of operations into new facilities and possible
       acquisitions.

     In addition, upon the completion of the offering, holders of 478,573
shares of preferred stock will convert or exchange their shares to 3,077,794
shares of common stock (after giving effect to a 1-for-5 reverse stock split).
This will result in an imputed dividend of approximately $2 million which will
result in a reduction in the net income, or in an increase in the net loss,
allocable to the common stock holders.

                                      F-25

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Lew Magram Ltd.

We have audited the accompanying statements of operations and cash flows of Lew
Magram Ltd. for the year ended January 4, 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lew Magram
for the year ended January 4, 1997, in conformity with generally accepted
accounting principles.

/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP

New York, New York
May 16, 1997, except for Note 2
which is as of February 19, 1998

                                      F-26
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Lew Magram Ltd.

We have audited the accompanying statements of operations and cash flows of Lew
Magram Ltd. for the six months ended June 30, 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lew Magram
for the six months ended June 30, 1997, in conformity with generally accepted
accounting principles.

/s/ Feldman Sherb Ehrlich & Co., P.C.
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants

New York, New York
January 30, 1999

                                      F-27

<PAGE>

                                LEW MAGRAM LTD.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED     YEAR ENDED
                                                                                 JUNE 30, 1997       JANUARY 4, 1997
                                                                                 ----------------    ---------------
<S>                                                                              <C>                 <C>
Net sales.....................................................................     $ 19,642,703        $51,926,603
Cost of goods sold............................................................       11,960,210         25,111,912
                                                                                   ------------        -----------
  Gross profit................................................................        7,682,493         26,814,691
Selling, general and administrative expenses..................................       14,670,290         28,296,249
                                                                                   ------------        -----------
  Operating loss..............................................................       (6,987,797)        (1,481,558)
Other income (expense)........................................................         (218,636)           691,553
                                                                                   ------------        -----------
  Loss before income taxes....................................................       (7,206,433)          (790,005)
Income taxes..................................................................          (70,000)                --
                                                                                   ------------        -----------
Net loss......................................................................     $ (7,276,433)       $  (790,005)
                                                                                   ------------        -----------
                                                                                   ------------        -----------
</TABLE>

                See accompanying notes to financial statements.

                                      F-28
<PAGE>

                                LEW MAGRAM LTD.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED     YEAR ENDED
                                                                                 JUNE 30, 1997       JANUARY 4, 1997
                                                                                 ----------------    ---------------
<S>                                                                              <C>                 <C>
Cash flows from operating activities:
  Net loss....................................................................     $ (7,276,433)       $  (790,005)
  Adjustments to reconcile net loss to net cash provided by (used in)
     operating activities:
     Depreciation and amortization............................................          303,547            546,030
     Unrealized gain in marketable securities.................................               --            (12,000)
     Decrease (increase) in:
       Accounts receivable....................................................          (10,977)            83,216
       Inventories............................................................          938,598            (67,018)
       Prepaid expenses and other current assets..............................            6,363           (991,238)
       Other assets...........................................................               --             34,937
     Increase (decrease) in:
       Accounts payable.......................................................         (469,981)           804,867
       Accrued expenses.......................................................        5,278,391            638,927
                                                                                   ------------        -----------
Total adjustments.............................................................        6,045,941          1,037,721
                                                                                   ------------        -----------
Net cash provided by (used in) operating activities...........................       (1,230,492)           247,716
                                                                                   ------------        -----------
Cash flows from investing activities:
  Capital expenditures........................................................          (87,175)          (543,950)
                                                                                   ------------        -----------
Cash flows from financing activities:
  Increase in long-term debt..................................................        1,369,084            325,547
  Issuance of preferred stock.................................................        2,000,000                 --
  Dividends on preferred stock................................................          (24,466)                --
  Payments under capital leases...............................................         (199,121)           138,606
  Redemption of stockholder...................................................          (77,619)            46,774
                                                                                   ------------        -----------
Net cash provided by financing activities.....................................        3,067,878            510,927
                                                                                   ------------        -----------
Net increase in cash..........................................................        1,750,211            214,693
Cash, beginning of period.....................................................          285,796             71,104
                                                                                   ------------        -----------
Cash, end of period...........................................................     $  2,036,007        $   285,797
                                                                                   ------------        -----------
                                                                                   ------------        -----------
</TABLE>

                See accompanying notes to financial statements.

                                      F-29
<PAGE>

                                LEW MAGRAM LTD.

                         NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF ACCOUNTING POLICIES

  Description of Business

     The Company is a mail order ladies apparel retailer.

  Inventories

     Inventories consisting of finished goods are valued at the lower of cost
(first-in, first-out) or market.

  Catalogue and Advertising Expenses

     The Company expenses the production costs of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits.

     Direct-response advertising consists primarily of mail order catalogues
that include order forms for the Company's products. The capitalized costs of
the catalogue are amortized over the shipping season of the products appearing
in the catalogues, which does not exceed 6 months.

     The Company began a production development program that extends the useful
lives of certain production costs over many catalogue seasons. These costs are
being amortized on a straight-line basis over 18 months, the estimated useful
life, and consist of photography, modeling and color separation costs.

  Property, Equipment and Depreciation

     Depreciation and amortization are computed by both accelerated and
straight-line methods based on the estimated useful lives of the assets.

  Revenue Recognition

     Revenue is recognized at the time merchandise is shipped to customers.
Proceeds received for merchandise not yet shipped are reflected as "open prepaid
orders," a current liability. In addition, the Company passes on the cost of
parcel shipments directly to the customer as part of the postal and handling
charge, which is customary in the direct mail industry. This is reflected as a
reduction of operating expenses.

     The Company also derives revenue through the rental of their customer
mailing list, which is reflected in other income.

  Merchandise Credits

     The Company issues merchandise credits for certain returns of merchandise
sold with substantial discounts. Unused credits are periodically written off
into income.

  Income Taxes

     The Company elected, with the consent of its stockholders, to be taxed as
an S corporation under the provisions of the Internal Revenue Code and New York
State Franchise Tax Law. The stockholder is required to report the Company's
taxable income or loss in their personal income tax returns; accordingly, such
income taxes are not reflected in the financial statements. The financial
statements include a provision for New York City and New Jersey income taxes
since New York City and New Jersey do not recognize S corporation status. New
York State imposes a corporate level tax based upon the differential between
corporate and individual tax rates, which has been provided for.

     During the year ended July 1, 1995, the Company adopted SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities

                                      F-30
<PAGE>

                                LEW MAGRAM LTD.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

1. SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)

for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Deferred income taxes are
immaterial and not recorded by the Company.

     In connection with the transactions discussed in Note 2, the Company's
corporation status was automatically terminated when the Company issued
preferred stock (see note 4(a)), and the Company will now be taxed as a C
corporation. The change in status will not materially affect the Company.

  Fiscal Year

     The Company's fiscal year is comprised of 52-53 weeks ending on the
Saturday closest to December 31.

2. ACQUISITION BY DIPLOMAT DIRECT MARKETING CORPORATION

     On February 19, 1998, Diplomat Direct Marketing Corporation ("DDMC")
completed the acquisition of Lew Magram, Ltd. The acquisition was effected as of
July 1, 1997, the date that DDMC assumed effective control of Magram. The
acquisition was accounted for as a purchase and the consideration consisted of
the issuance of 95,000 shares of DDMC's $.10 par value, Series D convertible
preferred stock and 250,000 shares of DDMC's common stock. The Series D
preferred stock is convertible into 3,166,667 shares of DDMC's common stock. The
fair market value of the consideration was approximately $8.7 million and
acquisition costs were approximately $646,000. DDMC recorded the carryover basis
for a certain selling stockholder of Magram who is also a principal stockholder
of DDMC.

3. RENT EXPENSE

     Rent expense amounted to approximately $280,000 and $563,000 for the six
months ended June 30, 1997 and the year ended January 4, 1997, respectively.

4. CONTINGENCIES

     Because of the Company's policy of periodically writing off into income
unused merchandise credits issued (approximately $264,110 and $796,000 for the
six months ended June 30, 1997 and the year ended January 4, 1997,
respectively), without expiration dates in connection with the return of sale
merchandise, it may be liable for future claims on such amounts previously
written off.

5. OTHER

     (a) On May 16, 1997, the Company issued 2,000 shares of preferred stock to
two individuals for $2,000,000. The preferred stock has been designated as
senior convertible preferred stock with $.01 par value. The preferred stock has
a $1,000 per share liquidation value and a 9.5% cumulative dividend.

     (b) In connection with the transaction discussed above, the Company amended
its certificate of intercompany whereby the Company is authorized to issue 2,000
shares of $.01 par value common stock and 2,000 shares of $.01 par value
preferred stock.

                                      F-31

<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                              FINANCIAL STATEMENTS

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                           PAGE
                                                                                                           NUMBER
                                                                                                           ------
<S>                                                                                                        <C>
Independent Auditors' Report............................................................................    F-33
Financial Statements:
  Balance Sheets........................................................................................    F-34
  Statements of Operations..............................................................................    F-35
  Statements of Cash Flows..............................................................................    F-36
  Notes to Financial Statements.........................................................................    F-37
</TABLE>

                                      F-32
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Jean Grayson's Brownstone Studio, Inc.

We have audited the accompanying balance sheets of Jean Grayson's Brownstone
Studio, Inc. as of December 31, 1996 and 1995, and the related statements of
operations and retained earnings (deficit) and cash flows for the years then
ended. 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 Jean Grayson's Brownstone Studio, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared on a going concern
basis. The Company has sustained significant losses during the last two years
and has a working capital deficit of $3,464,094 as of December 31, 1996.
Furthermore, in February 1997 the Company filed for bankruptcy under Chapter 11
culminating in a court approved assumption of its remaining assets and certain
liabilities in October 1997. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities.

/s/ FELDMAN SHERB EHRLICH & CO., P.C.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants

New York, New York
August 24, 1998

                                      F-33
<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                      --------------------------
                                                                                         1996           1995
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents........................................................   $   124,554    $   216,226
  Receivable from credit card companies............................................       104,537        129,011
  Merchandise inventories..........................................................     7,235,765     10,856,229
  Prepaid expenses and other current assets........................................     2,491,545      2,752,640
                                                                                      -----------    -----------
     Total current assets..........................................................     9,956,401     13,954,106
Property and equipment--net........................................................     1,423,873      1,881,868
Other assets.......................................................................       208,388        297,004
                                                                                      -----------    -----------
                                                                                      $11,588,662    $16,132,978
                                                                                      -----------    -----------
                                                                                      -----------    -----------

                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Current maturities of capital leases and long-term debt..........................   $    59,704    $    84,699
  Note payable.....................................................................     1,568,543      2,107,131
  Accounts payable and accrued expenses............................................     8,475,130      9,142,782
  Customers' advances and returns..................................................     3,317,118      1,992,709
                                                                                      -----------    -----------
     Total current liabilities.....................................................    13,420,495     13,327,321
                                                                                      -----------    -----------
Obligations under capital leases and long-term debt................................        51,897        109,670
                                                                                      -----------    -----------
Deferred credits...................................................................       481,914        600,159
                                                                                      -----------    -----------

Commitments and contingent liabilities
Stockholders' equity (deficit)
  Common stock, no par value--authorized and outstanding, 200 shares...............       148,000        148,000
  Retained earnings (deficit)......................................................    (2,513,644)     1,947,828
                                                                                      -----------    -----------
     Total stockholders' equity (deficit)..........................................    (2,365,644)     2,095,828
                                                                                      -----------    -----------
                                                                                      $11,588,662    $16,132,978
                                                                                      -----------    -----------
                                                                                      -----------    -----------
</TABLE>

                       See notes to financial statements

                                      F-34
<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                            STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                      --------------------------
                                                                                         1996           1995
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
Net sales..........................................................................   $50,171,947..  $53,031,632
Costs and expenses:
  Cost of goods sold...............................................................    26,508,223     27,599,674
  Operating, general and administrative expenses...................................    27,929,664     26,819,772
  Interest expense--net............................................................       195,534        125,787
                                                                                      -----------    -----------
                                                                                       54,633,421     54,545,233
                                                                                      -----------    -----------
Net loss...........................................................................    (4,461,474)    (1,513,601)
Retained earnings beginning of year................................................     1,947,830      3,461,431
                                                                                      -----------    -----------
Retained earnings (deficit) end of year............................................   $(2,513,644)   $ 1,947,830
                                                                                      -----------    -----------
                                                                                      -----------    -----------
</TABLE>

                       See notes to financial statements.

                                      F-35
<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                    ----------------------------
                                                                                       1996             1995
                                                                                    -----------      -----------
<S>                                                                                 <C>              <C>
Cash flows from operating activities:
  Net loss.......................................................................   $(4,461,474)     $(1,513,601)
  Adjustments to reconcile net income to net cash provided by operating
     activities:
     Depreciation and amortization...............................................       495,667          480,530
     Increase in cash surrender value on officers' life insurance................            --          (60,545)
     Amortization of deferred credits............................................      (118,245)        (137,910)
     Gain on trade-in of fixed assets............................................            --          (43,663)
  Changes in operating assets and liabilities:
  Receivable from credit card companies..........................................        24,474          276,547
  Merchandise inventories........................................................     3,620,464       (1,916,305)
  Prepaid expenses and other current assets......................................       261,095          471,431
  Other assets...................................................................        88,617           29,202
  Accounts payable and accrued expenses..........................................      (667,650)         832,378
  Customer mail order advances...................................................     1,324,409          677,209
                                                                                    -----------      -----------
  Net cash provided by (used in) operating activities............................       567,357         (904,727)
                                                                                    -----------      -----------
Cash flows from investing activities:
  Capital expenditures...........................................................       (37,673)        (822,276)
                                                                                    -----------      -----------
  Net cash used in investing activities..........................................       (37,673)        (822,276)
                                                                                    -----------      -----------
Cash flows from financing activities:
  Proceeds from short-term borrowings............................................     1,568,543        2,107,131
  Principal payments on short-term borrowings....................................    (2,107,131)        (500,000)
  Principal payments on long-term borrowings and capital lease obligations.......       (82,768)        (141,798)
                                                                                    -----------      -----------
  Net cash provided by (used in) financing activities............................      (621,356)       1,465,333
                                                                                    -----------      -----------
Net decrease in cash and cash equivalents........................................       (91,672)        (261,670)
Cash and cash equivalents, beginning of year.....................................       216,226          477,896
                                                                                    -----------      -----------
Cash and cash equivalents, end of year...........................................   $   124,554      $   216,226
                                                                                    -----------      -----------
                                                                                    -----------      -----------
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest.........................................   $   195,534      $   143,121
                                                                                    -----------      -----------
                                                                                    -----------      -----------
  Cash paid during the year for income taxes.....................................   $        --      $    18,468
                                                                                    -----------      -----------
                                                                                    -----------      -----------
</TABLE>


                       See notes to financial statements

                                      F-36
<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                         NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

1. BUSINESS AND BASIS OF PRESENTATION

     Jean Grayson's Brownstone Studio, Inc. is engaged in the sale of fine
women's apparel through catalogs and an outlet store. A portion of its
merchandise is purchased from Wilroy, Inc. (the "Affiliate"), a company related
through common ownership.

     The accompanying financial statements have been prepared assuming the
Company to continue as a going concern. The Company has experienced significant
recent losses and a working capital deficit of approximately $3.5 million at
December 31, 1996. The Company filed for bankruptcy in February 1997 and
operated under Chapter 11 of the Bankruptcy Code until September 1997 at which
time its remaining assets and certain liabilities were assumed by Diplomat
Direct Marketing Corporation under a court approved plan of reorganization.
These financial statements do not contain any adjustments related to these
subsequent events.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          A. Inventory Valuation--Merchandise inventories, consisting of
             finished goods only, are stated at the lower of cost (determined on
             a first-in, first-out basis) or market.

          B. Property and Equipment--Property and equipment are stated at cost.
             Depreciation and amortization are computed by either the
             accelerated or straight-line methods over the estimated useful
             lives of the assets. Leasehold improvements and capital leased
             assets are amortized over the lesser of the term of the lease or
             the estimated useful life.

                The Company received a construction allowance upon entering into
                an office lease. This allowance is recorded as a deferred credit
                and is amortized over the life of the lease.

          C. Catalog Costs--In 1995, the Company adopted the method of
             accounting for catalog costs pursuant to the AICPA Statement of
             Position ("SOP") 93-7, "Reporting on Advertising Costs". SOP 93-7
             requires that the amortization of capitalized advertising costs
             should be the amount computed using the ratio that current period
             revenues for the catalog cost pool bear to the total of current and
             estimated future period revenues for that catalog cost pool. The
             effect of this adoption was not material to the financial
             statements.

          D. Income Taxes--The Company, with the consent of its stockholders,
             elected to be taxed as an S Corporation under the provisions of the
             Internal Revenue Code and New York State Tax Law which provides
             that, in lieu of corporation income taxes, the stockholders are
             required to report their proportionate share of the Company's
             taxable income or loss on their personal tax returns. Other state
             and local taxes are included in operating, general and
             administrative expenses.

                The Company accounts for income taxes pursuant to Statement of
                Financial Accounting Standards ("SFAS") No. 109, "Accounting for
                Income Taxes".

          E. Fair Value of Financial Instruments--SFAS No. 107, "Disclosures
             About Fair Value of Financial Instruments" requires disclosure
             about the fair value of financial instruments. The carrying amounts
             reported in the balance sheet for cash and cash equivalents,
             accounts receivable, notes payable, and accounts payable
             approximate fair value because of the short-term maturity of these
             financial statements.

          F. Use of Estimates in the Preparation of Financial Statements--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 disclosures of contingent assets and
             liabilities at the date of the financial statements and the

                                      F-37
<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

             reported amounts of revenue and expenses during the reporting
             period. Actual results could differ from those estimates.

          G. Recent Accounting Pronouncement--In March 1995, the Financial
             Accounting Standards Board issued SFAS No. 121, "Accounting for the
             Impairment of Long-Lived Assets and for Long-Lived Assets to be
             disposed of". SFAS No. 121 requires that long-lived assets and
             certain identifiable intangibles to be held and used by an entity
             be reviewed for impairment whenever events or changes in
             circumstances indicate that the carrying amount of an asset may not
             be recoverable, and is effective for financial statements for
             fiscal years beginning after December 15, 1995. The Company has
             determined that the effect of adopting this new standard is not
             material to the financial statements.

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

     At December 31, 1996 and 1995, prepaid expenses and other current assets
included deferred catalog costs of approximately $1,726,000 and $2,325,000.

4. PROPERTY AND EQUIPMENT

     Major classes of property and equipment are as follows:

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                ESTIMATED      ------------------------
                                                               USEFUL LIVES       1996          1995
                                                              --------------   ----------    ----------
<S>                                                           <C>              <C>           <C>
Data processing equipment..................................   5-7 years        $1,225,898    $1,199,068
Machinery and equipment....................................   5-10 years          710,276       679,644
Furniture and fixtures.....................................   5-10 years          593,503       593,292
Transportation equipment...................................   3 years              78,087        98,087
Leasehold improvements.....................................   Term of lease     1,583,188     1,583,188
                                                                               ----------    ----------
                                                                                4,190,952     4,153,279
Less accumulated depreciation and amortization.............                     2,767,079     1,271,414
                                                                               ----------    ----------
                                                                               $1,423,873    $1,881,865
                                                                               ----------    ----------
                                                                               ----------    ----------
</TABLE>

5. LINES OF CREDIT

     In September 1995, the Company entered into a $4,000,000 revolving credit
agreement (the "Credit Agreement") with a bank. The Credit Agreement provides
for direct borrowings of up to $4,000,000 as calculated under the terms of the
Credit Agreement and letters of credit of up to $1,500,000 with an aggregate
limit of $4,000,000. Borrowings under the Credit Agreement are secured by the
Company's accounts receivable, inventory, property and equipment, and other
collateral, and are guaranteed by the Affiliate. Borrowings bear interest at the
Alternate Base Rate plus one and one-quarter percent. The Alternate Base Rate is
defined in the Credit Agreement as the higher of (I) the bank's base commercial
lending rate and (ii) the Federal Funds Rate plus 0.5 percent. The Credit
Agreement expires on September 11, 1997. Borrowings outstanding under the Credit
Agreement were $1,568,543 at December 31, 1996 and $2,107,131 at December 31,
1995.

     The provisions of the Credit Agreement include (i) requirements that the
Company maintain minimum levels of net worth, current ratio, fixed charge
coverage, earnings before interest and taxes; and (ii) limitations on mergers,
consolidations, acquisitions, sales of assets liens, investments, loans, capital
expenditures, payment of dividends, indebtedness, leases, among others. At
December 31, 1996 and

                                      F-38
<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

5. LINES OF CREDIT--(CONTINUED)

December 31, 1995, the Company was not in compliance with certain covenants
primarily relating to net worth, current ratio, fixed charge coverage, earnings
before interest and taxes and report deadlines.

     During 1996 and 1995, maximum borrowings under revolving credit agreements
were $2,736,673 and $2,477,339, respectively, and average borrowings were
$1,667,569 and $669,398, respectively.

     In February 1997, the Company refinanced this debt with a new lender.

6. OBLIGATIONS UNDER CAPITAL LEASES AND LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                         --------------------
                                                                           1996        1995
                                                                         --------    --------
<S>                                                                      <C>         <C>
Obligations under capital leases (a)..................................   $ 62,334    $128,902
Note payable to bank bearing interest at 9 percent; due in monthly
  principal and interest payments of $1,788 from August 1995 through
  July 1999...........................................................     49,267      65,487
                                                                         --------    --------
                                                                          111,601     194,389
Less current portion..................................................     59,704      84,699
                                                                         --------    --------
                                                                         $ 51,897    $109,690
                                                                         --------    --------
                                                                         --------    --------
</TABLE>

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

(a) The Company has capital lease obligations in connection with lease
    agreements to acquire computer equipment, furniture and fixtures. The leases
    are payable in monthly installments through 1998, including interest at
    approximately 11 to 12 percent per annum.

     The maturities of long-term debt during the next five years are:

YEAR                                                             AMOUNT
----                                                           ----------
1998........................................................   $   40,753
1999........................................................       11,144
                                                               ----------
                                                               $   51,897
                                                               ----------
                                                               ----------

7. COMMITMENTS

     Leases--The Company has various operating leases for office and operating
facilities. One of the facilities is leased from the Affiliate. Future minimum
annual rental commitments under such noncancellable leases (including
obligations related to facilities leased from the Affiliate under informal
leasing arrangements) at December 31, 1996 are summarized as follows:

                                                               OPERATING
YEAR                                                             LEASES
----                                                           ----------
1998........................................................   $1,381,000
1999........................................................    1,254,000
2000........................................................      875,000
2001........................................................      547,000
                                                               ----------
Total minimum lease payments................................   $4,057,000
                                                               ----------
                                                               ----------

Total rent expense charged to operations in 1996 and 1995 were $1,291,781 and
$1,248,000, respectively, including approximately $391,000 in 1996 and $424,000
in 1995 representing net charges from the Affiliate.

                                      F-39
<PAGE>

                     JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

8. STOCKHOLDERS' EQUITY

     The Company has agreements with its shareholders to provide for the
continued ownership of shares of common stock of the Company by the shareholders
and to set forth terms and conditions under which shares of common stock may be
transferred among the shareholders and/or the Company or to third parties. The
agreements require the shareholders to offer common shares first to the Company
and next to other shareholders at prices computed in accordance with the
agreements before disposing of these shares to others.

9. RELATED PARTY TRANSACTIONS

     During the years ended December 31, 1996 and 1995, the Company had
transactions with the Affiliate summarized as follows:

<TABLE>
<CAPTION>
                                                                     1996           1995
                                                                  -----------    -----------
<S>                                                               <C>            <C>
Purchases from Affiliate--net..................................   $11,370,473    $16,259,000
Due to (from) Affiliate--net...................................   $(1,436,000)   $ 1,539,000
</TABLE>

The Company incurred charges from the Affiliate of $132,000 and $153,000 in 1996
and 1995, respectively for its share of common space and shared expenditures.

10. EMPLOYEE PROFIT-SHARING PLAN AND 401(K) PLAN

     The Company has a voluntary noncontributory profit-sharing plan which
complies with the Employee Retirement Income Security Act of 1974. In general,
employees become participants after six months of continuous employment. There
were no contributions for the years ended December 31, 1996 and 1995.

     The Company has a defined contribution employee savings 401(k) plan whereby
eligible participants (all nonunion employees who work 1,000 hours or more per
year) may contribute a percentage of compensation, but not in excess of the
maximum allowed. Employees are eligible after one year of service and attainment
of age 20 1/2. The Company's contributions were approximately $32,000 in 1996
and $24,000 in 1995.

                                      F-40
<PAGE>

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

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.

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

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                  PAGE
                                                  ----
<S>                                               <C>
Prospectus Summary.............................      1
Risk Factors...................................      5
Where You Can Find More Information............     10
Use of Proceeds................................     11
Price Range of Common Stock....................     12
Dividend Policy................................     12
Capitalization.................................     13
Selected Financial Data........................     14
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...................................     16
Business.......................................     23
Management.....................................     34
Principal Stockholders.........................     43
Certain Transactions...........................     45
Description of Securities......................     48
Shares Eligible for Future Sale................     50
Underwriting...................................     51
Legal Matters..................................     53
Experts........................................     53
Indemnification for Securities Act
  Liabilities..................................     53
Financial Statements...........................    F-1
</TABLE>

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

UNTIL (INSERT DATE), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR INVOLVED
ALLOTMENTS OR SUBSCRIPTIONS.

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

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



                                DIPLOMAT DIRECT
                             MARKETING CORPORATION



                        1,900,000 SHARES OF COMMON STOCK



                            ------------------------
                                   PROSPECTUS
                            ------------------------



                          DONALD & CO. SECURITIES INC.



                                            , 1999

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

<PAGE>

       [ALTERNATIVE COVER PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]


                                 970,939 SHARES


                     DIPLOMAT DIRECT MARKETING CORPORATION


     Shareholders of Diplomat Direct Marketing Corporation named under the
caption "Selling Security Holders", from time to time, may offer and sell up to
970,939 shares of Diplomat common stock.

     Diplomat's common stock is traded on the Nasdaq SmallCap Market under the
symbol "DIPL". On June   , 1999, the last reported sale price of Diplomat's
common stock on Nasdaq was          .

     INVESTING IN DIPLOMAT'S COMMON STOCK IS RISKY. SEE RISK FACTORS COMMENCING
ON PAGE 5.

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

                  THE DATE OF THIS PROSPECTUS IS JUNE   , 1999

<PAGE>

                                  THE OFFERING

<TABLE>
<S>                                         <C>
Common Stock Offered......................  970,939 shares

Common Stock Outstanding..................  8,133,855 shares

Common Stock Symbol.......................  Nasdaq SmallCap Market--"DIPL"

Use of Proceeds...........................  The selling security holders will receive the net proceeds from the
                                            sale of the shares. We will receive none of the proceeds from the
                                            sale of the shares offered by this prospectus.

Risk Factors..............................  An investment in the shares involves a high degree of risk. See "Risk
                                            Factors" commencing on page 5.
</TABLE>

                                       3
<PAGE>

          [ALTERNATIVE PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]



                                USE OF PROCEEDS

     Diplomat will not receive any proceeds from the sale of the security
holders' shares offered by this prospectus. All proceeds from the sale of the
security holders' shares will be for the account of the selling security
holders. See "Selling Security Holders."

                                       11

<PAGE>

      [ALTERNATIVE (added) PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]


                            SELLING SECURITY HOLDERS

     All of the shares of Diplomat common stock offered under this prospectus
may be sold by the holders who either have previously acquired their shares or
who will acquire such shares from Diplomat upon the exercise of warrants.
Diplomat will not receive any of the proceeds from sales of shares offered under
this prospectus, but will receive the exercise price upon the exercise of the
warrants described above.

     All costs, expenses and fees in connection with the registration of the
security holders' shares will be borne by Diplomat. All brokerage commissions,
if any, attributable to the sale of shares by selling security holders will be
borne by such holders.

     The selling security holders are offering a total of 970,939 shares of
Diplomat's common stock. The following table sets forth:

     o the name of each person who is a selling security holder;

     o the number of securities owned by each such person at the time of this
       offering; and

     o the number of shares of common stock such person will own after the
       completion of this offering.

     The following table assumes the exercise of all warrants beneficially owned
by each such security holder.  The footnotes describe the shares included in
this offering.  If there is no footnote, the shares included in this offering
for that selling security holder are common stock owned prior to the date of
this prospectus.

     The column "Beneficial Ownership After Offering" gives effect to the sale
of all the shares of common stock being offered hereby.

<TABLE>
<CAPTION>
                                                                              BENEFICIAL                    BENEFICIAL
                                                                              OWNERSHIP      SHARES         OWNERSHIP
                                                                              PRIOR TO     INCLUDED IN       AFTER
NAME                                                                          OFFERING     THIS OFFERING    OFFERING
----                                                                          ---------    -------------    ---------
<S>                                                                           <C>          <C>              <C>
Jay Kaplowitz(1)(6)........................................................    244,503         96,889        147,614
Irving Magram..............................................................    186,660        186,660              0
Finova Mezzanine Capital, Inc.(2)..........................................    164,980        164,980              0
Warren H. Golden...........................................................     93,707         83,707         10,000
Michael Miller(6)..........................................................     60,556         60,556              0
Lawrence Kaplan(6).........................................................     54,500         54,500              0
Stephanie Sobel............................................................     51,854         41,854         10,000
Stanley A. Kaplan(6).......................................................     30,278         30,278              0
Manhattan Group Funding(6).................................................     24,222         24,222              0
Alfred Romano(6)...........................................................     24,222         24,222              0
Reedland Capital Partners(3)...............................................     20,000         20,000              0
Damon Testaverde(6)........................................................     19,611         12,111          7,500
Steven Wallitt(6)..........................................................     18,017         18,017              0
Michael Garnick(4).........................................................     16,000         16,000              0
Matthew C. Flemming(7).....................................................     12,500         12,500              0
Glen Cadrez(7).............................................................     12,500         12,500              0
Steven Goodman(6)..........................................................     12,111         12,111              0
Mel Lax(6).................................................................     12,111         12,111              0
Alliance Capital Investment Corp.(6) ......................................     12,111         12,111              0
The Bridge Fund (NY)(6)....................................................     12,111         12,111              0
Norman Friedman(6).........................................................      9,806          6,056          3,750
Burt Gusrae(6).............................................................      9,806          6,056          3,750
Stern & Co.(5).............................................................      9,000          9,000              0
Jerry Kaplan(6)............................................................      7,267          7,267              0
Bayside Development Trust(6)...............................................      6,056          6,056              0
John Bencivegna(6).........................................................      4,844          4,844              0
Vincent Fercante(6)........................................................      4,844          4,844              0
David Kaplan(6)............................................................      4,844          4,844              0
Andrew Kaplan(6)...........................................................      4,844          4,844              0
Stephen Kaplan(6)..........................................................      4,844          4,844              0
Nancy Barride(6)...........................................................      4,844          4,844              0
</TABLE>

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

(1) Includes 20,000 shares underlying an option with an exercise price of $5.00

(2) Represents shares issuable upon exercise of currently exercisable warrants.
    83,320 warrants are exercisable at $7.95, 41,660 are exercisable at $12.125
    and 40,000 are exercisable at [to be determined].

(3) Represents shares issuable upon exercise of currently exercisable warrants
    exercisable at $5.78 per share.

(4) Represents shares issuable upon exercise of currently exercisable warrants
    exercisable at $7.50 per share.

(5) Represents shares issuable upon exercise of 4,000 currently exercisable
    warrants at $5.78 per share and 5,000 shares issuable upon exercise of
    warrants to be issued upon certain events occurring.

(6) Represents shares issued upon conversion of the Series E Preferred Stock
    plus accrued dividends and such holder has agreed to a one year lock up from
    the date of this prospectus upon such conversion.

(7) Represents shares issuable upon exercise of currently exercisable warrants
    exercisable at $5.00 per share.

                                      44A
<PAGE>

          [ALTERNATIVE PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]


                              PLAN OF DISTRIBUTION

     Up to 970,939 of the selling security holders' shares may be sold by the
selling security holders who currently own or will have acquired such shares
from Diplomat upon the exercise of warrants. Diplomat will not receive any of
the proceeds from any sales by selling security holders of their shares, but
will receive the exercise price upon the exercise of warrants by the selling
security holders. See "Selling Security Holders."

     The selling security holders have advised us that the sale or distribution
of the common stock may be effected directly to purchasers by the selling
security holders as principals or through one or more underwriters, brokers,
dealers or agents from time to time in one or more transactions, including
crosses or block transactions, by any of the following methods:

     o on the Nasdaq SmallCap Market;

     o in the over-the-counter market;

     o in transactions other than on any stock exchange or in the
       over-the-counter market;

     o through the writing of options on Diplomat common stock; or

     o by settlement of short sales of Diplomat common stock.

     The purchase price of the shares may be determined by the selling security
holder or by agreement between the selling security holder and underwriters,
brokers, dealers or agents or purchasers. The price may be at:

     o market prices prevailing at the time of sale;

     o prices related to such prevailing market prices;

     o varying prices determined at the time of sale; or

     o negotiated or fixed prices.

     If the selling security holders effect such transactions by selling common
stock to or through underwriters, brokers, dealers or agents, such underwriters,
brokers, dealers or agents may receive compensation in the form of discounts,
concessions or commissions from the selling security holders or commissions from
purchasers of common stock for whom they may act as agent which may be in excess
of those customary in the types of transactions involved. The selling security
holders and any brokers, dealers or agents that participate in the distribution
of the common stock may be deemed to be underwriters, and any profit on the sale
of common stock by them and any discounts, concessions or commissions received
by any such underwriters, brokers, dealers or agents may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.

     Because the selling security holders may each be deemed to be an
"underwriter" within the meaning of Section 2(11) of the Securities Act of 1933,
the selling security holders will be subject to prospectus delivery requirements
under the Securities Act of 1933. Furthermore, in the event of a "distribution"
of its shares, the selling security holder, any selling broker or dealer and any
"affiliated purchasers" may be subject to Regulation M under the Securities
Exchange Act of 1934 until its participation in that distribution is completed.

     At the time a particular offer of security holders' shares is made by or on
behalf of any of the selling security holders, to the extent such offer
constitutes a distribution under the Securities Act of 1933, a supplement to
this prospectus will be distributed, which will set forth the type and number of
securities being offered by such selling security holders and the terms of such
offering, including:

     o the name or names and addresses of any underwriters, dealers or agents;

     o the purchase price paid by any underwriter for securities purchased from
       the selling security holder; and

     o any discounts, commissions or concessions allowed or reallowed or paid to
       dealers, and the proposed selling price to the public.

                                       51
<PAGE>

          [ALTERNATIVE PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]



Diplomat will bear all costs and expenses of the registration under the
Securities Act of 1933 and certain state securities laws of the security
holders' shares. However, all brokerage commissions, if any, attributable to the
sale of such shares by holders thereof will be borne by such holders.

     The shares that may be offered from time to time by selling security
holders may be sold through ordinary brokerage transactions in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices.

     Under the Securities Exchange Act of 1934 and the regulations thereunder,
any person engaged in a distribution of the securities offered by this
prospectus may not simultaneously engage in market-making activities with
respect to shares of Diplomat common stock during the applicable two or nine
days "cooling off" period prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the selling security holders will
be subject to applicable provisions of the Securities Exchange Act of 1934 and
the rules and regulations thereunder, including, without limitation, Regulation
M, in connection with transactions in the securities, which provisions may limit
the timing of purchases and sales of the securities by the selling security
holders.

                                       52

<PAGE>

        [ALTERNATIVE B/C PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]


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

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.

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

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                  PAGE
                                                  ----
<S>                                               <C>
Prospectus Summary.............................      1
Risk Factors...................................      5
Where You Can Find More Information............     10
Use of Proceeds................................     11
Price Range of Common Stock....................     12
Dividend Policy................................     12
Capitalization.................................     13
Selected Financial Data........................     14
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...................................     16
Business.......................................     23
Management.....................................     34
Principal Stockholders.........................     43
Selling Security Holders.......................     44A
Certain Transactions...........................     45
Description of Securities......................     48
Shares Eligible for Future Sale................     50
Plan of Distribution...........................     51
Legal Matters..................................     53
Experts........................................     53
Indemnification for Securities Act
  Liabilities..................................     53
Financial Statements...........................    F-1
</TABLE>


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

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


                                DIPLOMAT DIRECT
                             MARKETING CORPORATION


                         970,939 SHARES OF COMMON STOCK


                            ------------------------
                                   PROSPECTUS
                            ------------------------


                                            , 1999

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

<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

     The following is a statement of the estimated expenses to be paid by
Diplomat Direct Marketing Corporation (the "Company") in connection with the
issuance and distribution of the securities being registered:

<TABLE>
<S>                                                           <C>
SEC Registration Fee.......................................   $     4,070
NASD Filing Fee*...........................................         1,450
Nasdaq Listing Fees........................................         7,500
Printing Engraving Expenses*...............................       125,000
Legal Fees and Expenses*...................................       150,000
Accounting Fees and Expenses*..............................       100,000
Blue Sky Fees and Expenses*................................        42,000
Nonaccountable expense allowance...........................       190,000
Miscellaneous*.............................................   $    12,480
                                                              -----------
     Total.................................................   $   632,500
                                                              -----------
                                                              -----------
</TABLE>

------------------
* estimate

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

     Section 145 of the Delaware General Corporation Law, among other things,
and subject to certain conditions, authorizes the Company to indemnify its
officers and directors against certain liabilities and expenses incurred by such
persons in connection with claims made by reason of their being such an officer
or director. The Certificate of Incorporation, as amended, and By-laws of the
Company provide for indemnification of its officers and directors to the full
extent authorized by law.

     Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

     During the past three years, the Company has sold unregistered securities
as described below. Unless otherwise indicated, there were no underwriters
involved in the transactions or underwriting discounts or commissions paid in
connection therewith. Unless otherwise indicated, the issuances of these
securities were considered to be exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and the
regulations promulgated thereunder. The purchasers of the securities in such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the certificates for the
securities issued in such transaction. The purchasers of the securities in the
transactions had adequate access to information about the Registrant. The share
numbers that follow are not adjusted to reflect the proposed 1-for-5 reverse
stock split.

     In 1996, the Company granted Jonathan Rosenberg options to purchase 75,000
shares of common stock exercisable at $1.50 per share.

     In February 1996, in consideration for making a loan to the Company in the
amount of $2,353,500, the Company issued Mr. Rubin 100,000 shares of its
Series A Convertible Preferred Stock which are convertible at Mr. Rubin's option
into 1,000,000 shares of the Company's common stock.

     In September 1996, the Company issued (i) 350,000 shares of common stock
and (ii) options to purchase 150,000 shares of common stock at an exercise price
of $2.50, to Gersten, Savage, Kaplowitz & Fredericks, LLP in consideration for
providing certain legal and consulting services to the Company.

                                      II-1
<PAGE>

     In September 1996, Mr. Rubin converted an aggregate of approximately
$3,500,000 in debt into 290,000 shares of the Company's 9% Class B Convertible
Preferred Stock and 60,000 shares of the Company's 9% Class C Convertible
Preferred Stock. Each of the Series B and Series C shares is convertible at the
option of the holder into 10 shares of the Company's common stock.

     In November 1996, the Company issued options to purchase an aggregate of
1,060,000 shares of its common stock at an exercise price of $1.00 per share to
35 employees of the Company, including two executive officers and one outside
director.

     In May 1997, the Company issued options to purchase an aggregate of 150,000
shares of its common stock pursuant to the November 1996 Plan, 50,000 of which
were issued to Howard Katz, a director of the Company, and 100,000 of which were
issued to Mr. Fredericks in connection with his agreeing to become a member of
the Company's board of directors.

     In May 1997, the Company issued to Mr. Rubin 550,000 shares of common stock
in connection with (i) Mr. Rubin's conversion of debt to equity, and (ii)
Mr. Rubin deferring his monthly consulting fee. The issuance of this stock was
approved in 1996.

     In May 1997, the Company authorized the issuance of 200,000 shares of
common stock to Mr. Rubin in consideration of Mr. Rubin extending loans to the
Company as well as extending a personal guarantee to Congress on behalf of the
Company.

     Between May and July 1997, the Company issued an aggregate of 158,408
shares of common stock and options to acquire 200,000 shares of common stock to
six consultants. Of the 200,000 options, 50,000 are exercisable at $1.75 per
share and 150,000 are exercisable at $1.875 per share.

     From May 1997 through September 1997, the Company sold 1,250,000 shares of
its common stock in a private placement of its securities in which it raised
$2,500,000. In addition to these shares, the Company issued to European
Community Capital a placement agent's warrant exercisable to purchase up to
200,000 shares of common stock at $3.3125 per share. The Company issued an
option to a principle of the placement agent to purchase up to 100,000 shares of
common stock at $2.00 per share.

     In October 1997, in part to raise capital for the Company's acquisition out
of bankruptcy of the assets of Brownstone, the Company completed a private
offering of its securities which raised $3,630,000 from accredited investors.
The private placement consisted of units, each unit consisting of ten shares of
Series E Preferred Stock and 7,500 shares of common stock at a purchase price of
$10,000 per unit. The Company issued an aggregate of 3,630 shares of Series E
Preferred Stock and 2,772,500 shares of common stock.

     On October 30, 1997, the Company issued in connection with the acquisition
of assets of Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc. options to
purchase up to 200,000 shares of the Company's common stock.

     On December 23, 1997, the Company entered into a definitive agreement for
the acquisition of Lew Magram, Ltd. In connection with the acquisition, 95,000
shares of Series D Preferred Stock, which are convertible into a total of
3,166,667 shares of common stock, and 250,000 shares of common stock were issued
simultaneous with the closing of the acquisition on February, 1998.

     On June 29, 1998, the Company issued to Sirrom Capital Corporation, dba
Tandem Capital $5,000,000 principal amount 12% Subordinated Secured Notes and
warrants to purchase up to 208,300 shares of common stock. In February 1999 the
Company issued an additional warrant to purchase 416,600 shares. In connection
with the transaction, the Company issued to Donald & Co. Securities, Inc. a
$50,000 promissory note and a warrant to purchase up to 50,000 shares of common
stock.

     On December 28, 1998, the Company granted to certain of its employees
options under its November 1996 stock option plan. The options permit the
holders the right to purchase in the aggregate up to 860,000 shares of common
stock at a exercise price of $1.00 per share. The options expire on December 28,
2003. One fourth of the options granted are immediately exercisable and the
remaining options are exercisable in an equal amount each year for next three
years.

                                      II-2
<PAGE>

     In March 1999, the Company granted a warrant which grants the holder the
right to purchase in the aggregate up to 80,000 shares of the Company's common
stock at an exercise price of $1.50 per share. The warrant expires on March 18,
2002.

     In March 1999, the Company issued 32,440 shares of its Series F Preferred
Stock and 346,027 shares of its common stock for $3,244,000.

     In April 1999, the Company issued 75 shares of its Series E Preferred Stock
and 38,470 shares of its common stock.

     In May 1999, the Company issued 100,000 shares of its common stock for
$100,000, and an option to purchase 100,000 shares of its common stock at an
exercise price of $1.00 per share.

     The holders of all of the outstanding Series D Preferred Stock converted
their shares. The Company issued 3,083,447 shares of common stock upon the
conversion of the Series D Preferred Stock. The issuance is exempt under the
1933 Act by virtue of the exemption under section 4(2).

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER     DESCRIPTION
----------   -----------
<S>          <C>   <C>
    1.1       --   Form of Underwriting Agreement*
    1.2       --   Form of Agreement Among Underwriters*
    1.3       --   Form of Selected Dealers Agreement*
    3.1       --   Certificate of Incorporation, as amended (1)
    3.2       --   By-laws, amended(1)
    3.3       --   Amendment to Certificate of Incorporation(1)
    3.4       --   Amendment to Certificate of Incorporation(7)
    3.5       --   Amended Certificate of Designation of Series E Preferred Stock (14)
    3.6       --   Certificate of Designation of Series F Preferred Stock(14)
    4.1       --   Form of Common Stock Certificate (1)
    5.1       --   Legal Opinion of Gersten, Savage & Kaplowitz, LLP*
   10.1       --   1992 Stock Option Plan(1)
   10.2       --   August 1996 Stock Option Plan(11)
   10.3       --   November 1996 Stock Option Plan(5)
   10.4       --   License Agreement by and between Diplomat Juvenile Corporation, Wesley Howell and Steve Pressed(1)
   10.5       --   Loshell Realty mortgages with Union State Bank and Stony Point Technical Park, Inc. and related
                   Mortgage Notes, including Sheldon Rose guarantee of Union State Bank(1)
   10.6       --   First Amendment to Exclusive Distributorship Agreement by and between Ambrose & Montgomery, Inc.
                   and Diplomat Corporation(2)
   10.7       --   Second Amendment to Exclusive Distributorship Agreement between Ambrose Montgomery, Inc. and
                   Diplomat Corporation(3)
   10.8       --   Asset Purchase Agreement dated as of September 24, 1997 by and among Diplomat Corporation and Jean
                   Grayson's Brownstone Studio, Inc. and Wilroy Inc.(7)
   10.9       --   Bill of Sale provided by Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
   10.10      --   Assignment and Assumption Agreement dated October 30, 1997 between Brownstone Holdings, Inc., Jean
                   Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
   10.11      --   Agreement and Plan of Merger dated December 23, 1997, by and between Diplomat Corporation, Lew
                   Magram, et al(6)
   10.12      --   Employment Agreement between Warren H. Golden and Diplomat Corporation dated February 2, 1998(8)
</TABLE>

                                      II-3
<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER     DESCRIPTION
----------   -----------
<S>          <C>   <C>
   10.13      --   Employment Agreement between Irving Magram and Lew Magram dated February 2, 1998(8)
   10.14      --   Employment Agreement between Stephanie Sobel and Lew Magram dated February 2, 1998(8)
   10.15      --   Lease Agreement between Franklin Associates and Lew Magram, Ltd dated May 15, 1992(8)
   10.16      --   Employment Agreement between Kenneth Grossman and Brownstone Holdings, Inc. dated October 30,
                   1997(13)
   10.17      --   Employment Agreement between Joan Grossman and Brownstone Holdings, Inc. dated October 30,
                   1997(13)
   10.18      --   Debenture Purchase Agreement between Sirrom Capital Corporation, Diplomat Direct Marketing
                   Corporation, et al, and forms of exhibits(10)
   10.19      --   1998 Stock Option Plan(12)
   10.20      --   Secured Credit Agreement date May 12, 1999 among First Source Financial LLP, as Lender, Brownstone
                   Holding, Inc., Ecology Kids, Inc., Diplomat Holdings, Inc. and Lew Magram Ltd. As Borrowers and
                   Diplomat Direct Marketing Corporation, as Funds Administrator (exhibits and schedules omitted)(14)
   10.21      --   Security Agreement dated May 12, 1999 among First Source Financial LLP., Brownstone Holdings,
                   Inc., Ecology Kids, Inc. Diplomat Holding, Inc. and Lew Magram Ltd. (exhibits and schedules
                   omitted)(14)
   10.22      --   Guaranty of Diplomat Direct Marketing Corporation (First Source Financial LLP) dated May 12,
                   1999.(14)
   10.23      --   Employment Agreement between Julia Aryeh and Diplomat Direct Marketing Corporation dated
                   February 15, 1999*
   22         --   Subsidiaries of the Registrant(12)
   23.1       --   Consent of BDO Seidman, LLP
   23.2       --   Consent of Feldman Sherb Ehrlich Co., P.C.
   23.3       --   Consent of Gersten, Savage & Kaplowitz, LLP (included in Exhibit 5.1)*
   27         --   Financial Data Schedule
</TABLE>

------------------
* To be filed by amendment

 (1) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-66910 NY

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

 (3) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-95986

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

 (5) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1996

 (6) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1997

 (7) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     November 14, 1997

 (8) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     March 6, 1998

 (9) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB/A2 for the year ended September 30, 1997 and filed March 3, 1998

(10) Incorporated by reference to Diplomat Direct Marketing Corporation on
     Form 10QSB for the quarter ended June 30, 1998

(11) Incorporated by reference to Diplomat Corporation Registration Statement on
     Form S-8 filed August 30, 1996

(12) Incorporated by reference to Diplomat Corporation Proxy Statement on
     Schedule 14A Filed April 29, 1998

                                      II-4
<PAGE>

(13) Incorporated by reference to Diplomat Direct Marketing Corporation Annual
     Report on Form 10-K for the year ended September 30, 1998

(14) Incorporated by reference to Diplomat Direct Marketing Corporation
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1999

ITEM 17. UNDERTAKINGS

     Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to any charter provision, by-law, contract, arrangement, statute, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

     The Company hereby undertakes:

     (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

          (i)  To include any prospectus required by section 10(a)(3) of the
     Act;

          (ii)  To reflect in the prospectus any facts or events arising after
     the effective date of the registration statement (or the most recent
     post-effective amendment thereof) which, individually or in the aggregate,
     represent a fundamental change in the information set forth in the
     registration statement. Notwithstanding the foregoing, any increase or
     decrease in the volume of securities offered (if the total dollar value of
     securities offered would not exceed that which was registered) and any
     deviation from the high or low end of the estimated maximum offering range
     may be reflected in the form of prospectus filed with the Commission
     pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
     price represent no more than 20 percent change in the maximum aggregate
     offering price set forth in the "Calculation of Registration Fee" Table in
     the effective registration statement;

          (iii) To include any material information with respect to the plan of
     distribution not previously disclosed in the registration statement or any
     material change to suit information in the registration statement.

     (2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

     (4) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Company under Rule 424(b)(1), or (4) or 497(h), under the Act shall be deemed to
be part of this registration statement as of the time the Commission declared it
effective.

     (5) For the purpose of determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

                                      II-5

<PAGE>

                                   SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF THE ACT, THE REGISTRANT CERTIFIES THAT IT
HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENT FOR
FILING ON FORM S-1 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
TEANECK, STATE OF NEW JERSEY ON JUNE 8, 1999

                                          DIPLOMAT DIRECT MARKETING CORPORATION

                                          By:      /S/ WARREN H. GOLDEN
                                              ----------------------------------
                                                      Warren H. Golden
                                               President and Chief Executive
                                                         Officer

     KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and has appointed Warren H. Golden, President and
Chief Executive Officer, his or her true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same and all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, his or her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

     PURSUANT TO THE REQUIREMENTS OF THE ACT, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.

<TABLE>
<CAPTION>
                SIGNATURE                                      TITLE                             DATE
                ---------                                      -----                             ----

<S>                                         <C>                                           <C>
           /s/ ROBERT M. RUBIN              Chairman of the Board                                June 8, 1999
------------------------------------------
             Robert M. Rubin

           /s/ WARREN H. GOLDEN             Chief Executive Officer, President and               June 8, 1999
------------------------------------------  Director
             Warren H. Golden

           /s/ STEPHANIE SOBEL              Executive Vice President and Director                June 8, 1999
------------------------------------------
             Stephanie Sobel

             /s/ JULIA ARYEH                Chief Strategic Officer, Secretary and               June 8, 1999
------------------------------------------  Director
               Julia Aryeh

          /s/ MARK J. MCSWEENEY             Chief Financial Officer                              June 8, 1999
------------------------------------------
            Mark J. McSweeney

         /s/ STUART A. LEIDERMAN            Divisional President of Ecology Kids and             June 8, 1999
------------------------------------------  Director
           Stuart A. Leiderman

                                            Director                                             June  , 1999
------------------------------------------
               Howard Katz

              /s/ DAVID ABEL                Director                                             June 8, 1999
------------------------------------------
                David Abel
</TABLE>

                                      II-6

<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                                                                                                    SEQUENTIAL
NUMBER   DESCRIPTION                                                                                        PAGE NO.
------   -----------                                                                                       -----------
<S>      <C>   <C>                                                                                         <C>
  1.1     --   Form of Underwriting Agreement*
  1.2     --   Form of Agreement Among Underwriters*
  1.3     --   Form of Selected Dealers Agreement*
  3.1     --   Certificate of Incorporation, as amended(1)
  3.2     --   By-laws, amended(1)
  3.3     --   Amendment to Certificate of Incorporation(1)
  3.4     --   Amendment to Certificate of Incorporation(7)
  3.5     --   Amended Certificate of Designation of Series E Preferred Stock(14)
  3.6     --   Certificate of Designation of Series F Preferred Stock(14)
  4.1     --   Form of Common Stock Certificate(1)
  5.1     --   Legal Opinion of Gersten, Savage & Kaplowitz, LLP*
 10.1     --   1992 Stock Option Plan(1)
 10.2     --   August 1996 Stock Option Plan(11)
 10.3     --   November 1996 Stock Option Plan(5)
 10.4     --   License Agreement by and between Diplomat Juvenile Corporation, Wesley Howell and Steve
               Pressed(1)
 10.5     --   Loshell Realty mortgages with Union State Bank and Stony Point Technical Park, Inc. and
               related Mortgage Notes, including Sheldon Rose guarantee of Union State Bank(1)
 10.6     --   First Amendment to Exclusive Distributorship Agreement by and between Ambrose &
               Montgomery, Inc. and Diplomat Corporation(2)
 10.7     --   Second Amendment to Exclusive Distributorship Agreement between Ambrose Montgomery, Inc.
               and Diplomat Corporation(3)
 10.8     --   Asset Purchase Agreement dated as of September 24, 1997 by and among Diplomat Corporation
               and Jean Grayson's Brownstone Studio, Inc. and Wilroy Inc.(7)
 10.9     --   Bill of Sale provided by Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
 10.10    --   Assignment and Assumption Agreement dated October 30, 1997 between Brownstone Holdings,
               Inc., Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
 10.11    --   Agreement and Plan of Merger dated December 23, 1997, by and between Diplomat
               Corporation, Lew Magram, et al(6)
 10.12    --   Employment Agreement between Warren H. Golden and Diplomat Corporation dated February 2,
               1998(8)
 10.13    --   Employment Agreement between Irving Magram and Lew Magram dated February 2, 1998(8)
 10.14    --   Employment Agreement between Stephanie Sobel and Lew Magram dated February 2, 1998(8)
 10.15    --   Lease Agreement between Franklin Associates and Lew Magram, Ltd dated May 15, 1992(8)
 10.16    --   Employment Agreement between Kenneth Grossman and Brownstone Holdings, Inc. dated
               October 30, 1997(13)
 10.17    --   Employment Agreement between Joan Grossman and Brownstone Holdings, Inc. dated
               October 30, 1997(13)
 10.18    --   Debenture Purchase Agreement between Sirrom Capital Corporation, Diplomat Direct
               Marketing Corporation, et al, and forms of exhibits(10)
 10.19    --   1998 Stock Option Plan(12)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT                                                                                                    SEQUENTIAL
NUMBER   DESCRIPTION                                                                                        PAGE NO.
------   -----------                                                                                       -----------
<S>      <C>   <C>                                                                                         <C>
 10.20    --   Secured Credit Agreement date May 12, 1999 among First Source Financial LLP, as Lender,
               Brownstone Holding, Inc., Ecology Kids, Inc., Diplomat Holdings, Inc. and Lew Magram Ltd.
               As Borrowers and Diplomat Direct Marketing Corporation, as Funds Administrator (exhibits
               and schedules omitted)(14)
 10.21    --   Security Agreement dated May 12, 1999 among First Source Financial LLP., Brownstone
               Holdings, Inc., Ecology Kids, Inc. Diplomat Holding, Inc. and Lew Magram Ltd. (exhibits
               and schedules omitted)(14)
 10.22    --   Guaranty of Diplomat Direct Marketing Corporation (First Source Financial LLP) dated
               May 12, 1999(14)
 10.23    --   Employment Agreement between Julia Aryeh and Diplomat Direct Marketing Corporation dated
               February 15, 1999*
 22       --   Subsidiaries of the Registrant(12)
 23.1     --   Consent of BDO Seidman, LLP
 23.2     --   Consent of Feldman Sherb Ehrlich Co., P.C.
 23.3     --   Consent of Gersten, Savage & Kaplowitz, LLP (included in Exhibit 5.1)*
 27       --   Financial Data Schedule
</TABLE>

------------------
 *  To be filed by amendment

 (1) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-66910 NY

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

 (3) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-95986

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

 (5) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1996

 (6) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1997

 (7) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     November 14, 1997

 (8) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     March 6, 1998

 (9) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB/A2 for the year ended September 30, 1997 and filed March 3, 1998

(10) Incorporated by reference to Diplomat Direct Marketing Corporation
     Form 10QSB for the quarter ended June 30, 1998

(11) Incorporated by reference to Diplomat Corporation Registration Statement on
     Form S-8 filed August 30, 1996

(12) Incorporated by reference to Diplomat Corporation Proxy Statement on
     Schedule 14A Filed April 29, 1998

(13) Incorporated by reference to Diplomat Direct Marketing Corporation Annual
     Report on Form 10-K for the year ended September 30, 1998

(14) Incorporated by reference to Diplomat Direct Marketing Corporation
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
[{"type": "S-1", "sequence": "1", "description": "REGISTRATION STATEMENT", "secsgml_size_bytes": 458229}]
{"company-data": {"conformed-name": "DIPLOMAT DIRECT MARKETING CORP", "cik": "0000910319", "assigned-sic": "2390", "irs-number": "133727399", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-80499", "film-number": "99644977"}, "business-address": {"street1": "25 KAY FRIES DR", "city": "STONY POINT", "state": "NY", "zip": "10980", "phone": "9147865552"}, "mail-address": {"street1": "25 KAY FRIES DR", "street2": "25 KAY FRIES DR", "city": "STONY POINT", "state": "NY", "zip": "10980"}, "former-company": [{"former-conformed-name": "DIPLOMAT CORP", "date-changed": "19930923"}, {"former-conformed-name": "DIPLOMAT JUVENILE CORP", "date-changed": "19930806"}]}
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1999
                                       REGISTRATION STATEMENT NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
                     DIPLOMAT DIRECT MARKETING CORPORATION
                  (NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE                                    5137                                   13-3727399
        (STATE OF INCORPORATION)                (PRIMARY STANDARD INDUSTRIAL                (IRS EMPLOYER I.D. NO.)
                                                  CLASSIFICATION CODE NO.)
------------------------
WARREN H. GOLDEN, PRESIDENT
                                                                            DIPLOMAT DIRECT MARKETING CORPORATION
                      414 ALFRED AVENUE                                               414 ALFRED AVENUE
                  TEANECK, NEW JERSEY 07666                                       TEANECK, NEW JERSEY 07666
                       (201) 833-4450                                                  (201) 833-4450
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)     (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------

                                   Copies to:
JAY M. KAPLOWITZ, ESQ.                                       MICHAEL D. DIGIOVANNA, ESQ.
              GERSTEN, SAVAGE & KAPLOWITZ, LLP                                   PARKER DURYEE ROSOFF & HAFT
                     101 EAST 52ND STREET                                              529 FIFTH AVENUE
                   NEW YORK, NEW YORK 10022                                        NEW YORK, NEW YORK 10017
                       (212) 752-9700                                                  (212) 599-0500
------------------------

     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.

     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:  /x/

     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

     If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
                            ------------------------

                        CALCULATION OF REGISTRATION FEE
PROPOSED
                                                   NUMBER OF SHARES    MAXIMUM OFFERING       PROPOSED
              TITLE OF EACH CLASS                      TO BE            PRICE PER          MAXIMUM AGGREGATE     AMOUNT OF
         OF SECURITIES BEING REGISTERED            REGISTERED(1)         SHARE(2)          OFFERING PRICE(2)    REGISTRATION FEE
Common Stock....................................       2,185,000              4.375             9,559,375           2,657.51
Common Stock for Selling Security Holders.......         970,939              4.375             4,247,858           1,180.91
Representative's Warrants.......................              --                 --                    --
Common Stock underlying Representative's
Warrants(3).....................................         190,000              4.375               831,250             231.09
Total Registration Fee..........................       3,345,939                 --            14,638,483           4,069.51
(1) The number of shares being registered gives effect to the one-for-five
    reverse stock split to be effective upon the Registration Statement being
    declared effective including the shares that may be sold if the
    over-allotment option is exercised.

(2) Estimated solely for the purpose of computing the registration fee pursuant
    to Rule 457(c) under the Securities Act of 1933, as amended, based on the
    average of the high and low sales prices of the Registrant's common stock on
    The Nasdaq SmallCap Market for the five days preceding and including June 8,
    1999 multiplied by five (5) which gives effect to the one-for-five reverse
    stock split to be effective upon the Registration Statement being declared
    effective. This is the same fee that would have been paid had the Registrant
    not given effect to the reverse stock split.

(3) Determined in accordance with Rule 457(g)(2).
                            ------------------------

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EXPLANATORY NOTE

     This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering by Diplomat Direct Marketing Corporation of
shares of common stock (the "Prospectus") and (ii) one to be used in connection
with the sale of shares of common stock currently outstanding or issuable upon
exercise of warrants by certain selling security holders (the "Selling Security
Holder Prospectus"). The Prospectus and the Selling Security Holder Prospectus
will be identical in all respects except for the alternate pages for the Selling
Security Holder Prospectus included herein which are labeled "Alternative Page
for Selling Security Holder Prospectus."
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement that is filed with
the Securities and Exchange Commission is declared effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.

                      SUBJECT TO COMPLETION JUNE 11, 1999

PROSPECTUS

                                1,900,000 SHARES

                     DIPLOMAT DIRECT MARKETING CORPORATION

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

     This is a secondary offering of Diplomat Direct Marketing Corporation. We
are selling 1,900,000 shares of our common stock. The underwriter may also
purchase up to an additional 285,000 shares from us at the public offering
price, less the underwriting discount, within 30 days to cover any
over-allotments.

     Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"DIPL". On June   , 1999, the last reported sale price of our common stock on
Nasdaq was $               .

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

     INVESTING IN OUR COMMON STOCK IS RISKY. PLEASE SEE RISK FACTORS COMMENCING
ON PAGE 5.

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

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

[CAPTION]

                                          PRICE TO                UNDERWRITING              PROCEEDS TO
                                           PUBLIC                   DISCOUNT                  DIPLOMAT
Per Share.......................           $                         $                         $
Total...........................        $                         $                         $
------------------------

                          DONALD & CO. SECURITIES INC.

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

                  THE DATE OF THIS PROSPECTUS IS JUNE   , 1999
You should rely only on the information contained in this prospectus. To
understand this offering fully, you should read this entire prospectus
carefully, including the financial statements and notes. We have included a
brief overview of the most significant aspects of the offering itself in the
Prospectus Summary. However, individual sections of the prospectus are not
complete and do not contain all of the information that you should consider
before investing in our common stock. We have not, and the underwriter has not,
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of the common stock.

     Unless otherwise indicated, all reference to "Diplomat", "us", "our" and
"we" refer to Diplomat Direct Marketing Corporation and its subsidiaries Lew
Magram Ltd., Brownstone Holdings, Inc., Ecology Kids, Inc. and Diplomat
Holdings, Inc.

     Diplomat Direct Marketing(Trademark), Lew Magram(Registered), Brownstone
Studio(Registered) and Ecology Kids(Registered) are trademarks of Diplomat.
Other trademarks appearing in this prospectus are the property of their
respective owners.
PROSPECTUS SUMMARY

     This summary does not contain all of the information that may be important.
You should read the detailed information appearing elsewhere in this prospectus.

     Except where stated otherwise, the information contained in this prospectus
assumes a 1-for-5 reverse split of our common stock and the conversion or
exchange of the outstanding shares of preferred stock into 3,077,794 shares of
common stock both to be completed immediately before the date of this
prospectus, but does not assume that the over-allotment option is exercised.

                                  OUR BUSINESS

     We are a prominent specialty retailer of quality women's fashion apparel
and accessories sold through mail order catalogs, and we recently commenced
sales on the Internet. Currently, we target niche markets through our two
distinctive catalogs, Lew Magram and Brownstone Studio. Lew Magram was
established in 1948 as a men's clothier but by 1984 had converted its catalog to
solely offer women's apparel designed to appeal to fashion-oriented women.
Brownstone Studio, established in 1974, offers a broad range of fashions to the
affluent, more mature women. We generally publish 10 Lew Magram catalog editions
per year and nine Brownstone catalog editions per year. Each catalog includes
300 to 500 products and our annual circulation is over 45 million catalogs per
year. With the recent introduction of electronic commerce on the Internet, we
believe as a catalog marketer that we are well positioned to increase our market
penetration at a lower cost on the Internet. We believe that catalog consumers
are the ideal Internet customers because they are accustomed to purchasing
fashion merchandise from a non-store medium. In January 1999 we began offering
our products online at Catalogcity.com and in February, 1999 signed a joint
venture with Fashionmall.com, Inc. to build several websites leveraging our
fashion design capabilities, brand name and customer base with Fashionmall.com's
Internet presence and expertise. We are also a wholesaler of apparel and
accessories for babies and toddlers to mass merchandisers such as Kids "R" Us,
Wal-Mart, Target and Walgreens, under the brand name "Ecology Kids".

     We have an experienced management team with over 150 years in the catalog
business, unique product lines and well-integrated infrastructure and
fulfillment capabilities. Over our history, we have compiled a wealth of
information with respect to our customers' buying patterns. By managing this
information, we can tailor the content of our catalogs, target catalog
distribution to particular customers, offer an expanded range of products to
certain customers, and test new products. Our database includes over 5 million
names of which 3.8 million are customers and 1.2 are gift recepients and catalog
inquirers.

     We are currently creating and designing our own e-commerce websites for
each of Lew Magram and Brownstone Studio. These websites will be interactive,
allow for online product purchases from the catalogs and provide content areas
which we believe will be of interest to our existing and prospective customers.
With our accumulated information on existing customers and the information we
expect to obtain through our Internet sites, we believe we will be able to
customize each website in accordance with the preferences of the respective
target markets. These are intended to be the primary websites to offer our
products in addition to the Catalogcity.com and Fashionmall.com websites.

     Lew Magram products are marketed to fashion-conscious, value-oriented,
middle- and upper-income customers and career women. The Lew Magram customers
spend on average $160 per order. The Lew Magram catalog contains active wear,
career apparel, separates, outdoor wear, formal wear and footwear for a cross
range of lifestyles and women. Much of Lew Magram's apparel carries our brand
label but we do carry other labels as well, both in our apparel and footware
lines.

     Brownstone Studio merchandise is marketed to affluent, sophisticated and
mature women. The Brownstone Studio customer on average spends $140 per order.
The Brownstone Studio catalog contains both classic and modern fashion apparel,
footwear, accessories and some intimate apparel. Brownstone Studio offers a
broad range of sizes in stylish merchandise which, we believe, are not readily
available to our customers in the retail market place.

     Diplomat's principal executive offices are located at 414 Alfred Avenue,
Teaneck, New Jersey 07666. The phone number is (201) 833-4450.

                                       1
OUR STRATEGY

     By implementing our operating strategy, we intend to capitalize on our
competitive strengths to increase sales to both existing and new customers and
continue to develop efficiencies. We also intend to expand our core business
through our growth strategy. The key elements of our strategies are as follows:

Operating Strategy

o Increase ability to fulfill orders through improved capitalization

o Reduce costs and increase operational efficiencies through improved liquidity

o Leverage and expand our proprietary customer database by managing the
  information obtained from our customers

o Increase brand awareness

Growth Strategy

o Expand through diversifying product lines

o Implement our e-commerce strategy

o Form strategic relationships

o Expand Ecology Kids line of business

o Expand through acquiring complementary businesses

                                  OUR INDUSTRY

     In recent years, retailing in the United States has been characterized by a
shift to non-store sales through such media as printed catalogs, broadcast home
shopping channels and the Internet. According to the Direct Marketing
Association ("DMA"), an industry trade group, catalog sales are estimated to be
$93.27 billion for 1999, representing 3.3% of overall retail sales. The DMA
expects catalog sales to increase to $125 billion by 2004. The expected growth
for catalog sales is approximately 6.1% per year for the next five years.
According to the investment banking firm Gruppo, Levey, Incorporated, direct
marketing sales in the women's apparel category accounted for $8.4 billion in
1997. A DMA survey done in the first quarter of 1999 showed that women account
for 69.8% of all catalog sales, and women's apparel is the largest catalog
category representing 64% of all catalog purchases. In 1998, nearly 70% of the
women who shop via catalog made a purchase within that year. We believe that
direct marketing apparel sales to women will continue to grow, due to the
convenience and time savings afforded by catalog and recently introduced
e-commerce shopping. The U.S. Census Bureau is projecting the 35-64 year old
female population to grow 20.8% from 1995 to 2005. This is an attractive target
group for catalog distributors and e-commerce vendors such as ourselves,
particularly because more than 50 million women are in the work force and
therefore may have significant discretionary income.

  Moving into e-commerce

     International Data Corporation, a leading provider of information
technology data, projects worldwide commerce revenue on the Internet to increase
from $4.3 billion for 1997 to $11.0 billion in 1999 and to increase to
$84.2 billion by 2004. It is expected that online shopping will increase at a
rate of 50% per annum. Jupiter Communications LLC, a media research firm,
estimates that women accounted for 45% of all web users as of January 1998
accounting for 25% of all Internet sales and are estimated to account for 47% of
Internet sales by the year 2000. Forrester Research, Inc. a renowned independent
consumer and technology research firm, reported that women make 67% of all
household purchase decisions. According to a DMA study done in 1999, 43% of
their member companies are selling online and 49% of those are generating a
profit from online shopping. As a result of these factors, we believe that
apparel sales will be a major component of Internet commerce, and that women
will become a highly targeted customer for online stores and advertisers.

                                       2
THE OFFERING
Common Stock Offered by Diplomat..........  1,900,000 shares

Common Stock Outstanding Prior to the
  Offering(1).............................  6,233,855 shares

Common Stock Outstanding After the
  Offering(1).............................  8,133,855 shares

Use of Proceeds...........................  Repayment of indebtedness, redemption of preferred stock, develop
                                            Internet business, and general corporate purposes including possible
                                            consolidation of operations into a new facility and possible
                                            acquisitions

Risk Factors..............................  An investment in our shares involves a high degree of risk. See "Risk
                                            Factors" commencing on page 5

Common Stock Symbol.......................  Nasdaq SmallCap Market: DIPL
------------------

(1) Based on shares outstanding as of June 1, 1999 after giving effect to the
    conversion or exchange of 478,573 shares of preferred stock and the 1-for-5
    reverse stock split. Excludes shares issuable upon the exercise of options,
    warrants and the over-allotment option.

                                       3
SUMMARY CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

     The following selected historical financial data as of September 30, 1998,
September 30, 1997, September 30, 1996, December 31, 1995 and December 31, 1994
and for the periods then ended are derived from the audited financial
statements. The selected financial data as of March 31, 1999 and March 31, 1998
and for the six months ended March 31, 1999 and March 31, 1998 are derived from
the unaudited financial statements of Diplomat included in this prospectus. Such
unaudited data includes, in management's opinion, all normal recurring
adjustments necessary to present fairly the results of operations and financial
position of Diplomat for such periods. Results from interim periods are not
necessarily indicative of the results to be expected for an entire fiscal year.
The data should be read in conjunction with the financial statements, related
notes, "Management's Discussion and Analysis of Diplomat's Financial Condition
and Results of Operations," and other financial information included in this
prospectus.

     The following table summarizes the financial data for our business.
NINE MONTHS
                                                       SIX MONTHS ENDED         YEAR ENDED             ENDED         YEAR ENDED
                                                          MARCH 31,            SEPTEMBER 30,        SEPTEMBER 30,    DECEMBER 31,
                                                    --------------------   ----------------------   -------------   ------------
                                                     1999       1998(2)    1998(2)      1997(1)        1996(3)       1995   1994
                                                    ------     ---------   -------     ---------    -------------   ------ ------
                                                         (UNAUDITED)
DIPLOMAT'S CONSOLIDATED INCOME STATEMENT DATA:
Net sales.......................................... 41,581       36,516      74,586       17,468           7,449     11,301  10,279
Gross margin....................................... 20,642       19,486      40,152        8,744              57      4,388   4,390
(Loss) on discontinued operations(3)...............    (37)      (2,072)     (2,322)        (296)         (1,150)        --      --
(Loss) income from continuing operations
  before income taxes.............................. (4,341)       1,773       1,260        1,262          (6,057)      (721)   (439)
Net income (loss).................................. (4,379)        (299)     (1,063)       1,106          (7,225)      (721)   (439)
Net income (loss) per common share from
  continuing operations--basic.....................  (0.40)       (0.05)       0.08         0.19           (1.34)     (0.16)  (0.11)
Net income (loss) per common share from
  continuing operations--diluted...................  (0.40)        0.10        0.08         0.19           (1.34)     (0.16)  (0.11)
Net income (loss) per common share--basic
  and diluted......................................  (0.40)       (0.02)      (0.13)        0.14           (1.59)     (0.16)  (0.11)
MARCH 31, 1999                  SEPTEMBER 30,         DECEMBER 31,
                                                        --------------------   -----------------------------    --------------
                                                        PRO FORMA(4)  ACTUAL    1998(2)    1997(1)   1996(3)    1995     1994
                                                        ------------  ------   ---------   -------   ------     -----   ------
DIPLOMAT'S CONSOLIDATED BALANCE SHEET DATA:
Total assets.........................................      55,642     50,142     50,959     33,013    4,848     8,654    8,071
Total liabilities(5).................................      32,866     34,866     34,625     18,945    6,144     5,128    4,452
Working capital (deficiency).........................         128     (5,372)    (4,662)    (3,375)  (3,145)    3,162    3,154
Long-term debt less current maturities...............       4,267      6,267      6,384      1,155    1,047     2,061    1,993
Stockholders' equity.................................      22,372     14,869     16,334     14,068    2,523     3,526    3,619
MARCH 31, 1999                  SEPTEMBER 30,         DECEMBER 31,
                                                        --------------------   -----------------------------    --------------
                                                        PRO FORMA(4)  ACTUAL    1998(2)    1997(1)   1996(3)    1995     1994
                                                        ------------  ------   ---------   -------   ------     -----   ------
OTHER DATA:
E(L)BITDA(6).........................................     (2,255)     3,295      4,625      2,444    (5,143)     (21)     240
------------------
(1) On February 19, 1998, Diplomat closed on the acquisition of Lew Magram, Ltd.
    For accounting purposes, the acquisition was effected as of July 1, 1997.
    The acquisition was accounted for as a purchase.

(2) On October 30, 1997, Diplomat acquired out of bankruptcy all the assets of
    Jean Grayson's Brownstone Studios, Inc. The acquisition was accounted for as
    a purchase.

(3) On February 6, 1996, Diplomat completed the acquisition of Biobottoms, Inc.
    The acquisition was accounted for as a purchase. On April 17, 1998, Diplomat
    sold substantially all of the assets and certain of the liabilities of
    Biobottoms, Inc.

(4) Reflects the receipt of the net proceeds of approximately $8,000,000 (after
    deducting the underwriting discount, commissions and estimated offering
    expenses), the repayment of Finova debentures of $2,000,000 and redemption
    of preferred stock of $500,000. This does not reflect the payment of
    $2,000,000 to First Source Financial LLC which will be paid out of the
    proceeds of this offering.

(5) Does not reflect the First Source Financial transaction which closed on
    May 12, 1999.

(6) E(L)BITDA is defined as earnings (loss) from continuing operations before
    income taxes, interest expense, depreciation and amortization. We believe
    that the presentation of E(L)BITDA facilitates an investor's understanding
    of our operations. E(L)BITDA should not be considered by an investor as an
    alternative to net income as an indicator of the operating performance or to
    cash flows as a measure of liquidity. E(L)BITDA is not used in the
    presentation of financial statements prepared in accordance with generally
    accepted accounting principles and may not be comparable to similarly titled
    measurements reported by other companies.

                                       4
RISK FACTORS

     You should carefully consider the following factors before deciding to
invest in the shares. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us,
or that we consider immaterial or that are similar to those faced by other
companies in one or more of the same lines of business, may also impair our
business operations. The following risks could materially harm our business,
financial condition or future results. If that occurs, the trading price of our
common stock could decline, and you could lose all or part of your investment.

     This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus. Please also refer to "Forward looking information may not be
realized" on page 10.

RISKS PARTICULAR TO DIPLOMAT

     We have had operating losses in the past and may not be able to operate
profitably in the future.  During the fiscal years ended September 30, 1998 and
1997 and the nine months ended September 30, 1996, we reported a net loss to
common stockholders of approximately $1.4 million (including net losses from
discontinued operations of $2.3 million), net income to common stockholders of
approximately $800,000, and a net loss to common stockholders of approximately
$7.2 million, respectively. For the six months ended March 31, 1999, we had a
net loss of approximately $4.8 million. We may not be able to operate profitably
in the future. In addition, we will record an imputed dividend of approximately
$2,000,000 resulting from the conversion or exchange of preferred stock which
will be offset by an increase to paid-in-capital. The imputed dividend will
result in a reduction in the net income, or in an increase in the loss,
allocable to the common stockholders for the year ended September 30, 1999.

     Our inadequate working capital has caused, and may continue to cause,
inadequate availability of credit from vendors, cash reserves to be held by our
credit card processors for merchandise refunds, and delays in printing and
delivering catalogs.  Our lack of working capital has resulted in a reluctance
of certain key creditors to extend us adequate credit. Because of this
inadequate credit, we have been unable to fulfill our orders in a timely manner,
resulting in substantial back orders and delayed payment of our obligations. The
inability to ship goods on a timely basis has resulted in increased customer
order cancellations, higher than normal returns of goods, damage to our
reputation and loss of repeat buyers. We may not be successful in securing
additional vendor credit and improving shipment of merchandise in the future. If
we cannot get additional vendor credit, we may continue to incur substantial
losses. Our credit card processors have established a $500,000 reserve against
any future non-payment of credit card refunds. We cannot assure that this
reserve will be released in the near future or that it will not be increased in
the event the number of returns increases. Finally, we have not been able to pay
our printers in a timely manner to ensure timely printing and delivery of our
catalogs. Because of these delays, we have reduced our catalog circulation
during the current fiscal year.

     We may need additional working capital.  While we believe the proceeds of
this offering will alleviate our working capital shortage and allow us to
establish our presence on the Internet, this shortage may arise in the future
particularly if vendors do not extend us sufficient credit. In addition, our
growth strategy may require substantial additional capital investment. We may
require capital for

     o financing additional inventory for new product lines;

     o obtaining new facilities;

     o further developing our Internet presence;

     o developing strategic relationships; and

     o financing acquisitions.

     To the extent that the proceeds of this offering, cash generated internally
and cash available under the First Source Financial LLP loan facility are not
sufficient to provide the capital required for such purposes and to fund future
operations, we will require additional debt and/or equity financing in order to
provide such capital. Such financing, however, may not be available or, if
available, may not be on terms satisfactory to

                                       5
us. If we fail to obtain sufficient additional capital in the future, we may not
be able to implement our business strategy. If we are able to obtain additional
debt financing, we may incur increased interest and amortization expense,
increased leverage, increased exposure to competitive pressures and increased
exposure to economic downturns. If we are able to obtain equity financing, such
financing may dilute the equity interest of our existing stockholders.

     Our business may continue to be affected by our substantial leverage, our
restrictions under loan covenants, and security interests which we have granted
in our assets.  We have a significant amount of debt. Our debt service
obligations could have material adverse consequences to our security holders. We
have approximately $19.6 million of loans before payments contemplated by this
offering to reduce outstanding loans, of which $12.5 million is owed to First
Source under our new loan facility and $5 million is owed under debentures sold
in June 1998 to Finova Mezzanine Capital, formerly known as Tandem Capital. Both
the First Source loan facility and Finova debentures impose restrictions on us
including limiting our payment of dividends.

     The level of our indebtedness and debt covenants could have important
consequences to us and our stockholders including, but not limited to, the
following:

     o our ability to obtain additional financing in the future may be impaired;

     o a significant portion of our cash flow from operations must be dedicated
       to the payment of principal and interest on our indebtedness, thereby
       reducing the funds available to us for our operations;

     o the First Source loan facility bears interest at variable rates, which
       could result in higher interest expense in the event of increases in
       interest rates;

     o the First Source loan facility and Finova debentures contain financial
       and restrictive covenants, which if not complied with, may result in an
       event of default by us which, if not cured or waived, could have a
       material adverse effect on us;

     o we may be substantially more leveraged than certain of our competitors,
       which may place us at a competitive disadvantage; and

     o our substantial debt may limit our flexibility to adjust to changing
       market conditions, reduce our ability to withstand competitive pressures
       and make us more vulnerable to a downturn in general economic conditions
       or our business.

     Our ability to make scheduled payments and comply with our debt covenants
or to refinance our debt obligations will depend upon our future financial and
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond our
control. Cash flow from operations and other capital resources may not be
sufficient for payment of our debt in the future. In the absence of such
operating results and resources, we could face substantial liquidity problems
and might be required to dispose of material assets or operations to meet our
debt service and other obligations. If we are unable to pay our debt, we may be
required to take actions such as reducing or delaying planned expansion and
capital expenditures, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital. We can not predict whether
any of these actions could be effected on satisfactory terms, if at all.

     All of our assets, except for our Stony Point real estate, which is also
subject to mortgages, are pledged as collateral to secure the First Source loan
facility and Finova debentures. Unless these security interests are released,
such assets will not be available to secure future indebtedness, and as such may
adversely affect our ability to borrow money in the future. Moreover, in the
event of a default by us on any of our obligations, including with respect to
the financial covenants contained in the First Source loan facility and Finova
debentures, such lender could foreclose on our assets.

     Our Stony Point real estate is subject to two mortgage liens. We owe
approximately $600,000 on the junior mortgage, which is due but has been
extended to July 9, 1999 by the lender. We are currently seeking to refinance
these mortgages but may not be able to do so. If we cannot refinance the junior
mortgage by July 9, 1999, we must pay the junior mortgage lender or be in
default. Default by us on either mortgage lien

                                       6
could result in the loss of our real estate and also result in default under the
First Source loan facility and Finova debentures.

     We are dependent on our vendors and the loss of certain vendors or
increases in the costs of postage, paper or printing could substantially hurt
our operations.  We depend on the United Parcel Service and the United States
Post Office to timely deliver our merchandise to our customers. These package
delivery services each account for about one-half of our merchandise shipping. A
work stoppage or strike by either delivery service would have a material adverse
effect on us. Postal rates and paper and printing costs affect the cost of our
order fulfillment and catalog and promotional mailings. We rely heavily on
discounts from the basic United States Postal Service rate structure, such as
discounts for bulk mailings and pre-sorting by zip code and carrier routes. Like
others in the catalog industry, we pass on a significant portion of our shipping
and handling expenses directly to our customers, but we do not directly pass on
the costs of preparing and mailing catalogs and other promotional materials.
Historically, we have not entered into long-term contracts for our paper
purchases. Consequently, we could be subject to an increase in paper costs.
Significant increases in postal rates or paper or printing costs could have a
material adverse effect on our business, particularly if we are unable to pass
on such increases directly to our customers or to offset such increases by
either raising prices or reducing other costs.

     Our broad range of merchandise requires that we maintain relationships with
many manufacturing sources and suppliers. Although we believe that we have
established satisfactory relationships with our principal manufacturing sources,
we do not have long-term contracts. Our inability to source quality goods in a
timely manner at favorable prices could adversely affect us.

     We have not developed our websites.  To date, we have not hosted our
catalogs on our own websites, nor do we have any experience in the e-commerce
industry. We have not yet tested our e-commerce concept, and cannot be sure that
once launched, our e-commerce objectives will be achieved. We have entered into
a letter of intent with Fashionmall.com, Inc. to develop niche Internet stores
offering our products, however, we have not yet entered into a definitive
agreement with them. In the event that we do not reach a definitive agreement,
it may take some time for us to find an alternative candidate. This would delay
implementing our Internet strategy, which is a core part of our growth program.

     We may be liable for unused merchandise credits.  Because of our policy of
periodically writing off into income unused merchandise credits from the Lew
Magram and Brownstone Studio catalogs, we may be liable for future claims on
such amounts previously written off. The amounts written off into income for
1997 and 1998 were $742,000 and $3,398,000, respectively.

     We need to recruit and retain additional personnel.  We will require
additional personnel in order to implement our growth strategy and support
expanded operations, especially in implementing our e-commerce strategy.
Accordingly, we will need to recruit and retain additional operating, finance
and other personnel. There can be no assurance, that we will succeed in
recruiting and retaining the requisite qualified personnel as and when needed.

     We are dependent on our key personnel.  We depend upon our senior
management team as a whole, led by Warren H. Golden, our president and chief
executive officer, and Stephanie Sobel, our executive vice president, to
successfully implement our business strategy. We do not currently maintain key
man life insurance on either of these two officers.

     We may not be able to acquire companies or develop strategic
relationships.  We may encounter substantial competition in our efforts to
identify and acquire appropriate acquisition candidates, which could have the
effect of increasing prices for acquisitions. We may also be unable to identify
strategic partners on terms that will be favorable to us, which would prevent us
from pursuing certain business opportunities, especially in the e-commerce area.
There can be no assurance that we will succeed in identifying appropriate
acquisition candidates, or strategic partners, or that we will be able to
acquire any acquisition candidate that we do identify on terms that are
acceptable to us.

     We may incur significant costs to integrate our new operations if
acquired.  If we make an acquisition, we intend to focus substantial efforts on
its efficient integration, the elimination of duplicative costs and the

                                       7
reduction of overhead. There can be no assurance, however, that we will be
successful in these efforts or that these efforts may not in certain
circumstances adversely affect existing operations.

RISKS PARTICULAR TO OUR INDUSTRY

     We may not be able to adjust to changing consumer preferences.  The apparel
industry is cyclical. Purchases of apparel and related merchandise tend to
decline during recessionary periods and also may decline at other times. We may
not be able to achieve growth in revenues or earnings or become profitable in
the future. Further, a recession in the general economy or uncertainties
regarding future economic prospects could affect consumer spending habits and
have an adverse effect on our results of operations. Apparel sales have
historically been dependent, in part, upon discretionary consumer spending which
is affected by general economic conditions, consumer confidence, availability of
consumer credit and other factors beyond our control.

     Our performance is subject to risks associated with changing fashion and
our ability to deliver fashion that is in demand in a timely manner. We believe
that our success depends in substantial part on our ability to originate and
define product and fashion trends as well as to anticipate, gauge and react to
changing consumer demands in a timely manner. We may not continue to be
successful in this regard. If we misjudge fashion trends or consumer
preferences, or if there is a downturn in discretionary consumer spending, our
business could be adversely affected.

     Internet security concerns could hinder our e-commerce strategy.  The need
to securely transmit confidential information over the Internet has been a
significant barrier to electronic commerce and communications over the Internet.
Any well-publicized compromise of security could deter people from using the
Internet or using it to conduct transactions that involve transmitting
confidential information. We may incur significant costs to protect against the
threat of security breaches or to alleviate problems caused by such breaches.

     There is competition for Internet based businesses targeting women.  The
number of websites competing for the attention and patronage of women on the
Internet has increased and will continue to increase. We will be competing with
online apparel stores and online community sites which are targeting women. Many
of these sites have an established presence on the Internet or have financial
resources that are greater than ours. An inability to attract women fitting our
customer profile to our Internet site would adversely affect our Internet
strategy and could result in a loss of or negate any investment in our website
development.

     Our industry is competitive.  The women's apparel industry is highly
competitive. We compete with traditional department-store retailers, as well as
specialty apparel and accessory retailers. We also compete with other direct
marketers, some of which may specifically target our customers. Many of our
competitors are larger and have substantially greater financial, distribution
and marketing resources than we do.

     There are few barriers to entry in the women's apparel market. Other
catalogers, store-based retailers and apparel manufacturers may enter this
market. We also could face competition from manufacturers of women's apparel,
including our current vendors, who could market their products directly to
retail customers or make their products more readily available in retail stores
or through other catalogs. In addition, competitors could enter into exclusive
distribution arrangements with our vendors and deny us access to their products.
Increased competition could result in pricing pressures, increased marketing
expenditures and loss of market share, and could have a material adverse effect
on us.

     We expect that the direct marketing industry will be affected by
technological changes in distribution and marketing methods, such as on-line
catalogs, retail kiosks and Internet shopping. We believe that our long term
success will depend, in part, on our ability to adapt to new technologies and to
respond to competitive demands. We may need to incur substantial capital
expenditures to adapt to new technologies. We may not be able to remain
competitive in response to technological changes.

     If the computer systems we rely upon are not Year 2000 compliant, our
business may be adversely affected. Many currently installed computer systems
and software products are coded to accept only two-digit entries in the date
code field. Our computer equipment and software and devices with embedded
technology

                                       8
that are date-sensitive 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 disruptions of operations, including, among other things, a temporary
inability to process transactions. There can be no assurance that our computer
systems contain all necessary date code changes, or that, in the year 2000, our
computer systems will be compatible with third-party software that may be
integrated or used in conjunction with our computer systems.

     There can be no assurance that the computer systems of our suppliers or
shippers will be year 2000 compliant. The failure of our computer systems or
those of our suppliers, service producers, or shippers to be year 2000 compliant
could have a material adverse effect on our business, financial condition,
results of operations or prospects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."

RISKS PARTICULAR TO OUR OFFERING

     We are controlled by our principal stockholder who may have a possible
conflict of interest with us.  Our principal stockholder, the Rubin Family
Irrevocable Stock Trust, the grantor of which is Robert M. Rubin, our Chairman
of the Board, has invested in excess of $12,000,000 and beneficially owns
approximately 47% of our voting stock. As such, this stockholder is able to
effectively exercise control over the outcome of all matters submitted to the
stockholders for approval, including the election of our directors, and as a
result controls our affairs and management. Neither our certificate of
incorporation nor our bylaws provide stockholders with cumulative voting rights.

     Although Mr. Rubin has disclaimed beneficial ownership of the Trust's
interest in us, there can be no assurance that Mr. Rubin's relationships with us
will not give rise to conflicts with respect to future transactions by us. If
such conflicts arise, they may not be resolved in our favor.

     The market price for our common stock may be depressed when shares become
eligible for future sale.  The market price of our common stock could decline as
a result of sales of a substantial number of shares of our common stock in the
market after this offering, or the perception that such sales could occur. Such
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. After this offering,
we will have approximately 8.2 million outstanding shares of common stock.
Including the 1,900,000 shares being offered hereby, and up to an additional
285,000 shares that may be issued to cover the underwriters' over-allotment,
approximately 3.6 million shares will be freely tradeable.

     Our directors, officers and principal stockholder who hold an aggregate of
approximately 4.2 million shares together with the holders of options to
purchase approximately 550,000 shares of common stock have entered into lock-up
agreements pursuant to which they have agreed that they will not sell, directly
or indirectly, any shares of common stock without the prior written consent of
Donald for a period of one year from the date of this prospectus. For one year
thereafter, these persons may not sell more than 25% of their Diplomat shares in
any three month period without the representative's consent.

     Our debt covenants may make a takeover difficult.  The First Source loan
facility and Finova debentures contain covenants against certain changes in
control without prior consent. The First Source loan facility prohibits a change
in ownership of more than 50% of our voting stock, the removal or non-removal of
2/3 of our board or the resignation or termination of any two of Jonathan
Rosenberg, Warren H. Golden or Stephanie Sobel other than for cause without
First Source's consent. The Finova debentures prohibit termination or
resignation of any two of Jonathan Rosenberg, Warren H. Golden or Robert M.
Rubin other than for cause without Finova's consent. Resignation or termination
without cause of any of the other three individuals would violate these
covenants. Violation of these covenants triggers an event of default effectively
preventing a takeover without these lenders' consent.

     We could be delisted from the Nasdaq Stock Market.  The Nasdaq Stock Market
requires that, to maintain their continued listing, companies must have net
tangible assets of at least $2 million, market capitalization of at least
$35 million, or net income of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years. We did
not meet any of the three alternatives as

                                       9
of March 31, 1999. Although as of the date of this prospectus we have more than
$2 million of net tangible assets, we cannot assure you that Nasdaq will not
seek to delist us.

     Forward looking information may not be realized.  To the extent that the
information presented in this prospectus discusses financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements are forward-looking. Although we
believe that the expectations reflected in these forward-looking statements are
based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements. These include, among others:

     o the availability of vendor credit;

     o the successful expansion of product lines in our catalogs;

     o consumer acceptance of our new products;

     o price pressures and other competitive factors leading to a decrease in
       anticipated revenues and gross profit margins; and

     o a downturn in general economic conditions.

     When considering such forward-looking statements, you should keep in mind
the risk factors and other cautionary statements in this prospectus.

                      WHERE YOU CAN FIND MORE INFORMATION

     We file annual, quarterly and special reports, proxy statements, and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. We are listed on the
Nasdaq SmallCap Market. Our periodic reports, proxy statements, and other
information can be inspected at the offices of Nasdaq at 1735 K Street, NW,
Washington, DC, 20006, including our:

     o Annual Report on Form 10-K for the year ended September 30, 1998; and

     o Quarterly Reports on Form 10-Q for the quarters ended December 31, 1998
       and March 31, 1999.

     You may obtain a copy of these filings, without charge, by writing or
calling us at:

                            Diplomat Direct Marketing Corporation
                            414 Alfred Avenue
                            Teaneck, New Jersey 07666
                            (201) 833-4450

     If you would like to request these filings from us, please do so at least
five business days before you have to make an investment decision.

     You should rely only on the information provided in this prospectus. We
have not authorized anyone else to provide you with different information. We
are not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other then the date on the front page.

                                       10
USE OF PROCEEDS

     We estimate that the net proceeds to us from the sale of the 1,900,000
shares of common stock will be approximately $8 million. "Net proceeds" are what
we expect to receive after paying the underwriting discount and other expenses
of the offering. For the purpose of estimating net proceeds, we are assuming
that the public offering price will be $5.00 per share.

     We intend to use the net proceeds from the sale of the shares as follows:

     o $4.5 million to repay a portion of the outstanding balances due under the
       Finova debentures and the First Source loan facility and to redeem a
       portion of our redeemable preferred stock;

     o $600,000 to be used for creating, designing, integrating into operations
       and operating the Lew Magram and Brownstone Studio interactive websites;
       and

     o the balance, including any proceeds from the sale of over-allotment
       shares, to fund general corporate purposes, including possible
       consolidation of operations into new facilities and possible
       acquisitions.

     We reserve the right to reallocate proceeds to different uses if, in
management's view, the needs of the business so require. In addition, a large
portion of the proceeds is allocated to discretionary purposes. We are
restricted under the First Source loan facility from redeeming the Finova
debentures or our preferred stock. The intended use of proceeds or redemption of
any preferred stock or other debentures may be limited by First Source.

     We believe that the net proceeds of this offering, together with available
funds on hand, cash flow from operations and assuming our receipt of additional
vendor credit, will be sufficient to satisfy our current working capital
requirements for at least 12 months following this offering. Such belief is
based upon certain assumptions including assumptions as to our contemplated
operations, obtaining sufficient vendor credit, and economic and industry
conditions. We cannot be certain that such resources will be sufficient for such
purpose. Furthermore, if we were to obtain a new facility or make significant
acquisitions for cash, we would require additional capital. In addition,
contingencies may arise that may require us to obtain additional capital. We
cannot be certain that we will be able to obtain such capital on favorable terms
or at all. Pending use of the net proceeds of this offering, we intend to invest
the net proceeds in short-term, interest-bearing, investment grade securities.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."

                                       11
PRICE RANGE OF COMMON STOCK

     Our common stock is traded on The Nasdaq SmallCap Market under the symbol
"DIPL." The following table sets forth, for the two most recent fiscal years and
the first two quarters of fiscal year 1999, the high and low bid prices per
share of the common stock as reported by Nasdaq for each quarter. The prices
represent inter-dealer quotations without adjustments for mark-ups, mark-downs
or commission and may not represent actual transactions. These prices are not
adjusted to reflect the 1-for-5 reverse stock split or the conversion or
exchange of convertible preferred stock.
HIGH      LOW
                                                                                                    ----      ----
Fiscal 1997
  First Quarter..................................................................................     2          7/8
  Second Quarter.................................................................................     2 3/8      7/8
  Third Quarter..................................................................................     3 1/2     1 5/8
  Fourth Quarter.................................................................................     3 5/8     2 5/8

Fiscal 1998
  First Quarter..................................................................................     4 11/32   3 1/4
  Second Quarter.................................................................................     4 3/16    2 11/16
  Third Quarter..................................................................................     3 3/4     2
  Fourth Quarter.................................................................................     2 1/2     3 1/32

Fiscal 1999
  First Quarter..................................................................................     2 13/32   1 9/16
  Second Quarter.................................................................................     2 15/32   1
As of May 21, 1999, there were approximately 139 holders of record of the
15,780,310 outstanding shares of our common stock without giving effect to the
1-for-5 reverse stock split or conversion of convertible preferred stock. On
June 8, 1999, the last sales price for our common stock as reported on the
Nasdaq SmallCap Market was 7/8 without giving effect to the 1-for-5 reverse
stock split or conversion or exchange of preferred stock.

                                DIVIDEND POLICY

     Since June 1992, we have never paid or declared dividends on our common
stock. The payment of cash dividends, if any, in the future is within the
discretion of our Board of Directors and will depend upon our earnings, capital
requirements, financial condition and other relevant factors. Our existing loan
agreements with our lenders generally restrict our ability to pay dividends or
make other distributions on our common stock without their prior approval. We
intend, for the foreseeable future, to retain future earnings for use in our
business.

                                       12
CAPITALIZATION

     The following table sets forth:

     o our capitalization as of March 31, 1999, excluding shares of common stock
       issuable upon exercise of options and warrants and upon conversion of
       convertible preferred stock, under the column "Actual";

     o our capitalization after giving effect to the conversion or exchange of
       478,573 shares of preferred stock and the 1-for-5 reverse split of our
       common stock under the column "Pro Forma". This column also reflects the
       imputed dividend of approximately $2,000,000 resulting from the
       conversion of the Rubin Family Irrevocable Stock Trust preferred stock
       (see "Certain Transactions"). The imputed dividend will result in a
       reduction in the net income, or in an increase in the loss, allocable to
       the common stockholders for the year ended September 30, 1999; and

     o our capitalization after giving effect to the conversion or exchange of
       preferred stock and the 1-for-5 reverse split of our common stock, and
       after giving effect to the sale of 1,900,000 shares of common stock
       offered hereby (after deducting underwriting discount, commissions and
       estimated offering expenses) and the $2 million repayment of Finova
       debentures and $500,000 redemption of preferred stock under the column
       "As Adjusted".

     The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes appearing elsewhere in this prospectus.
MARCH 31, 1999
                                                                        -----------------------------------------
                                                                          ACTUAL        PRO FORMA     AS ADJUSTED
                                                                        -----------    -----------    -----------
Current maturities of long-term debt.................................   $   847,793    $   847,793    $   847,793
                                                                        -----------    -----------    -----------
Long-term debt less current maturities...............................     6,266,835      6,266,835      4,266,835
                                                                        -----------    -----------    -----------
Stockholders' equity:
  Preferred stock, $.01 par value; 1,000,000 shares authorized
     478,573 shares issued and outstanding actual; 5,000 shares
     issued and outstanding pro forma; and 0 shares issued and
     outstanding as adjusted.........................................         4,785              0              0
  Common stock, $.0001 par value; 50,000,000 shares authorized,
     12,608,399 shares issued and outstanding actual; 6,233,855
     shares issued and outstanding pro forma; and 8,133,855 shares
     issued and outstanding as adjusted..............................         1,257            624            814
  Additional paid-in capital.........................................    29,179,976     31,185,394     38,726,397
  Accumulated deficit................................................   (14,316,812)   (16,355,282)   (16,355,282)
     Total stockholders' equity......................................    14,869,206     14,830,736     22,371,929
                                                                        -----------    -----------    -----------
     Total capitalization............................................    21,983,834     21,945,364     27,556,557
                                                                        -----------    -----------    -----------
                                                                        -----------    -----------    -----------
13
SELECTED FINANCIAL DATA

     Diplomat's selected consolidated financial data presented below for the
years ended September 30, 1998 and September 30, 1997, the nine months ended
September 30, 1996, and the years ended December 31, 1995 and December 31, 1994
have been derived from Diplomat's audited consolidated financial statements. The
selected financial data of Lew Magram Ltd. presented below for the six months
ended June 30, 1997, the year ended January 4, 1997, the six months ended
December 30, 1995, the year ended July 1, 1995 and the year ended July 1, 1994
have been derived from Lew Magram Ltd.'s financial statements. Diplomat's
selected consolidated financial data presented below for the six months ended
March 31, 1999 and March 31, 1998 are derived from Diplomat's unaudited
consolidated financial statements.

     For financial accounting reporting purposes, we effectively acquired Lew
Magram Ltd. on July 1, 1997, and Lew Magram Ltd. is considered, for financial
accounting reporting purposes, as the predecessor issuer. The information
contained in the selected consolidated financial data is qualified by reference
to, and should be read in conjunction with, the Management's Discussion and
Analysis of Financial Condition and Results of Operations, the consolidated
financial statements and notes thereto, and other financial information
appearing elsewhere in this prospectus. Percentages are percent of net sales.

     We believe that the unaudited financial statements from which we derived
the unaudited statement of operations and balance sheet information presented
below were prepared on a basis consistent with our audited consolidated
financial statements and include all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of our financial
position for the unaudited statement of operations periods and the unaudited
balance sheet dates indicated below. Results for the six month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the complete 1999 fiscal year.

     The per share figures are not adjusted to reflect the 1-for-5 reverse stock
split or conversion or exchange of the preferred stock.

                    DIPLOMAT'S CONSOLIDATED INCOME STATEMENT DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS    YEAR ENDED
                                            SIX MONTHS ENDED                    YEAR ENDED                 ENDED        DECEMBER
                                               MARCH 31,                       SEPTEMBER 30,           SEPTEMBER 30,       31,
                                    --------------------------------   -----------------------------   -------------   -----------
                                      1999       %     1998(2)   %     1998(2)    %     1997(1)   %    1996(3)    %     1995    %
                                    ----------  ----   -------  ----   -------  -----   -------  ---   -------   ---   ------  ---
                                              (UNAUDITED)
Net sales.........................    41,581     100   36,516    100   74,586     100   17,468   100     7,449   100   11,301  100
Gross margin......................    20,642      50   19,486     53   40,152      54    8,744    50        57     1    4,388   39
SG&A expenses.....................    23,933      58   17,071     51   37,537      50    7,061    40     3,672    49    4,409   39
(Loss) income from continuing
  operations before income taxes..    (4,341)    (10)   1,773      5    1,260       2    1,262     7    (6,057)  (81)    (721)  (6)
Net income (loss).................    (4,379)    (11)    (299)    (1)  (1,063)     (1)   1,106     6    (7,225)  (97)    (721)  (6)
Net income (loss) per common share
  from continuing
  operations--basic...............     (0.40)            0.16            0.08             0.19           (1.34)         (0.16)
Net income (loss) per common share
  from continuing
  operations--diluted.............     (0.31)            0.10            0.08             0.19           (1.34)         (0.16)
Net income (loss) per common
  share--basic....................     (0.40)           (0.02)          (0.13)            0.14           (1.59)         (0.16)
Net income (loss) per common
  share--diluted..................     (0.31)           (0.02)          (0.13)            0.14           (1.59)         (0.16)

OTHER DATA
E(L)BITDA(4)......................    (2,255)     (5)   3,295     10    4,625       6    2,444    14    (4,143)  (69)     (21)  --
YEAR ENDED
                                    ------------
                                     1994     %
                                    -------  ---
Net sales.........................   10,279  100
Gross margin......................    4,390   43
SG&A expenses.....................    4,129   41
(Loss) income from continuing
  operations before income taxes..     (439)  (4)
Net income (loss).................     (439)  (4)
Net income (loss) per common share
  from continuing
  operations--basic...............    (0.11)
Net income (loss) per common share
  from continuing
  operations--diluted.............    (0.11)
Net income (loss) per common
  share--basic....................    (0.11)
Net income (loss) per common
  share--diluted..................    (0.11)
OTHER DATA
E(L)BITDA(4)......................      240    2
------------------

(1) On February 19, 1998, we closed on the acquisition of Lew Magram, Ltd. For
    accounting purposes, the acquisiton was effected as of July 1, 1997. The
    acquisition was accounted for as a purchase.

                                              (Footnotes continued on next page)

                                       14
(Footnotes continued from previous page)

(2) On October 30, 1997, we acquired out of bankruptcy all the assets of Jean
    Grayson's Brownstone Studios, Inc. The acquisition was accounted for as a
    purchase.

(3) On February 6, 1996, we completed the acquisition of Biobottoms, Inc. The
    acquisition was accounted for as a purchase. On April 17, 1998, we sold
    substantially all of the assets and certain of the liabilities of
    Biobottoms, Inc.

(4) E(L)BITDA is defined as earning (loss) before income taxes, interest
    expense, depreciation and amortization. We believe that the presentation of
    E(L)BITDA facilitates an investor's understanding of our operations.
    E(L)BITDA should not be considered by an investor as an alternative to net
    income as an indicator of our operating performance or to cash flows as a
    measure of liquidity. E(L)BITDA is not used in the presentation of financial
    statements prepared in accordance with generally accepted accounting
    principles and may not be comparable to similarly titled measurements
    reported by other companies.

               DIPLOMAT'S CONSOLIDATED BALANCE SHEET DATA (000'S)
MARCH 31,               SEPTEMBER 30,             DECEMBER 30,
                                            ----------------    ----------------------------    ---------------
                                             1999      1998      1998        1997      1996      1995     1994
                                            ------    ------    ------      ------    ------    ------    -----
                                              (UNAUDITED)
Total assets.............................   50,142    46,482    50,959      33,013     4,848     8,654    8,071
Total liabilities........................   34,866    28,669    34,625      18,945     6,144     5,128    4,452
Working capital (deficiency).............   (5,372)   (5,539)   (4,662)     (3,375)   (3,145)    3,162    3,154
Long term debt...........................    6,267     1,077     6,384       1,155     1,047     2,061    1,993
Stockholders' equity.....................   14,869    17,813    16,334      14,068     2,523     3,526    3,619
LEW MAGRAM LTD.'S INCOME STATEMENT DATA (000'S)
SIX MONTHS ENDED    YEAR ENDED    SIX MONTHS ENDED    YEAR ENDED    YEAR ENDED
                                           JUNE 30,        JANUARY 4,       DECEMBER 30,       JULY 1,       JULY 2,
                                             1997             1997             1995             1995          1994
                                       ----------------    ----------    ----------------    ----------    ----------
Net sales...........................        19,643           51,927           23,145           57,616        49,680
Gross margin........................         7,682           26,815           11,941           28,883        26,501
Net income (loss) from continuing
  operations........................        (6,988)          (1,482)            (761)          (2,107)        2,239
(Loss) income before income taxes...        (7,206)            (790)            (480)          (1,485)        2,755
Net (loss) income...................        (7,276)            (790)            (465)          (1,494)        2,636
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
prospectus. In addition to the information contained herein the following
discussion contains forward looking statements that involve certain risks and
uncertainties which may cause our actual results in future periods to differ
materially from forecasted results. See "Risk Factors--Forward looking
information may not be realized."

     We are a prominent specialty retailer of quality women's fashion apparel
and accessories sold through mail order catalogs and we recently commenced sales
on the Internet. Currently, we target niche markets through our two distinctive
catalogs, Lew Magram, designed to appeal to fashion-oriented women, and
Brownstone Studio, designed to appeal to a broad range of fashions for the
affluent and mature women. We recently acquired the Lew Magram and Brownstone
Studio catalogs. We acquired out of bankruptcy all of the assets of Jean
Grayson's Brownstone Studios, Inc. on October 30, 1997. We completed the
acquisition of Lew Magram Ltd. on February 19, 1998. We effectively took control
over Lew Magram in July 1997.

     We also manufacture and distribute, primarily to major mass merchandisers,
cloth diapers, diaper covers, layettes, infant and child travel products and
other infant accessories marketed primarily under the Ecology Kids name. On
April 17, 1998, we sold substantially all of the assets of our wholly owned
subsidiary Biobottoms, Inc. for $2,270,000 in cash and notes and $5,749,000 in
assumption of liabilities.

     We are currently experiencing significant delays in fulfilling merchandise
orders. This is a result of our difficulty in obtaining timely shipment of
inventory from our vendors to meet customer demand. Some of our vendors and
their lending institutions have been reluctant to extend credit to us in such
amounts and upon such terms as to support timely delivery of inventory as needed
to meet orders. This reluctance is principally a result of our working capital
being insufficient to satisfy vendors. Our inability to timely deliver
merchandise has resulted in increased order cancellations, which, for the last
18 months have been approximately 25% of demand compared to 10% as the industry
standard. As a result, we have recognized increased charges in the second
quarter of fiscal 1999 for the write-off catalog expenditures disproportionate
to the net sales realized for the quarter and projected for next quarter. We
have recently restructured our asset based credit facility to improve our
working capital position, which we anticipate will strengthen our ability to
obtain improved credit availability on more favorable terms, timely deliver
merchandise to its customers, reduce order cancellations, and improve initial
customer response. It is too early, however, to determine whether such
additional capital will yield such results.

RESULTS OF OPERATIONS

COMPARISON OF OUR SIX MONTHS ENDED MARCH 31, 1999 TO OUR SIX MONTHS ENDED
MARCH 31, 1998

  Net Sales

     Consolidated net sales from continuing operations for the six months ended
March 31, 1999, increased by 14% to $41.6 million from $36.5 million for the six
months ended March 31, 1998. This sales increase was primarily because we owned
Brownstone for less than six months and the absence of revenue while we were
sourcing vendors to supply Brownstone after the acquisition for the six months
ended March 31, 1998. Brownstone accounted for sales of $16.1 million for the
six months ended March 31, 1999 compared to $7.7 million for the six months
ended March 31, 1998. Net sales for Lew Magram decreased by approximately
$2.1 million due to increased order cancellations and sellouts as a result of
our inability to timely ship merchandise in this period. Also, Ecology Kids
sales decreased by approximately $1.2 million due to our inability to ship
merchandise in a timely fashion to our customers.

     We believe additional vendor credit will allow us to decrease our customer
cancellation rate resulting in additional net sales for which the expenses of
catalog distribution and order taking have been incurred.

                                       16
Gross Profit

     Consolidated gross profit from continuing operations increased by 6% from
$19.5 million for the six months ended March 31, 1998 to $20.6 million for the
six months ended March 31, 1999, primarily as a result of increase sales from
Brownstone. However, gross profit from continuing operations as a percentage of
net sales decreased from 53% for the six months ended March 31, 1998 to 50% for
the six months ended March 31, 1999 due to a decrease in margins. This decrease
was primarily a result of a higher proportion of clearance merchandise sales due
to an increase in returns of late delivered merchandise resulting from our
inability to obtain vendor credit.

  Selling, General and Administrative Expenses

     Selling, general and administrative expenses from continuing operations as
a percentage of net sales increased from 53% for the six months ended March 31,
1998 to 58% for the six months ended March 31, 1999. The increase in expenses is
attributable to the increase in catalog production costs in this period which
are typically written off over the sales life of the catalog. The life of the
catalog in this period was reduced as a result of our inability to mail books
over a normal catalog schedule. For the six months ended March 31, 1999, these
costs were $14.5 million as compared to $9.6 million for the six months ended
March 31, 1998.

     Other operating expenses as a percent of net sales increased for the six
months ended March 31, 1999 as compared to the six months ended March 31, 1998,
due primarily to an increase in amortization of intangibles in connection with
the Brownstone acquisition of approximately $180,000, as well as an increase of
approximately $400,000 in interest expense primarily due to the Finova
debentures.

  Income (Loss) from Continuing Operations

     Loss from continuing operations before income taxes for the six months
ended March 31, 1999 was approximately $4.3 million as compared to income from
continuing operations of $1.8 million for the six months ended March 31, 1998
primarily due to the increase in catalog production costs chargeable to that
period and to lower margins attributable to unshipped backorders.

  Net Income (Loss)

     Net loss for the six months ended March 31, 1999 was approximately
$4.4 million, as compared to net loss for the six months ended March 31, 1998 of
$299,000. This difference included the loss in 1998 from the discontinued
Biobottoms operations of approximately $2.1 million.

COMPARISON OF OUR FISCAL YEAR 1998 TO OUR FISCAL YEAR 1997

  Net Sales

     Consolidated net sales from continuing operations for fiscal year 1998
increased by 327% to $74.6 million from $17.5 million in fiscal year 1997. This
significant sales growth was primarily due to the acquisition of Lew Magram,
Ltd. effective July 1, 1997, and the acquisition of the assets of Jean Grayson's
Brownstone Studio out of bankruptcy as of October 30, 1997. These two new
subsidiaries accounted for sales of $68.8 million in 1998.

     Maintaining the prior circulation of both acquired catalogs while
streamlining catalog and operational expenses allowed us to be profitable in the
year of acquisition where both companies suffered substantial losses in the year
preceding acquisition. Unfortunately, we lost the opportunity in 1998 to even
further increase sales and profits in this segment of the business due to
excessive customer order cancellations caused by inadequate credit which limited
timely delivery of merchandise.

  Gross Profit

     Consolidated gross profit from continuing operations increased by 359% from
$8.7 million in 1997 to $40.2 million in 1998 primarily as a result of our
acquisitions. Gross profit from continuing operations as a percentage of net
sales increased from 50% in 1997 to 54% in 1998 due to the higher margins
generally available in the women's apparel catalog marketplace.

                                       17
Selling, General and Administrative Expenses

     Operating expenses net of other income but before depreciation,
amortization and interest from continuing operations as a percent of net sales
increased from 40% for 1997 to 50% for 1998. A major increase in expenses for
the year is attributable to the increase in the catalog production costs which
are typically written off over the sales life of the catalog. In 1998 these
costs were $21.1 million or 28% of net sales. As noted above, order
cancellations resulted in lost net sales and an inflated catalog cost
relationship.

     Other operating expenses as a percent of net sales increased in 1998 due
primarily to an increase in depreciation and amortization of tangible and
intangible assets as well as interest expense.

  Income from Continuing Operations

     Income from continuing operations before income taxes for 1998 was
approximately $1.3 million and was approximately the same as that of 1997,
despite a period of consolidation and re-structuring to assimilate the newly
acquired women's apparel catalog businesses.

COMPARISON OF OUR FISCAL YEAR 1997 TO OUR FISCAL YEAR 1996

     These results of operations compare the twelve months ended September 30,
1997 with the nine months ended September 30, 1996.

  Net Sales

     Consolidated net sales from continuing operations for fiscal year 1997 of
$17.5 million increased $10.0 million or 135% from fiscal year 1996 of $7.5
million, as a result of the Lew Magram sales of $10.6 million from July 1, 1997.
Diplomat took effective control of Lew Magram on July 1, 1997 even though the
acquisition was not completed until February 19, 1998.

  Gross Profit

     Gross profit in 1996 was essentially non-existent due to inventory write
downs while restructuring, and rose to 50% in 1997 due to normal Ecology Kids
operations and increased margins made available in the last fiscal quarter due
to the Lew Magram acquisition.

  Selling, General and Administrative Expenses

     Operating expenses from continuing operations were very high in 1996 due to
restructuring costs. These expenses normalized as a percentage of net sales to
40% in 1997 due to normal operations of Ecology Kids and expenses applicable to
Lew Magram for the final quarter.

     Interest expense decreased from $0.7 million in 1996 to $0.4 million in
1997 as a result of the conversion of debt to preferred stock by a principal
stockholder.

  Income from Continuing Operations

     The net income from continuing operations for 1997 was approximately
$1.4 million as compared to a net loss of approximately $6.1 million for 1996.

     At September 30, 1997, we recorded deferred tax assets of $1.3 million. The
full utilization of such deferred tax assets is dependent upon our realizing
taxable income in future years. The total amount of future taxable income
necessary for utilizing such deferred tax assets will be approximately $3.4
million. Based on the current year's operations, such realization would take
approximately six years.

COMPARISON OF LEW MAGRAM LTD.'S SIX MONTHS ENDED JUNE 30, 1997 TO YEAR ENDED
JANUARY 4, 1997

  Net sales

     Lew Magram Ltd. had begun to feel the effects of insufficient working
capital. Net sales decreased from $51.9 million, which was a full year to $19.6
million, which was a six month period, due to Lew Magram's inability to purchase
all of the merchandise needed for timely delivery to customers.

                                       18
Gross Profit

     Gross profit as a percent of net sales decreased from 52% to 39% primarily
due to the premium Lew Magram Ltd. paid for some merchandise which could not be
delivered in a timely manner at normal prices, as well as the need to clear
excess inventory, once delivered, at lesser margins.

  Selling, General and Administrative Expenses

     Selling general and administrative expenses net of other income as a
percent of net sales increased from 55% to 75%. This increase is a result of Lew
Magram Ltd.'s inability to timely ship merchandise resulting in increased
returns or failure to ship merchandise at all resulting in cancellations while
it was still incurring the catalog production and operating expenses to mail
catalogs and take and maintain catalog orders.

  Net Loss

     Net loss increased from $0.8 million to $7.3 million, or, as a percent of
net sales increased from 2% to 37%.

LIQUIDITY AND CAPITAL RESOURCES

     Our principal source of working capital has historically been asset based
loan facilities provided by Congress Financial Corporation. On May 12, 1999, we
entered into a Secured Credit Agreement with First Source Financial LLP
providing us with a $17 million asset based loan facility replacing our existing
asset based loan facilities provided by Congress.

     The First Source loan facility provides us with a $13 million revolving
loan with an interest rate at prime plus 1 1/2%, a $3 million three year term
loan with an interest rate at prime plus 2% and a $1 million three year term
loan with an interest rate at prime plus 2% increasing to prime plus 3% on
November 15, 1999. We may convert any or all of the loans to a LIBOR (London
interbank offer rate)-based rate. The revolving loan may be converted to LIBOR
plus 3 1/4%, the $3 million term loan may be converted to LIBOR plus 4% and the
$1 million term loan may be converted to LIBOR plus 4% increasing to LIBOR plus
5% on November 15, 1999.

     The loan facility is secured by substantially all of our assets, a personal
guarantee by Robert M. Rubin, our Chairman of the Board, up to $1 million and an
additional $1 million cash collateral deposit by Mr. Rubin.

     The amount of funds available for us to borrow under the revolving loan is
based on a percentage of our inventory and qualified receivables plus 100% of
Mr. Rubin's cash collateral. As of May 12, 1999, the aggregate availability
under the revolving loan was approximately $8.5 million.

     Under the Secured Credit Agreement, we are obligated to comply with
numerous covenants including (i) providing current information to First Source;
(ii) maintaining corporate status, books and records and minimum insurance;
(iii) complying with tax and other laws and regulations; (iv) maintaining our
real estate; (v) maintaining a minimum net worth of $14 million increasing
periodically to $16.5 million; (vi) maintaining an interest coverage ratio of 2
to 1; and (vii) maintaining a fixed charge coverage ratio of 1.1 to 1.

     We are also prohibited, except under certain circumstances, to (i) redeem
any of our outstanding common or preferred stock; (ii) prepay any subsidiary's
debt; (iii) pay dividends on our common stock; (iv) make investments in other
companies; (v) acquire other companies; (vi) amend our charter; (vii) engage in
other types of businesses; (viii) engage in transactions with our officers,
directors, control persons and other affiliates; (ix) incur debt other than debt
in the ordinary course of business and purchase money debt of more than
$1 million; (x) create any liens against our property with certain exceptions;
(xi) move our assets; (xii) sell our assets other than in the ordinary course of
business; (xiii) hire management consultants; (xiv) make capital expenditures in
excess of $500,000 per year; or (xv) incur lease obligations in excess of
$1.5 million per year.

                                       19
The loan facility will terminate and the loans become due and payable in
the event of a default. Events of default include, with limited exceptions,
(i) failure to pay any of the loans when due, (ii) failure to pay any other
debts when due; (iii) breach of certain material agreements; (iv) insolvency;
(v) breach of any guaranty under the loan facility; (vi) breach of a covenant in
the loan facility; (vii) breach of a representation in the loan facility; (viii)
change to our pension plan; (ix) breach of any of the other agreements delivered
in connection with the loan facility; (x) suffering judgments or levies of more
than $50,000; (xi) destruction of our assets representing more than 15% of our
revenues; (xii) any event resulting in any lien securing the loan facility to
cease to have a first priority position; or (xiii) a change in control. A change
in control includes (i) more than one-half of our voting stock is transferred;
(ii) two-thirds of our board is removed or not re-elected; or (iii) any two of
Jonathan Rosenberg, Warren H. Golden or Stephanie Sobel resigns or is terminated
without cause.

     On June 29, 1998, we issued $5,000,000 principal amount of our 12%
subordinated secured debentures to Finova Mezzanine Capital, formerly known as
Sirrom Capital Corporation, d/b/a Tandem Capital. The debentures are due June
29, 2003, and bear interest at 12%, payable quarterly. The debentures are
secured by all of our personal property and include certain restrictive
covenants, including restrictions on dividends and distributions, additional
debt financing and transactions between us and our affiliates. We also issued
warrants in connection with the issuance of the debentures. At the time of the
loan, we issued a warrant to purchase up to 208,300 shares of our common stock
exercisable at $2.35 per share for five years. The exercise price is to be
adjusted downward if our common stock price is below this exercise price to an
exercise price equal to the greater of 80% of the market price on June 29, 1999
or $2.00 per share. Because the debentures were outstanding on February 28,
1999, we issued an additional warrant to purchase 416,600 shares of common stock
exercisable at $1.59 per share for five years. After giving effect to the
1-for-5 reverse stock split Finova has warrants to purchase 41,660 shares at
$11.75 per share and 83,320 shares at $7.95 per share. Finova will also receive
40,000 warrants each June 29 commencing in 1999 while the debentures remain
outstanding.

     We, however, continue to experience working capital shortages and require
additional capital resources to fund our existing operations. We have borrowed
the maximum amounts available under the First Source loan facility as of the
date hereof and there is no unused loan availability. We are pursuing a number
of financing alternatives, although there can be no assurance that such efforts
will result in necessary financing or that the terms of such financing will be
on terms favorable to us or our stockholders. The failure to secure additional
working capital could materially adversely affect our business and financial
condition. Insufficient working capital may require us to alter operations
significantly.

     We have signed a non-binding letter of intent to purchase new facilities in
Clifton, New Jersey. The facility, which is approximately 160,000 square feet,
would provide us with warehouse and office facilities to consolidate our
operations currently located in Teaneck, New Jersey, and Stony Point, New York
and a portion of our New York City operations. The purchase price for this
facility would be approximately $5.6 million. If we take this facility, we
estimate the cost to consolidate operations would be $1 million. We have not yet
determined whether we will purchase this facility.

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

SEASONALITY

     Our business does not follow the seasonal pattern typical of the retail
apparel industry, but is, instead, more closely related to the timing and
distribution of catalog mailings. Through 1997 there were significant variations
in our seasonal sales volume with the largest volume period being first quarter,
ending December 31. In 1998, the Lew Magram and Brownstone acquisitions helped
to spread out the volume evenly throughout the year since mail order volume
varies only in proportion to the orders generated and merchandise shipped.
Accordingly, we are now less susceptible to seasonable variations. The combined
net sales of Lew Magram, Brownstone and Ecology Kids for each quarter of the
fiscal years ended

                                       20
September 30, 1996, September 30, 1997, and September 30, 1998, presented as a
percentage of net sales for each such year, were as follows:

                           PERCENTAGE OF ANNUAL SALES
FIRST      SECOND     THIRD      FOURTH
FISCAL YEAR                                                         QUARTER    QUARTER    QUARTER    QUARTER
-----------                                                         -------    -------    -------    -------
September 30, 1996...............................................     27%        24%        30%        19%
September 30, 1997...............................................     33%        25%        24%        18%
September 30, 1998...............................................     24%        23%        28%        25%
INFLATION

     There was no significant impact on our operations as a result of inflation
during fiscal year 1996, fiscal year 1997 or fiscal year 1998.

YEAR 2000

  Year 2000 Compliance

     Beginning in the Year 2000, the data fields coded in some software products
and computer systems will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such Year 2000 requirements. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance issues.

  State of Readiness

     We have developed a remediation plan for the Year 2000 issue that involves
identification, assessment and testing of the equipment and systems affected:

     o an assessment of information technology (IT) equipment and systems has
       been done;

     o an assessment of non-information technology (non-IT) embedded systems
       such as telephones, voice mail and building security systems has been
       completed; and

     o the readiness of significant third party vendors and suppliers of
       services is being analyzed.

     The evaluation, which is expected to be completed by December 1999, covers
the following phases:

     o development of an inventory of all IT equipment and systems and non-IT
       systems that are potentially affected (100% complete);

     o determination of those systems that require repair or replacement (70%
       complete);

     o repair or replacement of those systems (25% complete); and

     o creation of contingency plans in the event of Year 2000 failures (25%
       complete).

     To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs have been
reviewed, and are not considered to be date sensitive to the Year 2000. Based on
this evaluation, we do not believe that our systems and programs present Year
2000 issues, and generally believe that we will be Year 2000 compliant.

     Although we believe that we will be Year 2000 compliant, third party
equipment and software is used that may not be Year 2000 compliant. An
evaluation of the Year 2000 compliance of the third party products used in our
internal systems and major vendors have begun, but we are unable to predict the
extent to which:

     o the Year 2000 issue will affect suppliers; or

     o we would be vulnerable to the suppliers' failure to remediate any Year
       2000 issues on a timely basis.

     All our vendors and suppliers have been placed in a priority category
according to their importance to our business. Letters will be sent to all
vendors and suppliers with an operating impact seeking details of the

                                       21
status of their Year 2000 program. Vendor and supplier readiness is being
assessed and tracked. Vendors have generally indicated that they are making best
efforts toward Year 2000 compliance. We expect to have certification that all
vendors and suppliers with an operating impact are Year 2000 compliant by
December 1999. Plans are being developed to ensure continued availability of
service through alternate channels in the event that satisfactory commitments
are not received from vendors and suppliers with an operating impact. For the
highest priority vendors and suppliers, where business risk warrants it, we are
planning to conduct, in the third quarter, an integration test of Y2K compliance
where specific dates are simulated. These vendors and suppliers include
merchandise suppliers such as Call Center Services, Convergys Group,
CommercialWare, Inc. and Clairicom and package delivery services such as United
Parcel Service and the United States Postal Service. The failure of one of these
highest priority vendors or suppliers to convert its systems on a timely basis
or in a manner compatible with our systems could cause us to incur unanticipated
expenses to remedy any problems and could adversely affect its business. In
addition, the software and hardware products used by affiliate Web sites,
advertisers, customers, governmental agencies, public utilities,
telecommunication companies and others, may not be Year 2000 compliant. If these
products are not Year 2000 compliant, customers' ability to use our Web site may
be disrupted.

  Costs to Address Year 2000 Compliance

     To date, we have incurred approximately $100,000 in connection with
identifying or evaluating Year 2000 compliance issues. Most of these expenses
have related to the opportunity cost of time evaluating software, the current
versions of our products and Year 2000 compliance matters generally. We expect
that our future Year 2000 costs will be approximately $250,000 and will be
funded out of cash on hand. However, the full impact of the Year 2000 issues
cannot be determined at this time. The failure by certain third parties to
address their Year 2000 issues on a timely basis could adversely affect our
business.

  Contingency Plan

     We have not yet completed our Year 2000 contingency plans. Such plans
include, but are not limited to, using alternative suppliers and establishing
contingent supply arrangements. We expect to have such plans in place by the end
of December 1999. The worst case scenario related to Year 2000 issues would
involve a major shutdown of the telecommunication companies, which would result
in the loss of our principal revenue source until the shutdown was resolved.

NEW ACCOUNTING STANDARDS

     We adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS 130 did not have any effect on our
financial statements.

     We adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," which establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of enterprises
about which separate financial information is available that is evaluted
regularly by our management in deciding how to allocate resources and in
assessing performance. The adoption of SFAS 131 did not have any effect on our
financial statements.

     Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments. We have not in the past nor do
we anticipate that we will engage in transactions involving derivative
instruments which will impact our financial statements.

                                       22
BUSINESS

     We are a prominent specialty retailer of quality women's fashion apparel
and accessories sold through mail order catalogs, and we recently commenced
sales on the Internet. Currently, we target niche markets through our two
distinctive catalogs, Lew Magram and Brownstone Studio. Lew Magram was
established in 1948 as a men's clothier but by 1984 had converted its catalog to
solely offer women's apparel designed to appeal to fashion-oriented women.
Brownstone Studio, established in 1974, offers a broad range of fashions to the
affluent, more mature women. We generally publish 10 Lew Magram catalog editions
per year and nine Brownstone catalog editions per year. Each catalog includes
300 to 500 products and our annual circulation is over 45 million catalogs per
year. With the recent introduction of electronic commerce on the Internet, we
believe as a catalog marketer that we are well positioned to increase our market
penetration at a lower cost on the Internet. We believe that catalog consumers
are the ideal Internet customers because they are accustomed to purchasing
fashion merchandise from a non-store medium. In January 1999 we began offering
our products online at Catalogcity.com and in February, 1999 signed a joint
venture with Fashionmall.com, Inc. to build several websites leveraging our
fashion design capabilities, brand name and customer base with Fashionmall.com's
Internet presence and expertise. We are also a wholesaler of apparel and
accessories for babies and toddlers to mass merchandisers such as Kids "R" Us,
Wal-Mart, Target and Walgreens, under the brand name "Ecology Kids".

     We have an experienced management team with over 150 years in the catalog
business, unique product lines and well-integrated infrastructure and
fulfillment capabilities. Over our history, we have compiled a wealth of
information with respect to our customers' buying patterns. By managing this
information, we can tailor the content of our catalogs, target catalog
distribution to particular customers, offer an expanded range of products to
certain customers, and test new products. Our database includes over 5 million
names of which 3.8 million are customers and 1.2 million are gift recepients and
catalog inquirers.

     We are currently creating and designing our own e-commerce websites for
each of Lew Magram and Brownstone Studio. These websites will be interactive,
allow for online product purchases from the catalogs and provide content areas
which we believe will be of interest to our existing and prospective customers.
With our accumulated information on existing customers and the information we
expect to obtain through our Internet sites, we believe we will be able to
customize each website in accordance with the preferences of the respective
target markets. These are intended to be the primary websites to offer our
products in addition to the Catalogcity.com and Fashionmall.com websites.

     Lew Magram products are marketed to fashion-conscious, value-oriented,
middle- and upper-income and above customers and career women. The Lew Magram
customers spend on average $160 per order. The Lew Magram catalog contains
active wear, career apparel, separates, outdoor wear, footwear and formal wear
for a cross range of lifestyles and women. Much of Lew Magram's apparel carries
our brand label but we do carry other labels as well, both in our apparel and
footware lines.

     Brownstone Studio merchandise is marketed to affluent, sophisticated and
mature women. The Brownstone Studio customer on average spends $140 per order.
The Brownstone Studio catalog contains both classic and modern fashion apparel,
footwear, accessories and some intimate apparel. Brownstone Studio offers a
broad range of sizes in stylish merchandise which, we believe, are not readily
available to our customers in the retail market place.

                                       23
OUR STRATEGY

     We intend to capitalize on our competitive strengths to increase sales to
both existing and new customers and continue to develop operating efficiencies.
The key elements of our strategy are as follows:

BUSINESS STRATEGY

  Increase ability to fulfill orders through improved capitalization

     We have invested significant capital to acquire the businesses of Lew
Magram and Brownstone Studio. We have been unable to realize all of the benefits
of these investments because a substantial amount of the assets acquired have
been treated as goodwill, an intangible asset. As a result, vendors have been
reluctant to extend us the credit necessary to fully realize the potential of
these acquisitions. The completion of this offering will provide the tangible
net worth necessary to obtain vendor credit to increase our inventory levels to
meet expected customer demand and reduce merchandise returns and order
cancellations. We believe our improved capital structure will also enable us to
accelerate fulfillment of customer orders, expand merchandise offerings within
each catalog, expand our proprietary Lew Magram and Brownstone Studio Frequent
Buyers Club loyalty programs and offer other promotions to prospective
customers. We believe that these efforts will increase revenues from our current
customers and also attract new customers.

  Reduce costs and increase operational efficiencies through improved liquidity

     We believe the additional capital generated from this offering will allow
us to take advantage of discounts and flexible payment terms from vendors and
service providers, increase the number of vendors available to us, reduce our
fulfillment cost per order, reduce customer service costs and reduce interest
expense. We intend to operate more efficiently by maximizing use of our in-house
capabilities, improving inventory management, better utilizing our warehouse
space, reducing the number of shipments required to fulfill customer orders and
reducing the use of outside services.

  Leverage and expand proprietary customer database

     We intend to leverage our proprietary customer database through statistical
modeling and market segmentation techniques. This will enable us to increase our
customer response rate, the dollar amount of purchases per catalog mailed and
the gross profit margin per catalog. We intend to expand our proprietary
customer database by test marketing to specific target audiences which we
believe meet the criteria of our traditional customer base.

  Increase brand awareness

     We intend to increase brand awareness by expanding the assortment of
available products under the Lew Magram and Brownstone Studio private labels,
increasing merchandise categories offered in each catalog, providing exclusive
product offerings tailored to specific customer profiles and increasing the
usage of our branded private label credit cards. We also intend to utilize our
planned e-commerce Internet sites, our strategic relationships with
Fashionmall.com, Inc. and Catalogcity.com and other strategic alliances to
increase our brand awareness.

GROWTH STRATEGY

  Expand through diversifying product lines

     We plan to diversify our current Lew Magram and Brownstone Studio product
offerings through the addition of complementary product lines which we believe
will be of interest to our target markets. These product lines will be added
over time and will be subject to the results of our in-house test marketing
programs, some of which will be performed through the Internet, to determine
customer acceptance on additional items before they are included as a regular
segment of our catalogs and online stores. Complementary products which we may
add include cosmetics, fragrances, jewelry and additional fashion accessories.
We believe that the addition of new product lines to our Lew Magram and
Brownstone Studio

                                       24
catalogs will lead to additional sales to our regular customers and create a
greater level of buying interest from prospective customers. We expect that this
will further enhance our brand names by broadening the range of products with
which they are associated.

  Expansion of Ecology Kids line of business

     We recently entered into a licensing agreement with Warner Bros. to market
and distribute a line of Baby Looney Tunes swimsuits. We are attempting to
locate other licensing partners for products in our Ecology Kids line to
increase the marketability of these products. In addition, we are continuing to
develop a prototype of a business-to-business catalog for the direct marketing
of the Ecology Kids product line to our wholesale customers. We believe that a
well designed business-to-business catalog will allow us to use our existing
infrastructure to build our Ecology Kids operation. We also expect to launch our
Ecology Kids products on the Internet through strategic relationships with
online baby stores and as specialty features on our Lew Magram and Brownstone
Studio websites, as well as to wholesale customers on a business-to-business
format.

  Expand through purchasing complementary businesses

     We intend to continue to pursue strategic acquisitions of additional
businesses which complement our current businesses. Our primary focus will be
catalogs that expand our current customer profile, introduce new product
offerings and generate greater operational efficiencies. In addition, we may
seek to purchase catalogs offering products that are compatible with our Lew
Magram and Brownstone Studios product lines, such as additional accessories,
cosmetics, fragrances or jewelry. We also may seek to acquire businesses that
are compatible with Ecology Kids and expand the range of products offered to our
extensive customer base, although such businesses or products have not yet been
identified.

INTERNET STRATEGY

     We believe that catalog consumers are logical customers for Internet
commerce because they are accustomed to purchasing fashion products from a
non-store medium. We anticipate that a substantial portion of our existing
customer base will in the future become Internet consumers of our Lew Magram and
Brownstone product offerings. We also believe that our extensive experience with
the presentation of fashion products in an appealing format will help us to
design unique, attractive websites for Lew Magram and Brownstone. The Internet
provides us the opportunity to market our products to a substantially greater
audience than we would otherwise have access to, at a relatively low cost. The
technology available through the Internet provides the customer the ability to
visualize products, colors and styles according to her individual preferences,
and track order status. The Internet also allows us to communicate directly with
our customers through personalized communications and customized product
offerings. This enables us to react to changing business conditions, alter
merchandise selection, pricing and presentation on a virtually real-time basis
without of being subject to catalog lead times.

     We believe the Internet will ultimately allow us to significantly reduce
our largest non-merchandise expenses such as catalog printing costs, postage and
customer communications. These costs represented more than 35% of our revenues
for the fiscal year ended September 30, 1998. We can also use the Internet as a
lower cost and a more efficient method of testing new products, new product
lines, special events and promotions and increasing access to prospective
customers.

  Our e-commerce sites

     Our objective is to build a branded e-commerce site for each of Lew Magram
and Brownstone Studio. Each website will attempt to capture the look and feel of
its target market, offering customers shopping and order processing
capabilities, as well as offering additional interactive and community features
such as travel guides, personal shopping capabilities, daily planners and gift
registries. We also intend to augment our mail order customer profile database
through information we obtain through our Internet sites. We believe this data
will make our website communities attractive destinations for other vendors and
e-commerce companies that want access to our customers. The Internet should also
increase brand identity as we cross market

                                       25
through strategic relationships and online marketing efforts. Cross marketing
should increase as we add product categories such as cosmetics, fragrances and
additional fashion accessories. We believe that leveraging our existing
distribution center and customer service center will support our online
fulfillment performance and compliment our e-mail customer service.

  Strategic relationships

     We recently entered into a letter of intent to form a joint venture with
Fashionmall.com, Inc. (Nasdaq: "FASH"), one of the leading apparel shopping
destinations on the Internet. As part of our agreement, we have escrowed
$500,000 for the purpose of creating an on line presence with other retailers
for specific product offerings such as women's large size apparel.
Fashionmall.com will build and maintain the website, prominently position the
site within its on-line mall, and link our Lew Magram and Brownstone Studio
websites directly to their mall. We have also entered into an agreement with
Catalogcity.com, the largest online catalog destination on the Internet, to
access the Lew Magram and Brownstone Studio catalogs over the Internet. We
intend to develop other strategic relationships relating to our Internet
strategy.

                                  OUR INDUSTRY

     In recent years, retailing in the United States has been characterized by a
shift to non-store sales through such media as printed catalogs, broadcast home
shopping channels and the Internet. According to the DMA, catalog sales are
estimated to be $93.27 billion for 1999, representing 3.3% of overall retail
sales. The DMA expects catalog sales to increase to $125 billion by 2004. The
expected growth for catalog sales is approximately 6.1% per year for the next
five years. According to the investment banking firm Gruppo, Levey,
Incorporated, direct marketing sales in the women's apparel category accounted
for $8.4 billion in 1997. A DMA survey done in the first quarter of 1999 showed
that women account for 69.8% of all catalog sales, and women's apparel is the
largest catalog category representing 64% of all catalog purchases. In 1998,
nearly 70% of the women who shop via catalog made a purchase within that year.
We believe that direct marketing apparel sales to women will continue to grow,
due to the convenience and time savings afforded by catalog and recently
introduced e-commerce shopping. The U.S. Census Bureau is projecting the 35-64
year old female population to grow 20.8% from 1995 to 2005. This is an
attractive target group for catalog distributors and e-commerce vendors such as
ourselves, particularly because in excess of 50 million women are in the work
force and therefore may have material discretionary income.

MOVING INTO E-COMMERCE

     International Data Corporation projects worldwide commerce revenue on the
Internet to increase from $4.3 billion for 1997 to $11.0 billion in 1999 and is
expected to increase to $84.2 billion by 2004. It is expected that online
shopping will increase at a rate of 50% per annum. Jupiter Communications
estimated that women accounted for 45% of all web users as of January 1998
accounting for 25% of all Internet sales and are expected to account for 47% of
Internet sales by the year 2000. Forrester Research reported that women make 67%
of all household purchase decisions. According to a DMA study done in 1999, 43%
of their member companies are selling online and 49% of those are generating a
profit from online shopping. As a result of these factors, we believe that
apparel sales will be a major component of Internet commerce and that women will
become a highly targeted customer for online stores and advertisers.

                                   OUR BRANDS

     We currently offer our products through three operating
subsidiaries--direct mail catalog and Internet retail sales of apparel under the
Lew Magram and Brownstone Studio brands and sales of apparel and accessories for
infants and toddlers to mass merchandisers under the Ecology Kids tradename. For
financial information on the operations of our lines of business, see our
consolidated financial statements commencing on page F-1 and the notes thereto.

                                       26
LEW MAGRAM

     Lew Magram is a leading catalog for stylish career women. Founded in 1948
as a men's clothier, by 1984 Lew Magram converted its catalog to become a
premier women's apparel direct marketer. We began managing the operations of Lew
Magram in July 1997 and completed the acquisition of its assets in
February 1998. We offer our Lew Magram customers unique, fashionable, affordable
women's apparel and accessories, including active wear, career apparel,
separates, outdoor wear and dressy wear that is selected to appeal to a
cross-range of lifestyles and women. Our Lew Magram proprietary database
contains approximately 2.2 million names, of whom 1.6 million are customers,
550,000 are gift recipients and catalog inquirers.

     Based on information we regularly gather from our customers, we believe our
typical Lew Magram customer is about 40 years old, works outside the home on
either a full or part-time basis, is well educated, lives in a single family
home, and has a household income of approximately $60,000 per year. Our Lew
Magram customer base is both fashion conscious and value oriented. A particular
niche for our Lew Magram catalog is career suits and dresses. This apparel is
offered in the newest styles, colors and fabrics at prices geared toward the
target customer. As this customer has a busy social and professional life, she
also looks to Lew Magram as a source to provide her with her "day to dinner" and
special occasion dressing needs. In addition, we believe Lew Magram is renowned
in the catalog industry for having a premier selection of leather and suede
sportswear and outerwear at competitive prices. We have also recently expanded
our size offerings for certain products. Based on positive response from our
customers, we believe this represents a growth opportunity.

     The average order from the Lew Magram catalog for fiscal years 1997 and
1998 was $158 and $160, respectively. Our database includes more than 500,000
customers who have made at least two purchases from Lew Magram. In addition to
accepting all major credit cards, Lew Magram also sells its merchandise through
a private label credit card which was launched in 1993. Approximately 110,000
people have the Lew Magram credit card, which accounts for approximately 25% of
Lew Magram's sales.

BROWNSTONE STUDIO

     Since 1974, "Jean Grayson's Brownstone Studio" and "Studio Collection" have
been among the largest direct catalog marketers of upscale mature women's
apparel in the United States. We believe this is due principally to superior
merchandising to our target customers, focusing on high quality presentation in
our catalogs, frequently utilizing location shots to display our merchandise in
an appropriate mood and tone, and providing a large and unique selection of
merchandise, including larger sizes which our customers often have difficulty
purchasing elsewhere.

     Brownstone has chosen to focus on a relatively narrow but rapidly growing
segment of the consumer catalog market--upscale mature women's fashions--in
order to develop a strong image and identity with our customers. On Brownstone's
proprietary customer list, 79% are age 55 and older. According to American
Demographics magazine, there were approximately 17 million women between the
ages of 50 and 64 in 1997. Also according to American Demographics, the portion
of the US female population ages 50 and over is forecast to increase from
33 million in 1997 to 52 million in 2010. Brownstone seeks to increase market
share in this growing segment of the consumer market. Approximately 49% of
Brownstone's customers have annual household income of $50,000 or more, and
about 86% own their own home.

     Our Brownstone proprietary customer database contains approximately 2.8
million names, of whom 2.2 million are customers, 180,000 are gift recipients
and 420,000 are catalog inquirers. For the Fall 1997 season, Jean Grayson's
Brownstone Studio, Inc. was not operational and, as a result, incurred damage to
its customer base. We have since begun recirculating and have had positive
customer response. In addition, we introduced the Brownstone Studio private
label credit card in September 1998. We mailed a total of approximately
22 million Brownstone catalogs in ten different issues during fiscal year 1998,
with an average order value of approximately $140, and we plan to mail a similar
number in 1999. By strengthening customer relations with Brownstone customers,
we believe that we can improve initial customer response and increase average
orders for the Brownstone catalogs.

                                       27
ECOLOGY KIDS

     Our Ecology Kids subsidiary designs, develops, markets and distributes
apparel and accessories for infants and toddlers, such as bathing suits, infant
sleepwear, bedding, garment bags, teething rings and other related products. We
contract manufacture most of our products and the remainder is either assembled
or produced within our own facility at Stony Point, New York. These products are
sold directly to general mass merchandisers, toy retailers, selected chain
stores and independent retail stores. We create customized point-of-purchase
displays for our customers, which include broad selections of branded products
in a variety of categories. We develop uniform packaging with branded product
identification designed to promote a theme of one-stop shopping for all infant
needs.

     We believe that customer service is an important component of our Ecology
Kids marketing strategy and tends to be a significant factor in gaining access
to large chain store accounts. As a result, we design our service strategy to
assist those chain stores through the development of improved packaging, product
mix, display, and pricing strategies and effective promotional programs.

     We market our Ecology Kids products directly through an internal sales
force and to a lesser extent through independent sales organizations, which are
given principal responsibility for maintaining accounts in specific geographic
regions. Due to a change in the retail marketplace, Ecology Kids has experienced
a reduction in the number of retail accounts from prior periods, with an
increased emphasis on mass merchandisers and chain stores. We have approximately
500 retail accounts consisting primarily of mass merchandisers and toy
retailers, and, less significantly, drug store chains, catalog showrooms, mail
order operations and food store chains. In addition to American Drug Stores,
Burlington Coat Factory, Eckerd Drugs, Kids "R" Us, Publix Supermarkets, Toys
"R" Us and Wal-Mart, customers include Target Stores, Walgreen Drug, and
Winn-Dixie Supermarkets.

     We have recently entered into an agreement with Warner Bros. to market and
distribute a line of products with the Warner Bros. Baby Looney Toons
characters. We are currently developing wholesale direct marketing of Ecology
Kids products through catalog offerings, utilizing our direct marketing
expertise.

                             OUR CATALOG OPERATIONS

PROPRIETARY CUSTOMER DATABASE

     We have developed our proprietary customer database over many years through
a variety of techniques, including referrals, gift certificates, catalog
requesters, customers from other mailing lists who have made a purchase and
targeted classified advertising. We have found that our database generates a
greater response rate than purchased or rented mailing lists. Our database
currently includes approximately five million names, of which approximately 3.8
million are customers who have made at least one purchase from us and
approximately 1.2 million are catalog inquirers and gift recipients.

     We use traditional mail order techniques to grow our catalog businesses by
mailing catalogs to a combination of names on our customer file and prospect
lists. We employ industry standard segmentation techniques for mailing our
catalogs to names on our proprietary customer database. Typical mailing criteria
include recency of purchase, frequency of purchase and monetary value of the
customer's purchase. This allows us to assign the segmented names to the
appropriate number of mailings as well as the appropriate promotions and page
counts. We use third party providers for merge and file services and maintaining
our customer list rental files. Our best prospects are sourced from other mail
order companies in the women's apparel market. Recent successes with cooperative
databases offer additional sources of economical names. Typically, one third to
one-half of our catalog mailings are to prospect names.

     As is common throughout the direct mail industry, we routinely exchange
names with our competitors and rent our list to our competitors and other
businesses. Approximately two-thirds of prospects to whom our catalogs were
mailed in 1998 were obtained on an exchange basis, requiring no cash outlay by
us. Income from list rentals has been over $1 million in each of the last three
years.

                                       28
CATALOG CONFIGURATION

     We believe we are an industry leader in efficiency of catalog
configuration. Most catalogers mail a single edition of their book per mailing,
along with perhaps a few different covers or a signature change for a remail. We
utilize selective binding in order to mail multiple versions of our catalogs. In
the Lew Magram catalog, a typical book would comprise one large assemblage of
pages in common to the entire mailing, plus an additional supplemental set of
pages to a narrower targeted audience, plus one or two other supplements to yet
a narrower audience, plus perhaps a clearance supplement. Any of these parts
might appear in any drop of a book, depending on a number of variables, such as
testing, prospect mailing and special offerings to holders of our proprietary
credit cards, all selectively bound and mailed as parts of a greater whole. This
technique is used to a lesser degree for Brownstone.

MARKETING

     Our primary means of marketing is through distribution of our catalogs. Our
marketing department uses certain industry criteria to plan our distribution,
including our overall circulation, number of pages in each book, gross demand
(before returns and cancellations), cost per book, dollars per book, cost per
page per book and dollars per page per book. These enable us to prepare our
annual budget and forecast actual contribution dollars to overhead and profit.
The following table illustrates our results for fiscal year 1998:
LEW MAGRAM     BROWNSTONE STUDIO
                                                                         -----------    -----------------
Circulation...........................................................    27,490,000         22,111,000
Average Pages Per Book................................................          68.5               74.0
Gross Demand..........................................................   $    76,635      $      63,660
Cost Per Book.........................................................   $      0.56      $        0.59
Dollars Per Book......................................................   $      2.79      $        2.88
Cost Per Page Per Book................................................   $    0.0082      $      0.0080
Dollars Per Page Per Book.............................................   $    0.0406      $      0.0389
Our marketing department uses various special promotions to increase
revenues. For example, we have instituted our private label credit card, which
provides deferred payment plans, accelerated shipping and toll free customer
service. The average private label credit card customer typically spends 25% to
30% more than our other customers. Credit card billing inserts with special
promotions have also generated significant customer response. We also use
"bounceback catalogs", which are catalogs delivered with a customer's
merchandise delivery, accompanied by short-term discount offers, to generate
additional revenues. We also deliver other materials with customers' merchandise
packages, such as clearance merchandise offer inserts and other retailers'
offerings. We have recently introduced a point system, similar to the airline
industry's frequent flyer miles, which allows customers to earn gift
certificates for purchases on our proprietary credit card. Our marketing team is
also devoting time and attention to the use of data base marketing to launch our
new e-commerce business.

MERCHANDISING

  Merchandise Selection Process

     The merchandise selection process for our Lew Magram and Brownstone
catalogs takes into account the following factors:

     o Same season performance for the prior year, which analysis includes the
       overall success of a given category, the performance of new versus repeat
       items, space productivity, price point and best and worst selling items;

     o Current sales trends on all the above criteria plus an overview from the
       marketing department on current customer database productivity, customer
       profile trends, circulation and mail date plans; and

                                       29
o A trend and fashion direction presentation highlighting the most
       important and customer-appropriate styles, colors and fabrics for the
       upcoming season.

     Our merchandising staff actively considers 1,500 to 2,000 new products in a
given season to develop an exclusive assortment of styles that reflects the
customer's taste at prices she can afford.

     Most of our merchandise is sold under our Lew Magram and Brownstone Studio
brand names. The remainder are branded products from other design houses and
market sources. We purchase from over 300 vendors, with no one vendor
representing more than 10% of our sales volume. As we increase the amount and
type of merchandise offered in our catalogs, we anticipate that we will increase
the number of vendors we use, thereby reducing reliance on any particular
vendor.

  Creative Processes

     Our in-house creative team designs the Lew Magram and Brownstone catalogs
and controls all aspects of their preparation. This in-house capability allows
us the flexibility to direct the production schedule and reduce production lead
time and costs. Once the merchandise is decided upon for an upcoming catalog, we
begin to photograph the merchandise, sometimes on location at exotic
destinations. We utilize the latest computer technology to modify features of
products offered such as changing a dress color, narrowing a waist, changing the
model's shoes or sleeve length. By utilizing ISDN high-speed transmission,
changes are immediately accessible to all parties allowing for last minute
adjustments. Once finalized, the print file is transmitted to the printer. We
can complete a catalog, from the finish of photography through printing, in
about two to four weeks.

  Quality Control

     Every item selected undergoes a rigorous quality control review that
addresses the fit, styling, quality, and construction of the merchandise. Our
technical design team works with our product specialists to fit each garment on
a live model in advance of production. Upon our receipt of the goods, they are
once again inspected and fit before they are shipped to the customer.

  Operations

     The primary components of the Lew Magram and Brownstone integrated
operations are its call center services, merchandise returns, distribution and
fulfillment, inventory management, and management information systems.

CALL CENTER SERVICES

     Customer orders are received at our call center by phone, fax and mail.
Approximately 87% of all orders are placed by phone; the balance is received by
mail and fax. We provide our customers with 24-hour, seven-days-a-week,
toll-free telephone access for placing orders through voice activation or key
pad depression. Customer service representatives process orders directly into
our management information system, which provides customer information and order
history, product specifications, available substitutes and accessories, expected
ship date and order number. To capitalize on each customer contact, we provide
telemarketing services to other retailers and are compensated with a fee for
each such customer contact. In May 1999, we entered into such a strategic
relationship with Magazine Direct, Inc., a leading magazine subscription agency,
for a joint marketing program through which our call center representatives
offer discount magazine subscriptions to our customers. This generates income to
us based on the number of subscriptions obtained. In addition, Magazine Direct
pays for all calls in which a solicitation is made, which we believe will result
in significant cost savings for us.

     Our call center operates on a system with over 160 incoming and outgoing
telephone lines. Approximately 5,000 calls are received per day in our Teaneck,
New Jersey facility. We currently have 84 in-house phone stations which operate
on weekdays from 8:00 a.m. to 10:30 p.m., Eastern Time, with abbreviated
schedules on weekends and holidays. The call center is supported by two outside
service bureaus which handle overflow orders and orders placed when our in-house
call center is closed. Our system

                                       30
processes orders in approximately two to four minutes, depending upon the nature
of the order and whether the customer is a first-time or repeat customer. Our
telephone system automatically routes calls to the overflow centers after twenty
seconds if no in-house customer service representative is available and our
voice recognition unit allows customers to access status of orders or item
availability without involvement of an operator. We have recently renegotiated
our toll-free telephone rates, reducing these costs by approximately 30%.

MERCHANDISE RETURNS

     We have a liberal return policy allowing customers to return regular-priced
merchandise for a full refund within 60 days of receiving the merchandise.
Customers may return sale-priced items for merchandise credits which are good
for one year and are redeemable for our merchandise only. Certain sales of
discounted merchandise are final. Over 95% of returned items are either replaced
in inventory for future sale, generally after minimal refurbishing, or returned
to their vendors.

DISTRIBUTION AND FULFILLMENT

     Our distribution center in Teaneck, New Jersey is integrated with our order
entry system, enabling us to fulfill orders for in-stock merchandise in a timely
manner. Once a customer's telephone order is accepted, our management
information system forwards the order to our distribution center, where all
necessary distribution and shipping documents are printed to facilitate
processing. Shipped orders are bar-coded and scanned and the merchandise ship
date and weight are entered automatically into the customer order history file
and to create United Parcel Service and United States Postal Service billing
information. Our system also employs "least cost routing" which automatically
determines the most cost effective means of shipping merchandise. Each shipment
is packed in a corrugated box with customized tissue paper and sealed with an
embossed foil seal with the Lew Magram or Brownstone logo. Each shipment also
contains a current catalog, a thank-you note which is a turnaround postcard
inviting customer comments, and a packing slip.

     A majority of orders for in-stock merchandise are shipped within 48 hours.
Customers generally receive their merchandise within three to five business days
after shipping. Credit card customers receive their merchandise within two days.
Approximately one-half of our products are shipped through the United Parcel
Service and one-half through the United States Postal Service.

INVENTORY MANAGEMENT

     We attempt to maintain sufficient quantities by size and color of each item
in our inventory to fill projected orders within the shortest possible lead
time. Our management information system enables our marketing department to
forecast four catalogs simultaneously within each catalog title and make
constant adjustments to update selling curves and needs by item. When overstocks
do occur, we use the following process for their liquidation:

     o Strong selling items are re-introduced in the catalogs at a 10-20%
       discount;

     o Items that have reached the end of their selling-life cycle are eligible
       for sales inserts inside of our regular-priced catalogs, at markdowns of
       35%-60%;

     o Smaller quantities can be liquidated at a very low-cost, high-return
       manner through the use of package inserts;

     o Items that are not in significant quantity to be placed in a catalog or
       package inserts are sent to our outlet stores located in Teaneck and
       Secaucus, New Jersey, and are sold at a 30-70% discount; and

     o Merchandise that is not sold in the stores is sold to a liquidator to
       recover approximately 15-20% of the cost.

                                       31
MANAGEMENT INFORMATION SYSTEMS

     Our mail order operations are supported by a leading mail order software
for order-taking, shipping, credit card authorization, billing, inventory
control and maintenance of online perpetual inventory. Lew Magram was one of six
development partners involved with the development of this software program. The
software program operates on an IBM AS400. The system has recently been upgraded
and is Year 2000 compliant, and we believe that it will adequately provide for
future growth and expansion.

GOVERNMENTAL REGULATION

     Our direct marketing business and the catalog industry in general are
subject to regulation by a variety of state and federal laws relating to, among
other things, advertising, imports and sales taxes. The U.S. Federal Trade
Commission regulates our advertising and trade practices and the Consumer
Product Safety Commission has issued regulations governing the safety of our
products. We are also subject to Department of Treasury customs regulations with
respect to goods that it directly imports, including customs duties, quotas and
other import restrictions.

     As a seller of infants products, we are subject to laws and regulations
administered by various states and the Federal Trade Commission. As a seller of
bedding products, we are also required to maintain licenses in the various
states where it conducts business. These licenses subject us to compliance with
a variety of laws and regulations regarding the labeling and cleanliness of its
infants products. In addition, we have all of our bedding products produced to
the upholstered product specifications required by the flammability laws of the
State of California, which we believe to be the most stringent in the United
States. We believe that we comply with applicable laws and applicable
regulations in all material respects.

INTELLECTUAL PROPERTY

     Our success depends, in part, upon the continued development of strong
brand identification for our catalogs and products. We have registered trademark
protection for the names Ecology Kids, Lew Magram, Jean Grayson's Brownstone
Studio, and Studio Collection among other trademarks, as well as many supporting
trade names. We may apply to register other trademarks as we deem appropriate.

COMPETITION

     The markets in which Lew Magram and Brownstone participate are highly
competitive. These markets are served by a number of catalog companies and
retailers including traditional department stores, discount retailers, and
specialty chains. We compete generally in the retail women's apparel market and,
more specifically, the direct mail catalog market, with such companies as
Brylane, Inc., DM Management, Inc., Lands-End, Inc., Delias, Inc. and Coldwater
Creek, Inc. Lew Magram directly competes with catalog retailers that target the
market for women ages 35 to 55, which include J. Jill, Spiegel, Victoria's
Secret, Chadwick's of Boston and Clifford & Wills. Brownstone directly competes
with catalog retailers which target the mature women's market, which include
Talbot's, Nicole Somers, Damon's & Draper's, Papillon, as well as specialty
store catalogs such as Nordstrom's, Saks and Nieman Marcus. Many of our
competitors have substantially greater resources, name recognition and market
share than Lew Magram and Brownstone. In the e-commerce area we will compete
with companies or sites which are primarily focused on targeting women online
such as iVillage.com, Women.com networks, a joint venture between Women.com
networks and The Hearst Corp., Microsoft Corporation's womencentral.msn.com,
condenet.com and Oxygen Media's Web sites, as well as all apparel companies that
sell women's clothing to our target markets on the Internet. Our competitive
advantage is the combination of our experienced marketing team, talented
merchandising and operational efficiencies. We believe that we can maintain and
improve our competitive position in the market by utilizing our proprietary
customer database, soliciting new customers, identifying distinct fashion trends
and continuing to address the needs and fashion tastes of our customers and
leveraging this core business on the Internet.

     The infant products industry is highly competitive. Ecology Kids faces
substantial competition in each of its product lines. Ecology Kids competes in a
variety of segments within these product categories, including diapers. Ecology
Kids competes by focusing on product quality, promotions, name recognition and
service.

                                       32
Many of Ecology Kids competitors have substantially greater resources, name
recognition and market share than Ecology Kids.

EMPLOYEES

     As of May 21, 1999, we had approximately 348 full-time and 71 part-time
employees. Of these employees, nine were senior executives of Diplomat, two of
which were employed by Ecology Kids, and two of which were employed by Lew
Magram and Brownstone. Lew Magram, Brownstone and Ecology Kids had 51 employees
related to marketing and merchandising (including store employees), 221 in its
call center, 125 in operations and distribution, and 39 in other administrative
positions. None of our employees are represented by a labor union. We consider
relations with our employees to be good.

PROPERTIES

     Our executive offices and Lew Magram and Brownstone operations are located
at 414 Alfred Avenue, Teaneck, New Jersey, where we lease approximately
72,000 square feet of warehouse and office space. Total fixed monthly charges
are approximately $52,000 subject to annual escalation clauses. The lease
expires in August 2001, subject to a three-year renewal option. We also lease
approximately 11,000 square feet in the Garment District in New York City at
$19,000 per month for its Lew Magram and Brownstone operations.

     We own our warehouse and distribution facilities for Ecology Kids, which is
located at 25 Kay Fries Drive, Stony Point, New York. We pay approximately
$26,000 per month for both mortgage payments and real estate taxes on its Stony
Point facilities. We also operate two retail stores, one located at its Teaneck
facility and one located in Secaucus, New Jersey. The Secaucus store is
approximately 4,300 square feet. Monthly rent and other fixed charges are
approximately $5,000.

     We are currently seeking larger facilities to expand our warehousing
capability and consolidate most of our operations. We have signed a non-binding
letter of intent to purchase office and warehouse facilities in Clifton, New
Jersey. This facility which is approximately 160,000 square feet, would be
sufficient to consolidate our operations in Teaneck, New Jersey and Stony Point,
New York and a portion of our New York City operations. The purchase price for
this facility would be $5.6 million, most of which would be financed. We have
not yet determined whether we will purchase this facility.

LEGAL PROCEEDINGS

     In September 1996, Diplomat was named as one of several defendants in an
action brought by Richard Tracy and Anne Tracy in Rockland County Supreme Court.
Mr. Tracy alleges that the defendants' negligent maintenance of a railroad
crossing adjacent to our property caused him to collide with a train. Mr. Tracy
is seeking $10,000,000 in damages for his injuries, and Mrs. Tracy is seeking an
additional $1,000,000 in damages for loss of Mr. Tracy's services. Our insurance
carrier is currently defending this action. We believe that this claim is
without merit and we intend to defend vigorously against it. The ultimate
outcome of this matter cannot presently be determined, and, accordingly, no
provision for liability has been made in the accompanying financial statements.

     In March 1998, Paul Russo filed a complaint against Diplomat alleging that
he is entitled to the Unit Purchase Option granted by Diplomat as part of our
initial public offering in November 1993. Mr. Russo demands unspecified
compensatory and punitive damages. Although Diplomat does not dispute that it
granted the Unit Purchase Option as part of its initial public offering, it has
not yet been determined that Mr. Russo is entitled to the Unit Purchase Option
or the number of Diplomat's shares which may be purchased under the Unit
Purchase Option.

     Other than the above claims, we have no notice of any pending material
litigation.

                                       33
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL

     The following table sets forth certain information about our directors,
executive officers and key personnel:
NAME                                          AGE    POSITION
----                                          ---    --------
Robert M. Rubin............................   58     Chairman of the Board
Warren H. Golden...........................   57     Chief Executive Officer, President and Director
Stephanie Sobel............................   38     Executive Vice President and Director
Mark J. McSweeney..........................   41     Chief Financial Officer
Jeffrey Ayes...............................   44     Chief Operating Officer
Julia Aryeh................................   32     Chief Strategic Officer, Secretary and Director
Sherry Dolin-Shikora.......................   50     Vice President of Creative Services
Robert Kramer..............................   45     Vice President of Marketing
Kenneth Grossman...........................   55     Divisional President of Brownstone
Irving Magram..............................   48     Divisional President of Lew Magram
Stuart A. Leiderman........................   55     Divisional President of Ecology Kids and Director
Howard Katz................................   56     Director
David Abel.................................   57     Director
DIRECTORS AND EXECUTIVE OFFICERS

     Robert M. Rubin has served as a Director since June 1992 and has been
Chairman since November 1996. Since December 5, 1995, Mr. Rubin has been a
Director of Help at Home, Inc., a public company engaged in the business of
providing homemaker and general housekeeping services to elderly and disabled
persons at home. Since 1997, Mr. Rubin has been Chairman of the Board of IDF
International, Inc., a company that specializes in civil engineering for federal
and state government projects. In October 1996, Mr. Rubin became a director of
Med-Emerg International Inc., an operator of nursing homes and related
healthcare services. Mr. Rubin has served as a Director of Western Power and
Equipment Corporation, a construction equipment distributor, since November 20,
1992. Between November 20, 1992 and March 7 1993, Mr. Rubin served as Chief
Executive Officer of Western Power. Since October 1990, Mr. Rubin has served as
the Chairman of the Board and Chief Executive Officer of American United Global
Inc., a telecommunications and software company. Mr. Rubin was formerly a
Director and Vice Chairman, and is a minority stockholder of American Complex
Care, Incorporated, a public company which provided on-site health care
services, including intradermal infusion therapies. In April 1995, the principal
operating subsidiaries of American Complex petitioned in the Circuit Court of
Broward County, Florida for an assignment for the benefit of creditors. Until
1997, Mr. Rubin was also Chairman, Chief Executive Officer and a principal
stockholder of ERD Waste Corp., a public company specializing in the management
and disposal of municipal solid waste, industrial and commercial nonhazardous
solid waste and hazardous waste. In September 1997, ERD Waste Corp. filed for
protection under Chapter 11 of the Bankruptcy Code.

     Warren H. Golden was appointed our Chief Executive Officer and President in
May 1999 and had been Executive Vice President, Chief Operating Officer and a
Director of Diplomat since February 1998. Mr. Golden had been with Lew Magram
since 1991 as its Executive Vice President. From 1989 to 1991, Mr. Golden was
with S.C. Corporation, most recently as President. From 1983 to 1989, he was
Vice President of Operations, Chief Financial Officer and Treasurer of Honeybee,
Inc. Prior thereto, Mr. Golden was Senior Vice President, Operations and
Control, for Plymouth Shops, a New York apparel retailer. Mr. Golden is a
graduate of Long Island University.

     Stephanie Sobel was appointed as Executive Vice President in May 1999 and
held the position of Senior Vice President of Merchandising for Diplomat since
February 1998. Ms. Sobel was Senior Vice President of

                                       34
Merchandising at Lew Magram from 1995 to February 1998 and, prior to that, at
Honeybee Inc., a store retailer and cataloger of women's apparel, also in New
York City, where she worked for five years. Prior to that she had two years of
buying experience at Macy's New York and was a graduate of the management
training program at Abraham & Straus Department Stores. Ms. Sobel graduated from
Cornell University in 1982 with a degree in Arts & Sciences.

     Mark J. McSweeney has been Chief Financial Officer since May 1999. From
1998 to 1999, he was Executive Vice President with Atlantic Rancher Co., an
upscale men's apparel cataloger. From 1990 to 1998 he was with New England Serum
Co., a business to business and consumer multi-title cataloger of pet supplies,
as its Vice President of Finance/Administration. From 1986-1990, he was
Controller with Woodcraft Supply Corp., a woodworking tool cataloger. From 1982
to 1986, he was with Markline Co., Inc, a consumer electronics cataloger as its
controller. Mr. McSweeney is a graduate of Suffolk University, Boston, MA.

     Jeffrey Ayes has been Chief Operating Officer since May 1999. Prior to that
he was Vice President of Operations and is responsible for the daily operations
of MIS, Distribution, Human Resources and the Customer Telemarketing Center.
From 1976 to 1985 he occupied various positions at Hoffritz for Cutlery, most
recently as Advertising and Catalog Manager. He joined Lew Magram in 1985.
Mr. Ayes holds a B.A. from the University of Hartford.

     Julia Aryeh has been the Chief Strategic Officer since February 1999 and
was appointed Secretary in May 1999. From 1996 through February 1999, Ms. Aryeh
was a Vice President of Investment Banking at Josephthal and Co. Inc. where she
acted as our financial advisor from April 1998 until joining Diplomat. Prior to
Josephthal, Ms. Aryeh practiced securities and corporate law at the Law Firm of
Shereff Friedman Hoffman & Goodman LLP from January 1995 through January 1996.
Prior to that Ms. Aryeh practiced securities law at the law firm of Kelly Drye &
Warren from July 1992 through December 1994.

     Sherry Dolin-Shikora has been Lew Magram's Vice President of Creative
Services since 1988. Prior to that, she served as Director of Retail and Catalog
Advertising and Marketing for Coward Shoe. She spent a number of years with
consumer advertising agencies specializing in the casino/hotel industry, where
she was Account Supervisor, as well as Radio and TV Copywriter and Producer.
Ms. Dolan has a Master's Degree in Literature from Temple University in
Philadelphia.

     Robert A. Kramer joined Lew Magram in 1991 as Marketing Manager and became
Vice President in 1993. From 1976 to 1986, he held numerous merchandising
positions at Saks Fifth Avenue, including management, buying, and catalog
administration. During his next four years, he was Circulation Manager, then
Marketing Manager for the cataloger Comfortably Yours. He was educated at
Washington University, St. Louis.

     Kenneth Grossman founded the Brownstone Studio catalog in 1972 and served
as its president until October 1997. Mr. Grossman became divisional President of
Diplomat's Brownstone subsidiary when Brownstone acquired the assets of Wilroy
Inc. and Jean Grayson's Brownstone Studio, Inc. in October 1997. Mr. Grossman
holds a bachelors degree from Princeton University and a law degree from New
York University Law School.

     Irving Magram joined Lew Magram, Ltd. in 1971 and became Vice President in
1980. From 1981 to 1984, he directed the metamorphosis of Lew Magram Ltd. from
retailer and catalog marketer of exclusively men's wear to that of exclusively
women's wear. Diplomat acquired Lew Magram Ltd. in July 1997. He received his
bachelors degree from American University in Washington, DC.

     Stuart A. Leiderman was appointed as Divisional President of Ecology Kids,
Inc. in October 1998. Previously to that date he served as Executive Vice
President of Sales and Marketing since July 1989, and has been a Director of
Diplomat since June 1992. From 1985 to 1989, Mr. Leiderman was a Divisional Vice
President for Hasbro, Inc., Playskool Baby Division, a company engaged primarily
in the development, sales and marketing of toys.

     Howard Katz has been a Director since October 1996. Mr. Katz has been
Executive Vice President of American United Global, Inc. since April 15, 1996.
From December 1995 through April 15, 1996 Mr. Katz was a consultant for and from
January, 1994 through December, 1995 held various executive positions,

                                       35
including Chief Financial Officer with National Fiber Network (a fiber optics
telecommunications company). From January 1991 through December 1993 Mr. Katz
was the President of Katlaw Construction Corporation, a company that provides
general contractor services to foreign embassies and foreign missions located in
the United States.

     David Abel has been a Director since May 1998. Mr. Abel has been president
of United Realty since its inception in 1972, an industrial and commercial real
estate company. Mr. Abel has served as a director of numerous companies, and is
currently a director of M.S. Farrell Holdings, Inc. and Innapharma, Inc.
Mr. Abel is a member of the Society of Industrial Realtors and The Commercial
Industrial Brokers Society. Mr. Abel received his BA from the Bernard Baruch
School of Business in 1962.

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No member of Diplomat's Compensation Committee is a current or former
officer or employee of Diplomat. Robert Rubin, a member of the Compensation
Committee, has made substantial equity and debt investments in Diplomat, has
personally guaranteed a portion of the First Source loan facility, was a
controlling stockholder of Lew Magram, Ltd. immediately prior to the acquisition
by Diplomat, and has a consulting agreement with Diplomat. See "Certain
Transactions."

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     To our knowledge, no officers, directors, beneficial owner of more than ten
percent of any class of our equity securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended, or any other person subject
to Section 16 of the Exchange Act with respect to Diplomat, failed to file on a
timely basis reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year, which ended September 30, 1998.

                                       36
EXECUTIVE COMPENSATION

     The following table sets forth certain information regarding compensation
paid by Diplomat during each of the last three fiscal years to our Chief
Executive Officer and to each of our four most highly compensated executive
officers who earned in excess of $100,000.

                           SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
                                                           ANNUAL                ---------------------------------
                                                        COMPENSATION                              SECURITIES
                                                    ---------------------        OTHER ANNUAL     UNDERLYING
NAME AND PRINCIPAL POSITION                           YEAR       SALARY          COMPENSATION    OPTIONS/SARS (#)
---------------------------                         -------   -----------        ------------    ----------------
Warren H. Golden
  Executive Vice President, COO...................  9/30/98       245,387                  0                0
                                                    9/30/97        50,000(1)               0                0
Stephanie Sobel
  Senior Vice President--Merchandising............  9/30/98       193,025                  0                0
                                                    9/30/97        43,125(1)               0                0
Irving Magram
  Divisional President--Lew Magram................  9/30/98       245,387                  0                0
                                                    9/30/97        50,000(1)               0                0
Kenneth Grossman
  Divisional President--Brownstone................  9/30/98       183,502                  0           70,000
Jonathan Rosenberg(2)
  President, CEO..................................  9/30/98       225,000                  0                0
                                                    9/30/97       190,769                  0                0
                                                    9/30/96       130,804                  0                0
Sheldon R. Rose(3)................................  9/30/96       159,375                  0                0
------------------

(1) Salaries for Irving Magram, Warren H. Golden, and Stephanie Sobel for the
    fiscal year ending September 30, 1997 are included only for the period from
    July 1, 1997, the effective date Diplomat acquired Lew Magram, Ltd., through
    September 30, 1997. Prior to the acquisition of Lew Magram Ltd. on July 1,
    1997, their annual salaries were as follows: Irving Magram, $300,000; Warren
    H. Golden, $287,500; Stephanie Sobel, $172,500.

(2) Mr. Rosenberg served as President and Chief Executive Officer from November
    1996 to May 1999. In May 1999, Mr. Rosenberg left Diplomat and is entitled
    to six months salary, payable weekly, as part of his severance arrangement.

(3) Mr. Rose resigned as President and Chief Executive Officer in November 1996.

OPTION GRANTS IN LAST FISCAL YEAR

     The following table sets forth information concerning stock options granted
to each of the executives named in the Summary Compensation Table for the fiscal
year ending September 30, 1998:
PERCENTAGE OF
                                                TOTAL OF                                    POTENTIAL REALIZABLE VALUE
                                NUMBER OF       OPTIONS                                     AT ASSUMED ANNUAL RATES OF
                                 SHARES       GRANTED TO                                     STOCK PRICE APPRECIATION
                               UNDERLYING      EMPLOYEES         EXERCISE                        FOR OPTION TERM(1)
                                OPTIONS       DURING FISCAL     PRICE PER     EXPIRATION    --------------------------
NAME                            GRANTED           YEAR            SHARE          DATE            5%             10%
---------------------------    ----------     -------------     ---------     ----------    --------------------------
Kenneth Grossman(2)........      70,000          50%              13.75         3/24/03      $266,000        $588,000
37

                                                       (Footnotes on next page)
(Footnotes from previous page)

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

(1) The amounts shown in these columns represent the potential realizable values
    using the options granted and the exercise price. The assumed rates of stock
    price appreciation are set by the Securities and Exchange Commission's
    executive compensation disclosure rules and are not intended to forecast
    appreciation of the common stock.

(2) Of the options granted to Kenneth Grossman, 20,000 are exercisable over a
    four year period subject to Brownstone reaching certain earnings criteria,
    and 50,000 options are exercisable over time, of which 20,000 are currently
    exercisable. Excludes 70,000 options granted to Joan Grossman, Kenneth
    Grossman's wife and an employee of Brownstone, which options are on the same
    terms as the options granted to Kenneth Grossman.

FISCAL YEAR-END OPTION VALUES

     As of September 30, 1998, no options have been exercised by the executives
named in the Summary Compensation Table. The following table sets forth certain
information concerning the number of shares covered by both exercisable and
unexercisable stock options as of September 30, 1998. Also reported are values
of "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and the fair market
value of our common stock as of September 30, 1998.
NUMBER OF SHARES SUBJECT TO            VALUE OF IN-THE-MONEY
                                                         UNEXERCISED OPTIONS AT              OPTIONS AT FISCAL YEAR
                                                             FISCAL YEAR-END                         END(1)
                                                      -----------------------------       -----------------------------
NAME                                                  EXERCISABLE     UNEXERCISABLE       EXERCISABLE     UNEXERCISABLE
--------------------------------------------------    -----------     -------------       -----------     -------------
Jonathan Rosenberg(2).............................       43,000           26,000            $18,750          $12,500
Kenneth Grossman..................................       20,000           50,000                  0                0
------------------

(1) Based on the closing bid price of our common stock of $1.125 per share on
    September 30, 1998 multipled by five to give effect to the 1-for-5 reverse
    stock split.

(2) As part of Mr. Rosenberg's severance agreement (entered into subsequent to
    September 30, 1998), all of his options become immediately exercisable,
    contain a cashless exercise feature and the underlying stock has
    registration rights.

EMPLOYMENT AGREEMENTS

     Warren H. Golden has an employment agreement with us which provides that
Mr. Golden will be employed as Diplomat's Chief Operations Officer and Executive
Vice President and Lew Magram's Executive Vice President, subject to annual
renewals, at an annual salary of $235,000 subject to certain periodic increases
based on performance. The employment agreement, which terminates in February
2001, may only be earlier terminated by us for cause as defined in the
agreement. Mr. Golden was appointed as Diplomat's Chief Executive Officer and
President on May 21, 1999.

     Irving Magram has an employment agreement with us which provides that
Mr. Magram will be employed as Divisional President of Lew Magram, subject to
annual renewals, at an annual salary of $235,000 subject to certain periodic
increases based on performance. The employment agreement, which terminates in
February, 2001, may only be earlier terminated by us for cause as defined in the
agreement.

     Stephanie Sobel has an employment agreement with us which provides that
Ms. Sobel will be employed as our Senior Vice President of Merchandising,
subject to annual renewals, at an annual salary of $187,500 subject to certain
periodic increases based on performance. The employment agreement, which
terminates in February, 2001, may only be earlier terminated by us for cause as
defined in the agreement. Ms. Sobel was appointed as Diplomat's Executive Vice
President on May 21, 1999.

     In accordance with their respective employment agreements, Messrs. Golden
and Magram and Ms. Sobel will also receive cash bonuses based on Lew Magram
meeting certain profitability criteria. The maximum

                                       38
aggregate cash payment to Messrs. Golden and Magram and Ms. Sobel under this
bonus arrangement is $185,000 per year.

     Julia Aryeh has an employment agreement with us which provides that
Ms. Aryeh will be employed as our Chief Strategic Officer and Secretary, subject
to annual renewals, at an annual salary of $200,000 subject to certain periodic
increases based on performance. The employment agreement, which terminates in
February, 2002, may only be earlier terminated by us for cause as defined in the
agreement.

     Kenneth S. Grossman has an employment agreement with us which provides that
Mr. Grossman is employed as Brownstone's Divisional President at an annual
salary of $200,000, plus certain other benefits, including an annual bonus of up
to $250,000 based on Brownstone meeting certain income criteria. Mr. Grossman's
agreement also provides for Mr. Grossman to receive $10,000 per year for
merchandise consulting. The employment agreement, which terminates in October
2002, may only be earlier terminated by us for cause as defined in the
agreement.

     Each of the foregoing employment agreements contain a provision prohibiting
such employee from competing with us for one year after the employee terminates
his or her position with us or our subsidiaries other than for cause, as defined
in the respective employment agreement.

     Robert M. Rubin, Chairman of the Board, has a financial consulting
agreement with us pursuant to which Mr. Rubin is paid $200,000 per annum. The
agreement terminates in December, 2002.

     On May 21, 1999, Diplomat entered into a severance agreement with Jonathan
Rosenberg. The agreement provides that Mr. Rosenberg will be paid six months
severance equal to $112,500 plus twelve months of health and other benefits. The
agreement terminated Mr. Rosenberg's employment agreement which would have
expired on February 15, 2002. Mr. Rosenberg resigned as Chief Executive Officer,
President and Director on May 21, 1999.

STOCK OPTION PLANS

  1998 Stock Option Plan

     Our 1998 stock option plan was adopted by the Board of Directors in
February 1998 and approved by the stockholders in May 1998. Under the 1998 plan,
we are authorized to issue options to purchase up to 240,000 shares of common
stock. All officers and other employees and as well as other persons who perform
significant services for or on behalf of us are eligible to participate in the
1998 plan.

     We may grant under the 1998 plan both incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
stock options that do not qualify for incentive treatment under the Code.

     The exercise price of each incentive stock option under the plan will be
determined by the committee, but will be not less than 100% of the fair market
value of common stock on the date of grant (or 110% in the case of an employee
who at the time owns more than 10% of the total combined voting power of all
classes of capital stock). The nonstatutory option exercise price will be
determined by the Committee, but will not be less than 85% of the common stock
on the date of grant.

     In the discretion of the committee and upon receipt of all regulatory
approvals, an optionee may be permitted to utilize a cashless exercise deliver
as payment in whole or in part of the exercise price certificates for shares of
common stock (valued for this purpose at its fair market value on the day of
exercise) or other property.

     An incentive stock option granted under the plan may not be exercisable
after the expiration of ten years from the date it is granted. Without limiting
the generality of the foregoing, the committee may provide in the stock option
agreement that the option subject thereto expires 30 days following the
termination of employment for any reason other than death or disability or
twelve months following a termination of employment for disability or death;
provided, however, that in no event shall any option granted under the plan be
exercised after the expiration date of such option set forth in the applicable
stock option agreement.

                                       39
If the outstanding shares of common stock are changed into, or under the
plan, exchanged for cash or different number of kind of shares or securities of
the company or another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse-stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment will be made by the committee in
the number and kind of shares as to which options may be granted. In the event
of such change or exchange, other than for shares or securities or of another
corporation or by reason of reorganization, the committee will also make a
corresponding adjustment in the number or kind of shares, and the exercise price
per share allocated to unexercised options or portions thereof, of options which
have been granted prior to such change. Any such adjustment, however, will be
made without change in the total price applicable to the unexercised portion of
the option but with a corresponding adjustment in the price for each share
(except for any change in the aggregate price resulting from rounding-off of
share quantities or prices).

     Under the plan, we have outstanding options to purchase an aggregate of
240,000 shares of common stock, 140,000 of which are exercisable at $13.75 per
share and 100,000 of which are exercisable at $5.00, all of which are held by
our employees. Options to purchase 40,000 shares of common stock become
exercisable upon Brownstone meeting certain minimum net income. The remaining
outstanding options become exercisable over four years.

  1992 Stock Option Plan

     Our 1992 stock option plan provides for the issuance of up to 40,000 shares
of common stock. The terms of the plan are substantially similar to the 1998
Plan. We have outstanding options to purchase an aggregate of 26,000 shares,
exercisable at $7.50 per share, all of which are held by affiliates or employees
of Diplomat at the time of grant.

  August 1996 Stock Option Plan

     We also established a stock option plan providing for the issuance of
options to purchase up to 300,000 shares of common stock to our directors,
officers, key employees and consultants. To date, we have granted directors,
officers and key employees an aggregate of 30,000 nonstatutory options at an
exercise price of $12.50 per share. Excluding the fact that options granted
under the plan cannot qualify as incentive stock options, the terms of the
August 1996 Plan are substantially similar to the 1998 Plan.

  November 1996 Stock Option Plan

     Under our November 1996 stock option plan, options to purchase up to
300,000 shares of common stock may be granted to employees, officers, directors
and other persons who provide services to us. As of March 31, 1999, 294,000 of
such options have been granted and are exercisable at an exercise price of
$5.00, of which options to purchase 124,000 shares of common stock expired on
June 17, 1998, 130,000 are exercisable at $11.88 and 10,000 are exercisable at
$5.00. The options to be granted under the plan may be designated as incentive
stock options or nonstatutory options. Other than the fact that officers and
directors who currently own more than 5% of the issued and outstanding stock are
not eligible to participate in the plan, the terms of the November 1996 plan are
substantially similar to the 1998 plan.

EMPLOYEE BENEFIT PLANS

  Employee Pension Plan

     In 1985, we instituted a pension plan, which is a defined benefit pension
plan maintained for all employees. Benefits are payable based on 60% of average
compensation for the three highest paid consecutive years of service, reduced
for less than 29 years of service retirement. The pension plan is funded as
required by the Employee Retirement Income Security Act of 1974 and does not
require employee contributions. Full vesting occurs immediately upon joining the
plan. As of February 1993, the pension plan was curtailed and no additional
pension benefits will accrue.

                                       40
Profit Sharing and 401(k) Plans

     Lew Magram has a profit sharing program established on April 1, 1981. On
July 1, 1993, Lew Magram amended the Plan to include 401(k) provisions. All
employees servicing either the Lew Magram or Brownstone subsidiaries are invited
to participate in the plan after the required waiting period and while they work
the minimum hours required. Lew Magram and Brownstone match employee 401(k)
contribution on the basis of 25% of the employee's first 5% of 401(k)
withholdings. As of December 31, 1998, the entire plan had assets of
approximately $2.3 million. Benefits vest on a 5-year schedule. Vesting and
eligibility for matching requires the employee to be employed as of the last day
of each plan year.

     We also have a 401(k) plan in effect for employees of the Ecology Kids
subsidiary, which was established on January 1, 1997. As of December 31, 1998,
the plan had assets of approximately $175,000.

DIRECTORS' COMPENSATION AND COMMITTEES

     In May 1997, we issued to Howard Katz options to purchase up to 10,000
shares of common stock. The options are exercisable at $11.90 per share and
terminate in 2001. In June 1998, we issued David Abel options to purchase 10,000
shares of Common Stock at $15.63 per share which options terminate in May 2003.
The options were granted in connection with each of Messrs. Katz, Fredericks and
Abel agreeing to serve on the Board of Directors. Mr. Fredericks resigned as a
director effective December 31, 1998. We have not paid and do not presently
propose to pay compensation to any director for acting in such capacity, except
for the grant of options described above and nominal sums for attending meetings
and reimbursement for reasonable out-of-pocket expenses in attending those
meetings.

     We have three formal committees; the Audit Committee, which consists of
Mark J. McSweeney, David Abel and Howard B. Katz; the Compensation Committee,
which consists of Robert M. Rubin, Howard Katz and David Abel; and the Corporate
Governance Compliance Committee, which consists of Warren H. Golden and Robert
M. Rubin. We do not currently have a stock option committee or a nominating
committee.

     The functions of the Audit Committee include: (i) recommending for approval
by the Board of Directors a firm of certified public accountants whose duty it
will be to audit our financial statements for the fiscal year in which they are
appointed, and (ii) to monitor the effectiveness of the audit effort, our
internal financial and accounting organization and controls and financial
reporting. The Audit Committee will also consider various capital and investment
matters.

     The Compensation Committee is responsible for establishing compensation
arrangements for officers and directors, reviewing benefit plans and
administering each of our stock option plans.

     The Corporate Governance Compliance Committee is responsible for reviewing
us on an ongoing basis regarding compliance with the corporate governance
standards, including Nasdaq rules and standards.

     The Board of Directors does not have a standing nominating committee.
Nominations for election to the Board of Directors may be made by the Board of
Directors, or by any shareholder entitled to vote for the election of directors.

     Special meetings may be held from time to time to consider matters for
which approval of the Board of Directors is desirable or is required by law. The
Board of Directors met once during fiscal 1998 and acted on numerous matters by
written consent. The Audit, Compensation and Corporate Governance Compliance
Committees did not meet during fiscal 1998.

EXECUTIVES' COMPENSATION POLICIES

     Compensation of our executives is intended to attract, retain and award
persons who are essential to the corporate enterprise. The fundamental policy of
our executive compensation program is to offer competitive compensation to
executives that appropriately rewards the individual executive's contribution to
corporate performance. The Board of Directors utilizes subjective criteria for
evaluation of individual performance and relies substantially on the executives
in doing so. The Board focuses on two primary components of our executives
compensation program, each of which is intended to reflect individual and
corporate performance: base salary compensation and long-term incentive
compensation.

                                       41
Executives' base salaries are determined primarily by reference to
compensation packages for similarly situated executives of companies of similar
size or in comparable lines of business with whom we expect to compete for
executive talent and with reference to revenues, gross profits and other
financial criteria. The Board also assesses subjective qualitative factors to
discern a particular executive's relative value to the corporate enterprise in
establishing base salaries.

     It is the Board's philosophy that significant stock ownership by management
creates a powerful incentive for executives to build long-term shareholder
value. Accordingly, the Board believes that an integral component of executive
compensation is the award of equity-based compensation, which is intended to
align executives' long-term interests with those of our shareholders. Awards of
stock options to executives have historically been at then-current market
prices. The Board believes that option grants should be considered on an annual
basis.

PERFORMANCE GRAPH

     Below is the line graph comparing the yearly percentage change in our
common stockholders' return with the Nasdaq Stock Market (U.S.) Index and the
Nasdaq Non-Financial Index from our initial public offering in November 1993
through September 1998.

                                 [LINE GRAPH]
CUMULATIVE TOTAL RETURN
                                                                   ----------------------------------------------------
                                                                   11/4/93     9/94     9/95     9/96     9/97     9/98
                                                                   -------     ----     ----     ----     ----     ----
Diplomat Direct Marketing Corporation..........................      100        162       64       27       62       23
NASDAQ Stock Market (U.S.).....................................      100         99      136      162      222      227
NASDAQ Non-Financial...........................................      100         96      134      157      211      213
42
PRINCIPAL STOCKHOLDERS

     The following table sets forth, as of May 21, 1999, except as otherwise
provided, information with respect to beneficial ownership of the common stock
by (i) each director, (ii) each current executive officer named in the Summary
Compensation Table under "Management", (iii) the executive officers and
directors as a group and (iv) each person known to us who beneficially owns 5%
or more of the outstanding shares of our common stock. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities and includes shares of common stock issuable upon conversion or
exchange of outstanding preferred stock, or subject to options, or warrants
exercisable or convertible within 60 days and after giving effect to the 1-for-5
reverse stock split. The percentage of stock outstanding for each stockholder is
calculated by dividing (i) the number of shares of common stock deemed to be
beneficially held by such stockholder as of May 21, 1999 by (ii) the sum of (A)
the number of shares of common stock outstanding as of May 21, 1999 plus (B) the
number of shares issuable upon exercise of options or warrants held by such
stockholder which were exercisable as of May 21, 1999 or which will become
exercisable within 60 days after May 21, 1999. Unless otherwise indicated, each
of the stockholders has sole voting and investment power with respect to the
shares beneficially owned. Unless otherwise indicated, the address of each
person listed below is c/o Diplomat Direct Marketing Corporation, 414 Alfred
Avenue, Teaneck, New Jersey 07666.
PERCENTAGE    PERCENTAGE
                                                                         NUMBER OF SHARES      BEFORE         AFTER
NAME AND ADDRESS                                                         BENEFICIALLY OWNED    OFFERING      OFFERING
----------------                                                         ------------------    ----------    ----------
The Rubin Family Irrevocable
  Stock Trust U/A dated April 30, 1997(1) ............................        3,846,161             62%           47%
  18 Pinetree Drive
  Great Neck, New York 11024
Irving Magram.........................................................          186,660              3%            2%
Warren H. Golden(2)...................................................           93,707              2%            1%
Stuart Leiderman(3)...................................................           65,600              *             *
Stephanie Sobel(4)....................................................           51,854              *             *
Kenneth Grossman(5)...................................................           40,000              *             *
Julia Aryeh(6)........................................................           25,000              *             *
Howard Katz(7)........................................................           21,667              *             *
David Abel(8).........................................................            4,000              *             *
Robert M. Rubin(1)....................................................                0              0             0
All officers and directors as a group (9 persons).....................          468,488              7%            6%
------------------

*     less than one percent

(1)   Robert M. Rubin, the Chairman of the Board, is the spouse of the Trust's
      co-trustee and parent of the Trust's beneficiaries and may be deemed to be
      a beneficial owner of these shares. Mr. Rubin disclaims beneficial
      ownership of these shares.

(2)   Represents (i) 83,707 shares of common stock currently owned and 10,000
      shares of common stock issuable upon exercise of currently exercisable
      options granted under the November 1996 stock option plan. Mr. Golden also
      has additional options to purchase 30,000 shares of common stock which are
      not currently exercisable and not exercisable in the next 60 days.

(3)   Represents 53,600 shares of common stock currently owned, and 12,000
      shares of common stock issuable upon exercise of currently exercisable
      options granted under the November 1996 stock option plan. Mr. Leiderman
      also has additional options to purchase 8,000 shares of common stock which
      are not currently exercisable and will not become exercisable in the next
      60 days.

                                              (Footnotes continued on next page)

                                       43
(Footnotes continued from previous page)

(4)   Represents 41,854 shares of common stock currently owned and 10,000
      shares of common stock issuable upon exercise of currently exercisable
      options granted under the November 1996 stock option plan. Ms. Sobel also
      has additional options to purchase 30,000 shares of common stock which are
      not currently exercisable and will not become exercisable in the next 60
      days.

(5)   Represents 20,000 shares of common stock issuable upon exercise of
      currently exercisable options granted under the 1998 stock option plan,
      and 20,000 shares of common stock issuable upon exercise of currently
      exercisable options granted under the 1998 stock option plan to Joan
      Grossman, Kenneth Grossman's wife and an employee of Brownstone. Each of
      Kenneth Grossman and Joan Grossman has an additional 30,000 options under
      the 1998 stock option plan which are not currently exercisable and will
      not become exercisable in the next 60 days, and an additional 20,000
      options under the 1998 stock option plan which are not currently
      exercisable and will become exercisable only upon Brownstone meeting
      certain minimum earnings criteria which, at the present, have not been
      achieved.

(6)   Represents 25,000 shares of common stock issuable upon exercise of
      currently exercisable options granted pursuant to the 1998 stock option
      plan. Ms. Aryeh also has an additional 75,000 options which are not
      currently exercisable and will not become exercisable within the next 60
      days.

(7)   Represents 21,667 shares of common stock issuable upon exercise of
      currently exercisable options granted pursuant to the November 1996 stock
      option plan. Mr. Katz also has an additional 3,333 options which are not
      currently exercisable and will not become exercisable within the next 60
      days.

(8)   Represents 4,000 of 10,000 shares of common stock issuable upon exercise
      of currently exercisable options, which have vested to date, granted
      pursuant to the November 1996 stock option plan.

                                       44
CERTAIN TRANSACTIONS

     Unless otherwise stated, the following information does not give effect to
the conversion or exchange of preferred stock or the 1-for-5 reverse split of
our common stock.

     We have a financial consulting agreement with Robert M. Rubin, Chairman of
the Board, providing for the payment to him of $200,000 per annum. Mr. Rubin
consults with us on financial management and long term planning matters,
including consideration of acquisitions. The agreement terminates in December
2000.

     In February 1996, Mr. Rubin loaned us $2,353,500 to be used as part of the
acquisition price of Biobottoms, Inc. which we sold in April 1998. In connection
with such loan, we issued Mr. Rubin 100,000 shares of our Series A Preferred
Stock, convertible into 1,000,000 shares of common stock at the option of
Mr. Rubin. Mr. Rubin transferred the shares to the Rubin Family Irrevocable
Stock Trust which converted the Series A Preferred Stock in November 1998.

     On September 9, 1996, we entered into an arrangement with Gersten, Savage,
Kaplowitz & Fredericks, LLP which provided that Gersten Savage will provide
certain legal and consulting services to us over an extended period of time. As
compensation for its services, certain individual members of Gersten Savage
received an aggregate of 350,000 shares of common stock and options to purchase
an aggregate of 150,000 shares of common stock at $2.50 per share. Of such
securities, 157,500 shares of common stock and 67,500 options were issued to
Wesley C. Fredericks, who was a Director and resigned on December 31, 1998.

     We issued to Mr. Rubin an aggregate of 550,000 shares of common stock in
consideration of Mr. Rubin's waiver of certain compensation owed to him and for
restructuring certain debt owed to him, waiving certain defaults and providing
an additional loan to us in the aggregate amount of $600,000.

     As of September 30, 1996, the $600,000 loan was converted into 60,000
shares of Series C Preferred Stock. The Series C Preferred Stock, which has a
liquidation value of $10.00 per share, is convertible into common stock at 75%
of the current market price based on the average closing price for the common
stock for the 10 days preceding the conversion. Each share of Series C Preferred
Stock entitles the holder to 10 votes per share. The Series C Preferred Stock
pays an annual dividend of 9%, based on the per share liquidation value. In the
event that the dividend, which is payable monthly, is not paid for three
consecutive months, the holder is entitled to an additional 100,000 shares of
common stock for each month that the dividend is not paid. Mr. Rubin transferred
the shares to the Trust.

     As of September 30, 1996, Mr. Rubin converted an aggregate of approximately
$2,900,000 in outstanding debt into an aggregate of 290,000 shares of Series B
Preferred Stock. The Series B Preferred Stock, which has a liquidation value of
$10 per share, is convertible into common stock at 75% of the current market
price based on the average closing price for the common stock for the 10 days
preceding the conversion. In addition, each share of Series B Preferred Stock
entitles the holder thereof to 10 votes per share. The Series B Preferred Stock
pays an annual dividend of 9%, based on the per share liquidation value. In the
event that the dividend, which is payable monthly, is not paid for three
consecutive months, the holder is entitled to an additional 100,000 shares of
common stock for each month that the dividend is not paid. Mr. Rubin transferred
the shares to the Trust.

     In November 1996, we issued an aggregate of 1,060,000 options to 35
employees, including two executive officers and one outside director, pursuant
to the November 1996 stock option plan. The options are exercisable at $1.00 per
share, vest over a period of five years, and expire ten years from the date of
grant, if not sooner due to termination or death of the employee. Options to
acquire 620,000 shares were granted to certain employees of Biobottoms Inc.,
which we subsequently sold, and expired in July, 1998.

     In March 1997, we issued 52,217 shares of common stock to Mr. Rubin in lieu
of the dividend payments due under the Series B and Series C Preferred Stock, as
well as for an adjustment in consulting fees, for the period from January 1,
1997 through March 31, 1997. In May 1999, we issued 150,000 shares of common
stock in lieu of the dividend payments due under the Series B and Series C
Preferred Stock.

                                       45
In May 1997, we issued 200,000 shares of common stock to Mr. Rubin in
consideration of Mr. Rubin extending loans to us as well as extending a personal
guarantee to Congress in connection with our loan facilities.

     In May 1997, Robert Rubin and Jay Kaplowitz acquired for $2 million all of
the outstanding senior convertible preferred stock of Lew Magram Ltd., which was
convertible into one-half of the outstanding common stock of Lew Magram Ltd.
after giving effect to the conversion. The purpose for the investment was to
provide Lew Magram Ltd. with sufficient working capital to maintain operations
until Diplomat and Lew Magram Ltd. could reach an agreement for the acquisition
by Diplomat of Lew Magram. In December 1997, Diplomat entered into an Agreement
and Plan of Merger with Lew Magram Ltd., Robert Rubin, Jay Kaplowitz, Irving
Magram, Warren Golden and Stephanie Sobel, all of the shareholders of Lew Magram
Ltd. Simultaneous with the closing of the merger on February 19, 1998, Lew
Magram Ltd. merged with Magram Acquisition Corp. resulting in Lew Magram
becoming a wholly owned subsidiary of Diplomat. Prior to the closing Messrs.
Magram and Golden and Ms. Sobel owned all of the outstanding common stock of Lew
Magram Ltd. and Messrs. Rubin and Kaplowitz owned all of the outstanding senior
convertible preferred stock of Lew Magram Ltd. At the closing of the Merger,
Diplomat issued 95,000 shares of the Series D Preferred Stock to each of the Lew
Magram Ltd. shareholders of which Mr. Rubin received 46,253 shares, Mr. Magram
received 24,999 shares (excluding 2,497 shares sold to third parties who
converted the shares to common stock), Mr. Kaplowitz received 5,417 shares,
Mr. Golden received 10,556 shares, and Ms. Sobel received 5,278 shares. In
addition, Mr. Magram, Mr. Golden and Ms. Sobel received 100,000, 66,667 and
33,333 shares of Diplomat's common stock, respectively, excluding 50,000 shares
of Diplomat's common stock issued to their counsel at the closing. Each share of
Diplomat's Series D Preferred Stock is convertible into 33 1/3 shares of
Diplomat's common stock. Each of the Lew Magram Ltd. shareholders have agreed to
indemnify Diplomat for any material breach of the representations made by Lew
Magram Ltd. in the Merger Agreement limited to $9,500,000 and which claims for
indemnification must be brought within one year of the closing date of the
Merger. Messrs. Rubin and Kaplowitz assigned to Diplomat their rights to any
claim either of them may have for breach of any warranty made by Lew Magram Ltd.
in the May 1997 Senior Convertible Preferred Stock Purchase Agreement in return
for a release of their indemnification obligations under the Merger Agreement.
Mr. Rubin transferred his shares to the Trust. All of the Series D Preferred
Stock was converted in May 1999.

     In September 1997, Robert Rubin and Jay Kaplowitz advanced an aggregate of
$2,205,000 for the financing of Jean Grayson's Brownstone Studio, Inc. prior to
the purchase by Diplomat, as well as for working capital.

     In October 1997, in part to raise capital for our acquisition of
substantially all of the assets of Brownstone out of bankruptcy, we completed a
private offering of our securities which raised $3,630,000 from accredited
investors. The private placement consisted of units, each unit consisting of ten
shares of Series E Preferred Stock and 7,500 shares of common stock at a
purchase price of $10,000 per unit. As a result, we issued an aggregate of 3,630
shares of Series E Preferred Stock and 2,608,750 shares of common stock. Robert
Rubin and Jay Kaplowitz purchased an aggregate of 220.5 of the units for
$2,205,000, the proceeds of which repaid the $2,205,000 advance by Messrs. Rubin
and Kaplowitz made in September 1997. Mr. Rubin transferred his shares to the
Trust. In April 1999, an additional 75 shares of Series E Preferred Stock and
38,470 shares of common stock were issued to a shareholder.

     In March, 1999, Diplomat issued 32,440 Series F Preferred Stock plus
346,027 shares of common stock for an aggregate amount of $3,244,000. Of this
amount, 5,000 shares of Series F Preferred Stock and 53,333 shares of common
stock were issued to an investor for a cash contribution of $500,000, which the
Series F Preferred Stock shall be redeemed out of the proceeds of this offering.
17,200 shares of Series F Preferred Stock and 183,467 shares of common stock
were issued to the Trust for a cash contribution of $1.72 million. Mr. Rubin
received 10,240 shares of Series F Preferred Stock and 109,227 shares of common
stock for (i) converting his $200,000 principle amount loan, (ii) converting his
$500,000 loan in connection with the Fashionmall.com advance, and (iii)
advancing $324,000 directly to Diplomat's catalog printer. Mr. Rubin transferred
his shares to the Trust.

                                       46
Our principal working capital credit facility was provided by Congress
Financial Corporation. The lines of credit between Congress and us were
personally guaranteed by Mr. Rubin up to an aggregate amount of approximately
$1,000,000. In addition, Mr. Rubin provided cash collateral in the amount of $1
million and Jay Kaplowitz provided cash collateral in the amount of $100,000 to
increase availability under the Congress credit facility. Mr. Kaplowitz received
an option to purchase 100,000 shares of common stock with an exercise price of
$1.00 per share.

     We refinanced our asset based loan facility in May, 1999. We obtained a
$17 million loan facility from First Source Financial LLP and terminated the
Congress credit facilities. Mr. Rubin provided a guaranty to First Source of
$2 million which includes a $1 million cash collateral. Mr. Rubin received
50,000 shares of common stock for the First Source guaranty. Mr. Rubin
transferred these shares to the Trust.

     In June 1999, we entered into an agreement with our principal stockholder,
The Rubin Family Irrevocable Stock Trust, to convert or exchange all of the
preferred shares owned by the Trust into our common stock other than the
Series D Preferred Stock which was already converted as described above. The
conversion becomes effective immediately prior to the date of this prospectus.
The Trust has agreed to convert all of the Series B Preferred Stock and Series C
Preferred Stock at a formula derived by dividing the total liquidation value of
such preferred shares ($3,500,000) by $.65 per share for a total of 5,384,615
shares of common stock. The terms of the Series B Preferred Stock and Series C
Preferred Stock provided that such preferred shares were to convert at 75% of
the current market price based on the average closing price of the common stock
for the 10 days preceding the conversion (which would have been $0.6525 on that
date, resulting in an issuance of 5,363,985 shares of common stock, a difference
of 20,630 shares of common stock). The additional shares of common stock issued
upon conversion of such preferred shares was consideration for the early
conversion of such preferred shares by the Trust and for surrendering certain
rights and privileges of owning the preferred shares. The holders of the Series
E Preferred Stock have been granted a limited opportunity to convert their
shares into common stock at a formula derived by dividing the total liquidation
value of such preferred shares ($3,705,000) by $.90 per share. The terms of the
Series E Preferred Stock provided that such preferred shares were not
convertible. The exchange offer of shares of common stock for the Series E
Preferred Stock was consideration for the holders to surrender certain rights
and privileges of owning the preferred shares. Of the total shares to be issued
upon conversion of all of the Series E Preferred Stock, which is 4,116,667, the
Trust will receive 2,005,556 shares. The Trust has agreed to exchange for common
stock all of the shares of the Series F Preferred Stock at a formula derived by
dividing the total liquidation value of such preferred shares ($2,744,000) by
$.50 per share. The terms of the Series F Preferred Stock provided that such
preferred shares were not convertible. The agreement to the exchange of common
stock for the Series F Preferred Stock was consideration for the Trust giving up
certain rights and privileges of owning the preferred shares. We intend to
redeem for cash the remaining $500,000 of Series F Preferred Stock. We are
paying in common stock accrued and unpaid dividends on the Series E Preferred
Stock and Series F Preferred Stock. Of the total 399,690 shares of common stock
being issued in lieu of cash dividends, the Trust will receive 224,192 shares.
The conversion of the preferred shares of the Trust where the conversion price
is less than that of the original terms, or in the case of preferred shares
which were not convertible when issued where the conversion price is less than
the offering price, will result in an imputed dividend to the Trust of
approximately $2,000,000 based upon an offering price of $4.375 per common
share.

                                       47
DESCRIPTION OF SECURITIES

     The following description of certain matters relating to our securities
does not purport to be complete and is subject in all respects to applicable
Delaware law and to the provisions of our certificate of incorporation, as
amended, and bylaws, and the underwriting agreement between us and Donald,
copies of all which have been filed with the SEC as exhibits to the registration
statement of with this prospectus is a part.

GENERAL

     We are authorized by the certificate of incorporation to issue an aggregate
of 50,000,000 shares of common stock, $.0001 par value per share, and up to
1,000,000 shares of preferred stock, $.01 par value per share. Immediately prior
to this offering, an aggregate of 6,233,855 shares of common stock and 5,000
shares of Series F Preferred Stock were issued and outstanding. All outstanding
shares of common stock are of the same class and have equal rights and
attributes.

COMMON STOCK

     We are authorized to issue 50,000,000 shares of, common stock, $.0001 par
value per share. As of the date of this prospectus, there are 6,233,855 shares
of common stock outstanding. Each share of common stock entitles the holder
thereof to one vote on all matters submitted to a vote of the shareholders.
Since the holders of common stock do not have cumulative voting rights, holders
of more than 50% of the outstanding shares can elect all of the directors and
holders of the remaining shares by themselves cannot elect any directors. The
holders of common stock do not have preemptive rights or rights to convert their
common stock into other securities. Holders of common stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. In the event of our liquidation,
dissolution or winding up, holders of the common stock outstanding and to be
outstanding upon completion of this offering are and will be fully paid and
nonassessable.

PREFERRED STOCK

     Our certificate of incorporation authorizes the issuance of up to 1,000,000
shares of preferred stock the rights, privileges and preferences of which may be
designated by the Board of Directors from time to time. We currently have
outstanding 5,000 shares of Series F Preferred Stock, which we intend to redeem
for $500,000 from the proceeds of this offering. Preferred stock may be issued
in the future in connection with acquisitions, financings or such other matters
as the Board of Directors deems to be appropriate. In the event that any such
shares of preferred stock shall be issued, a certificate of designation, setting
forth the series of such preferred stock and the relative rights, privileges and
designations with respect thereto, shall be filed with the Secretary of State of
the State of Delaware. The effect of such preferred stock is that our Board of
Directors alone may authorize the issuance of preferred stock which could have
the effect of making more difficult or discouraging an attempt to obtain control
of us by means of a merger, tender offer, proxy contest or other means.

WARRANTS

     We have outstanding warrants and other non-plan options to purchase up to
330,980 shares of our common stock. The exercise prices of these warrants are
$5.00 to $6.99 to purchase 45,000 shares of common stock, $7.00 to $8.99 to
purchase 109,320 shares of common stock, $9.00 to $11.99 to purchase 45,000
shares of common stock, $12.00 to $14.99 to purchase 51,660 shares of common
stock, and $15.00 or more to purchase 80,000 shares of common stock.

DELAWARE ANTI-TAKEOVER LAW

     Section 203 of the Delaware General Corporation Law generally prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless
(i) the corporation has elected in its original certificate of incorporation not
to be governed by the Delaware anti-takeover law (we have not made such an
election), (ii) prior to such date the Board of Directors of the

                                       48
corporation approved either the business combination or the transaction in which
the person became an interested stockholder, (iii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the outstanding voting stock of
the corporation excluding shares owned by directors who are also officers of the
corporation and by certain employee stock plans, (iv) on or after such date the
business combination is approved by the Board of Directors of the corporation
and by the affirmative vote of at least 66 3/4% of the outstanding voting stock
of the corporation that is not owned by the interested stockholder, or (v) the
majority of the corporation's stockholders adopt an amendment to the
corporation's certificate of incorporation electing not to be governed by the
Delaware anti-takeover law, such amendment not being effective for 12 months
following its adoption and not applicable to any business combination between
the corporation and a stockholder who became an interested stockholder after its
adoption. A "business combination" generally includes mergers, asset sales and
similar transactions between the corporation and the interested stockholder, and
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of the corporation's voting stock or who is an
affiliate or associate of the corporation and, together with his affiliates and
associates, has owned 15% or more of the corporation's voting stock within three
years.

PERSONAL LIABILITY OF DIRECTORS

     The Delaware General Corporation Law permits Delaware corporations to
eliminate or limit the personal liability of a director to the corporation for
monetary damages arising from certain breaches of fiduciary duties as a
director. Our certificate of incorporation includes such a provision eliminating
the personal liability of directors to us and our shareholders for monetary
damages for any breach of fiduciary duty as a director, except (i) any breach of
a director's duty of loyalty to us or our stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for any transaction from which the director derived an
improper personal benefit; or (iv) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law. Directors are also not insulated from
liability for claims arising under the federal securities laws. The foregoing
provisions of our certificate of incorporation may reduce the likelihood of
derivative litigation against directors for breaches of their fiduciary duties,
even though such an action, if successful, might otherwise have benefitted us
and our shareholders.

     Our certificate of incorporation also provides that we shall indemnify its
directors, officers and agents to the fullest extent permitted by the Delaware
General Corporation Law. We have directors' and officers' liability insurance in
the aggregate amount of $5 million. Furthermore, we may enter into indemnity
agreements with its directors and officers for the indemnification of and
advancing of expenses to such persons to the fullest extent permitted by law.

TRANSFER AGENT

     The transfer agent for our common stock is North American Transfer & Trust
Company.

                                       49
SHARES ELIGIBLE FOR FUTURE SALE

     Upon the consummation of this offering, we will have 8,133,855 shares of
common stock outstanding. In addition, we have reserved for issuance 880,000
shares upon the exercise of options eligible for grant under the our stock
option plans, 592,000 of which have been granted and are currently outstanding.
The 1,900,000 shares of common stock registered hereby will be freely tradeable
without restriction or further registration under the Act, except for any shares
purchased or held by our affiliates (in general, a person who has a control
relationship with us), which will be subject to the limitations of Rule 144
adopted under the Act. Of the shares of common stock to be issued and
outstanding after this offering, approximately 4.9 million shares of common
stock are "restricted securities" as that term is defined under Rule 144, and
may not be sold unless registered under the Act or exempted therefrom. Of these
4.9 million shares, 970,939 are being registered along with the shares in this
offering. These 970,939 shares are subject to a one year lock up as described
below. Certain of the foregoing "restricted securities" are now eligible to be
sold in accordance with the exemptive provisions and the volume limitations of
Rule 144.

     In general, under Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
us, who for at least one year has beneficially owned restricted securities
acquired directly or indirectly from us or an affiliate of us in a private
transaction is entitled to sell in brokerage transactions within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
total number of outstanding shares of the same class, or (ii) if the stock is
quoted on a national securities exchange, the average weekly trading volume in
the stock during the four calendar weeks preceding the day notice is given to
the SEC with respect to such sale. A person who is not an affiliate and has not
been an affiliate of us for at least three months immediately preceding the sale
and who has beneficially owned restricted securities for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to any of
the limitations described above.

     Our officers, directors and controlling stockholder have agreed that,
subject to certain exceptions, that they will not, without the prior written
consent of Donald, directly or indirectly, sell or otherwise dispose of any
shares of common stock or securities convertible into or exercisable for common
stock for one year from the date of this prospectus. Upon expiration of the
lock-up period all of the shares of common stock subject to such lock-up
agreements will be eligible for sale under Rule 144 subject to volume and other
restrictions of Rule 144. These persons, however, have agreed not to sell more
than 25% of their Diplomat shares in any three month period without Donald's
consent after the one year lock-up period.

     Future sales of common stock by certain of the present stockholders, under
Rule 144, may have a depressive effect on the price of our common stock.

                                       50
UNDERWRITING

     We have entered into an underwriting agreement with the underwriters named
below. Donald & Co. Securities Inc. is acting as representative of the
underwriters.

     The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:

UNDERWRITER                                             NUMBER OF SHARES
-----------                                             ----------------
Donald & Co. Securities Inc.........................
                                                            ---------
          Total.....................................        1,900,000
                                                            ---------
                                                            ---------

     This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.

     The representative has advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $       per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $       per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.

     We have granted the representative an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the representative to purchase a maximum of 285,000 additional shares
from us to cover over allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $       , the total proceeds to us will be $       .

     The following table provides information regarding the amount of the
discount to be received by the underwriters.
TOTAL WITHOUT EXERCISE OF    TOTAL WITH FULL EXERCISE OF
                                    PER SHARE      OVER-ALLOTMENT OPTION         OVER-ALLOTMENT OPTION
                                    ---------    -------------------------    ---------------------------
$                  $                             $
We will pay all of the total expenses of the offering, which we estimate
will be approximately $       . In addition we will pay to Donald $       for
its expenses of which we have paid $15,000.

     We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.

     Our officers, directors and controlling stockholder have agreed that,
subject to certain exceptions, that they will not, without the prior written
consent of Donald, directly or indirectly, sell or otherwise dispose of any
shares of common stock or securities convertible into or exercisable for common
stock for one year from the date of this prospectus. Upon expiration of the
lock-up period all of the shares of common stock subject to such lock-up
agreements will be eligible for sale under Rule 144 subject to volume and other
restrictions of Rule 144. These persons, however, have agreed not to sell more
than 25% of their Diplomat shares in any three month period without Donald's
consent after the one year lock-up period.

     We and our principal stockholders, officers and directors will grant to
Donald a one (1) year right of first refusal to have Donald sell securities
under future public and private offerings of any non bank debt or equity
securities of our or our subsidiaries, by us, our subsidiaries, our affiliates,
and/or principal stockholders, officers and directors, except for issuances or
sales to employees pursuant to our stock option plan.

                                       51
In addition for a two year period we will not sell securities to raise
money or issue any options or warrants below the then current market price
without Donald's consent.

     We and Donald will enter into a financial consulting agreement providing
for Donald or its designee to act as financial consultant to us for a twelve
month period for a fee of $24,000 payable at a rate of $2,000 per month.

     We have granted Donald for a period ending on           ,      the right to
have Donald's designee present at meetings of the Board and each of its
committees subject to our right to exclude such designee under certain
circumstances. The designee will be entitled to the same notices and
communications sent by us as we gave to our directors and will attend directors'
and committees' meetings, but will not be entitled to vote thereat. Such
designee will also be entitled to receive the same compensation payable to
directors as members of the Board and its committees and all reasonable expenses
in attending such meetings. As of the date of this Prospectus no designee has
been selected.

     In connection with this offering, we have agreed to sell to Donald, for
nominal consideration, warrants to purchase up to an aggregate of 190,000 shares
of common stock exercisable initially at $       per share of common stock for a
period of four years beginning one year from the date hereof. These warrants
contain antidilution provisions providing for adjustment of the exercise price
upon the occurrence of certain events, including (i) the issuance of common
stock, or securities exercisable or convertible into common stock, at a price
less than the exercise price and (ii) any recapitalization, reclassification,
stock dividend, stock split, stock combination or similar transaction. In
addition, the warrants grant to the holders rights commencing one year from the
date of this prospectus to have common stock to be issued upon exercise of the
warrants registered under the Securities Act. These rights include the right to
require us to register these shares for a four year period and the right to
include these shares for a six year period in a registration statement filed by
us.

     Rules of the Securities and Exchange Commission may limit the ability of
the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the following rules:

     o Stabilizing transactions--The representatives may make bids or purchases
       for the purpose of pegging, fixing or maintaining the price of shares, so
       long as stabilizing bids do not exceed a specified maximum.

     o Over-allotments and syndicate covering transactions--The underwriters may
       create a short position in the shares by selling more shares than are set
       forth on the cover page of this prospectus. If a short position is
       created in connection with the offering, the representatives may engage
       in syndicate covering transactions by purchasing shares in the open
       market. The representatives may also elect to reduce any short position
       by exercising all or part of the over-allotment option.

     Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of such transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.

     Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq Small Cap Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.

     o Penalty bids--If the representative purchases shares in the open market
       in a stabilizing transaction or syndicate covering transaction, they may
       reclaim a selling concession from the underwriters and selling group
       members who sold those shares as part of this offering.

     In June 1998 Donald received a fee for introducing us to Tandem Capital
which purchased $5,000,000 of our subordinated debentures. For the introduction
Donald was paid a fee of $50,000 paid in installments and received warrants to
purchase 10,000 shares of Diplomat's common stock exercisable at $12.125 per
share. Donald will also receive fees of $40,000 in connection with our new debt
financing with First Source.

                                       52
LEGAL MATTERS

     The validity of the shares offered will be passed upon for Diplomat by
Gersten, Savage & Kaplowitz, LLP, 101 East 52nd Street, New York, New York
10022. Certain members of Gersten, Savage own approximately 250,000 shares of
common stock and options to purchase approximately 70,000 shares of common
stock. Certain legal matters in connection with the offering will be passed upon
for the underwriters by Parker Duryee Rosoff & Haft, 529 Fifth Avenue, New York,
New York 10022.

                                    EXPERTS

     The financial statements of Diplomat Direct Marketing Corporation as of and
for the year ended September 30, 1998 included in this prospectus and in the
registration statement have been audited by BDO Seidman, LLP, independent
certified public accountants, as set forth in their report appearing elsewhere
herein and in the registration statement, and is included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.

     The financial statements of Diplomat Direct Marketing Corporation as of and
for the two years ended September 30, 1997 and 1996 included in this prospectus
and in the registration statement have been audited by Feldman Sherb Ehlrich
& Co., P.C., independent certified public accountants as set forth in their
report appearing elsewhere herein and in the registration statement, and is
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.

     The financial statements of Lew Magram Ltd. as of and for the year ended
January 4, 1997 included in this prospectus and in the registration statement
have been audited by BDO Seidman, LLP, independent certified public accountants,
as set forth in their report appearing elsewhere herein and in the registration
statement, and is included in reliance upon such report given upon the authority
of said firm as experts in auditing and accounting.

     The financial statements of Lew Magram Ltd. as of and for the six months
ended June 30, 1997 included in this prospectus and in the registration
statement have been audited by Feldman Sherb Ehrlich & Co., P.C., independent
certified public accountants, as set forth in their report appearing elsewhere
herein and in the registration statement, and is included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.

     The financial statements of Jean Grayson's Brownstone Studio, Inc. as of
December 31, 1996 and December 31, 1995 and for the years then ended included in
this prospectus and in the registration statement have been audited by Feldman
Sherb Ehlrich & Co., P.C., independent certified public accountants as set forth
in their report appearing elsewhere herein and in the registration statement,
and is included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.

                 INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

     Our certificate of incorporation and by-laws provide that we shall
indemnify to the fullest extent permitted by Delaware law any person whom we may
indemnify thereunder, including our directors, officers, employees and agents.
Such indemnification (other than as ordered by a court) shall be made by us only
upon a determination that indemnification is proper in the circumstances because
the individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination shall
be made by a majority vote of a quorum consisting of disinterested directors, or
by independent legal counsel or by the stockholders. In addition, the
certificate of incorporation provides for the elimination, to the extent
permitted by Delaware law, of personal liability of directors to us and our
shareholders for monetary damages for breach of fiduciary duty as directors.

     We have obtained directors and officers insurance with $5 million coverage.
The policy insures directors and officers against unindemnified losses arising
from certain wrongful acts in their capacities and would reimburse us for such
loss for which we have lawfully indemnified the directors and officers.

     Insofar as indemnification for liabilities arising under the Act may be
provided to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the Act
and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless, in the opinion of our counsel, the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by us is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

                                       53
FINANCIAL STATEMENTS
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
Reports of Independent Certified Public Accountants................................................     F-2 - F-3
Consolidated Balance Sheets as of March 31, 1999 (unaudited) September 30, 1998 and 1997...........           F-4
Consolidated Statements of Operations for the six months ended March 31, 1999 and 1998 (unaudited)
  and the fiscal years ended September 30, 1998, 1997 and 1996.....................................           F-5
Consolidated Statements of Changes in Stockholders' Equity for the six months ended March 31, 1999
  (unaudited) and the fiscal years ended September 30, 1998, 1997 and 1996.........................           F-6
Consolidated Statements of Cash Flows for the six months ended March 31, 1999 and 1998 (unaudited)
  and the fiscal years ended September 30, 1998, 1997 and 1996.....................................           F-7
Notes to Consolidated Financial Statements.........................................................    F-8 - F-25

LEW MAGRAM LTD.
Reports of Independent Certified Public Accountants................................................   F-26 - F-27
Statements of Operations for the six months ended June 30, 1997 and for the fiscal year ended
  January 4, 1997..................................................................................          F-28
Statements of Cash Flows for the six months ended June 30, 1997 and for the fiscal year ended
  January 4, 1997..................................................................................          F-29
Notes to Financial Statements......................................................................   F-30 - F-31

JEAN GRAYSON'S BROWNSTONE STUDIO, INC.
Report of Independent Certified Public Accountants.................................................          F-33
Balance Sheets as of December 31, 1996 and 1995....................................................          F-34
Statement of Operations for the years ended December 31, 1996 and 1995.............................          F-35
Statement of Cash Flows for the years ended December 31, 1996 and 1995.............................          F-36
Notes to Financial Statements......................................................................   F-37 - F-40
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Diplomat Direct Marketing Corporation

We have audited the accompanying consolidated balance sheet of Diplomat Direct
Marketing Corporation and Subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diplomat Direct
Marketing Corporation and Subsidiaries as of September 30, 1998, and the results
of their operaitons and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.

/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP

New York, New York
January 30, 1999

                                      F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of Diplomat Direct
Marketing Corporation and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year ended September 30, 1997 and the nine months ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above, as
restated for the adjustments disclosed in Note 3(b), present fairly, in all
material respects, the financial position of Diplomat Direct Marketing
Corporation and Subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for the year ended September 30, 1997 and the
nine months ended September 30, 1996, in conformity with generally accepted
accounting principles.

/s/ FELDMAN SHERB EHRLICH & CO., P.C.
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants

New York, New York
  January 13, 1998,
  except for Note 3(a),
  which is as of February 19, 1998,
  and Note 3(b),
  which is as of January 30, 1999

                                      F-3
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
MARCH 31,           SEPTEMBER 30,
                                                                       -----------    --------------------------
                                                                          1999           1998           1997
                                                                       -----------    -----------    -----------
                                                                       (UNAUDITED)
ASSETS
Current:
  Cash and cash equivalents.........................................   $   310,613    $   322,778    $    59,750
  Accounts receivable, net of allowance of $172,001, $204,196, and
     $147,001.......................................................     2,372,660      1,921,209      1,585,840
  Inventories.......................................................    11,768,919     11,066,380      6,354,619
  Net assets held for sale..........................................            --             --      3,254,010
  Prepaid catalogs..................................................     6,359,778      8,051,651      1,534,830
  Prepaid expenses..................................................     1,755,647      1,379,567      1,143,848
  Other current assets..............................................       659,268        837,946        482,738
                                                                       -----------    -----------    -----------
  Total current assets..............................................    23,226,885     23,579,531     14,415,635
                                                                       -----------    -----------    -----------
  Property and equipment, net.......................................     3,859,914      4,176,903      3,092,736
                                                                       -----------    -----------    -----------

  Other assets:
     Goodwill, net of amortization of $592,778, $345,435 and
       $199,000.....................................................    14,340,015     14,587,358      9,945,930
     Customer list, net of amortization of $1,300,000,
       $900,000 and $125,000........................................     6,700,000      7,100,000      4,875,000
     Note receivable................................................       870,000        870,000             --
     Other..........................................................     1,145,090        645,091        683,586
                                                                       -----------    -----------    -----------
  Total other assets................................................    23,055,105     23,202,449     15,504,516
                                                                       -----------    -----------    -----------
                                                                       $50,141,904    $50,958,883    $33,012,887
                                                                       -----------    -----------    -----------
                                                                       -----------    -----------    -----------
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.............................   $16,007,527    $18,469,136    $12,366,083
  Loans payable--officers...........................................        25,000        225,000        235,000
  Loans payable--Congress Financial Corp............................     7,813,023      5,504,371      3,083,896
  Open prepaid orders...............................................       805,086      1,211,165        335,948
  Outstanding merchandise credit....................................     3,100,344      1,892,148        945,313
  Current maturities of long-term debt..............................       847,793        939,816        823,918
                                                                       -----------    -----------    -----------
Total current liabilities...........................................    28,598,773     28,241,636     17,790,158
                                                                       -----------    -----------    -----------
Long-term debt, less current maturities.............................     6,266,835      6,383,585      1,154,645
                                                                       -----------    -----------    -----------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $.01 par value--shares authorized 1,000,000;
     issued and outstanding 478,573, 546,133 and 545,000
     (Liquidation value of $16,380,000).............................         4,785          5,461          5,450
  Common stock, $.0001 par value--shares authorized 50,000,000;
     issued and outstanding 12,608,399, 11,162,372 and 8,304,150....         1,257          1,112            829
  Additional paid-in capital........................................    29,179,976     25,835,445     22,144,478
  Accumulated deficit...............................................   (14,316,812)    (9,508,356)    (8,082,673)
                                                                       -----------    -----------    -----------
Total stockholders' equity..........................................    14,869,206     16,333,662     14,068,084
                                                                       -----------    -----------    -----------
                                                                       $50,141,904    $50,958,883    $33,012,887
                                                                       -----------    -----------    -----------
                                                                       -----------    -----------    -----------
See accompanying notes to consolidated financial statements.

                                      F-4
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED                    YEAR ENDED           NINE MONTHS ENDED
                                                  MARCH 31,                      SEPTEMBER 30,           SEPTEMBER 30,
                                     -----------------------------------   -------------------------   -----------------
                                          1999               1998             1998          1997            1996
                                     ----------------   ----------------   -----------   -----------   -----------------
                                                 (UNAUDITED)
Net sales..........................    $ 41,580,537       $ 36,515,628     $74,585,592   $17,468,066      $ 7,448,778
Cost of goods sold.................      20,938,435         17,029,324      34,433,297     8,724,030        7,392,265
                                       ------------       ------------     -----------   -----------      -----------
  Gross profit.....................      20,642,102         19,486,304      40,152,295     8,744,036           56,513
Selling, general and administrative
  expenses.........................      23,933,263         17,070,661      37,537,372     7,060,658        3,672,133
Restructuring and reorganization
  costs............................              --                 --              --            --        1,738,975
                                       ------------       ------------     -----------   -----------      -----------
  Operating income (loss)..........      (3,291,161)         2,415,643       2,614,923     1,683,378       (5,354,595)
Interest expense...................      (1,050,159)          (642,249)     (1,355,324)     (421,233)        (702,474)
                                       ------------       ------------     -----------   -----------      -----------
  Income (loss) before income tax
     (expense) benefit.............      (4,341,320)         1,773,394       1,259,599     1,262,145       (6,057,069)
Income tax (expense) benefit.......              --                 --              --       140,000          (17,353)
                                       ------------       ------------     -----------   -----------      -----------
  Income (loss) from continuing
     operations....................      (4,341,320)         1,773,394       1,259,599     1,402,145       (6,074,422)
Loss on discontinued operations
  (net of $453,000 gain on sale
  assets in 1998)..................         (37,386)        (2,072,098)     (2,322,392)     (295,633)      (1,150,478)
                                       ------------       ------------     -----------   -----------      -----------
Net income (loss)..................      (4,378,706)          (298,704)     (1,062,793)    1,106,512       (7,224,900)
Preferred stock dividends..........        (429,750)          (157,500)       (362,890)     (288,892)              --
                                       ------------       ------------     -----------   -----------      -----------
Net income (loss) to common
  stockholders.....................    $ (4,808,456)      $   (456,204)    $(1,425,683)  $   817,620      $(7,224,900)
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
Per common share--basic and diluted
  Net income (loss) from continuing
     operations....................    $      (0.40)      $       0.10     $      0.08   $      0.19      $     (1.34)
  Net income (loss) from
     discontinued operations.......    $       0.00       $      (0.12)    $     (0.21)  $     (0.05)     $     (0.25)
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
Net income (loss)--basic and
  diluted per common share.........    $      (0.40)      $      (0.02)    $     (0.13)  $      0.14      $     (1.59)
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
Average number of shares used in
  computation (basic and
  diluted).........................      11,884,247          9,941,023      10,717,628     5,892,454        4,549,525
                                       ------------       ------------     -----------   -----------      -----------
                                       ------------       ------------     -----------   -----------      -----------
See accompanying notes to consolidated financial statements.

                                      F-5
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED),
                    YEARS ENDED SEPTEMBER 30, 1998 AND 1997
                    AND NINE MONTHS ENDED SEPTEMBER 30, 1996
COMMON STOCK        PREFERRED STOCK     ADDITIONAL
                                       -------------------   ------------------     PAID-IN     ACCUMULATED
                                         SHARES     AMOUNT    SHARES    AMOUNT      CAPITAL       DEFICIT         TOTAL
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance, December 30, 1995............  4,493,525   $ 458          --   $    --   $ 5,201,441   $ (1,675,393)  $ 3,526,506
  Exercise of options, issuance of
     500,000 shares of common stock
     par .0001........................    500,000      50          --        --       474,950             --       475,000
  Issuance of common stock............    550,000      55          --        --       399,945             --       400,000
  Issuance of preferred stock.........         --      --     450,000     4,500     4,095,500             --     4,100,000
  Net loss............................         --      --          --        --            --     (7,224,900)   (7,224,900)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance, September 30, 1996...........  5,543,525     563     450,000     4,500    10,171,836     (8,900,293)    1,276,606
  Private placements..................  1,250,000     125          --        --     2,174,875             --     2,175,000
  Exercise of warrants................    500,000      50          --        --       499,950             --       500,000
  Issuance of shares..................    708,408      63          --        --       515,747             --       515,810
  Preferred and common stock issued
     for Magram acquisition...........    250,000      24      95,000       950     8,690,694             --     8,691,668
  Common stock issued for Preferred
     stock dividend...................     52,217       4          --        --        91,376             --        91,380
  Net income..........................         --      --          --        --            --      1,106,512     1,106,512
  Preferred stock dividends...........         --      --          --        --            --       (288,892)     (288,892)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance, September 30, 1997...........  8,304,150     829     545,000     5,450    22,144,478     (8,082,673)   14,068,084
  Private placements..................  2,722,500     272       3,630        36     3,619,711             --     3,620,019
  Exercise of options.................     35,000       2          --        --        64,341             --        64,343
  Common stock issued for Brownstone
     acquisition......................     17,500       1          --        --         6,898             --         6,899
  Net loss............................         --      --          --        --            --     (1,062,793)   (1,062,793)
  Conversion of Series D preferred....     83,222       8      (2,497)      (25)           17             --            --
  Preferred stock dividends...........         --      --          --        --            --       (362,890)     (362,890)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance, September 30, 1998........... 11,162,372   1,112     546,133     5,461    25,835,445     (9,508,356)   16,333,662
  Period ended March 31, 1999
     (unaudited)
  Private Placement...................    446,027      45      32,440       324     3,343,631                    3,344,000
  Net Loss............................         --      --          --        --            --     (4,378,706)   (4,378,706)
  Conversion of Series A preferred....  1,000,000     100    (100,000)   (1,000)          900
  Preferred stock dividends...........         --      --          --        --            --       (429,750)     (429,750)
                                       ----------   ------   --------   -------   -----------   ------------   -----------
Balance March 31, 1999 (Unaudited).... 12,608,399   $1,257    478,573   $ 4,785   $29,179,976   $(14,316,812)  $14,869,206
                                       ----------   ------   --------   -------   -----------   ------------   -----------
                                       ----------   ------   --------   -------   -----------   ------------   -----------
See accompanying notes to consolidated financial statements.

                                      F-6
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS
                                                        SIX MONTHS ENDED                 YEAR ENDED                 ENDED
                                                           MARCH 31,                    SEPTEMBER 30,           SEPTEMBER 30,
                                                   --------------------------   -----------------------------   -------------
                                                      1999          1998            1998            1997            1996
                                                   -----------   ------------   -------------   -------------   -------------
                                                   (UNAUDITED)   (UNAUDITED)
Cash flows from operating activities:
  Net income (loss)..............................  $(4,378,706)     (298,704)    $(1,062,793)    $ 1,106,512     $(7,224,900)
  Adjustments to reconcile net income (loss) to
    net cash used in operating activities........
    Amortization.................................      647,343       477,826       1,245,435         375,333              --
    Depreciation.................................      389,167       401,802         765,107         384,857         211,237
    Issuance of stock for expenses...............           --            --              --          91,380         400,000
    Gain on sale of Biobottoms...................           --            --        (453,000)             --              --
    Changes in assets and liabilities:
      (Increase) decrease in accounts
         receivable..............................     (451,451)   (2,192,733)        264,631         297,154        (282,507)
      (Increase) decrease in inventories.........     (702,539)   (3,972,465)     (1,897,761)     (3,076,019)      2,551,187
      (Increase) decrease in prepaid expenses....     (376,080)      (57,125)       (235,719)        512,723       1,041,372
      (Increase) decrease in prepaid catalogs....    1,691,873    (1,911,148)     (6,516,821)     (1,982,124)       (641,132)
      (Increase) decrease in current assets......           --            --        (355,208)       (205,824)        702,866
      (Increase) decrease in other assets........     (321,321)   (2,656,946)        (38,495)        (92,373)        500,202
      (Increase) decrease in assets held for
         sale....................................           --     3,254,010              --              --              --
      Increase (decrease) in accounts payable and
         accrued expenses........................   (2,258,064)   (3,612,371)     (5,057,623)     (1,998,570)      2,054,897
      Increase (decrease) in outstanding
         merchandise credits.....................    1,208,196     8,296,234         946,835         748,083              --
      Increase (decrease) in prepaid orders......     (406,079)    1,108,677         575,217          22,130              --
                                                   -----------    ----------     -----------     -----------     -----------
Net cash used in operating activities............   (4,957,661)   (1,162,943)    (11,820,195)     (3,816,738)       (686,778)
                                                   -----------    ----------     -----------     -----------     -----------
Cash flows from investing activities:
  Proceeds from sale of Biobottoms...............           --            --       3,707,010              --              --
  Cash paid for Biobottoms, Inc. (net of cash
    acquired)....................................           --            --              --              --      (2,899,211)
  Acquisition of subsidiary assets...............           --    (4,764,240)             --              --              --
  Cash acquired in Magram acquisition............           --            --              --       2,051,007              --
  Purchase of trademark..........................           --      (664,311)             --         (75,000)             --
  Purchase of property and equipment.............      (72,178)           --      (2,049,274)       (189,780)       (211,096)
  Note Receivable................................           --            --        (870,000)             --              --
                                                   -----------    ----------     -----------     -----------     -----------
Net cash provided by (used in) investing
  activities.....................................      (72,178)   (5,428,551)        787,736       1,786,227      (3,110,307)
                                                   -----------    ----------     -----------     -----------     -----------
Cash flows from financing activities:
  Proceeds of loans..............................           --            --       5,000,000              --         450,000
  Increase (decrease) in long term debt and loans
    payable......................................     (408,773)     (159,748)        228,940              --              --
  Revolving credit loans.........................    2,308,652     4,399,085       2,745,075        (735,145)        583,650
  Preferred stock dividends paid.................     (429,750)     (205,390)       (362,890)       (288,892)             --
  Issuance of preferred and common stock.........    3,547,545     3,941,294       3,684,362       3,190,809         475,000
  Borrowings from stockholder....................           --            --              --       1,435,000       2,620,000
  Repayment of long-term debt and loan payables..           --            --              --      (1,580,769)       (393,678)
                                                   -----------    ----------     -----------     -----------     -----------
Net cash provided by financing activities........    5,017,674     7,975,241      11,295,487       2,021,003       3,734,972
                                                   -----------    ----------     -----------     -----------     -----------
Net decrease in cash and cash equivalents........      (12,165)    1,383,747         263,028          (9,508)        (62,113)
Cash and cash equivalents, beginning of period...      322,778        59,750          59,750          69,258         131,371
                                                   -----------    ----------     -----------     -----------     -----------
Cash and cash equivalents, end of period.........  $   310,613    $1,443,497     $   322,778     $    59,750     $    69,258
                                                   -----------    ----------     -----------     -----------     -----------
                                                   -----------    ----------     -----------     -----------     -----------
Supplemental disclosures of cash flow
  information:
Cash paid during the period for:
  Interest.......................................  $ 1,050,159    $  642,249     $ 1,500,676     $   764,000     $   706,000
                                                   -----------    ----------     -----------     -----------     -----------
                                                   -----------    ----------     -----------     -----------     -----------
  Income taxes...................................           --            --              --              --              --
                                                   -----------    ----------     -----------     -----------     -----------
                                                   -----------    ----------     -----------     -----------     -----------
See accompanying notes to consolidated financial statements.

                                      F-7
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a) The consolidated financial statements include the accounts of Diplomat
Direct Marketing Corporation (the "Company") and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.

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

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

     (d) The Company follows Statement of Financial Accounting Standards
("SFAS") No. 109 for income taxes. Pursuant to SFAS No. 109, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse.

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

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

     (g) Computation of Earnings Per Common Share.

     Basic earnings per share has been computed using the weighted average
number of shares of common stock outstanding. Diluted earnings per share
includes the assumed excercise of stock options using the treasury stock method
that could potentially dilute earnings per share. In all periods presented,
there were no differences between basic and diluted income (loss) per common
share because the assumed exercise of stock options was anti-dilutive. The
assumed exercise of stock options could potentially dilute basic earnings per
share amounts in the future.

     (h) Long-lived assets, primarily property and equipment, goodwill and
customer lists are periodically reviewed by management to determine if there has
been a permanent impairment in their value by evaluating various factors,
including current and projected operating results. Based on this assessment,
management concluded that at March 31, 1999 the Company's long-lived assets were
fully realizable.

     (i) The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments. Long-term debt has been
recorded at its face value which approximates its fair value based on its term
and interest rate.

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

     (k) Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period in
which related revenues are expected to be realized, generally three to six
months. Advertising costs, principally the amortization of such prepaid catalog
costs attributable to continuing operations, included in the accompanying
statement of operations were $14,500,000 for the six months ended March 31,
1999, $20,974,673 for the year ended September 30, 1998, $3,102,588 for the year
ended September 30, 1997 and none for the nine months ended September 30, 1996.

     (l) Interim Financial Statements. The consolidated financial statements as
of March 31, 1999 and for the six months ended March 31, 1999 and 1998 are
presented as unaudited. In the opinion of management, these

                                      F-8
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

financial statements include all adjustments necessary to present fairly the
information set forth therein. These adjustments consist solely of normal
recurring accruals. The interim results of operations for the six months ended
March 31, 1999 and 1998 are not necessarily indicative of the results to be
expected for the full year or for any other interim period.

     (m) Revenue is recognized at the time merchandise is shipped to customers.
Proceeds received for merchandise not yet shipped are reflected as "prepaid
orders", a current liability.

     (n) The Company issues merchandise credits for certain returns of
merchandise sold with substantial discounts. Unused credits are periodically
written off into income.

     (o) New Accounting Standards

     The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The adoption of SFAS 130 did not have
any effect on the Company's financial statements.

     The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," which establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of enterprises
about which separate financial information is available that is evaluated
regularly by Management in deciding how to allocate resources and in assessing
performance. The adoption of SFAS 131 did not have any effect on the Company's
financial statements.

     Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for Derivative Instruments. The Company has not in the past
nor does it anticipate that it will engage in transactions involving Derivative
Instruments which will impact the Financial Statements.

2. BUSINESS

     The Company is engaged in two continuing lines of business and,
accordingly, its operations are classified into two business segments: mail
order catalog retail operations, and the manufacturing, marketing and
distribution of infants' accessories principally to mass merchants. In 1998, the
Company sold its Biobottoms subsidiary. The operations of that company have been
accounted for as a discontinued operations, see note 5.

     On November 12, 1996, the Company changed its reporting period to September
30. Effective October 1, 1996, the Company's subsidiaries report their results
of operations on a fifty-two/fifty-three week ending on the Saturday closest to
September 30.

3. ACQUISITION OF MAGRAM

     (a) On February 19, 1998, the Company (through its wholly-owned subsidiary,
Magram Acquisition Corp.) closed on the acquisition of Lew Magram, Ltd.
("Magram"), a New York corporation with a place of business in Teaneck, New
Jersey, which is in the business of mail order catalogue sales of women's
clothing. For accounting purposes, the acquisition was effected as of July 1,
1997, the date that the Company assumed effective control of Magram. The
acquisition was accounted for as a purchase and the consideration consisted of
the issuance of

                                      F-9
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

3. ACQUISITION OF MAGRAM--(CONTINUED)

95,000 shares of the Company's $.01 par value, Series D, convertible preferred
stock. The Series D preferred stock is convertible into 3,166,667 shares of the
Company's common stock (which assumes a market value of $4.00 per share). The
preferred stock does not pay any dividends, but participates with common in any
Company distributions. The preferred stock has a liquidation preference of $100
per share. An additional 250,000 shares of common stock were also given as
consideration to the sellers. The fair market value of the consideration was
approximately $8.7 million and acquisition costs were approximately $646,000.
The Company recorded the carryover basis for certain selling stockholders of
Magram who are also principal stockholders of the Company.

     The net fair market value of identifiable assets acquired was approximately
$6.9 million, and included customer lists valued at $5 million. The customer
lists are being amortized over a period of 10 years. Cost in excess of net
assets acquired amounted to approximately $10 million and is being amortized
over 25 years.

     (b) In January 1999, the Company, based upon historical information
developed in conjunction with the preparation of its September 30, 1998
financial statements, determined that certain liabilities of Magram were
understated as of July 1, 1997, and also at September 30, 1997. Such liabilities
included reserves for customer merchandise returns and credits and unrecorded
liabilities for purchased merchandise. Consequently, the accompanying
consolidated financial statements have been restated to reflect the above
adjustments. The effect of such restatement on the Company's consolidated
balance sheet and statement of operations as at and for the year ended
September 30, 1997 is as follows:
AS REPORTED    ADJUSTMENTS    RECLASSIFICATIONS(A)    AS RESTATED
                                               -----------    -----------    --------------------    -----------
                                                                        (000'S OMITTED)
Current assets..............................     $17,066        $    --            $ (2,651)           $14,415
Property and equipment......................       3,465             --                (372)             3,093
Goodwill....................................      10,879          2,515              (3,448)             9,946
Other assets................................       5,604             --                 (45)             5,559
                                                 -------        -------            --------            -------
Total.......................................     $37,014        $ 2,515            $ (6,516)           $33,013
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
Current liabilities.........................     $21,490        $ 2,736            $ (6,436)           $17,790
Long-term debt..............................       1,235             --                 (80)             1,155
Stockholders' equity........................      14,289           (221)                 --             14,068
                                                 -------        -------            --------            -------
Total.......................................     $37,014        $ 2,515            $ (6,516)           $33,013
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
Net sales...................................     $35,147        $  (297)           $(17,382)           $17,468
Cost of goods sold..........................      16,665            (76)             (7,865)             8,724
                                                 -------        -------            --------            -------
Gross profit................................     $18,482        $  (221)           $ (9,517)           $ 8,744
                                                 -------        -------            --------            -------
Operating income............................     $ 1,761        $  (221)           $    143            $ 1,683
                                                 -------        -------            --------            -------
Net income..................................     $ 1,328        $  (221)           $     --            $ 1,107
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
Net income to common shareholders...........     $   964        $  (221)           $     74            $   817
                                                 -------        -------            --------            -------
Net income per share........................     $   .16                                                   .14
                                                 -------        -------            --------            -------
                                                 -------        -------            --------            -------
------------------

(a) Reflects the discontinued Biobottoms assets and liabilities.

                                      F-10
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

3. ACQUISITION OF MAGRAM--(CONTINUED)

     The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Magram as if the acquisition had occurred at
the beginning of 1996, after giving effect to certain adjustments, including
amortization:
NINE MONTHS ENDED
                                                                       YEAR ENDED          SEPTEMBER 30,
                                                                   SEPTEMBER 30, 1997          1996
                                                                   ------------------    -----------------
Net sales.......................................................      $ 55,382,211          $43,772,271
Net loss........................................................        (7,415,554)          (8,397,091)
Net loss per common share.......................................             (1.20)               (1.74)
                                                                      ------------          -----------
                                                                      ------------          -----------
The pro forma results do not necessarily represent results which would have
occurred if the acquisition had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.

4. ACQUISITION OF BROWNSTONE

     On October 30, 1997, the Company acquired out of bankruptcy all the assets
of Jean Grayson's Brownstone Studios, Inc., a mail order catalog company for the
assumption of approximately $10,000,000 in liabilities and an option to the
owners of Jean Grayson's Brownstone Studios, Inc. to purchase 200,000 shares of
Diplomat common stock at $3.9375 (market value) for a period of three years. The
acquisition was accounted for as a purchase accordingly, the operating results
include the operations of Brownstone for the period November 1, 1997 through
October 3, 1998. The purchase price was allocated to assets acquired based on
their estimated fair value, including customer lists valued at $3,000,000 which
will be amortized on a straight line basis over ten years. This treatment
results in approximately $4,000,000 in cost in excess of net assets acquired
which will be amortized on a straight line basis over twenty five years. As a
result of this acquisition, the scope of the Company's business has expanded
into the mature women's apparel and accessories markets primarily through direct
mail catalog. Since Brownstone was in bankruptcy prior to its acquisition in
October 1997, presentation of pro forma financial information as if it had been
acquired October 1, 1996 would not be meaningful and, therefore, has not been
presented.

5. ACQUISITION AND SALE OF BIOBOTTOMS, INC. AND RELATED FINANCING

     (a) Acquisition of Biobottoms, Inc.

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

     The Company paid $2,500,000 for Biobottoms, $1,000,000 in cash and
$1,500,000 in the form of two promissory notes to Biobottoms' stockholders, each
in the amount of $750,000 ("Acquisition Notes"). The notes bore interest at 1%
over the prime rate as defined in the agreements. One such note was due six
months from the acquisition date and the second note was due in two equal
installments of $375,000, nine months and eighteen months after the date of
acquisition, respectively. The Company did not make the payments which were
required in August and November 1996. On December 9, 1996, the Company received
notification of the default from the former Biobottoms' stockholders, which
required that the Company cure the default on the notes within 270 days, or be
subject to enforcement action. On February 25, 1997, the former Biobottoms'
stockholders agreed not to initiate enforcement action under this or subsequent
defaults until not earlier than December 31, 1997. In connection with obtaining
this agreement, Diplomat agreed to pay the Biobottoms' stockholders ten
installments of $5,000 to be applied against the acquisition notes, commencing
on February 21, 1997 and to undertake to conduct a private placement of its
securities to raise funds for the remaining balance due on the acquisition
notes. In July 1997, the Company received proceeds from a private placement and
pursuant to an agreement with the Biobottoms' stockholders paid $1,500,000 in
full satisfaction of all amounts due under the acquisition notes, and also
amended its consulting agreement with the former stockholders to provide for

                                      F-11
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

5. ACQUISITION AND SALE OF BIOBOTTOMS, INC. AND RELATED FINANCING--(CONTINUED)

additional compensation of 29,204 shares each of the Company's common stock.
Additionally, the Company incurred costs related to the acquisition in the
amount of approximately $720,000. Of this amount, $600,000 represents the
estimated fair value of 100,000 shares of the Company's convertible Series A
preferred stock issued to a significant stockholder (who is also a member of the
Board of Directors), as a fee for his assistance in consummating the
acquisition. The Series A preferred shares were converted into 1,000,000 common
shares of the Company during November 1996.

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

     (b) Financing

     Simultaneously with the closing of the Biobottoms acquisition, the Company
and Biobottoms entered into a loan and subordinated security agreement with a
director and principal stockholder of the Company and an affiliate of such
individual pursuant to which the Company borrowed from such director and
principal stockholder and affiliate $2,353,100 and $450,000, respectively. The
loan from the director and principal stockholder was utilized to fund the
acquisition of Biobottoms in part. The loan from the affiliate has been utilized
for working capital purposes. Subject to an intercreditor agreement between the
Company's asset-based lender and other lenders, the $450,000 loan was paid in
full on May 4, 1997.

     In connection with such aforementioned loan by a director and principal
stockholder of the Company in the amount of $2,353,100, the Company issued
100,000 shares of its Series A preferred stock, which were convertible into
1,000,000 shares of common stock at the option of the director and principal
stockholder. The holder of such shares of preferred stock will have the right,
subject to a subordination and intercreditor agreement by and among Congress
Financial Corporation and others, during any period during which there shall be
an Event of Default under such loans, as such term is defined therein, to
designate a majority of the members of the Board of Directors of the Company.
Such right of designation will continue during the duration of any such Event of
Default.

     (c) Sale of Biobottoms

     On April 17, 1998, the Company entered into an Asset Purchase Agreement
(the "Agreement") with Genesis Direct Thirty-Four, LLC ("Buyer") in which the
Buyer purchased substantially all of the assets and assumed certain of the
liabilities of Biobottoms. The Buyer paid $2,270,000 in cash and a note and
assumed $5,749,000 in liabilities. The note is subject to reduction depending on
the net assets acquired as determined in a closing date balance sheet. If the
amount of the net value of acquired assets is less than negative $778,000 or the
accrued expenses and customer liabilities included in the assumed liabilities
exceed $828,877, the greater of such deficiencies will reduce the amount of the
note.

     The Company shall retain all claims for tax refunds, tax loss carryforwards
or carrybacks of tax credits of any kind applicable to the business of
Biobottoms prior to the closing of the asset sale. The Agreement further
specifies that certain intercompany and affiliated person liabilities will not
be assumed by the Buyer.

     Following is a summary of net assets and the results of operations of
Biobottoms:
SEPTEMBER 30, 1997
                                                                                       ------------------
Assets--current.....................................................................      $  5,904,579
  Property and Equipment............................................................           372,757
  Other.............................................................................         3,493,295
Liabilities--current................................................................        (6,435,512)
  Long-Term.........................................................................           (81,109)
                                                                                          ------------
Net assets to be disposed of........................................................      $  3,254,010
                                                                                          ------------
                                                                                          ------------
F-12
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

5. ACQUISITION AND SALE OF BIOBOTTOMS, INC. AND RELATED FINANCING--(CONTINUED)
PERIODS ENDED
                                                             -----------------------------------------
                                                                1998           1997           1996
                                                             -----------    -----------    -----------
Sales.....................................................   $ 7,539,651    $17,591,784    $11,774,023
                                                             -----------    -----------    -----------
Cost of sales.............................................     5,105,464      8,074,679      5,942,323
Operating expenses........................................     5,027,458      9,589,738      6,900,075
Interest..................................................       182,121        223,000         82,103
                                                             -----------    -----------    -----------
                                                              10,315,043     17,887,417     12,924,501
                                                             -----------    -----------    -----------
Net Loss..................................................   $(2,775,392)   $  (295,633)   $(1,150,478)
                                                             -----------    -----------    -----------
                                                             -----------    -----------    -----------
6. RESTRUCTURING OF OPERATIONS

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

     As a result of the actions taken, the Company incurred restructuring
charges of approximately $1,739,000. The restructuring charges include
approximately $568,000 primarily for write-offs and other costs associated with
the discontinuance of various products and $771,000 for severance pay and
professional and consulting fees payable in connection with the restructuring
plan.

7. CONVERSION OF STOCKHOLDER DEBT AND ISSUANCE OF SERIES B & C PREFERRED STOCK

     Effective September 30, 1996, a significant stockholder and member of the
Company's Board of Directors converted $3,500,285 of indebtedness into 290,000
shares of Series B preferred stock of the Company and 60,000 shares of the
Company's Series C preferred stock. Both the Series B and C shares of preferred
stock have a liquidation preference of $10 per share ("Liquidation Value") and a
normal dividend of 9% of Liquidation Value payable monthly. Should the Company
not pay the dividends on either the Series B or C preferred stock for three
consecutive months, the holder will be entitled to receive 100,000 shares of the
Company's common stock for each month that the dividend has not been paid as a
penalty. The preferred stock, based on Liquidation Value, is convertible into
common stock of the Company at 75% of the average market value of the common
stock for the ten trading days immediately preceding the day of conversion. The
preferred stock also has voting rights equal to 3,500,000 shares of common stock
on all matters on which common stock votes, including election of directors. As
part of the consideration for the conversion, the holder was issued 500,000
shares of the Company's common stock. The issuance of the common stock was
valued at approximately $.80 per share, the estimated fair value of such shares
at the time of issuance.

     In September 1997, this significant stockholder loaned the Company an
additional $1.2 million, with interest at 9%.

                                      F-13
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

8. INVENTORIES

     Inventories consist of the following:
MARCH 31,           SEPTEMBER 30,
                                                              -----------    -------------------------
                                                                 1999           1998           1997
                                                              -----------    -----------    ----------
Raw materials and packaging................................   $   397,930    $   371,573    $  375,510
Work-in-process............................................        50,511         54,892       365,333
Finished goods.............................................    11,320,478     10,639,915     5,613,776
                                                              -----------    -----------    ----------
                                                              $11,768,919    $11,066,380    $6,354,619
                                                              -----------    -----------    ----------
                                                              -----------    -----------    ----------
9. PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:
MARCH 31,           SEPTEMBER 30,
                                                              -----------    -------------------------
                                                                 1999           1998           1997
                                                              -----------    -----------    ----------
Land.......................................................   $   420,000    $   420,000    $  420,000
Building...................................................     1,517,600      1,517,600     1,517,600
Equipment..................................................     6,087,580      5,757,682     6,132,117
                                                              -----------    -----------    ----------
                                                                8,025,180      7,695,282     8,069,717
Less: Accumulated depreciation.............................    (4,165,266)    (3,518,379)   (4,976,981)
                                                              -----------    -----------    ----------
                                                              $ 3,859,914    $ 4,176,903    $3,092,736
                                                              -----------    -----------    ----------
                                                              -----------    -----------    ----------
10. OTHER ASSETS
MARCH 31,           SEPTEMBER 30,
                                                              -----------    -------------------------
                                                                 1999           1998           1997
                                                              -----------    -----------    ----------
Noncurrent deferred tax asset..............................   $   581,535    $   581,535    $  581,535
Other......................................................        63,555         63,556       102,051
Long-Term Investment(1)....................................       500,000             --            --
                                                              -----------    -----------    ----------
                                                              $ 1,145,090    $   645,091    $  683,586
                                                              -----------    -----------    ----------
                                                              -----------    -----------    ----------
------------------
(1) In February 1999, the Company signed a joint venture with Fashionmall.com,
    Inc. to build several websites and contributed $500,000 in cash to the joint
    venture.

11. REVOLVING CREDIT AGREEMENTS

     (a) In April 1994, the Company entered into an agreement with Congress
Financial Corporation which has been extended to July 2000, providing the
Company with a maximum $3,000,000 secured line of credit to be used for loans
and trade letters of credit. The loans are secured by substantially all of the
Company's personal property, including without limitation, accounts receivable,
inventory and trademarks. The interest rate on loans is two percent (2%) above
the prime rate announced by Core States Bank. The credit agreement contains
restrictions relating to the payment of dividends. Additionally, prior to
amendment, the Company was required to maintain a minimum of $3,500,000 in
stockholders' equity and a minimum of $4,500,000 of working capital (excluding
the Congress loan and certain subordinated debt). At September 30, 1996, the
Company was not in compliance with these financial covenants, however, Congress
continued to extend the Company credit under the terms of the original
agreement. On February 25, 1997, the violations were waived by Congress, and the
Company and Congress agreed on revised financial covenants. Under the revised
agreement, the stockholders' equity and working capital minimums (excluding the
Congress loan and certain subordinated debt) were reduced to $750,000 and
$500,000, respectively, and was increased during the fiscal year ending
September 30, 1997 to

                                      F-14
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

11. REVOLVING CREDIT AGREEMENTS--(CONTINUED)

($250,000) and $1,500,000, respectively. The Company has received waivers for
its failure to comply with the reporting and financial requirements of the
Agreement through September 30, 1998, and is currently negotiating revised
financial covenants to reflect the current corporate structure.

     (b) Under the terms of the credit agreement, the Company could borrow up to
85% (reduced to 80% in the third quarter of 1997) of the amount of eligible
accounts receivable (as defined in the agreement), not to exceed the maximum
credit. In February 1995, the agreement was amended to adjust the formula used
to determine the amount available for revolving loans by including therein an
amount based upon eligible inventory not to exceed $750,000.

     (c) As of October 30, 1997, Brownstone entered into a loan agreement which
expires in February 2000 with Congress providing Brownstone with a maximum
$5,500,000 secured line of credit to be used for loans and trade letters of
credit. The line of credit is secured by all of the assets of Brownstone and
guaranteed by the Company and Magram. The interest rate is two percent (2%)
above the prime rate announced by Core States Bank. The loan agreement provides
for certain restrictive covenants, including restrictions on Brownstone's debt
financing, dividends and distributions, and transactions with the Company and
its subsidiaries. The loan agreement also requires Brownstone maintain a net
worth (excluding debt subordinated to the Congress loan) of $300,000 until
June 30, 1998, and $500,000 thereafter. The Company has received waivers for its
failure to comply with the reporting and financial requirements through
September 30, 1998.

     (d) Prior to the acquisition of Magram, Magram had entered into a loan
agreement, dated as of August 13, 1996, which expires in July 1999, with
Congress providing Magram with a maximum of $5,000,000 secured line of credit to
be used for loans and trade letters of credit. The line of credit is secured by
all of the assets of Magram and guaranteed by the Company and Brownstone. The
interest rate is one and one-half percent (1 1/2%) above the prime rate
announced by Core States Bank. The loan agreement provides for certain
restrictive covenants, including restrictions on Magram's debt financing,
dividends and distributions and transactions with the Company and its
subsidiaries. The loan agreement also requires Magram maintain working capital
of at least $1,500,000 and net worth (excluding debt subordinated to the
Congress loan) of $1,600,000. Upon the acquisition of Lew Magram, these
covenants were waived by Congress, and the Company and Congress are currently
negotiating revised contracts.

     The lines of credit between Congress and each of the Company, Brownstone
and Magram are guaranteed by a principal shareholder and director up to an
aggregate maximum amount of $1,000,000.

     On May 12, 1999, the Company entered into a Secured Credit Agreement with
First Source Financial LLP providing a $17 million asset based loan facility
replacing the existing asset based loan facilities provided by Congress.

     The First Source loan facility provides a $13 million revolving loan with
an interest rate at prime plus 1 1/2%, a $3 million three year term loan with an
interest rate at prime plus 2% and a $1 million three year term loan with an
interest rate at prime plus 2% increasing to prime plus 3% on November 15, 1999.
The loan facility is secured by substantially all of the Company's assets, a
personal guarantee by Robert M. Rubin, the Company's Chairman of the Board, up
to $1 million and an additional $1 million cash collateral deposit by
Mr. Rubin.

     The amount of funds available to borrow under the revolving loan is based
on a percentage of the Company's inventory and qualified receivables plus 100%
of Mr. Rubin's cash collateral. As of May 12, 1999, the aggregate availability
under the revolving loan was approximately $8.5 million.

                                      F-15
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

12. LONG-TERM DEBT

     Long-term debt consists of the following:
MARCH 31,          SEPTEMBER 30,
                                                                 ----------    ------------------------
                                                                    1999          1998          1997
                                                                 ----------    ----------    ----------
12% subordinated debenture due June 2003(a)...................   $5,000,000    $5,000,000    $       --
Note payable--bank, payable in monthly installments of $10,018
  which includes interest at 8.375% due August 2010. The note
  is collateralized by land and building and is guaranteed by
  a former stockholder........................................      890,813       911,877       952,806
Note payable--bank, payable in monthly installments of $7,201
  which includes interest at 12%. The note is collateralized
  by land and buildings and is cosigned by a former
  stockholder(b)..............................................      534,027       544,811       564,540
Equipment loans--payable in monthly installments..............      598,788       775,983       450,851
Other.........................................................       91,000        90,730        10,366
                                                                 ----------    ----------    ----------
                                                                  7,114,628     7,323,401     1,978,563
Less: Current maturities......................................      847,793       939,816       823,918
                                                                 ----------    ----------    ----------
Long-term debt................................................   $6,266,835    $6,383,585    $1,154,645
                                                                 ----------    ----------    ----------
                                                                 ----------    ----------    ----------
------------------

(a) On June 29, 1998, the Company issued $5,000,000 principal amount of its 12%
    subordinated secured debentures to Finova Mezzanine Capital, Inc. (formerly
    known as Sirrom Capital Corporation, d/b/a Tandem Capital) ("Finova
    Debentures"). The debentures are due June 29, 2003, and bear interest at
    12%, payable quarterly. The Finova Debentures are secured by all of the
    personal property of the Company and its subsidiaries and includes certain
    restrictive covenants, including restrictions on dividends and
    distributions, additional debt financing and transaction with the Company
    and its subsidiaries. The Company also issued warrants in connection with
    the issuance of the Finova Debentures. The Company issued warrants to
    purchase up to 208,300 shares of its common stock exercisable at $2.35 for
    five years. The value of the warrants is immaterial and no original issue
    discount has been recorded. An additional 416,600 warrants will be issued on
    February 28, 1999 if the debenture is still outstanding at an exercise price
    equal to 80% of the average closing bid price for the twenty days prior to
    their issuance. An additional 200,000 warrants will be issued on each
    anniversary that the debenture is outstanding at an exercise price equal to
    80% of the average closing bid price for the twenty days prior to their
    issuance. The exercise price is to be adjusted downward if the Company's
    common stock price is below this exercise price to an exercise price equal
    to the greater of 80% of the market price or $2.00 per share.

(b) Full payment of this mortgage was due on January 26, 1997. The lender agreed
    to extend the mortgage to July 1999. The Company is in the process of
    refinancing the mortgage.

     The maturities of long-term debt are as follows:
1999........................................................   $  939,816
2000........................................................      367,743
2001........................................................      237,945
2002........................................................      166,217
2003........................................................    5,120,216
Thereafter..................................................      491,464
                                                               ----------
                                                               $7,323,401
                                                               ----------
                                                               ----------
F-16
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

13. STOCKHOLDERS' EQUITY

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

     (b) On November 4, 1998, 581,175 warrants to purchase shares of the
Company's common stock at $3.50 per share issued in connection with the
Company's initial public offering of its common stock expired.

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

     (d) In September 1996, the Company issued 500,000 common shares at $.95 per
share to previously unrelated investors from the exercise of warrants. Net
proceeds to the Company were $475,000.

     (e) In May 1997, pursuant to an agreement in 1996, the Company issued to a
principal shareholder and officer an aggregate of 550,000 shares of common stock
valued at $400,000 ($.75 per share) in consideration of his waiver of certain
compensation owed to him and for restructuring certain debt owed to him, waiving
certain defaults and providing an additional loan to the Company in the
aggregate amount of $600,000 during 1996.

     (f) In March 1997, the Company approved the issuance of 52,217 shares of
common stock to a principal shareholder and officer in lieu of the dividend
payments due under the Series B and Series C preferred stock.

     (g) On September 9, 1996, the Company entered into an agreement with
Gersten, Savage, Kaplowitz & Fredericks, LLP ("GSK&F") which provided that GSK&F
will provide certain legal and consulting services to the Company over an
extended prior of time. In 1997 as compensation for its services, certain
individual members of GSK&F received an aggregate of 350,000 shares of common
stock and options to purchase an aggregate of 150,000 shares of common stock at
$2.50 per share.

     (h) In November 1996, the Company issued an aggregate of 1,060,000 options
to 35 employees of the Company, including two executive officers and one outside
director, pursuant to the November 1996 Plan. The options are exercisable at
$1.00 per share, vest over a period of five years, and expire ten years from the
date of grant, if not sooner, due to termination or death of the employee.

     Options to purchase 520,000 shares expired on June 17, 1998 and 150,000
options were granted with an exercise price of $2.375.

     (i) In May 1997, the Company issued an aggregate of 150,000 options
pursuant to the November 1996 Plan, 50,000 of which were issued to Howard Katz,
a director of the Company, and 100,000 of which were issued to Mr. Fredericks in
connection with his agreement to become a member of the Company's Board of
Directors. Such options are exercisable at $1.875 per share.

     (j) In May 1997, the Company authorized the issuance of 200,000 shares of
common stock to a principal shareholder and officer in consideration of his
extending loans to the Company, as well as extending a personal guarantee to
Congress on behalf of the Company.

     (k) Between May and July 1997, the Company issued an aggregate of 100,000
and 58,408 shares of common stock in connection with the acquisitions of Magram
and Biobottoms. The shares were recorded at fair market value with a
corresponding increase in goodwill. During the same period options to acquire
200,000 shares of common stock were issued to six consultants. Of the 200,000
options, 50,000 are exercisable at $1.75 per share and 150,000 are exercisable
at $1.875 per share.

     (l) From May 1997 through September 1997, the Company sold 1,250,000 shares
of its common stock in a private placement of its securities in which it raised
$2,500,000. In addition to these shares, the Company issued

                                      F-17
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

13. STOCKHOLDERS' EQUITY--(CONTINUED)

to European Community Capital a placement agent's warrant exercisable to
purchase up to 200,000 shares of common stock at $3.3125 per share. The Company
issued an option to a principal of the common stock at $3.3125 per share. The
Company issued an option to a principal of the placement agent to purchase up to
100,000 shares of common stock at $2.00 per share.

     (m) In September 1997, a principal shareholder and officer made an
additional loan to the Company in the amount of $1,200,000.

     (n) In October 1997, in part to raise capital for the Company's acquisition
out of bankruptcy of the assets of Brownstone, the Company completed a private
offering of its securities which raised $3,620,000 from accredited investors.
The private placement consisted of units, each unit consisting of ten shares of
Series E preferred stock and 7,500 shares of common stock at a purchase price of
$10,000 per unit. As a result, the Company issued an aggregate of 3,630 shares
of Series E preferred stock and 2,722,500 shares of common stock.

     (o) On June 29, 1998, the Company completed the sale of subordinated
debentures to Finova Capital in the amount of $5,000,000 to be used for working
capital. In connection with the transaction, the Company issued warrants to
purchase 208,300 shares of common stock.

     (p) In March, 1999, the Company issued 32,440 shares of Series F Preferred
Stock plus 346,027 shares of common stock for an aggregate amount of $3,244,000.
Of this amount, 5,000 shares of Series F Preferred Stock and 53,333 shares of
common stock were issued to an investor for a cash contribution of $500,000
which the Series F Preferred Stock will be redeemed out of the proceeds of the
Company's proposed public offering (see Note 20). 17,200 shares of Series F
Preferred Stock and 183,467 shares of common stock were issued to a principal
stockholder for a cash contribution of $1.72 million.  A director of the Company
received 10,240 shares of Series F Preferred Stock and 109,227 shares of common
stock for converting loans and advances to the Company totaling $700,000 and
advancing $324,000 directly to a vendor of the Company.

     (q) In April 1999, the Company issued 75 shares of Series E Preferred Stock
and 38,470 shares of common stock were issued to a shareholder.

     At September 30, 1998 the components of the Preferred Stock were:
SHARES                         PAR VALUE
                                                      ----------------------                 ---------    LIQUIDATION
                                                      ISSUED     OUTSTANDING    PER SHARE     TOTAL          VALUE
                                                      -------    -----------    ---------    ---------    -----------
Series A(d)........................................   100,000      100,000        $ .01        1,000      $        --
Series B(a)........................................   290,000      290,000          .01        2,900        2,900,280
Series C(a)........................................    60,000       60,000          .01          600          600,000
Series D(b)........................................    95,000       92,503          .01          950        9,250,300
Series E(c)........................................     3,630        3,630          .01           36        3,630,000
                                                                                                          -----------
                                                                                                          $16,380,580
                                                                                                          -----------
                                                                                                          -----------
------------------
(a) Convertible into common into common stock at 75% of "current market price"
    with a dividend of 9% of liquidation value and 10 votes per share.
(b) Shares issued in connection with the Magram acquisition (see Note 3(a)).
(c) Redeemable at the option of the Company with a dividend based on liquidation
    value of 6% increased to 12% if not redeemed by October 2000.
(d) Converted into 1,000,000 shares of common stock in November 1998.

                                      F-18
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

14. CONCENTRATIONS OF CREDIT RISK

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

15. NET SALES

     Two customers of Ecology Kids accounted for the following percentage of net
sales from continuing operations. No customer exceeded 10% of net sales in 1998
or the six months ended March 31, 1999.

                            PERCENTAGE OF NET SALES
Year ended September 30, 1997..................................    12       8
                                                                   --      --
                                                                   --      --
Nine months ended September 30, 1996...........................    11      40
                                                                   --      --
                                                                   --      --
16. COMMITMENTS AND CONTINGENCIES

     (a) Sales Tax Audit

     In November 1997, Magram was served with a proposed assessment related to a
sales tax audit aggregating approximately $2.4 million (including penalties and
interest). This matter was settled for $350,000 and has been accrued at
October 3, 1998. The liability was recorded as of the acquisition date of
Magram.

     (b) Merchandise Credits

     Because of Magram's policy of periodically writing off into income unused
merchandise credits issued with the return of sale merchandise, it may be liable
for future claims on such amounts previously written off. The amounts written
off into income for 1997, 1998 and the six months ended March 31, 1999 were
$742,000, $3,398,000 and $2,021,780 respectively.

     (c) Employment Agreements

     In connection with the Magram acquisition, the Company entered into
three-year employment agreements with three former principals of Magram to serve
in executive capacities with the acquired company. Aggregate minimum annual
compensation under these agreements is $657,000 for the first two years and
$692,000 for the third year.

     In connection with the Brownstone acquisition in October 1997, the Company
entered into five-year employment agreements with two former principals of
Brownstone to serve in executive capacities with the Company. Aggregate minimum
annual compensation under these agreements is $372,500.

     During 1999, the Company entered into a three-year employment agreement
with an officer of the Company for a minimum of $200,000 a year.

     Robert M. Rubin, Chairman of the Board, has a financial consulting
agreement with the Company pursuant to which Mr. Rubin is paid $200,000 per
annum. The agreement terminates in December, 2002.

     On May 21, 1999, the Company entered into a severance agreement with
Jonathan Rosenberg. The agreement provides that Mr. Rosenberg will be paid six
months severance equal to $112,500 plus twelve months of health and other
benefits. The agreement terminated Mr. Rosenberg's employment agreement which
would have expired on February 15, 2002. Mr. Rosenberg resigned as Chief
Executive Officer, President and Director on May 21, 1999.

     (d) Leases

     The Company rents real and personal property under long-term lease
agreements which expire at various dates through August 2002. Although the lease
on the facility used in the Magram and Brownston operations will

                                      F-19
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

16. COMMITMENTS AND CONTINGENCIES--(CONTINUED)

expire in August 1999, the Company intends to exercise its option to extend to
2001. Future minimum rentals under noncancellable operating leases are as
follows:
FISCAL YEAR ENDING                                               AMOUNT
------------------                                             ----------
1999........................................................   $  654,756
2000........................................................      663,996
2001........................................................      674,780
2002........................................................       78,736
                                                               ----------
                                                               $2,072,268
                                                               ----------
                                                               ----------
Rent expense amounted to approximately $890,000, $823,277, $0, $497,324 and
$346,747 for the years ended September 30, 1998, 1997, the nine months ended
September 30, 1996, and the six months ended March 31, 1999 and 1998,
respectively.

     (e) Litigation

     In September 1996, the Company was named as a defendant in an action
brought in the Supreme Court of New York. The plaintiff alleges that the
defendants' (including the Company) negligent maintenance of a railroad crossing
adjacent to the Company's property caused him to collide with a train. The
plaintiff is seeking $10,000,000 in damages for his injuries, and his spouse is
seeking an additional $1,000,000 in damages for loss of the plaintiff's
services. The Company and its insurance carrier intend to vigorously defend this
action. The ultimate outcome of the litigation cannot be presently determined.
The Company has $1,000,000 of insurance coverage which could be applied to any
liability posed by this matter.

     In March 1998, Paul Russo filed a complaint against Diplomat alleging that
he is entitled to the Unit Purchase Option granted by Diplomat as part of our
initial public offering in November 1993. Mr. Russo demands unspecified
compensatory and punitive damages. Although Diplomat does not dispute that it
granted the Unit Purchase Option as part of its initial public offering, it has
not yet been determined that Mr. Russo is entitled to the Unit Purchase Option
or the number of Diplomat's shares which may be purchased under the Unit
Purchase Option.

17. INCOME TAXES

     The following analyzes the deferred tax assets at March 31,1999,
September 30, 1998 and 1997:
1999           1998           1997
                                                    -----------    -----------    -----------
Net operating loss carryforward..................   $ 4,378,000    $ 3,485,000    $ 2,915,000
Depreciation.....................................       100,000        100,000        102,000
Inventory........................................     1,016,000      1,016,000      1,016,000
Other items......................................       164,000        164,000        164,000
                                                    -----------    -----------    -----------
                                                      5,858,000      4,765,000      4,197,000
Less: Valuation allowance........................    (4,296,000)    (3,403,000)    (2,835,000)
                                                    -----------    -----------    -----------
Deferred tax asset...............................   $ 1,362,000    $ 1,362,000    $ 1,362,000
                                                    -----------    -----------    -----------
                                                    -----------    -----------    -----------
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred tax asset
reflects management's estimates of the amount which will be realized from future
profitability which can be predicted with reasonable certainty. The valuation
allowance was $2,835,000 at September 30, 1997, which represents a decrease of
$212,000 over the amount reported at September 30, 1996. The current portion of
the deferred tax asset amounts to $780,464, and is included with other current
assets. The long-term portion amounts to $581,536 and is included with other
assets. The increase in the deferred tax assets in 1998 was fully reserved.

                                      F-20
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

17. INCOME TAXES--(CONTINUED)

     As of September 30, 1998, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $7,300,000 which are available
to offset future Federal taxable income through 2009.

     The provision for income taxes differs from the amount computed by applying
the 34% Federal statutory income tax rate to the net loss before provision for
income taxes as follows:
SIX MONTHS           YEAR ENDED
                                                                     ENDED           SEPTEMBER 30,
                                                                   MARCH 31,     ----------------------
                                                                     1999          1998         1997
                                                                  -----------    ---------    ---------
Income tax benefit computed at statutory rate..................   $ 2,320,000    $ 568,000    $ 376,000
Tax benefit of net operating loss carryforward.................                         --     (376,000)
State tax benefit, net of Federal tax benefit..................                         --        1,567
Adjustment to valuation allowance..............................    (2,320,000)    (568,000)    (212,000)
                                                                  -----------    ---------    ---------
Income tax (benefit) as reported...............................   $        --    $      --    $(210,433)(1)
                                                                  -----------    ---------    ---------
                                                                  -----------    ---------    ---------
------------------
(1) Includes amounts attributable to discontinued operations.

18. BUSINESS SEGMENT INFORMATION

     The Company is engaged in two lines of business, specialty catalog retail
and mass merchant manufacturing and distribution. Operations are conducted in
North America. The following is a summary by business segment:
MASS MERCHANT
                                                                   SPECIALTY CATALOG   MANUFACTURING &
INFORMATION BY BUSINESS SEGMENT                                    RETAIL OPERATIONS   DISTRIBUTION         TOTAL
-------------------------------                                    -----------------   ---------------   -----------
MARCH 31, 1999
Net sales........................................................     $38,691,961        $ 2,888,576     $41,580,537
Cost of goods sold...............................................      19,115,262          1,823,173      20,938,435
                                                                      -----------        -----------     -----------
Gross profit.....................................................      19,576,699          1,065,403      20,642,102
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................      22,873,428          1,059,835      23,933,263
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $(3,296,729)       $     5,568     $(3,291,161)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $  (891,299)       $  (158,860)    $(1,050,159)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $(4,188,028)       $  (153,292)    $(4,341,320)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $44,652,892        $ 5,489,012     $50,141,904

MARCH 31, 1998
Net sales........................................................     $32,509,034        $ 4,006,594     $36,515,628
Cost of goods sold...............................................      14,654,574          2,374,750      17,029,324
                                                                      -----------        -----------     -----------
Gross profit.....................................................      17,854,480          1,631,844      19,486,304
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................      15,718,136          1,352,525      17,070,661
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $ 2,136,324        $   279,319     $ 2,415,643
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $  (451,920)       $  (190,329)    $  (642,249)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $ 1,684,404        $    88,990     $ 1,773,394
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $35,935,856        $10,546,108     $46,481,964
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
F-21
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

18. BUSINESS SEGMENT INFORMATION--(CONTINUED)
MASS MERCHANT
                                                                   SPECIALTY CATALOG   MANUFACTURING &
INFORMATION BY BUSINESS SEGMENT                                    RETAIL OPERATIONS   DISTRIBUTION         TOTAL
-------------------------------                                    -----------------     -----------     -----------
SEPTEMBER 30, 1998
Net sales........................................................     $67,921,661        $ 6,663,931     $74,585,592
Cost of goods sold...............................................      30,248,309          4,184,988      34,433,297
                                                                      -----------        -----------     -----------
Gross profit.....................................................      37,673,352          2,478,943      40,152,295
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................      35,436,230          2,101,142      37,537,372
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $ 2,237,122        $   377,801     $ 2,614,923
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $(1,007,927)       $  (347,397)    $(1,355,324)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $ 1,229,195        $    30,404     $ 1,259,599
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $46,024,819        $ 4,934,064     $50,958,883
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
SEPTEMBER 30, 1997
Net sales........................................................     $10,575,342        $ 6,892,724     $17,468,066
Cost of goods sold...............................................       5,005,817          3,718,213       8,724,030
                                                                      -----------        -----------     -----------
Gross profit.....................................................       5,569,525          3,174,511       8,744,036
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses...............................................       5,322,581          1,738,077       7,060,658
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $   246,944        $ 1,436,434     $ 1,683,378
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $        --        $  (421,233)    $  (421,233)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $   246,944        $ 1,015,201     $ 1,262,145
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $27,597,554        $ 5,415,333     $33,012,887
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
SEPTEMBER 30, 1996
Net sales........................................................     $        --        $ 7,448,778     $ 7,448,778
                                                                      -----------        -----------     -----------
Cost of goods sold...............................................     $        --        $ 7,392,265     $ 7,392,265
                                                                      -----------        -----------     -----------
Gross profit.....................................................     $        --        $    56,513     $    56,513
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Operating expenses:
  Selling, general & administrative expenses.....................              --          3,672,133       3,672,133
  Restructuring & reorganization costs...........................              --          1,738,975       1,738,975
                                                                      -----------        -----------     -----------
Total expenses...................................................              --          5,411,108       5,411,108
                                                                      -----------        -----------     -----------
Operating income (loss)..........................................     $        --        $(5,354,595)    $(5,354,595)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Interest expense.................................................     $        --        $  (702,474)    $  (702,474)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Loss before provision for income taxes...........................     $        --        $(6,057,069)    $(6,057,069)
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
Total assets.....................................................     $        --        $ 7,762,190     $ 7,762,190
                                                                      -----------        -----------     -----------
                                                                      -----------        -----------     -----------
F-22
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

19. STOCK OPTION PLANS

     The Company's 1992 Stock Option Plan ("1992 Stock Option Plan") provides
for the issuance of up to 200,000 shares of common stock upon exercise of
incentive stock options and is intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended ("Code").

     The 1992 Stock Option Plan may be administered by the Board of Directors or
by a stock option committee of the Board of Directors (the "Committee").
Incentive stock options are granted under the 1992 Stock Option Plan to
employees generally on the basis of the recipient's responsibilities and the
achievement of performance objectives. Subject to the limitations set forth in
the 1992 Stock Option Plan, the Board or the Committee has the authority to
determine when the options may be exercised and vest. Under the Plan, the per
share exercise price may not be less than the greater of 100% of the fair market
value of the shares on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting rights of the Company's
outstanding capital stock, the per share exercise price must be at least 110% of
the fair market value on the date of grant and the term may not be longer than
five years. As of this date, the Company has outstanding an aggregate of 130,000
stock options, exercisable at $1.50 per share, all of which are held by
affiliates or employees of the Company at the time of grant.

  August 1996 Stock Option Plan

     The Company also established a nonqualified stock option plan providing for
the issuance of up to 1,500,000 shares of common stock to its directors,
officers, key employees and consultants (the "August 1996 Plan"). To date, the
Company has granted directors, officers and key employees an aggregate of
150,000 incentive and nonqualified stock options, at an exercise price of $2.00
per share and 500,000 nonqualified stock options issued and exercised by a
consultant. Future grants could have an adverse effect on the market price of
the Company's securities.

  November 1996 Stock Option Plan

     Under the Company's November 1996 Incentive Stock Option Plan (the
"November 1996 Plan"), options to purchase a maximum of 1,500,000 shares of
common stock of the Company (subject to adjustments in the event of stock
splits, stock dividends, recapitalizations and other capital adjustments) may be
granted to employees, officers and directors of the Company and other persons
who provide services to the Company. 1,060,000 of such options have been granted
at an exercise price of $1.00, of which 620,000 options expired on June 17,
1998, 150,000 are exercisable at $2.375 and 50,000 are exercisable at $1.00. The
options to be granted under the November 1996 Plan are designated as incentive
stock options or nonincentive stock options by the Board of Directors which also
have discretion as to the persons to be granted options, the number of shares
subject to the options and terms of the option agreements. Only employees,
including officers and part-time employees of the Company, and nonemployee
directors, consultants and advisors and other persons who perform significant
service for or on behalf of the Company, may be granted incentive stock options;
officers and directors who currently own more than 5% of the issued and
outstanding stock are not eligible to participate in the November 1996 Plan.

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

  1998 Stock Option Plan

     The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Board of Directors in February, 1998 and approved by the stockholders in May,
1998. Under the 1998 Plan, the Company is authorized to issue options to
purchase up to 1,200,000 shares of common stock. All officers and other
employees of the Company and other persons who perform significant services for
or on behalf of the Company are eligible to participate in the 1998 Plan.

                                      F-23
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

19. STOCK OPTION PLANS--(CONTINUED)

     The Company may grant under the 1998 Plan both incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "code"), and stock options that do not
qualify for incentive treatment under the Code ("Nonstatutory Options").

     The Plan shall be administered by the Board of Directors of the Company
(the "board"), if each member is a "disinterested" person within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended
("Rule 16b-3"), or a committee (the "Committee") of two or more directors, each
of whom is a disinterested person.

     Subject to the provisions of the 1998 Plan, the Committee has the authority
to construe and interpret the 1998 Plan, to prescribe, adopt, amend and rescind
rules and regulations relating to the administrations of the 1998 Plan and to
make all other determinations necessary or advisable for its administration.
Subject to the limitations of the 1998 Plan, the Committee also selects from
among the eligible persons those individuals who will receive options, whether
an optionee will receive Incentive Stock Options or Nonstatutory Options, or
both, and the amount, price, restrictions and all other terms and provisions of
such options (which need not be identical).

     The exercise price of each Incentive Stock Option under the Option Plan
will be determined by the Committee, but will not be less than 100% of the "Fair
Market Value" (as defined in the 1998 Plan) of common stock on the date of grant
(or 110% in the case of an employee who at the time owns more than 10% of the
total combined voting power of all classes of capital stock of the Company). The
Nonstatutory Option exercise price will be determined by the Committee, but will
not be less than 85% of the common stock on the date of grant.

     Under the 1998 Plan, the Company has outstanding options to purchase an
aggregate of 700,000 shares of common stock exercisable at $2.75 per share, all
of which are held by employees of the Company. Options to purchase 200,000
shares of common stock become exercisable upon Brownstone meeting certain
minimum net income. These options will be recorded, when and if, the net income
assessments are met. The remaining outstanding options become exercisable over
four years.

     The following table is a summary of stock option information for 1996
through 1998:
OPTION        PRICE RANGE      AVERAGE
                                                                  SHARES         PER SHARE       PRICE
                                                                 ---------    ----------------   -------
Outstanding 1/1/96............................................     130,000               $1.50    $1.50
  Granted.....................................................     650,000       $.95 to $2.50    $1.34
  Exercised...................................................     500,000                $.95    $ .95
  Forfeited...................................................           0                   0        0
                                                                 ---------    ----------------    -----
Outstanding 10/1/96...........................................     280,000      $1.50 to $2.50    $2.04
  Granted.....................................................   1,485,000     $1.00 to $3.125    $1.21
  Exercised...................................................           0                   0        0
  Forfeited...................................................           0                   0        0
                                                                 ---------    ----------------    -----
Outstanding 10/1/97...........................................   1,765,000     $1.00 to $3.125    $1.67
  Granted.....................................................     750,000      $1.00 to $2.75    $2.63
  Exercised...................................................      35,000      $1.75 to $1.85    $1.84
  Forfeited...................................................     620,000               $1.00    $1.00
                                                                 ---------    ----------------    -----
Outstanding 9/30/98...........................................   1,860,000     $1.00 to $3.125    $2.05
                                                                 ---------    ----------------    -----
                                                                 ---------    ----------------    -----
Exercisable at year-end
  9/30/96.....................................................     130,000               $1.50    $1.50
  9/30/97.....................................................     527,000     $1.00 to $3.125    $1.61
  9/30/98.....................................................     831,000     $1.00 to $3.125    $2.02
F-24
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999)

19. STOCK OPTION PLANS--(CONTINUED)

  Available for future grants
1992     AUGUST 1996    NOVEMBER 1996     1998
                                                                   PLAN       PLAN            PLAN           PLAN
                                                                  ------    -----------    -------------    -------
9/30/98........................................................   70,000      850,000         710,000       500,000
The following table summarizes information about stock options outstanding
at September 30, 1998.
Range of Exercise prices:..................................................    $1.00 to $3.125
Outstanding options Number outstanding at September 30, 1998...............          1,860,000
Weighted average remaining contractual life (years)........................                3.5
Weighted average exercise price............................................              $2.05
Exercisable options Number outstanding at September 30, 1998...............            831,000
Weighted average exercise price............................................              $2.02
In fiscal 1997, the Company adopted the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". For disclosure purposes, the
fair value of options is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
stock options granted during the years ended September 30, 1998 and 1997 and
nine months ended September 30, 1996: annual dividends of $-0-; expected
volatility of 46.10% in 1988 and 94.99% in 1997; risk-free interest rate of 7%
and expected life of five years. The weighted average fair value of stock
options granted during the years ended September 30, 1998 and 1997 and nine
months ended September 30, 1996 was $1.51, $1.17 and $1.48, respectively. If the
Company had recognized compensation cost for stock options in accordance with
SFAS No. 123, the Company's pro forma net loss and net loss per share would have
been $2,257,683 and $ .21 per share and $550,088 and $.09 per share for the
years ended September 30, 1998 and 1997 and $8,298,400 and $1.82 per share for
the nine months ended September 30, 1996.

20. SUBSEQUENT EVENTS

     The Company intends to raise an additional $9 million in equity capital
upon the completion of an offering. The proceeds from the sale of the shares are
intended to be used as follows:

     o $4.5 million to repay a portion of the outstanding balances due under the
       Finova debentures ($2,000,000) and the First Source loan facility
       ($2,000,000) and to redeem a portion of the Company's redeemable
       preferred stock ($500,000);

     o $600,000 to be used for creating, designing, integrating into operations
       and operating the Lew Magram and Brownstone Studio interactive websites;
       and

     o the balance, including any proceeds from the sale of over-allotment
       shares, to fund general corporate purposes, including possible
       consolidation of operations into new facilities and possible
       acquisitions.

     In addition, upon the completion of the offering, holders of 478,573
shares of preferred stock will convert or exchange their shares to 3,077,794
shares of common stock (after giving effect to a 1-for-5 reverse stock split).
This will result in an imputed dividend of approximately $2 million which will
result in a reduction in the net income, or in an increase in the net loss,
allocable to the common stock holders.

                                      F-25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Lew Magram Ltd.

We have audited the accompanying statements of operations and cash flows of Lew
Magram Ltd. for the year ended January 4, 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lew Magram
for the year ended January 4, 1997, in conformity with generally accepted
accounting principles.

/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP

New York, New York
May 16, 1997, except for Note 2
which is as of February 19, 1998

                                      F-26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Lew Magram Ltd.

We have audited the accompanying statements of operations and cash flows of Lew
Magram Ltd. for the six months ended June 30, 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lew Magram
for the six months ended June 30, 1997, in conformity with generally accepted
accounting principles.

/s/ Feldman Sherb Ehrlich & Co., P.C.
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants

New York, New York
January 30, 1999

                                      F-27
LEW MAGRAM LTD.

                            STATEMENTS OF OPERATIONS
SIX MONTHS ENDED     YEAR ENDED
                                                                                 JUNE 30, 1997       JANUARY 4, 1997
                                                                                 ----------------    ---------------
Net sales.....................................................................     $ 19,642,703        $51,926,603
Cost of goods sold............................................................       11,960,210         25,111,912
                                                                                   ------------        -----------
  Gross profit................................................................        7,682,493         26,814,691
Selling, general and administrative expenses..................................       14,670,290         28,296,249
                                                                                   ------------        -----------
  Operating loss..............................................................       (6,987,797)        (1,481,558)
Other income (expense)........................................................         (218,636)           691,553
                                                                                   ------------        -----------
  Loss before income taxes....................................................       (7,206,433)          (790,005)
Income taxes..................................................................          (70,000)                --
                                                                                   ------------        -----------
Net loss......................................................................     $ (7,276,433)       $  (790,005)
                                                                                   ------------        -----------
                                                                                   ------------        -----------
See accompanying notes to financial statements.

                                      F-28
LEW MAGRAM LTD.

                            STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED     YEAR ENDED
                                                                                 JUNE 30, 1997       JANUARY 4, 1997
                                                                                 ----------------    ---------------
Cash flows from operating activities:
  Net loss....................................................................     $ (7,276,433)       $  (790,005)
  Adjustments to reconcile net loss to net cash provided by (used in)
     operating activities:
     Depreciation and amortization............................................          303,547            546,030
     Unrealized gain in marketable securities.................................               --            (12,000)
     Decrease (increase) in:
       Accounts receivable....................................................          (10,977)            83,216
       Inventories............................................................          938,598            (67,018)
       Prepaid expenses and other current assets..............................            6,363           (991,238)
       Other assets...........................................................               --             34,937
     Increase (decrease) in:
       Accounts payable.......................................................         (469,981)           804,867
       Accrued expenses.......................................................        5,278,391            638,927
                                                                                   ------------        -----------
Total adjustments.............................................................        6,045,941          1,037,721
                                                                                   ------------        -----------
Net cash provided by (used in) operating activities...........................       (1,230,492)           247,716
                                                                                   ------------        -----------
Cash flows from investing activities:
  Capital expenditures........................................................          (87,175)          (543,950)
                                                                                   ------------        -----------
Cash flows from financing activities:
  Increase in long-term debt..................................................        1,369,084            325,547
  Issuance of preferred stock.................................................        2,000,000                 --
  Dividends on preferred stock................................................          (24,466)                --
  Payments under capital leases...............................................         (199,121)           138,606
  Redemption of stockholder...................................................          (77,619)            46,774
                                                                                   ------------        -----------
Net cash provided by financing activities.....................................        3,067,878            510,927
                                                                                   ------------        -----------
Net increase in cash..........................................................        1,750,211            214,693
Cash, beginning of period.....................................................          285,796             71,104
                                                                                   ------------        -----------
Cash, end of period...........................................................     $  2,036,007        $   285,797
                                                                                   ------------        -----------
                                                                                   ------------        -----------
See accompanying notes to financial statements.

                                      F-29
LEW MAGRAM LTD.

                         NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF ACCOUNTING POLICIES

  Description of Business

     The Company is a mail order ladies apparel retailer.

  Inventories

     Inventories consisting of finished goods are valued at the lower of cost
(first-in, first-out) or market.

  Catalogue and Advertising Expenses

     The Company expenses the production costs of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits.

     Direct-response advertising consists primarily of mail order catalogues
that include order forms for the Company's products. The capitalized costs of
the catalogue are amortized over the shipping season of the products appearing
in the catalogues, which does not exceed 6 months.

     The Company began a production development program that extends the useful
lives of certain production costs over many catalogue seasons. These costs are
being amortized on a straight-line basis over 18 months, the estimated useful
life, and consist of photography, modeling and color separation costs.

  Property, Equipment and Depreciation

     Depreciation and amortization are computed by both accelerated and
straight-line methods based on the estimated useful lives of the assets.

  Revenue Recognition

     Revenue is recognized at the time merchandise is shipped to customers.
Proceeds received for merchandise not yet shipped are reflected as "open prepaid
orders," a current liability. In addition, the Company passes on the cost of
parcel shipments directly to the customer as part of the postal and handling
charge, which is customary in the direct mail industry. This is reflected as a
reduction of operating expenses.

     The Company also derives revenue through the rental of their customer
mailing list, which is reflected in other income.

  Merchandise Credits

     The Company issues merchandise credits for certain returns of merchandise
sold with substantial discounts. Unused credits are periodically written off
into income.

  Income Taxes

     The Company elected, with the consent of its stockholders, to be taxed as
an S corporation under the provisions of the Internal Revenue Code and New York
State Franchise Tax Law. The stockholder is required to report the Company's
taxable income or loss in their personal income tax returns; accordingly, such
income taxes are not reflected in the financial statements. The financial
statements include a provision for New York City and New Jersey income taxes
since New York City and New Jersey do not recognize S corporation status. New
York State imposes a corporate level tax based upon the differential between
corporate and individual tax rates, which has been provided for.

     During the year ended July 1, 1995, the Company adopted SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities

                                      F-30
LEW MAGRAM LTD.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

1. SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)

for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Deferred income taxes are
immaterial and not recorded by the Company.

     In connection with the transactions discussed in Note 2, the Company's
corporation status was automatically terminated when the Company issued
preferred stock (see note 4(a)), and the Company will now be taxed as a C
corporation. The change in status will not materially affect the Company.

  Fiscal Year

     The Company's fiscal year is comprised of 52-53 weeks ending on the
Saturday closest to December 31.

2. ACQUISITION BY DIPLOMAT DIRECT MARKETING CORPORATION

     On February 19, 1998, Diplomat Direct Marketing Corporation ("DDMC")
completed the acquisition of Lew Magram, Ltd. The acquisition was effected as of
July 1, 1997, the date that DDMC assumed effective control of Magram. The
acquisition was accounted for as a purchase and the consideration consisted of
the issuance of 95,000 shares of DDMC's $.10 par value, Series D convertible
preferred stock and 250,000 shares of DDMC's common stock. The Series D
preferred stock is convertible into 3,166,667 shares of DDMC's common stock. The
fair market value of the consideration was approximately $8.7 million and
acquisition costs were approximately $646,000. DDMC recorded the carryover basis
for a certain selling stockholder of Magram who is also a principal stockholder
of DDMC.

3. RENT EXPENSE

     Rent expense amounted to approximately $280,000 and $563,000 for the six
months ended June 30, 1997 and the year ended January 4, 1997, respectively.

4. CONTINGENCIES

     Because of the Company's policy of periodically writing off into income
unused merchandise credits issued (approximately $264,110 and $796,000 for the
six months ended June 30, 1997 and the year ended January 4, 1997,
respectively), without expiration dates in connection with the return of sale
merchandise, it may be liable for future claims on such amounts previously
written off.

5. OTHER

     (a) On May 16, 1997, the Company issued 2,000 shares of preferred stock to
two individuals for $2,000,000. The preferred stock has been designated as
senior convertible preferred stock with $.01 par value. The preferred stock has
a $1,000 per share liquidation value and a 9.5% cumulative dividend.

     (b) In connection with the transaction discussed above, the Company amended
its certificate of intercompany whereby the Company is authorized to issue 2,000
shares of $.01 par value common stock and 2,000 shares of $.01 par value
preferred stock.

                                      F-31
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                              FINANCIAL STATEMENTS

                                     INDEX
PAGE
                                                                                                           NUMBER
                                                                                                           ------
Independent Auditors' Report............................................................................    F-33
Financial Statements:
  Balance Sheets........................................................................................    F-34
  Statements of Operations..............................................................................    F-35
  Statements of Cash Flows..............................................................................    F-36
  Notes to Financial Statements.........................................................................    F-37
F-32
INDEPENDENT AUDITORS' REPORT

Board of Directors
Jean Grayson's Brownstone Studio, Inc.

We have audited the accompanying balance sheets of Jean Grayson's Brownstone
Studio, Inc. as of December 31, 1996 and 1995, and the related statements of
operations and retained earnings (deficit) and cash flows for the years then
ended. 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 Jean Grayson's Brownstone Studio, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared on a going concern
basis. The Company has sustained significant losses during the last two years
and has a working capital deficit of $3,464,094 as of December 31, 1996.
Furthermore, in February 1997 the Company filed for bankruptcy under Chapter 11
culminating in a court approved assumption of its remaining assets and certain
liabilities in October 1997. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities.

/s/ FELDMAN SHERB EHRLICH & CO., P.C.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants

New York, New York
August 24, 1998

                                      F-33
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                                 BALANCE SHEET
DECEMBER 31,
                                                                                      --------------------------
                                                                                         1996           1995
                                                                                      -----------    -----------
ASSETS
Current assets:
  Cash and cash equivalents........................................................   $   124,554    $   216,226
  Receivable from credit card companies............................................       104,537        129,011
  Merchandise inventories..........................................................     7,235,765     10,856,229
  Prepaid expenses and other current assets........................................     2,491,545      2,752,640
                                                                                      -----------    -----------
     Total current assets..........................................................     9,956,401     13,954,106
Property and equipment--net........................................................     1,423,873      1,881,868
Other assets.......................................................................       208,388        297,004
                                                                                      -----------    -----------
                                                                                      $11,588,662    $16,132,978
                                                                                      -----------    -----------
                                                                                      -----------    -----------

                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Current maturities of capital leases and long-term debt..........................   $    59,704    $    84,699
  Note payable.....................................................................     1,568,543      2,107,131
  Accounts payable and accrued expenses............................................     8,475,130      9,142,782
  Customers' advances and returns..................................................     3,317,118      1,992,709
                                                                                      -----------    -----------
     Total current liabilities.....................................................    13,420,495     13,327,321
                                                                                      -----------    -----------
Obligations under capital leases and long-term debt................................        51,897        109,670
                                                                                      -----------    -----------
Deferred credits...................................................................       481,914        600,159
                                                                                      -----------    -----------

Commitments and contingent liabilities
Stockholders' equity (deficit)
  Common stock, no par value--authorized and outstanding, 200 shares...............       148,000        148,000
  Retained earnings (deficit)......................................................    (2,513,644)     1,947,828
                                                                                      -----------    -----------
     Total stockholders' equity (deficit)..........................................    (2,365,644)     2,095,828
                                                                                      -----------    -----------
                                                                                      $11,588,662    $16,132,978
                                                                                      -----------    -----------
                                                                                      -----------    -----------
See notes to financial statements

                                      F-34
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                            STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
                                                                                      --------------------------
                                                                                         1996           1995
                                                                                      -----------    -----------
Net sales..........................................................................   $50,171,947..  $53,031,632
Costs and expenses:
  Cost of goods sold...............................................................    26,508,223     27,599,674
  Operating, general and administrative expenses...................................    27,929,664     26,819,772
  Interest expense--net............................................................       195,534        125,787
                                                                                      -----------    -----------
                                                                                       54,633,421     54,545,233
                                                                                      -----------    -----------
Net loss...........................................................................    (4,461,474)    (1,513,601)
Retained earnings beginning of year................................................     1,947,830      3,461,431
                                                                                      -----------    -----------
Retained earnings (deficit) end of year............................................   $(2,513,644)   $ 1,947,830
                                                                                      -----------    -----------
                                                                                      -----------    -----------
See notes to financial statements.

                                      F-35
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                            STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
                                                                                    ----------------------------
                                                                                       1996             1995
                                                                                    -----------      -----------
Cash flows from operating activities:
  Net loss.......................................................................   $(4,461,474)     $(1,513,601)
  Adjustments to reconcile net income to net cash provided by operating
     activities:
     Depreciation and amortization...............................................       495,667          480,530
     Increase in cash surrender value on officers' life insurance................            --          (60,545)
     Amortization of deferred credits............................................      (118,245)        (137,910)
     Gain on trade-in of fixed assets............................................            --          (43,663)
  Changes in operating assets and liabilities:
  Receivable from credit card companies..........................................        24,474          276,547
  Merchandise inventories........................................................     3,620,464       (1,916,305)
  Prepaid expenses and other current assets......................................       261,095          471,431
  Other assets...................................................................        88,617           29,202
  Accounts payable and accrued expenses..........................................      (667,650)         832,378
  Customer mail order advances...................................................     1,324,409          677,209
                                                                                    -----------      -----------
  Net cash provided by (used in) operating activities............................       567,357         (904,727)
                                                                                    -----------      -----------
Cash flows from investing activities:
  Capital expenditures...........................................................       (37,673)        (822,276)
                                                                                    -----------      -----------
  Net cash used in investing activities..........................................       (37,673)        (822,276)
                                                                                    -----------      -----------
Cash flows from financing activities:
  Proceeds from short-term borrowings............................................     1,568,543        2,107,131
  Principal payments on short-term borrowings....................................    (2,107,131)        (500,000)
  Principal payments on long-term borrowings and capital lease obligations.......       (82,768)        (141,798)
                                                                                    -----------      -----------
  Net cash provided by (used in) financing activities............................      (621,356)       1,465,333
                                                                                    -----------      -----------
Net decrease in cash and cash equivalents........................................       (91,672)        (261,670)
Cash and cash equivalents, beginning of year.....................................       216,226          477,896
                                                                                    -----------      -----------
Cash and cash equivalents, end of year...........................................   $   124,554      $   216,226
                                                                                    -----------      -----------
                                                                                    -----------      -----------
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest.........................................   $   195,534      $   143,121
                                                                                    -----------      -----------
                                                                                    -----------      -----------
  Cash paid during the year for income taxes.....................................   $        --      $    18,468
                                                                                    -----------      -----------
                                                                                    -----------      -----------
See notes to financial statements

                                      F-36
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                         NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

1. BUSINESS AND BASIS OF PRESENTATION

     Jean Grayson's Brownstone Studio, Inc. is engaged in the sale of fine
women's apparel through catalogs and an outlet store. A portion of its
merchandise is purchased from Wilroy, Inc. (the "Affiliate"), a company related
through common ownership.

     The accompanying financial statements have been prepared assuming the
Company to continue as a going concern. The Company has experienced significant
recent losses and a working capital deficit of approximately $3.5 million at
December 31, 1996. The Company filed for bankruptcy in February 1997 and
operated under Chapter 11 of the Bankruptcy Code until September 1997 at which
time its remaining assets and certain liabilities were assumed by Diplomat
Direct Marketing Corporation under a court approved plan of reorganization.
These financial statements do not contain any adjustments related to these
subsequent events.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          A. Inventory Valuation--Merchandise inventories, consisting of
             finished goods only, are stated at the lower of cost (determined on
             a first-in, first-out basis) or market.

          B. Property and Equipment--Property and equipment are stated at cost.
             Depreciation and amortization are computed by either the
             accelerated or straight-line methods over the estimated useful
             lives of the assets. Leasehold improvements and capital leased
             assets are amortized over the lesser of the term of the lease or
             the estimated useful life.

                The Company received a construction allowance upon entering into
                an office lease. This allowance is recorded as a deferred credit
                and is amortized over the life of the lease.

          C. Catalog Costs--In 1995, the Company adopted the method of
             accounting for catalog costs pursuant to the AICPA Statement of
             Position ("SOP") 93-7, "Reporting on Advertising Costs". SOP 93-7
             requires that the amortization of capitalized advertising costs
             should be the amount computed using the ratio that current period
             revenues for the catalog cost pool bear to the total of current and
             estimated future period revenues for that catalog cost pool. The
             effect of this adoption was not material to the financial
             statements.

          D. Income Taxes--The Company, with the consent of its stockholders,
             elected to be taxed as an S Corporation under the provisions of the
             Internal Revenue Code and New York State Tax Law which provides
             that, in lieu of corporation income taxes, the stockholders are
             required to report their proportionate share of the Company's
             taxable income or loss on their personal tax returns. Other state
             and local taxes are included in operating, general and
             administrative expenses.

                The Company accounts for income taxes pursuant to Statement of
                Financial Accounting Standards ("SFAS") No. 109, "Accounting for
                Income Taxes".

          E. Fair Value of Financial Instruments--SFAS No. 107, "Disclosures
             About Fair Value of Financial Instruments" requires disclosure
             about the fair value of financial instruments. The carrying amounts
             reported in the balance sheet for cash and cash equivalents,
             accounts receivable, notes payable, and accounts payable
             approximate fair value because of the short-term maturity of these
             financial statements.

          F. Use of Estimates in the Preparation of Financial Statements--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 disclosures of contingent assets and
             liabilities at the date of the financial statements and the

                                      F-37
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

             reported amounts of revenue and expenses during the reporting
             period. Actual results could differ from those estimates.

          G. Recent Accounting Pronouncement--In March 1995, the Financial
             Accounting Standards Board issued SFAS No. 121, "Accounting for the
             Impairment of Long-Lived Assets and for Long-Lived Assets to be
             disposed of". SFAS No. 121 requires that long-lived assets and
             certain identifiable intangibles to be held and used by an entity
             be reviewed for impairment whenever events or changes in
             circumstances indicate that the carrying amount of an asset may not
             be recoverable, and is effective for financial statements for
             fiscal years beginning after December 15, 1995. The Company has
             determined that the effect of adopting this new standard is not
             material to the financial statements.

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

     At December 31, 1996 and 1995, prepaid expenses and other current assets
included deferred catalog costs of approximately $1,726,000 and $2,325,000.

4. PROPERTY AND EQUIPMENT

     Major classes of property and equipment are as follows:
DECEMBER 31,
                                                                ESTIMATED      ------------------------
                                                               USEFUL LIVES       1996          1995
                                                              --------------   ----------    ----------
Data processing equipment..................................   5-7 years        $1,225,898    $1,199,068
Machinery and equipment....................................   5-10 years          710,276       679,644
Furniture and fixtures.....................................   5-10 years          593,503       593,292
Transportation equipment...................................   3 years              78,087        98,087
Leasehold improvements.....................................   Term of lease     1,583,188     1,583,188
                                                                               ----------    ----------
                                                                                4,190,952     4,153,279
Less accumulated depreciation and amortization.............                     2,767,079     1,271,414
                                                                               ----------    ----------
                                                                               $1,423,873    $1,881,865
                                                                               ----------    ----------
                                                                               ----------    ----------
5. LINES OF CREDIT

     In September 1995, the Company entered into a $4,000,000 revolving credit
agreement (the "Credit Agreement") with a bank. The Credit Agreement provides
for direct borrowings of up to $4,000,000 as calculated under the terms of the
Credit Agreement and letters of credit of up to $1,500,000 with an aggregate
limit of $4,000,000. Borrowings under the Credit Agreement are secured by the
Company's accounts receivable, inventory, property and equipment, and other
collateral, and are guaranteed by the Affiliate. Borrowings bear interest at the
Alternate Base Rate plus one and one-quarter percent. The Alternate Base Rate is
defined in the Credit Agreement as the higher of (I) the bank's base commercial
lending rate and (ii) the Federal Funds Rate plus 0.5 percent. The Credit
Agreement expires on September 11, 1997. Borrowings outstanding under the Credit
Agreement were $1,568,543 at December 31, 1996 and $2,107,131 at December 31,
1995.

     The provisions of the Credit Agreement include (i) requirements that the
Company maintain minimum levels of net worth, current ratio, fixed charge
coverage, earnings before interest and taxes; and (ii) limitations on mergers,
consolidations, acquisitions, sales of assets liens, investments, loans, capital
expenditures, payment of dividends, indebtedness, leases, among others. At
December 31, 1996 and

                                      F-38
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

5. LINES OF CREDIT--(CONTINUED)

December 31, 1995, the Company was not in compliance with certain covenants
primarily relating to net worth, current ratio, fixed charge coverage, earnings
before interest and taxes and report deadlines.

     During 1996 and 1995, maximum borrowings under revolving credit agreements
were $2,736,673 and $2,477,339, respectively, and average borrowings were
$1,667,569 and $669,398, respectively.

     In February 1997, the Company refinanced this debt with a new lender.

6. OBLIGATIONS UNDER CAPITAL LEASES AND LONG-TERM DEBT
DECEMBER 31,
                                                                         --------------------
                                                                           1996        1995
                                                                         --------    --------
Obligations under capital leases (a)..................................   $ 62,334    $128,902
Note payable to bank bearing interest at 9 percent; due in monthly
  principal and interest payments of $1,788 from August 1995 through
  July 1999...........................................................     49,267      65,487
                                                                         --------    --------
                                                                          111,601     194,389
Less current portion..................................................     59,704      84,699
                                                                         --------    --------
                                                                         $ 51,897    $109,690
                                                                         --------    --------
                                                                         --------    --------
------------------

(a) The Company has capital lease obligations in connection with lease
    agreements to acquire computer equipment, furniture and fixtures. The leases
    are payable in monthly installments through 1998, including interest at
    approximately 11 to 12 percent per annum.

     The maturities of long-term debt during the next five years are:

YEAR                                                             AMOUNT
----                                                           ----------
1998........................................................   $   40,753
1999........................................................       11,144
                                                               ----------
                                                               $   51,897
                                                               ----------
                                                               ----------

7. COMMITMENTS

     Leases--The Company has various operating leases for office and operating
facilities. One of the facilities is leased from the Affiliate. Future minimum
annual rental commitments under such noncancellable leases (including
obligations related to facilities leased from the Affiliate under informal
leasing arrangements) at December 31, 1996 are summarized as follows:

                                                               OPERATING
YEAR                                                             LEASES
----                                                           ----------
1998........................................................   $1,381,000
1999........................................................    1,254,000
2000........................................................      875,000
2001........................................................      547,000
                                                               ----------
Total minimum lease payments................................   $4,057,000
                                                               ----------
                                                               ----------

Total rent expense charged to operations in 1996 and 1995 were $1,291,781 and
$1,248,000, respectively, including approximately $391,000 in 1996 and $424,000
in 1995 representing net charges from the Affiliate.

                                      F-39
JEAN GRAYSON'S BROWNSTONE STUDIO, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

8. STOCKHOLDERS' EQUITY

     The Company has agreements with its shareholders to provide for the
continued ownership of shares of common stock of the Company by the shareholders
and to set forth terms and conditions under which shares of common stock may be
transferred among the shareholders and/or the Company or to third parties. The
agreements require the shareholders to offer common shares first to the Company
and next to other shareholders at prices computed in accordance with the
agreements before disposing of these shares to others.

9. RELATED PARTY TRANSACTIONS

     During the years ended December 31, 1996 and 1995, the Company had
transactions with the Affiliate summarized as follows:
1996           1995
                                                                  -----------    -----------
Purchases from Affiliate--net..................................   $11,370,473    $16,259,000
Due to (from) Affiliate--net...................................   $(1,436,000)   $ 1,539,000
The Company incurred charges from the Affiliate of $132,000 and $153,000 in 1996
and 1995, respectively for its share of common space and shared expenditures.

10. EMPLOYEE PROFIT-SHARING PLAN AND 401(K) PLAN

     The Company has a voluntary noncontributory profit-sharing plan which
complies with the Employee Retirement Income Security Act of 1974. In general,
employees become participants after six months of continuous employment. There
were no contributions for the years ended December 31, 1996 and 1995.

     The Company has a defined contribution employee savings 401(k) plan whereby
eligible participants (all nonunion employees who work 1,000 hours or more per
year) may contribute a percentage of compensation, but not in excess of the
maximum allowed. Employees are eligible after one year of service and attainment
of age 20 1/2. The Company's contributions were approximately $32,000 in 1996
and $24,000 in 1995.

                                      F-40
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.

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

                               TABLE OF CONTENTS
PAGE
                                                  ----
Prospectus Summary.............................      1
Risk Factors...................................      5
Where You Can Find More Information............     10
Use of Proceeds................................     11
Price Range of Common Stock....................     12
Dividend Policy................................     12
Capitalization.................................     13
Selected Financial Data........................     14
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...................................     16
Business.......................................     23
Management.....................................     34
Principal Stockholders.........................     43
Certain Transactions...........................     45
Description of Securities......................     48
Shares Eligible for Future Sale................     50
Underwriting...................................     51
Legal Matters..................................     53
Experts........................................     53
Indemnification for Securities Act
  Liabilities..................................     53
Financial Statements...........................    F-1
------------------------

UNTIL (INSERT DATE), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR INVOLVED
ALLOTMENTS OR SUBSCRIPTIONS.

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

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

                                DIPLOMAT DIRECT
                             MARKETING CORPORATION

                        1,900,000 SHARES OF COMMON STOCK

                            ------------------------
                                   PROSPECTUS
                            ------------------------

                          DONALD & CO. SECURITIES INC.

                                            , 1999

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[ALTERNATIVE COVER PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]

                                 970,939 SHARES

                     DIPLOMAT DIRECT MARKETING CORPORATION

     Shareholders of Diplomat Direct Marketing Corporation named under the
caption "Selling Security Holders", from time to time, may offer and sell up to
970,939 shares of Diplomat common stock.

     Diplomat's common stock is traded on the Nasdaq SmallCap Market under the
symbol "DIPL". On June   , 1999, the last reported sale price of Diplomat's
common stock on Nasdaq was          .

     INVESTING IN DIPLOMAT'S COMMON STOCK IS RISKY. SEE RISK FACTORS COMMENCING
ON PAGE 5.

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

                  THE DATE OF THIS PROSPECTUS IS JUNE   , 1999
THE OFFERING
Common Stock Offered......................  970,939 shares

Common Stock Outstanding..................  8,133,855 shares

Common Stock Symbol.......................  Nasdaq SmallCap Market--"DIPL"

Use of Proceeds...........................  The selling security holders will receive the net proceeds from the
                                            sale of the shares. We will receive none of the proceeds from the
                                            sale of the shares offered by this prospectus.

Risk Factors..............................  An investment in the shares involves a high degree of risk. See "Risk
                                            Factors" commencing on page 5.
3
[ALTERNATIVE PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]

                                USE OF PROCEEDS

     Diplomat will not receive any proceeds from the sale of the security
holders' shares offered by this prospectus. All proceeds from the sale of the
security holders' shares will be for the account of the selling security
holders. See "Selling Security Holders."

                                       11
[ALTERNATIVE (added) PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]

                            SELLING SECURITY HOLDERS

     All of the shares of Diplomat common stock offered under this prospectus
may be sold by the holders who either have previously acquired their shares or
who will acquire such shares from Diplomat upon the exercise of warrants.
Diplomat will not receive any of the proceeds from sales of shares offered under
this prospectus, but will receive the exercise price upon the exercise of the
warrants described above.

     All costs, expenses and fees in connection with the registration of the
security holders' shares will be borne by Diplomat. All brokerage commissions,
if any, attributable to the sale of shares by selling security holders will be
borne by such holders.

     The selling security holders are offering a total of 970,939 shares of
Diplomat's common stock. The following table sets forth:

     o the name of each person who is a selling security holder;

     o the number of securities owned by each such person at the time of this
       offering; and

     o the number of shares of common stock such person will own after the
       completion of this offering.

     The following table assumes the exercise of all warrants beneficially owned
by each such security holder.  The footnotes describe the shares included in
this offering.  If there is no footnote, the shares included in this offering
for that selling security holder are common stock owned prior to the date of
this prospectus.

     The column "Beneficial Ownership After Offering" gives effect to the sale
of all the shares of common stock being offered hereby.
BENEFICIAL                    BENEFICIAL
                                                                              OWNERSHIP      SHARES         OWNERSHIP
                                                                              PRIOR TO     INCLUDED IN       AFTER
NAME                                                                          OFFERING     THIS OFFERING    OFFERING
----                                                                          ---------    -------------    ---------
Jay Kaplowitz(1)(6)........................................................    244,503         96,889        147,614
Irving Magram..............................................................    186,660        186,660              0
Finova Mezzanine Capital, Inc.(2)..........................................    164,980        164,980              0
Warren H. Golden...........................................................     93,707         83,707         10,000
Michael Miller(6)..........................................................     60,556         60,556              0
Lawrence Kaplan(6).........................................................     54,500         54,500              0
Stephanie Sobel............................................................     51,854         41,854         10,000
Stanley A. Kaplan(6).......................................................     30,278         30,278              0
Manhattan Group Funding(6).................................................     24,222         24,222              0
Alfred Romano(6)...........................................................     24,222         24,222              0
Reedland Capital Partners(3)...............................................     20,000         20,000              0
Damon Testaverde(6)........................................................     19,611         12,111          7,500
Steven Wallitt(6)..........................................................     18,017         18,017              0
Michael Garnick(4).........................................................     16,000         16,000              0
Matthew C. Flemming(7).....................................................     12,500         12,500              0
Glen Cadrez(7).............................................................     12,500         12,500              0
Steven Goodman(6)..........................................................     12,111         12,111              0
Mel Lax(6).................................................................     12,111         12,111              0
Alliance Capital Investment Corp.(6) ......................................     12,111         12,111              0
The Bridge Fund (NY)(6)....................................................     12,111         12,111              0
Norman Friedman(6).........................................................      9,806          6,056          3,750
Burt Gusrae(6).............................................................      9,806          6,056          3,750
Stern & Co.(5).............................................................      9,000          9,000              0
Jerry Kaplan(6)............................................................      7,267          7,267              0
Bayside Development Trust(6)...............................................      6,056          6,056              0
John Bencivegna(6).........................................................      4,844          4,844              0
Vincent Fercante(6)........................................................      4,844          4,844              0
David Kaplan(6)............................................................      4,844          4,844              0
Andrew Kaplan(6)...........................................................      4,844          4,844              0
Stephen Kaplan(6)..........................................................      4,844          4,844              0
Nancy Barride(6)...........................................................      4,844          4,844              0
------------------

(1) Includes 20,000 shares underlying an option with an exercise price of $5.00

(2) Represents shares issuable upon exercise of currently exercisable warrants.
    83,320 warrants are exercisable at $7.95, 41,660 are exercisable at $12.125
    and 40,000 are exercisable at [to be determined].

(3) Represents shares issuable upon exercise of currently exercisable warrants
    exercisable at $5.78 per share.

(4) Represents shares issuable upon exercise of currently exercisable warrants
    exercisable at $7.50 per share.

(5) Represents shares issuable upon exercise of 4,000 currently exercisable
    warrants at $5.78 per share and 5,000 shares issuable upon exercise of
    warrants to be issued upon certain events occurring.

(6) Represents shares issued upon conversion of the Series E Preferred Stock
    plus accrued dividends and such holder has agreed to a one year lock up from
    the date of this prospectus upon such conversion.

(7) Represents shares issuable upon exercise of currently exercisable warrants
    exercisable at $5.00 per share.

                                      44A
[ALTERNATIVE PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]

                              PLAN OF DISTRIBUTION

     Up to 970,939 of the selling security holders' shares may be sold by the
selling security holders who currently own or will have acquired such shares
from Diplomat upon the exercise of warrants. Diplomat will not receive any of
the proceeds from any sales by selling security holders of their shares, but
will receive the exercise price upon the exercise of warrants by the selling
security holders. See "Selling Security Holders."

     The selling security holders have advised us that the sale or distribution
of the common stock may be effected directly to purchasers by the selling
security holders as principals or through one or more underwriters, brokers,
dealers or agents from time to time in one or more transactions, including
crosses or block transactions, by any of the following methods:

     o on the Nasdaq SmallCap Market;

     o in the over-the-counter market;

     o in transactions other than on any stock exchange or in the
       over-the-counter market;

     o through the writing of options on Diplomat common stock; or

     o by settlement of short sales of Diplomat common stock.

     The purchase price of the shares may be determined by the selling security
holder or by agreement between the selling security holder and underwriters,
brokers, dealers or agents or purchasers. The price may be at:

     o market prices prevailing at the time of sale;

     o prices related to such prevailing market prices;

     o varying prices determined at the time of sale; or

     o negotiated or fixed prices.

     If the selling security holders effect such transactions by selling common
stock to or through underwriters, brokers, dealers or agents, such underwriters,
brokers, dealers or agents may receive compensation in the form of discounts,
concessions or commissions from the selling security holders or commissions from
purchasers of common stock for whom they may act as agent which may be in excess
of those customary in the types of transactions involved. The selling security
holders and any brokers, dealers or agents that participate in the distribution
of the common stock may be deemed to be underwriters, and any profit on the sale
of common stock by them and any discounts, concessions or commissions received
by any such underwriters, brokers, dealers or agents may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.

     Because the selling security holders may each be deemed to be an
"underwriter" within the meaning of Section 2(11) of the Securities Act of 1933,
the selling security holders will be subject to prospectus delivery requirements
under the Securities Act of 1933. Furthermore, in the event of a "distribution"
of its shares, the selling security holder, any selling broker or dealer and any
"affiliated purchasers" may be subject to Regulation M under the Securities
Exchange Act of 1934 until its participation in that distribution is completed.

     At the time a particular offer of security holders' shares is made by or on
behalf of any of the selling security holders, to the extent such offer
constitutes a distribution under the Securities Act of 1933, a supplement to
this prospectus will be distributed, which will set forth the type and number of
securities being offered by such selling security holders and the terms of such
offering, including:

     o the name or names and addresses of any underwriters, dealers or agents;

     o the purchase price paid by any underwriter for securities purchased from
       the selling security holder; and

     o any discounts, commissions or concessions allowed or reallowed or paid to
       dealers, and the proposed selling price to the public.

                                       51
[ALTERNATIVE PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]

Diplomat will bear all costs and expenses of the registration under the
Securities Act of 1933 and certain state securities laws of the security
holders' shares. However, all brokerage commissions, if any, attributable to the
sale of such shares by holders thereof will be borne by such holders.

     The shares that may be offered from time to time by selling security
holders may be sold through ordinary brokerage transactions in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices.

     Under the Securities Exchange Act of 1934 and the regulations thereunder,
any person engaged in a distribution of the securities offered by this
prospectus may not simultaneously engage in market-making activities with
respect to shares of Diplomat common stock during the applicable two or nine
days "cooling off" period prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the selling security holders will
be subject to applicable provisions of the Securities Exchange Act of 1934 and
the rules and regulations thereunder, including, without limitation, Regulation
M, in connection with transactions in the securities, which provisions may limit
the timing of purchases and sales of the securities by the selling security
holders.

                                       52
[ALTERNATIVE B/C PAGE FOR SELLING SECURITY HOLDER PROSPECTUS]

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

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.

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

                               TABLE OF CONTENTS
PAGE
                                                  ----
Prospectus Summary.............................      1
Risk Factors...................................      5
Where You Can Find More Information............     10
Use of Proceeds................................     11
Price Range of Common Stock....................     12
Dividend Policy................................     12
Capitalization.................................     13
Selected Financial Data........................     14
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...................................     16
Business.......................................     23
Management.....................................     34
Principal Stockholders.........................     43
Selling Security Holders.......................     44A
Certain Transactions...........................     45
Description of Securities......................     48
Shares Eligible for Future Sale................     50
Plan of Distribution...........................     51
Legal Matters..................................     53
Experts........................................     53
Indemnification for Securities Act
  Liabilities..................................     53
Financial Statements...........................    F-1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

                                DIPLOMAT DIRECT
                             MARKETING CORPORATION

                         970,939 SHARES OF COMMON STOCK

                            ------------------------
                                   PROSPECTUS
                            ------------------------

                                            , 1999

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

     The following is a statement of the estimated expenses to be paid by
Diplomat Direct Marketing Corporation (the "Company") in connection with the
issuance and distribution of the securities being registered:
SEC Registration Fee.......................................   $     4,070
NASD Filing Fee*...........................................         1,450
Nasdaq Listing Fees........................................         7,500
Printing Engraving Expenses*...............................       125,000
Legal Fees and Expenses*...................................       150,000
Accounting Fees and Expenses*..............................       100,000
Blue Sky Fees and Expenses*................................        42,000
Nonaccountable expense allowance...........................       190,000
Miscellaneous*.............................................   $    12,480
                                                              -----------
     Total.................................................   $   632,500
                                                              -----------
                                                              -----------
------------------
* estimate

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

     Section 145 of the Delaware General Corporation Law, among other things,
and subject to certain conditions, authorizes the Company to indemnify its
officers and directors against certain liabilities and expenses incurred by such
persons in connection with claims made by reason of their being such an officer
or director. The Certificate of Incorporation, as amended, and By-laws of the
Company provide for indemnification of its officers and directors to the full
extent authorized by law.

     Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

     During the past three years, the Company has sold unregistered securities
as described below. Unless otherwise indicated, there were no underwriters
involved in the transactions or underwriting discounts or commissions paid in
connection therewith. Unless otherwise indicated, the issuances of these
securities were considered to be exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and the
regulations promulgated thereunder. The purchasers of the securities in such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the certificates for the
securities issued in such transaction. The purchasers of the securities in the
transactions had adequate access to information about the Registrant. The share
numbers that follow are not adjusted to reflect the proposed 1-for-5 reverse
stock split.

     In 1996, the Company granted Jonathan Rosenberg options to purchase 75,000
shares of common stock exercisable at $1.50 per share.

     In February 1996, in consideration for making a loan to the Company in the
amount of $2,353,500, the Company issued Mr. Rubin 100,000 shares of its
Series A Convertible Preferred Stock which are convertible at Mr. Rubin's option
into 1,000,000 shares of the Company's common stock.

     In September 1996, the Company issued (i) 350,000 shares of common stock
and (ii) options to purchase 150,000 shares of common stock at an exercise price
of $2.50, to Gersten, Savage, Kaplowitz & Fredericks, LLP in consideration for
providing certain legal and consulting services to the Company.

                                      II-1
In September 1996, Mr. Rubin converted an aggregate of approximately
$3,500,000 in debt into 290,000 shares of the Company's 9% Class B Convertible
Preferred Stock and 60,000 shares of the Company's 9% Class C Convertible
Preferred Stock. Each of the Series B and Series C shares is convertible at the
option of the holder into 10 shares of the Company's common stock.

     In November 1996, the Company issued options to purchase an aggregate of
1,060,000 shares of its common stock at an exercise price of $1.00 per share to
35 employees of the Company, including two executive officers and one outside
director.

     In May 1997, the Company issued options to purchase an aggregate of 150,000
shares of its common stock pursuant to the November 1996 Plan, 50,000 of which
were issued to Howard Katz, a director of the Company, and 100,000 of which were
issued to Mr. Fredericks in connection with his agreeing to become a member of
the Company's board of directors.

     In May 1997, the Company issued to Mr. Rubin 550,000 shares of common stock
in connection with (i) Mr. Rubin's conversion of debt to equity, and (ii)
Mr. Rubin deferring his monthly consulting fee. The issuance of this stock was
approved in 1996.

     In May 1997, the Company authorized the issuance of 200,000 shares of
common stock to Mr. Rubin in consideration of Mr. Rubin extending loans to the
Company as well as extending a personal guarantee to Congress on behalf of the
Company.

     Between May and July 1997, the Company issued an aggregate of 158,408
shares of common stock and options to acquire 200,000 shares of common stock to
six consultants. Of the 200,000 options, 50,000 are exercisable at $1.75 per
share and 150,000 are exercisable at $1.875 per share.

     From May 1997 through September 1997, the Company sold 1,250,000 shares of
its common stock in a private placement of its securities in which it raised
$2,500,000. In addition to these shares, the Company issued to European
Community Capital a placement agent's warrant exercisable to purchase up to
200,000 shares of common stock at $3.3125 per share. The Company issued an
option to a principle of the placement agent to purchase up to 100,000 shares of
common stock at $2.00 per share.

     In October 1997, in part to raise capital for the Company's acquisition out
of bankruptcy of the assets of Brownstone, the Company completed a private
offering of its securities which raised $3,630,000 from accredited investors.
The private placement consisted of units, each unit consisting of ten shares of
Series E Preferred Stock and 7,500 shares of common stock at a purchase price of
$10,000 per unit. The Company issued an aggregate of 3,630 shares of Series E
Preferred Stock and 2,772,500 shares of common stock.

     On October 30, 1997, the Company issued in connection with the acquisition
of assets of Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc. options to
purchase up to 200,000 shares of the Company's common stock.

     On December 23, 1997, the Company entered into a definitive agreement for
the acquisition of Lew Magram, Ltd. In connection with the acquisition, 95,000
shares of Series D Preferred Stock, which are convertible into a total of
3,166,667 shares of common stock, and 250,000 shares of common stock were issued
simultaneous with the closing of the acquisition on February, 1998.

     On June 29, 1998, the Company issued to Sirrom Capital Corporation, dba
Tandem Capital $5,000,000 principal amount 12% Subordinated Secured Notes and
warrants to purchase up to 208,300 shares of common stock. In February 1999 the
Company issued an additional warrant to purchase 416,600 shares. In connection
with the transaction, the Company issued to Donald & Co. Securities, Inc. a
$50,000 promissory note and a warrant to purchase up to 50,000 shares of common
stock.

     On December 28, 1998, the Company granted to certain of its employees
options under its November 1996 stock option plan. The options permit the
holders the right to purchase in the aggregate up to 860,000 shares of common
stock at a exercise price of $1.00 per share. The options expire on December 28,
2003. One fourth of the options granted are immediately exercisable and the
remaining options are exercisable in an equal amount each year for next three
years.

                                      II-2
In March 1999, the Company granted a warrant which grants the holder the
right to purchase in the aggregate up to 80,000 shares of the Company's common
stock at an exercise price of $1.50 per share. The warrant expires on March 18,
2002.

     In March 1999, the Company issued 32,440 shares of its Series F Preferred
Stock and 346,027 shares of its common stock for $3,244,000.

     In April 1999, the Company issued 75 shares of its Series E Preferred Stock
and 38,470 shares of its common stock.

     In May 1999, the Company issued 100,000 shares of its common stock for
$100,000, and an option to purchase 100,000 shares of its common stock at an
exercise price of $1.00 per share.

     The holders of all of the outstanding Series D Preferred Stock converted
their shares. The Company issued 3,083,447 shares of common stock upon the
conversion of the Series D Preferred Stock. The issuance is exempt under the
1933 Act by virtue of the exemption under section 4(2).

ITEM 16. EXHIBITS
EXHIBIT
  NUMBER     DESCRIPTION
----------   -----------
1.1       --   Form of Underwriting Agreement*
    1.2       --   Form of Agreement Among Underwriters*
    1.3       --   Form of Selected Dealers Agreement*
    3.1       --   Certificate of Incorporation, as amended (1)
    3.2       --   By-laws, amended(1)
    3.3       --   Amendment to Certificate of Incorporation(1)
    3.4       --   Amendment to Certificate of Incorporation(7)
    3.5       --   Amended Certificate of Designation of Series E Preferred Stock (14)
    3.6       --   Certificate of Designation of Series F Preferred Stock(14)
    4.1       --   Form of Common Stock Certificate (1)
    5.1       --   Legal Opinion of Gersten, Savage & Kaplowitz, LLP*
   10.1       --   1992 Stock Option Plan(1)
   10.2       --   August 1996 Stock Option Plan(11)
   10.3       --   November 1996 Stock Option Plan(5)
   10.4       --   License Agreement by and between Diplomat Juvenile Corporation, Wesley Howell and Steve Pressed(1)
   10.5       --   Loshell Realty mortgages with Union State Bank and Stony Point Technical Park, Inc. and related
                   Mortgage Notes, including Sheldon Rose guarantee of Union State Bank(1)
   10.6       --   First Amendment to Exclusive Distributorship Agreement by and between Ambrose & Montgomery, Inc.
                   and Diplomat Corporation(2)
   10.7       --   Second Amendment to Exclusive Distributorship Agreement between Ambrose Montgomery, Inc. and
                   Diplomat Corporation(3)
   10.8       --   Asset Purchase Agreement dated as of September 24, 1997 by and among Diplomat Corporation and Jean
                   Grayson's Brownstone Studio, Inc. and Wilroy Inc.(7)
   10.9       --   Bill of Sale provided by Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
   10.10      --   Assignment and Assumption Agreement dated October 30, 1997 between Brownstone Holdings, Inc., Jean
                   Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
   10.11      --   Agreement and Plan of Merger dated December 23, 1997, by and between Diplomat Corporation, Lew
                   Magram, et al(6)
   10.12      --   Employment Agreement between Warren H. Golden and Diplomat Corporation dated February 2, 1998(8)
II-3
EXHIBIT
  NUMBER     DESCRIPTION
----------   -----------
10.13      --   Employment Agreement between Irving Magram and Lew Magram dated February 2, 1998(8)
   10.14      --   Employment Agreement between Stephanie Sobel and Lew Magram dated February 2, 1998(8)
   10.15      --   Lease Agreement between Franklin Associates and Lew Magram, Ltd dated May 15, 1992(8)
   10.16      --   Employment Agreement between Kenneth Grossman and Brownstone Holdings, Inc. dated October 30,
                   1997(13)
   10.17      --   Employment Agreement between Joan Grossman and Brownstone Holdings, Inc. dated October 30,
                   1997(13)
   10.18      --   Debenture Purchase Agreement between Sirrom Capital Corporation, Diplomat Direct Marketing
                   Corporation, et al, and forms of exhibits(10)
   10.19      --   1998 Stock Option Plan(12)
   10.20      --   Secured Credit Agreement date May 12, 1999 among First Source Financial LLP, as Lender, Brownstone
                   Holding, Inc., Ecology Kids, Inc., Diplomat Holdings, Inc. and Lew Magram Ltd. As Borrowers and
                   Diplomat Direct Marketing Corporation, as Funds Administrator (exhibits and schedules omitted)(14)
   10.21      --   Security Agreement dated May 12, 1999 among First Source Financial LLP., Brownstone Holdings,
                   Inc., Ecology Kids, Inc. Diplomat Holding, Inc. and Lew Magram Ltd. (exhibits and schedules
                   omitted)(14)
   10.22      --   Guaranty of Diplomat Direct Marketing Corporation (First Source Financial LLP) dated May 12,
                   1999.(14)
   10.23      --   Employment Agreement between Julia Aryeh and Diplomat Direct Marketing Corporation dated
                   February 15, 1999*
   22         --   Subsidiaries of the Registrant(12)
   23.1       --   Consent of BDO Seidman, LLP
   23.2       --   Consent of Feldman Sherb Ehrlich Co., P.C.
   23.3       --   Consent of Gersten, Savage & Kaplowitz, LLP (included in Exhibit 5.1)*
   27         --   Financial Data Schedule
------------------
* To be filed by amendment

 (1) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-66910 NY

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

 (3) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-95986

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

 (5) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1996

 (6) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1997

 (7) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     November 14, 1997

 (8) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     March 6, 1998

 (9) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB/A2 for the year ended September 30, 1997 and filed March 3, 1998

(10) Incorporated by reference to Diplomat Direct Marketing Corporation on
     Form 10QSB for the quarter ended June 30, 1998

(11) Incorporated by reference to Diplomat Corporation Registration Statement on
     Form S-8 filed August 30, 1996

(12) Incorporated by reference to Diplomat Corporation Proxy Statement on
     Schedule 14A Filed April 29, 1998

                                      II-4
(13) Incorporated by reference to Diplomat Direct Marketing Corporation Annual
     Report on Form 10-K for the year ended September 30, 1998

(14) Incorporated by reference to Diplomat Direct Marketing Corporation
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1999

ITEM 17. UNDERTAKINGS

     Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to any charter provision, by-law, contract, arrangement, statute, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

     The Company hereby undertakes:

     (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

          (i)  To include any prospectus required by section 10(a)(3) of the
     Act;

          (ii)  To reflect in the prospectus any facts or events arising after
     the effective date of the registration statement (or the most recent
     post-effective amendment thereof) which, individually or in the aggregate,
     represent a fundamental change in the information set forth in the
     registration statement. Notwithstanding the foregoing, any increase or
     decrease in the volume of securities offered (if the total dollar value of
     securities offered would not exceed that which was registered) and any
     deviation from the high or low end of the estimated maximum offering range
     may be reflected in the form of prospectus filed with the Commission
     pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
     price represent no more than 20 percent change in the maximum aggregate
     offering price set forth in the "Calculation of Registration Fee" Table in
     the effective registration statement;

          (iii) To include any material information with respect to the plan of
     distribution not previously disclosed in the registration statement or any
     material change to suit information in the registration statement.

     (2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

     (4) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Company under Rule 424(b)(1), or (4) or 497(h), under the Act shall be deemed to
be part of this registration statement as of the time the Commission declared it
effective.

     (5) For the purpose of determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

                                      II-5
SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF THE ACT, THE REGISTRANT CERTIFIES THAT IT
HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENT FOR
FILING ON FORM S-1 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
TEANECK, STATE OF NEW JERSEY ON JUNE 8, 1999

                                          DIPLOMAT DIRECT MARKETING CORPORATION

                                          By:      /S/ WARREN H. GOLDEN
                                              ----------------------------------
                                                      Warren H. Golden
                                               President and Chief Executive
                                                         Officer

     KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and has appointed Warren H. Golden, President and
Chief Executive Officer, his or her true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same and all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, his or her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

     PURSUANT TO THE REQUIREMENTS OF THE ACT, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
SIGNATURE                                      TITLE                             DATE
                ---------                                      -----                             ----
/s/ ROBERT M. RUBIN              Chairman of the Board                                June 8, 1999
------------------------------------------
             Robert M. Rubin

           /s/ WARREN H. GOLDEN             Chief Executive Officer, President and               June 8, 1999
------------------------------------------  Director
             Warren H. Golden

           /s/ STEPHANIE SOBEL              Executive Vice President and Director                June 8, 1999
------------------------------------------
             Stephanie Sobel

             /s/ JULIA ARYEH                Chief Strategic Officer, Secretary and               June 8, 1999
------------------------------------------  Director
               Julia Aryeh

          /s/ MARK J. MCSWEENEY             Chief Financial Officer                              June 8, 1999
------------------------------------------
            Mark J. McSweeney

         /s/ STUART A. LEIDERMAN            Divisional President of Ecology Kids and             June 8, 1999
------------------------------------------  Director
           Stuart A. Leiderman

                                            Director                                             June  , 1999
------------------------------------------
               Howard Katz

              /s/ DAVID ABEL                Director                                             June 8, 1999
------------------------------------------
                David Abel
II-6
EXHIBIT INDEX
EXHIBIT                                                                                                    SEQUENTIAL
NUMBER   DESCRIPTION                                                                                        PAGE NO.
------   -----------                                                                                       -----------
1.1     --   Form of Underwriting Agreement*
  1.2     --   Form of Agreement Among Underwriters*
  1.3     --   Form of Selected Dealers Agreement*
  3.1     --   Certificate of Incorporation, as amended(1)
  3.2     --   By-laws, amended(1)
  3.3     --   Amendment to Certificate of Incorporation(1)
  3.4     --   Amendment to Certificate of Incorporation(7)
  3.5     --   Amended Certificate of Designation of Series E Preferred Stock(14)
  3.6     --   Certificate of Designation of Series F Preferred Stock(14)
  4.1     --   Form of Common Stock Certificate(1)
  5.1     --   Legal Opinion of Gersten, Savage & Kaplowitz, LLP*
 10.1     --   1992 Stock Option Plan(1)
 10.2     --   August 1996 Stock Option Plan(11)
 10.3     --   November 1996 Stock Option Plan(5)
 10.4     --   License Agreement by and between Diplomat Juvenile Corporation, Wesley Howell and Steve
               Pressed(1)
 10.5     --   Loshell Realty mortgages with Union State Bank and Stony Point Technical Park, Inc. and
               related Mortgage Notes, including Sheldon Rose guarantee of Union State Bank(1)
 10.6     --   First Amendment to Exclusive Distributorship Agreement by and between Ambrose &
               Montgomery, Inc. and Diplomat Corporation(2)
 10.7     --   Second Amendment to Exclusive Distributorship Agreement between Ambrose Montgomery, Inc.
               and Diplomat Corporation(3)
 10.8     --   Asset Purchase Agreement dated as of September 24, 1997 by and among Diplomat Corporation
               and Jean Grayson's Brownstone Studio, Inc. and Wilroy Inc.(7)
 10.9     --   Bill of Sale provided by Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
 10.10    --   Assignment and Assumption Agreement dated October 30, 1997 between Brownstone Holdings,
               Inc., Jean Grayson's Brownstone Studio, Inc. and Wilroy, Inc.(7)
 10.11    --   Agreement and Plan of Merger dated December 23, 1997, by and between Diplomat
               Corporation, Lew Magram, et al(6)
 10.12    --   Employment Agreement between Warren H. Golden and Diplomat Corporation dated February 2,
               1998(8)
 10.13    --   Employment Agreement between Irving Magram and Lew Magram dated February 2, 1998(8)
 10.14    --   Employment Agreement between Stephanie Sobel and Lew Magram dated February 2, 1998(8)
 10.15    --   Lease Agreement between Franklin Associates and Lew Magram, Ltd dated May 15, 1992(8)
 10.16    --   Employment Agreement between Kenneth Grossman and Brownstone Holdings, Inc. dated
               October 30, 1997(13)
 10.17    --   Employment Agreement between Joan Grossman and Brownstone Holdings, Inc. dated
               October 30, 1997(13)
 10.18    --   Debenture Purchase Agreement between Sirrom Capital Corporation, Diplomat Direct
               Marketing Corporation, et al, and forms of exhibits(10)
 10.19    --   1998 Stock Option Plan(12)
EXHIBIT                                                                                                    SEQUENTIAL
NUMBER   DESCRIPTION                                                                                        PAGE NO.
------   -----------                                                                                       -----------
10.20    --   Secured Credit Agreement date May 12, 1999 among First Source Financial LLP, as Lender,
               Brownstone Holding, Inc., Ecology Kids, Inc., Diplomat Holdings, Inc. and Lew Magram Ltd.
               As Borrowers and Diplomat Direct Marketing Corporation, as Funds Administrator (exhibits
               and schedules omitted)(14)
 10.21    --   Security Agreement dated May 12, 1999 among First Source Financial LLP., Brownstone
               Holdings, Inc., Ecology Kids, Inc. Diplomat Holding, Inc. and Lew Magram Ltd. (exhibits
               and schedules omitted)(14)
 10.22    --   Guaranty of Diplomat Direct Marketing Corporation (First Source Financial LLP) dated
               May 12, 1999(14)
 10.23    --   Employment Agreement between Julia Aryeh and Diplomat Direct Marketing Corporation dated
               February 15, 1999*
 22       --   Subsidiaries of the Registrant(12)
 23.1     --   Consent of BDO Seidman, LLP
 23.2     --   Consent of Feldman Sherb Ehrlich Co., P.C.
 23.3     --   Consent of Gersten, Savage & Kaplowitz, LLP (included in Exhibit 5.1)*
 27       --   Financial Data Schedule
------------------
 *  To be filed by amendment

 (1) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-66910 NY

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

 (3) Incorporated by reference to Diplomat Corporation Registration Statement
     No. 33-95986

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

 (5) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1996

 (6) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB for the year ended September 30, 1997

 (7) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     November 14, 1997

 (8) Incorporated by reference to Diplomat Corporation report on Form 8-K dated
     March 6, 1998

 (9) Incorporated by reference to Diplomat Corporation Annual Report on
     Form 10KSB/A2 for the year ended September 30, 1997 and filed March 3, 1998

(10) Incorporated by reference to Diplomat Direct Marketing Corporation
     Form 10QSB for the quarter ended June 30, 1998

(11) Incorporated by reference to Diplomat Corporation Registration Statement on
     Form S-8 filed August 30, 1996

(12) Incorporated by reference to Diplomat Corporation Proxy Statement on
     Schedule 14A Filed April 29, 1998

(13) Incorporated by reference to Diplomat Direct Marketing Corporation Annual
     Report on Form 10-K for the year ended September 30, 1998

(14) Incorporated by reference to Diplomat Direct Marketing Corporation
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1999