UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

    [X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
            ACT OF 1934

            For the fiscal year ended February 2, 1997

    [ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934

                 for the transition period from _____ to ______

                       Commission file number     0-16007
                                               --------------

                        The Village Green Bookstore, Inc.
                  --------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

              New York                                       16-1181167
     ------------------------------                       ---------------- 
    (State or Other Jurisdiction of                      (I.R.S. Employer
    Incorporation or Organization)                       Identification No.)

                               1357 Monroe Avenue
                            Rochester, New York 14618
                     --------------------------------------
                    (Address of Principal Executive Offices)


Issuer's Telephone Number, Including Area Code  (716) 442-1151
                                                -------------- 

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

Title of Each Class                                        Name of Each Exchange
-------------------                                         on Which Registered
                                                            -------------------
Common Stock, par value $.001 per share
---------------------------------------                     -------------------

Redeemable Common Stock Purchase Warrants
---------------------------------------                     -------------------

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

                     Common Stock, par value $.001 per share
                     ---------------------------------------
                                (Title of Class)

                    Redeemable Common Stock Purchase Warrants
                    -----------------------------------------
                                (Title of Class)

<PAGE>


Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

        Yes     No X
           ---    ---

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  Form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

        Issuer's revenues for its most recent fiscal year: $    8,069,316     .
                                                            ------------------

The approximate  aggregate market value of the registrant's common stock held by
non-affiliates,  computed by reference to the price at which the stock was sold,
or the  average  bid and asked  prices  of such  stock,  as of May 15,  1997 was
$278,500.  The number of shares outstanding of the registrant's  common stock on
May 15, 1997, was 3,741,255 shares.

        Transitional Small Business Disclosure Format (check one): Yes    No  X
                                                                      ---    ---


                       DOCUMENTS INCORPORATED BY REFERENCE
                       -----------------------------------

Definitive Proxy Statement dated April 13, 1987

Definitive Proxy Statement dated June 25, 1990

Definitive Proxy Statement dated September 28, 1993




















                                      -ii-

<PAGE>

                                     PART I
                                     ------

ITEM 1. DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT

        The Village Green Bookstore, Inc. (the "Company" or "Village Green") was
organized under the name Monroe Book Corporation in 1982 to acquire the business
of the Village Green Bookstore,  a Rochester based proprietorship which had been
engaged in the bookstore  business since 1973. The Company's  corporate name was
changed in  February  1986 to The Village  Green  Bookstore,  Inc. In 1996,  the
Company introduced Kideology(TM),  with the opening of two stores. Kideology(TM)
is an educational  retail system which the Company developed to sell educational
toys and products to children from ages 14 and under.

        The Company  competes with a diverse  group of national book  retailers,
including WaldenBooks,  Borders Bookshop, Barnes & Noble, B. Dalton Booksellers,
Crown Books, Encore Books and  Books-A-Million.  In recent years, many competing
national chains have expanded in size and number of outlets,  and have developed
and opened  superstores  within the Company's  existing  markets.  The Company's
strategic  objective is to attempt to continue to operate  retail  bookstores in
the areas in which it currently competes.

        Each  Village   Green   bookstore  is  situated  and   merchandised   to
specifically address the tastes and demand characteristics of its clientele. The
Company's  stores  feature a diversified  retail mix. The Company's  basic store
format includes (i) an inventory of several  thousand book titles and magazines,
periodicals and newspapers;  (ii) a stationery department which carries a number
of lines of greeting cards,  boxed  stationery and writing papers;  (iii) a gift
department,  which offers unusual,  humorous and traditional gift items;  (iv) a
gourmet and  packaged  food  department  selling  fresh and  packaged  desserts,
gourmet chocolates,  coffees and ice creams as well as other food items; and (v)
special  services such as special  orders of books and  newspapers.  The Company
also offers books-on-tape,  selective video tape rentals and multimedia products
in several of its locations.

        On  March  23,  1995,  the  Company  consummated  a public  offering  of
2,000,000 Units at $3.00 per Unit (the "Public  Offering")  through Thomas James
Associates, Inc., now known as H.J. Meyers & Co., Inc., as Representative of the
Underwriters ("H.J. Meyers").  Each Unit consisted of one share of the Company's
Common  Stock,  par value  $.001 per  share,  and one  Redeemable  Common  Stock
Purchase Warrant ("Redeemable Warrants"),  exercisable for a five year period at
an initial exercise price of $3.60 (the "Initial Notice Price").

        On  April  18,  1997,  the  Company  announced  that it had  reached  an
agreement in principle  with CD Titles,  Inc.  and an  underwriter,  whereby the
Company will be merged into a subsidiary of CD Titles,  Inc. The new corporation
created  as a result of the  merger  plans to issue and sell  $5,000,000  of its
Common  Stock to the  public.  The  agreement  in  principle  is  subject to the
customary  contingencies,  including due  diligence by the parties,  shareholder
approval and market  factors.  Upon  execution of a  definitive  agreement,  the
Company plans to submit the proposed merger to its shareholders for approval.




<PAGE>


        The following  table sets forth the number of stores at the start of the
fiscal year, the number of Bookstores  opened during the fiscal year, the number
of Bookstores closed during the fiscal year and the number of stores open at the
end of the fiscal year:


 Fiscal Year     Stores at        New Stores      Stores Closed       Stores at
                Beginning of        Opened         During Year       End of Year
                    Year         During Year
--------------  -------------    ------------     --------------    ------------

    1987             1                1                 --                2
    1988             2                --                --                2
    1989             2                1                 --                3
    1990             3                1                 --                4
    1991             4                --                --                4
    1992             4                --                --                4
    1993             4                4                 1                 7
    1994             7                2                 2                 7
    1995             7                1                 --                8
    1996             8                4                 --               12
    1997             12               --                6                 6

        In February, March, May, May, August, 1996 and January, 1997 the Company
closed six of its  underperforming  bookstores,  in Philadelphia,  Pennsylvania,
Blasdell,  New York, Greece, New York,  Ridgefield,  Connecticut,  Philadelphia,
Pennsylvania and Wilkes Barre, Pennsylvania, respectively.

INDUSTRY OVERVIEW

        RETAIL  BOOKSTORES.  The  retail  book  industry  is  comprised  of  two
principal segments, including independent bookstores and chain stores.

        The  independent  bookstores  generally  have been  established  as free
standing stores or in strip shopping centers catering to well-educated, affluent
customers.  Such stores  generally are well  stocked,  and staffed by attentive,
service-oriented  salespersons.  The  books  generally  are sold at  publishers'
prices with occasional discounts. These independents build their business by way
of book fairs, media attention,  author interviews and advertising,  sponsorship
of local literary programs, author signing sessions,  teaching and other similar
programs.

        Chain  stores have grown by  discounting  best  selling  books and other
books in regional malls (such as B. Dalton and WaldenBooks),  and more recently,
through the  development  of discount  "superstores"  such as Barnes & Noble and
Borders  Bookshop.  Superstores  are  considerably  larger  in size and  offer a
substantially   greater  number  of  titles  than  typical   bookstores.   These
superstores  generally are  "destination"  stores  offering a wide  selection of
discounted books. The competition  within the bookstore  industry is significant
and  the  Company's   market  niche  has  been  severely   adversely   affected,
particularly during the most recent fiscal year.


                                      -2-

<PAGE>

BUSINESS STRATEGY

        GENERAL.  As a result of recent  increased and  substantial  openings of
retail book superstores within the Company's markets, the Company has determined
to  maintain  as many  bookstore  sites as  market  conditions  will  allow.  No
assurance  can be given that the Company  will be able to  maintain  its current
bookstore sales.

        RETAIL BOOKSTORES. The Company's retail bookstore strategy is to own and
continue  to  operate  retail  bookstores  in the  areas in  which it  currently
competes.  However, the Company is not certain if it can continue to operate all
of its retail  bookstores  or even continue to operate as a going  concern.  The
following are the key elements to the Company's strategy.

               OPTIMIZATION   OF  RETAIL  PRODUCT  MIX.  The  Company  seeks  to
differentiate  itself from its  competition  by, among other things,  offering a
retail mix that is focused and optimized to address the tastes and demands of an
affluent clientele.

               EMPHASIS ON SOCIAL AND CULTURAL MEETING PLACES;  ESTABLISHMENT OF
STRONG COMMUNITY TIES. The Company has introduced coffee cafes at certain of its
stores.  By incorporating  this concept,  the Company hopes to take advantage of
the changing social patterns  evidenced by the proliferation of coffee cafes and
reemphasize  Village  Green  stores as  community  meeting  places  and  leisure
oriented establishments.  Accordingly,  the Company has sought to integrate each
of its bookstores into their respective  communities through the sponsorship of,
and  participation  in,  community  activities such as book and poetry readings,
children's programs, book fairs and literature discussion groups.

THE VILLAGE GREEN MODEL

        The  Company  hopes to limit store  closings in response to  competitive
market  conditions  while  attempting  to build its  customer  base for existing
stores.

PRODUCT LINE

        o BOOKS.  The Village  Green carries up to several  thousand  titles per
year per store. The selection emphasizes bestsellers, backlist titles, publisher
closeouts,  computer books,  cookbooks,  science fiction,  novels,  mysteries, a
large selection of children's  books, art books and books of an academic nature.
The Company also special orders books from a database  comprising  approximately
100,000 titles. For the year ended February 2, 1997,  approximately 50.7% of the
Company's net sales were derived from the sale of books.

        o MAGAZINES AND  NEWSPAPERS.  Each store  carries up to several  hundred
different  magazine  titles,  per store,  per year,  ranging from broad  general
interest  titles to  specialized  magazines.  These  encompass a wide variety of
subjects,  including  general news,  business,  home and  decorating,  the arts,
sports, women's issues, academic journals and foreign magazines. Each store also
carries  several  dozen  different  newspapers,  ranging from local  dailies and
weeklies to major market and foreign newspapers.  For the year ended February 2,
1997,  approximately 16.7% of the Company's net sales were derived from the sale
of magazines and newspapers.


                                      -3-

<PAGE>


        o STATIONERY.  Each store typically carries several different stationery
lines, encompassing greeting cards, seasonal cards, boxed stationery and writing
papers.  The Company also  specializes in distinctive  lines of stationery  from
around the world, which it obtains through trade shows, trade journals, boutique
shopping  and  customer  recommendations.  For the year ended  February 2, 1997,
approximately  13.0% of the  Company's  net sales were  derived from the sale of
stationery.

        o FOOD. Each store contains a gourmet and packaged food department which
offers fresh and packaged  desserts,  gourmet  chocolates and coffees as well as
other food items.  Impulse food items include baked goods,  cheesecakes,  bagels
and gourmet ice creams. For the year ended February 2, 1997,  approximately 6.3%
of the Company's net sales were derived from the sale of food.

        o GIFTS.  Each store offers  fashionable and distinctive  presents and a
wide variety of traditional and seasonal gift items.  Moreover, the Company also
stocks an assortment of unusual,  humorous and surprising gift items which cater
to each store's  clientele.  For the year ended February 2, 1997,  approximately
3.9% of the Company's net sales were derived from the sale of gifts.

        o COFFEE  CAFES.  The  Company  hopes that  coffee  cafes will allow the
Company to increase  customer traffic in its stores.  Coffee cafes accounted for
approximately 3.0% of net sales in the year ended February 2, 1997.

        o KIDEOLOGY (TM). Kideology (TM)  accounted  for   approximately 5.1% of
net sales for the year ended February 2, 1997.

        o MULTIMEDIA.  The Company has multimedia  categories in addition to its
retail mix at several of its  locations.  These  categories  include:  (i) video
cassette rentals; (ii) books-on-tape for sale; (iii) music departments; and (iv)
select   computer   software  and  CD-ROMS.   The  Company   believes   that  by
cross-merchandising several different product categories in addition to its core
book business, it can encourage more frequent visits by its customers and appeal
to a wider demographic cross section of consumers.  Although it is the Company's
intent to incorporate as many of the foregoing multimedia categories as possible
into its various  locations,  at present only certain of these  categories  have
been so included  and only at certain of the  Company's  stores.  The  Company's
financial  position  may, in the future,  further limit the services and product
lines the Company's stores provide.  Sales of multimedia  products accounted for
approximately 1.3% of net sales in the year ended February 2, 1997.

STORE LAYOUT

        The Company's  bookstores are designed to promote customer  convenience,
stimulate customer interest and reinforce the Company's image as an upscale book
retailer.  Books on the New York Times  best-seller  list and bargain  books are
prominently  displayed at the front of the  Company's  stores.  Books within the
store are organized by subject and  categories  and  stationery  throughout  the
stores are near the stores' cash  registers.  Magazines are located  towards the
back of the store to attract  customers  through the store's other  departments.

                                      -4-

<PAGE>


STORE CLOSINGS

        As the retail  bookstore market becomes more  competitive,  it is likely
that the  Company  will  have to close  additional  bookstores.  If  competitive
conditions worsen, the Company may not be able to continue to operate as a going
concern.

PURCHASING AND MERCHANDISING

        The Company  purchases  merchandise  from many  different  vendors.  The
Company's  purchasing  decisions are  centralized  and are made at the Company's
headquarters in Rochester,  New York. The Company  negotiates terms,  discounts,
and  cooperative  advertising  allowances  for all of the  Company's  stores and
decides which products to purchase,  in what quantity and for which stores.  New
book  titles are  purchased  from  publishers  and  distributors  for all of the
company's  bookstores.  Although  the  majority  of  purchases  are  made by the
Company's  merchandise  department,  store  managers  have  the  flexibility  to
influence  purchasing  decisions  in order to respond  to local  demand for fast
selling titles.  The Company has experienced  financial  difficulties due to the
competitive  retail  bookstore  environment and as such its  relationships  with
certain of its  suppliers  have  become  strained.  Should  suppliers  refuse to
negotiate  supply  contracts  with  the  Company,   bookstore   operations  will
significantly worsen.

MANAGEMENT INFORMATION SYSTEM

        A management  information  system  ("MIS") is operational in most of the
Company's  stores.  This  information  system  provides  management  with sales,
inventory and other  information  and is important to the  Company's  ability to
achieve cost  efficiencies,  control shrinkage and evaluate customer  purchasing
patterns.

        The MIS features retail point-of-sale tracking functions that are polled
daily and generate sales reports and supporting documentation. These reports are
available to the Company's  corporate  headquarters  for auditing and input into
the Company's automated  accounting program.  The point-of-sale  system provides
daily  accounting  of sales as well as other  control  items such as  discounts,
price overrides and refunds.  Financial statements,  including income statements
and  balance  sheets,  are  produced  monthly for each such  location.  Complete
inventories  are taken at least once a year.  Each item in the Company's  stores
has its own distinct item number which is used by the  point-of-sales  system to
record  sale  and  cost  information.  Reports  are  also  tracked  for  reorder
information  and historical  sales  information  is used to make  purchasing and
reorder decisions.




                                      -5-


<PAGE>



MARKETING

        The  Company  emphasizes  customer  service  in its stores  through  its
knowledgeable salespeople and strives to provide its customers with an enjoyable
shopping  experience.  The  Company  adheres  to a number  of  customer  service
policies and practices to reinforce customer confidence in the Company.

        The Company's  Bookstores typically are open up to 15 to 17 hours a day,
365 days a year.  The Company  experiences  its heaviest sales during the fourth
quarter of the year, which includes the traditional holiday season. Although the
Company has  historically  discounted  books only during  special sales periods,
recognizing  the need to remain  competitive,  the Company  now offers  everyday
discounts on New York Times best sellers and hardcover  books.  The Company also
sells gift certificates.

TRADEMARKS

        The Company uses The Village Green Bookstore and Kideology(TM) names and
logos in its business operations.

COMPETITION

        RETAIL BOOKSTORES.  The retail book business is highly competitive.  The
Company  competes  with a diverse group of regional and local  independent  book
retailers,   as  well  as  with  large  national  bookstore  chains,   including
WaldenBooks,  Borders  Bookshop,  Barnes & Noble,  Inc.,  Media Play,  B. Dalton
Booksellers,   Inc.,  Encore  Books,  Books-A-Million,   Inc.  and  Crown  Books
Corporation. In recent years, many competing national chains have been expanding
in size and number of outlets,  and have developed and opened superstores.  Most
of these competitors have  significantly  greater  financial  resources than the
Company,  have been in existence for a substantially  greater period of time and
have more extensive  facilities,  personnel and other resources than those which
are now, or in the foreseeable future, will become available to the Company. The
Company also experiences indirect competition from retail specialty stores, such
as computer and "new age" stores, and religious bookstores,  that offer books in
a particular discipline or specialty.

        The  expansion  of  chain  and  "superstore"  bookstores  have  severely
impacted the  Company's  market and the  Company's  auditors  have,  on numerous
occasions  expressed  doubt as to the  Company's  ability to continue as a going
concern.

        The sale of new books also is affected by competition for the consumer's
dollar  with  alternative  forms  of  entertainment  and  information,  such  as
computer,  interactive software, books and games in electronic form, television,
movies and video  tapes.  Although  the  Company  believes  that book sales have
remained  relatively stable in recent periods,  unfavorable  economic conditions
affecting  retailers  generally,  a decline in consumer  spending  or  increased
demand for  alternative  forms of  entertainment  or  information  could further
adversely affect the Company's results of operations in future periods.






                                     -6-

<PAGE>





        EDUCATIONAL RETAIL. The retail toy business is highly  competitive.  The
Company  competes on the basis of its  stores'  interactive  environment,  broad
merchandise  selection,  customer service and competitive  pricing.  The Company
competes  with a  variety  of  mass  merchandisers,  superstores  and  specialty
retailers  selling  portions of its product lines,  including  books,  software,
video  and  audio  products,  and arts and  crafts.  It also  competes  with toy
superstores and other toy retailers,  including Toys R Us and Kay Bee Toy Stores
and  other  store  formats  selling  educational  children's  products,  such as
discount stores and smaller  specialty toy stores.  Included among the Company's
direct  competitors  are  Zany  Brainy,   Learningsmith,   Noodle  Kidoodle  and
Imaginarium.

        Many of the  Company's  competitors  are much  larger  in terms of sales
volume and have more capital and greater management  resources than the Company.
If any of the Company's  larger  competitors were to increase their focus on the
educational  market  or  if  any  regional  competitors  were  to  expand  their
activities  in the  markets  primarily  served  by the  Company,  the  Company's
Kideology(TM)  operation  will  be  further  adversely  affected.  If any of the
Company's  major  competitors  seek to gain or retain  market  share by reducing
prices,  the  Company may be required to reduce its prices on key items in order
to  remain   competitive,   which  would  have  the  effect  of   reducing   its
profitability.

EMPLOYEES

        As of May 15, 1997,  the Company  employed 40 full-time and 59 part-time
employees.  The Company  believes  its  success  will depend upon its ability to
identify, hire and retain capable management. There can be no assurance that the
Company will succeed in  recruiting  or retaining  suitable  staff.  The Company
considers  its  relations  with  its  employees,  none of whom  are  covered  by
collective bargaining agreements, to be generally good.

SUBSIDIARIES

        The Company was organized under the name Monroe Book Corporation in 1982
to acquire the  business  of the  Village  Green  Bookstore,  a Rochester  based
proprietorship  which had been engaged in the bookstore business since 1973. The
Company's  corporate  name was  changed in February  1986 to The  Village  Green
Bookstore,  Inc. Except for the Rochester store,  which is operated  directly by
the  Company,  all of the  Company's  stores are operated  through  wholly owned
subsidiaries. The Company's current stores are located in Rochester (acquired by
the Company in 1982), Buffalo (opened 1989 and operated by Buffalo Books, Inc.),
and Perinton (opened 1992 and operated by Rutgers Books, Inc.), all of which are
located in Western New York State; Doylestown,  Pennsylvania (opened in 1993 and
operated by Doylestown  Books,  Inc.). The  Kideology(TM)  store which opened in
Williamsville,  New York is  operated by  Kideology(TM),  Inc.,  a  wholly-owned
subsidiary.   All  of  the  Company's   operating   subsidiaries  are  New  York
corporations except Doylestown Books, Inc. which is a Pennsylvania corporation.



                                      -7-

<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY.

        The Company does not own any real  property but rather leases all of its
locations pursuant to written leases. It is not the policy of the Company to own
or invest in real  property.  The Company's  bookstores  are  presently  located
either in strip shopping centers or as free standing buildings.  Generally,  the
Company's leases have terms ranging from five years to ten years and require the
Company  to pay a  fixed  minimum  rental  fee  plus a  rental  fee  based  on a
percentage  of net  sales  above  a  minimum  threshold  together  with  certain
executory  costs  such  as  pro  rata  share  of  property  taxes,  common  area
maintenance and insurance.  Such properties,  in the opinion of management,  are
adequately covered by insurance.

        On October 1, 1993 the Company  relocated its corporate offices from its
Monroe  Avenue  store to 1357 Monroe  Avenue,  Rochester,  New York  14618.  The
corporate offices comprise  approximately 3,400 square feet at an annual rent of
$17,940  for a term  which  expires  on May 31,  1997.  This  lease has not been
renewed.

        Set forth below are the principal terms for all  significant  leases for
bookstores of the Company (or its subsidiaries).
<TABLE>
<CAPTION>
                            APPROX.          TERM
                            SQUARE          AND/OR
        LOCATION            FOOTAGE        EXPIRATION       CURRENT RENT          LESSOR
------------------------- ----------      ------------     ------------------  ---------------
<S>                           <C>         <C>              <C>                 <C>           
CORPORATE OFFICE:             3,400       Expires          $17,940 per year    U.S. Realty
The Village Green                         May 31,                              Corporation
Bookstore, Inc.                           1997
1357 Monroe Avenue
Rochester, NY 14618

LOCATION 1:                  10,000       10 years         $126,000 per        Paul Adams
766 Monroe Avenue                         Ending           year plus 4.5%
Rochester, NY  14607                      1/31/06          of annual gross
                                                           sales over $2.8
                                                           million

LOCATION 2:                   6,150       5 years          $73,800 per year    765 Elmwood
765 Elmwood Avenue                        ending           plus 4% of          Associates
Buffalo, NY  14222                        6/30/99          annual gross
                                                           sales over
                                                           $1.845 million

LOCATION 3:                  18,039       10 years         $154,858 per        Wegmans
6600 Pittsford-Palmyra                    Ending           year plus 4.5%      Enterprises
Road                                      9/30/05          of annual gross
Fairport, NY 14450                                         sales over $4.1
(Perinton)                                                 million

LOCATION 4:                   8,300       5 years          $92,000 per year    B.C.
16 South Main Street                      with 5           plus 3% of          Associates
Doylestown, PA 18901                      year option      annual gross
                                          Ending           sales over
                                          10/31/03         $1.533 million

LOCATION 5:                   3,600       10 years         $46,800 per year    Stephen S.
5455 Main Street                          with 10          years 4 thru 7      Obletz
Williamsville, NY                         year             $50,400 per year
                                          option           years 8 thru 10
                                          ending           $57,600 per year
                                          12/14/05
</TABLE>
                                     -8-

<PAGE>




ITEM 3. LEGAL PROCEEDINGS.

        Tomorrow's Toys, Inc. d/b/a ABCO  Distributors v. The Village Green. The
Company was named a defendant in an adversary  proceeding  commenced on November
27,  1996 by  Tomorrow's  Toys,  Inc.  d/b/a ABCO  Distributors,  a supplier  of
children's  videos, as part of plaintiff's  bankruptcy case in the United States
Bankruptcy  Court  for the  Southern  District  of New  York.  Plaintiff  sought
judgment based upon unpaid  invoices in the amount of $11,136.10  plus interest,
litigation  costs and attorney's  fees. The case has been settled and payment by
the Company to the  plaintiff  in the amount of $8,908.88 is expected to be made
on or before June 1, 1997.  In the event of a default,  a judgment by confession
will be entered for $11,136.10 plus interest from July 26, 1996.

        Star Video  Entertainment  LP v. The Village Green  Bookstore,  Inc. The
Company has been named a defendant  in an action  commenced  in  Rochester  City
Court on January 3, 1997 by Star Video  Entertainment  LP. The  complaint  seeks
judgment  based upon unpaid  invoices in the amount of $2,885.04  plus interest,
litigation  costs and  attorney's  fees.  Plaintiff  recently filed a motion for
summary judgment seeking $1,073.71 plus interest, costs and attorney's fees. The
Company  contends  that no amount is owed to plaintiff and intends to vigorously
defend this action.  At this time, the outcome of this matter cannot be assessed
with certainty.

        Shurman  Fine  Papers,  Inc. v. The Village  Green  Bookstore,  Inc. The
Company has been named a defendant in an action  commenced  in Supreme  Court of
the State of New York for Monroe  County on  January  24,  1997 by Shurman  Fine
Papers, Inc., a supplier of greeting cards.  Plaintiff seeks judgment for unpaid
invoices in the total amount of $59,143.42 plus interest and costs, which amount
the Company contends is greatly overstated.  In addition, the Company intends to
return  seasonal  cards,  which will  further  reduce the total  amount  owed to
approximately $35,000. Settlement negotiations have begun in an attempt first to
agree upon the amount of the  liability,  and then to agree upon a payment plan.
At this time, the outcome of this matter cannot be assessed with certainty.

        Sunrise  Publications,  Inc. v. The Village  Green  Bookstore,  Inc. The
Company has been named a defendant in an action  commenced  in Supreme  Court of
the  State of New  York  for  Monroe  County  on  February  4,  1997 by  Sunrise
Publications,  Inc., a greeting  card  supplier.  Plaintiff  seeks  judgment for
unpaid  invoices in the total amount of $28,468.88  plus interest and litigation
costs.  The  Company  contends  that the  amount  owed has  been  overstated  by
plaintiff. The Company also intends to return seasonal cards, which will further
reduce the total amount owed to approximately $18,000.  Settlement  negotiations
have begun in an attempt  first to agree upon the amount of the  liability,  and
then to agree upon a payment  plan.  At this time,  the  outcome of this  matter
cannot be assessed with certainty.

        Empire State News Corp. v. The Village Green  Bookstore,  Inc. A default
judgment  in the  amount  of  $14,343.84  recently  was  obtained  in an  action
commenced  in Buffalo  City Court on or about March 6, 1997 by Empire State News
Corp.  Plaintiff  has  indicated a  willingness  to settle this matter,  and the
Company has prepared a payment proposal to be made to plaintiff.



                                      -9-

<PAGE>



        Andrews & McMeel v. The Village  Green  Bookstore,  Inc. The Company has
been  named a  defendant  in a suit  commenced  on or  about  April  3,  1997 in
Rochester City Court. Plaintiff seeks judgment based upon unpaid invoices in the
amount of  $14,187.76  plus  interest and costs.  The Company  contends that the
amount owed is  $8,194.19.  At this time,  the outcome of this matter  cannot be
assessed with certainty.

        International Playthings,  Inc. v. The Village Green Bookstore, Inc. The
Company has been named a defendant in a suit  commenced in Rochester  City Court
on or about March 21, 1997.  Plaintiff seeks judgment based upon unpaid invoices
in the  total  amount  of  $3,656.47.  The  amount  owed in this  case is not in
dispute,  and counsel have spoken  concerning  payment terms.  At this time, the
outcome of this matter cannot be assessed with certainty.

        International  Periodical  Distributors,   Inc.  v.  The  Village  Green
Bookstore, Inc. The Company has been named a defendant in an action commenced in
Supreme  Court  for  the  State  of  New  York  in  Erie  County  by a  magazine
distributor.  Plaintiff  seeks judgment based upon unpaid  invoices in the total
amount of  $51,972.24  plus  interest and costs.  The Company  contends that the
amount owed is  $45,679.18.  At this time,  the outcome of this matter cannot be
assessed with certainty.

        The Company has been named a defendant in an action commenced during the
first quarter of fiscal 1997 in Delaware County, PA. The plaintiff,  Glen Eagle,
is the landlord of the Company's former Glen Eagle, PA store,  which the Company
closed during fiscal 1997.  Glen Eagle has brought a suit for lease  termination
damages in excess of $1 million  for unpaid rent  scheduled  to be paid over the
remaining  term of the ten year lease  agreement.  Discovery  proceedings in the
case are just getting underway.  At this time, the outcome of this matter cannot
be  assessed  with  certainty,  especially  with  respect to open issues such as
potential mitigation of damages by reletting of the premises.

        Benderson  85-1 Trust v. The Village Green  Bookstore,  Inc. The Company
has been named a  defendant  in an action  commenced  on August 24,  1994 in the
Supreme Court of the State of New York for Erie County  involving a dispute on a
Lease in the amount of $42,392.07.  The plaintiff,  Benderson 85-1 Trust, is the
landlord of the Company's former  Tonawanda,  New York store,  which the Company
closed in January  1994.  The  Tonawanda  store was  operated  by the  Company's
subsidiary,  Niagara Books,  Inc.,  which was the party named on the Lease.  The
Company  believes it has meritorious  defenses and intends to vigorously  defend
this action.

        William W. Shuster, Jr. v. The Village Green Bookstore, Inc. The Company
has been  named a  defendant  in an  action  commenced  on August 3, 1994 in the
Supreme  Court of the State of New York for Monroe County by William W. Shuster,
Jr., as  plaintiff,  involving a "slip and fall" on the  Company's  property for
damages in the amount of $2  million.  The Company  carries $1 million  worth of
liability insurance which the Company believes should be sufficient to cover any
possible award of damages to the plaintiff. Further, the Company believes it has
meritorious defenses and intends to vigorously defend this action.




                                      -10-

<PAGE>


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

        The Company did not have an Annual Meeting of Shareholders during fiscal
1997.


















































                                      -11-

<PAGE>

                                     PART II

ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        The Company's  shares of Common Stock were traded on the NASDAQ SmallCap
Market until January 24, 1997 under the symbol Book,  when the  Company's  stock
and Redeemable Warrants were delisted for failing to meet the minimum bid prices
required for continued  listing.  Subsequent to January 24, 1997,  the Company's
Common Stock has traded on the National Association of Securities Dealers,  Inc.
("NASD")  Over-the-Counter  Market ("OTC").  The table reflects the high and low
bid prices for the Common  Stock as reported  by the NASD for each full  quarter
for the last two fiscal years and the current fiscal year.  There is no longer a
market  for the  Company's  Redeemable  Warrants.  The  prices  set forth  below
represent  quotes between  dealers and do not include  commissions,  mark-ups or
mark-downs and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
              Period                           Common Stock                Warrants
------------------------------------      ----------------------- ----------------------------
                                            Low           High           Low           High
                                          ---------      --------      ---------      --------
<S>                                          <C>           <C>             <C>           <C> 
Fiscal Year Ended January 28, 1996

        First Quarter                        $2.50         $3.75           $.44          $.75
        Second Quarter                       $1.88         $3.25           $.25          $.81
        Third Quarter                        $2.00         $3.13           $.38          $.81
        Fourth Quarter                       $1.63         $2.39           $.38          $.69

Fiscal Year Ended February 2, 1997

        First Quarter                        $ .88         $1.25           $.25          $.41
        Second Quarter                        $.19          $.35           $.38          $.75
        Third Quarter                         $.09          $.31           $.03          $.06
        Fourth Quarter                        $.03          $.13           $.03          $.03
</TABLE>


        On February 21, 1995, the Boston Stock Exchange  approved the listing of
the Company's  Common Stock and  Redeemable  Warrants  upon  official  notice of
issuance of the Company's Public  Offering,  which notice was given on March 15,
1995.  On March 16,  1995,  the NASDAQ Small Cap Market  approved and  commenced
trading on the  Redeemable  Warrants.  On January  24,  1997,  the  Company  was
delisted  from the NASDAQ  Small Cap Market for  failing to meet the minimum bid
prices required for continued listing.

        As of May 16, 1997 there were approximately 836 holders of record of the
Common Stock.  Such number of record holders was  determined  from the Company's
shareholder  records and does not include  beneficial owners of the Common Stock
whose  shares were held in the names of various  security  holders,  dealers and
clearing agencies.

        On May 15,  1997,  the closing bid and asked prices for the Common Stock
as reported by the OTC Market were $.06 and $.08, per share, respectively. There
is no active market for the Company's Redeemable Warrants.



                                      -12-

<PAGE>



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

OVERVIEW

        The  Company   currently   operates  four  retail   bookstores  and  two
Kideology(TM)  stores in New York and  Pennsylvania.  The Company's  strategy is
focused  primarily on  continuing  to own and operate  retail  bookstores in the
areas in which it currently competes.  However, the Company is not certain if it
can continue to operate all of its existing  retail  bookstores or even continue
to operate as a going concern.

        The fiscal year ending  February 2, 1997 ("Fiscal 1997") was a period of
consolidation and re-evaluation.  The events which led to the Company's position
in Fiscal 1997 were the following:

        o       The maturity of an aggregate  of $1.2 million  Principal  Amount
                1995  7%  Convertible   Senior   Subordinated   Debentures  (the
                "Debentures").  Sands  Brothers & Co., Ltd.  ("Sands  Brothers")
                acted as  placement  agent in the  sale of the  Debentures.  The
                Company is  currently in default on the  Debentures.  On October
                11,  1996,  the Company  signed a Credit  Agreement  dated as of
                September  25, 1996 with VGBS  Acquisition  Corp.  ("VGBS"),  an
                affiliate of H.J.  Meyers & Co.,  Inc.,  the  underwriter in the
                Company's March 23, 1995 public offering, pursuant to which VGBS
                is to loan  the  Company  the  amount  necessary  to  repay  the
                Debentures. To date only $300,000 has been loaned to the Company
                by VGBS.

        o      Severe  competitive  conditions  served to continue to  adversely
               affect  the  Company's  operations  in  both  the  bookstore  and
               educational retail environment.

        o      Lack of  working  capital  as well  as a lack of  vendor  support
               resulted in the Company consolidating  operations to reduce trade
               payables and generate  cash for daily  operations.  During fiscal
               1997, six bookstores were closed.












                                      -13-

<PAGE>


RESULTS OF OPERATIONS

               The  following  table sets forth for the  periods  indicated  the
percentage of net sales,  unless  otherwise  indicated,  represented  by certain
items reflected in the Company's consolidated statements of operations:


                                                   Fiscal Year Ended
                                     ------------------------------------------
                                       February 2, 1997       January 28, 1996
                                     ---------------------  -------------------
Statement of Operations Data
Net Sales                                    $ 8,069,316          $11,040,366
As a percentage of Net Sales:                        100%                 100%
  Same Stores                                       70.8                 87.0
  New Stores                                         6.1                 13.0
  Closed Stores                                     23.1                  0.0
                                                   100.0                100.0
  Total Net Sales
  Cost of Sales                                     69.7                 64.7

  Gross Profit                                      30.3                 35.3
  Selling, General and
    Administrative Expenses                         50.8                 45.6
  Other Expenses                                    12.7                  2.7
  Loss from Operations                             (33.2)               (13.0)
  Net Loss                                         (35.1)               (15.0)


YEAR ENDED FEBRUARY 2, 1997 COMPARED TO YEAR ENDED JANUARY 28, 1996

        The Company is facing  increased  competition  in the Buffalo,  New York
market with the addition of Borders Books and Music superstore as well as Barnes
& Noble and Media Play superstores.  In addition, Barnes & Noble, Media Play and
FYE have opened superstores in the Rochester, New York area. Rochester, New York
has been  historically  the financially  strongest  geographic area in which the
Company's stores compete.

        Net Sales for the fiscal year ended February 2, 1997 ("Fiscal 1997") and
fiscal  year  ended  January  28,  1996  ("Fiscal  1996")  were  $8,069,316  and
$11,040,366 respectively, a decrease of 26.9% in Fiscal 1997 versus Fiscal 1996.
Comparable store sales decreased 16.9% in Fiscal 1997, versus a decrease of 2.7%
during Fiscal 1996. The primary reason for this decline is the continued  severe
competitive conditions faced by the Company.











                                      -14-

<PAGE>


        The Company's gross profit margin for Fiscal 1997 was 30.3%, as compared
to 35.3% for Fiscal  1996.  In absolute  dollars,  gross profit  decreased  from
$3,902,258  for Fiscal  1996 to  $2,447,788  for  Fiscal  1997.  The  additional
competition in the bookstore  industry through the aggressive  expansion of book
superstores and the Company's lack of finance and reduced trade support resulted
in the  Company's  closing of six of its retail  bookstores  and a reduction  in
comparable store sales of 16.9%.

        In Fiscal 1997, the Company incurred other expenses of $1,025,818. These
expenses  were  recorded  as a result  of the  closing  of six of the  Company's
bookstores.  As a percentage of net sales,  selling,  general and administrative
expenses increased from 45.6% of net sales for Fiscal 1996 to 50.6% of net sales
for Fiscal 1997, as a result of decreased  economies of scale resulting from the
closing of six stores and reduced sales volumes from comparable stores.

YEAR ENDED JANUARY 28, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995

        Net Sales for the fiscal year ended January 28, 1996 ("Fiscal 1996") and
fiscal  year ended  January  29,  1995  ("Fiscal  1995")  were  $11,040,366  and
$10,002,901  respectively,  an increase  of 10.4% in Fiscal  1996 versus  Fiscal
1995.  Comparable store sales decreased 2.7% in Fiscal 1996,  versus an increase
of 1.0% during Fiscal 1995.  The primary  reason for this decline was due to the
sales decline at the McKinley Mall store in Blasdell,  New York.  This store was
closed in March 1996.

        The Company's gross profit margin for Fiscal 1996 was 35.3%, as compared
to 36.3% for Fiscal 1995. This nominal improvement of $273,285 in absolute gross
profit  dollars was a result of increased  sales  volumes.  The  improvement  in
absolute  dollars  represented  a 1.0%  decline in gross profit  percentage.  In
absolute  dollars,  gross profit  increased  from  $3,628,973 for Fiscal 1995 to
$3,902,258  for Fiscal 1996.  Increased  competition  in the bookstore  industry
resulted in the Company  competing more  aggressively,  with discounts  doubling
from 2.5% of sales to 5.0% of sales.  Notwithstanding this increase in discounts
of 2.5%, gross profit declined by 1.0%.

        Selling,  general and administrative  expenses for Fiscal 1996 increased
33.1%, due to the initial start up costs related to the addition of four (4) new
stores (two (2) bookstores and two (2) Kideology(TM)  stores),  the introduction
of  the  Company's  new  Kideology(TM)   retail  format,  and  the  slower  than
anticipated  growth in the new stores.  The new bookstores  were sited closer to
major metropolitan areas resulting in higher selling, general and administrative
costs.

        In fiscal 1996, the Company  incurred other expenses of $305,637.  These
expenses  were  recorded as a result of the closing of two (2) of the  Company's
underperforming  bookstores.  As a percentage of net sales, selling, general and
administrative  expenses  increased  from 37.8% of net sales for Fiscal  1995 to
45.6% of net sales for Fiscal 1996.







                                      -15-

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

        Cash  amounted to $140,417 at February 2, 1997,  as compared to $383,918
at January 28,  1996.  Inventories  decreased by  $3,522,277  to  $2,784,531  at
February 2, 1997 from  $6,306,808 at January 28, 1996. This is the result of the
closing of six retail locations. Working capital at February 2, 1997 was $59,243
as compared  to  $1,920,850  at January  28,  1996.  The  Company's  independent
auditors  have  stated  that as a  result  of the  Company's  current  financial
condition there is substantial  doubt as to the Company's ability to continue as
a going concern.

        On October  11,  1996,  the  Company  and VGBS  Acquisition  Corporation
("VGBS")  consummated a Credit Agreement dated as of September 25, 1996, whereby
VGBS agreed to loan up to $1,200,000 to the Company pursuant to a Senior Secured
Promissory Grid Note dated  September 25, 1996 (the "Grid Note").  The Grid Note
bears  interest at the rate of 9% per annum with  principal  and interest due in
arrears in quarterly  installments  commencing  June 30,  1997.  Pursuant to the
Credit  Agreement,  the Company has agreed that the $1,200,000 loan amount to be
provided by VGBS pursuant to the Grid Note will be used by the Company solely to
repay the entire  principal  amount  owed by the  Company to the  holders of the
Company's 1995 7% Convertible Senior Subordinated Debentures (the "Debentures").
To date, VGBS has made one installment loan on the Grid Note and the Company has
reduced the amount due to its  Debentureholders to approximately  $900,000.  The
Company owes approximately $300,000 to VGBS pursuant to the Grid Note.

        Concurrent with the  consummation of the Credit  Agreement,  the Company
executed a Warrant to purchase up to 2,400,000  shares of the  Company's  Common
Stock at the purchase price of $.50 per share in favor of VGBS (the "Warrant").

        The  Company  has also  entered  into a  Security  Agreement  with  VGBS
pursuant  to which the  Company  has  granted  VGBS a security  interest  on the
indebtedness  incurred by the Company pursuant to the Credit Agreement and Note.
The Security  Agreement is senior in right of payment and in  collateral  except
for up to $500,000 of inventory  financing for working capital.  VGBS has agreed
to subordinate its security interest under the Security agreement to the holders
of the  Debentures  in the  event  VGBS  breaches  its  obligation  to fund  any
installment due to the Company under the Credit Agreement and Note.

        Additionally, to induce VGBS to enter into the Credit Agreement, certain
of the Company's shareholders granted an irrevocably proxy to VGBS pursuant to a
Shareholders'  Agreement and Irrevocable Proxy to vote such shareholders' shares
of Common Stock (the "Shareholders' Agreement").  Subsequent to the execution of
the Credit Agreement, however, certain of such shareholders sold their shares in
violation of the Shareholders Agreement.












                                      -16-

<PAGE>


        Furthermore, under the terms of the Credit Agreement, VGBS has the right
to  reconstitute  the entire Board of  Directors  of the Company,  and, as such,
three  of  the  four  current  directors  of the  Company  have  tendered  their
resignations  from the Board of Directors to the Company,  including  Raymond C.
Sparks,  such  resignations to be held by the Company pending  acceptance by the
Company.

        VGBS is an affiliate of H.J. Meyers & Co., Inc., the Placement Agreement
in this Offering.  The Company  believes that given the lack of available credit
terms from  unaffiliated  third parties,  the consideration for the transactions
described above was the result of arms-length  negotiations  between the Company
and VGBS.  No  assurances  can be given that the Company  will be able to borrow
additional funds pursuant to the Grid Note.

SEASONALITY AND QUARTERLY FLUCTUATIONS

        The specialty  retail industry,  which includes the Company's  bookstore
and  Kideology(TM)  stores,  is  subject  to certain  seasonal  customer  buying
patterns. Typically, within the Company's fiscal year, net sales and income from
operations  are  significantly  higher during the fourth fiscal  quarter,  which
includes the traditional  holiday season, and are lowest in the first and second
fiscal quarters.  Working capital requirements are generally greatest during the
third  and  fourth  fiscal  quarters  due to  the  seasonality  of the  Company'
business.  This  seasonal  pattern is primarily  due to the  increased  customer
demand for books during the year-end holiday selling season.

INFLATION

        There was no significant  impact on the Company'  operations as a result
of inflation during the last two fiscal years.




















                                      -17-

<PAGE>


ITEM 7. FINANCIAL STATEMENTS.

        The  Company's  Financial  Statements,  including  Consolidated  Balance
Sheets as of February 2, 1997 and January 28, 1996 and the related  Consolidated
Statements of Operations, changes in stockholders' equity and cash flows for the
twelve (12) months ended  February 2, 1997 and January 28,  1996,  respectively.
For a list  of the  Consolidated  Financial  Statements  filed  as  part of this
report,  see  Contents  to  Consolidated   Financial   Statements  at  F-2.  The
Consolidated Financial Statements are deemed a part of this 10-KSB.











































                                      -18-

<PAGE>



                        THE VILLAGE GREEN BOOKSTORE, INC.
                        ---------------------------------
                                AND SUBSIDIARIES
                                ----------------

                               ROCHESTER, NEW YORK
                               -------------------


                    AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    -----------------------------------------

                                       AND
                                       ---

                          INDEPENDENT AUDITORS' REPORTS
                          -----------------------------

                      FEBRUARY 2, 1997 AND JANUARY 28, 1996
                      -------------------------------------

































                                     F - 1

<PAGE>





                                    CONTENTS
                                    --------


AUDITED CONSOLIDATED FINANCIAL STATEMENTS                                PAGE
-----------------------------------------                                ----

  Independent Auditors' Reports                                           F-3

  Consolidated Balance Sheets                                             F-5

  Consolidated Statements of Operations                                   F-6

  Consolidated Statements of Changes in Stockholders' Equity              F-7

  Consolidated Statements of Cash Flows                                   F-8

  Notes to Consolidated Financial Statements                             F-10
































                                     F - 2

<PAGE>


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




Board of Directors and Stockholders
The Village Green Bookstore, Inc.
  and Subsidiaries

We have audited the accompanying consolidated balance sheet of The Village Green
Bookstore,  Inc.  and  Subsidiaries  as of  February  2, 1997,  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 financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of The Village Green
Bookstore,  Inc. and  Subsidiaries as of February 2, 1997, and the  consolidated
results of their operations and their  consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements for the year ended February
2, 1997 have been  prepared  assuming  that the Company will continue as a going
concern. As discussed in Note B to the consolidated  financial  statements,  the
Company  has  experienced   recurring   losses  from  operations  and  liquidity
constraints  that raise  substantial  doubt  about its  ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note B. The consolidated  financial statements for the year ended February 2,
1997 do not include any  adjustments  that might result from the outcome of this
uncertainty.




                                                MENGEL, METZGER, BARR & CO. LLP


Rochester, New York
May 15, 1997





                                     F - 3

<PAGE>



                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors of
  The Village Green Bookstore, Inc.
Rochester, New York

We have audited the accompanying consolidated balance sheet of The Village Green
Bookstore,  Inc. as of January 28, 1996, and the related consolidated statements
of  operations,  changes in  stockholders'  equity,  and cash flows for the year
ended January 28, 1996. These financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the financial position of the Company as of January 28, 1996, and the
results  of its  operations  and its  cash  flows  for the  year  then  ended in
conformity with generally accepted accounting principles.

The  accompanying  1996  consolidated  financial  statements  have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
B  to  the  consolidated  financial  statements,  the  Company  is  experiencing
difficulty in generating  cash flows from  operations  and has recurring  losses
from operations which raises  substantial doubt about its ability to continue as
a going concern.  Management's plans concerning these matters are also described
in Note B.  The  1996  consolidated  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.




Deloitte & Touche LLP
Rochester, New York
May 9, 1996





                                     F - 4

<PAGE>


               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
<TABLE>
<CAPTION>
                             ASSETS                                            
                             ------                                 February 2,    January 28,
                                                                       1997           1996   
                                                                   -----------    -----------
<S>                                                                <C>            <C>   
CURRENT ASSETS
  Cash                                                             $   140,417    $   383,918
  Receivables                                                           80,725        130,974
  Inventories                                                        2,784,531      6,306,808
  Other current assets                                                  95,594        290,141
                                                                   -----------    -----------
                                            TOTAL CURRENT ASSETS     3,101,267      7,111,841

PROPERTY AND EQUIPMENT, net of accumulated
  depreciation and amortization                                      1,331,313      1,933,838

OTHER ASSETS                                                            57,802        161,585
                                                                   -----------    -----------
                                                    TOTAL ASSETS   $ 4,490,382    $ 9,207,264
                                                                   ===========    ===========

              LIABILITIES AND STOCKHOLDERS' EQUITY
              ------------------------------------

CURRENT LIABILITIES
  Current portion of long-term debt                                $ 1,001,519    $ 1,231,227
  Accounts payable                                                   1,746,379      3,332,642
  Accrued payroll expense                                               47,577         77,565
  Accrued sales taxes payable                                           57,534         81,442
  Other current liabilities                                            189,015        468,115
                                                                   -----------    -----------
                                       TOTAL CURRENT LIABILITIES     3,042,024      5,190,991

LONG-TERM DEBT                                                         277,090         13,965
                                                                                 
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
 Common stock, $.001 par:
    Authorized 10,000,000 shares
    Issued and outstanding, 3,741,255 shares                             3,741          3,741
  Additional paid-in capital                                         8,117,154      8,117,154
  Accumulated deficit                                               (6,949,627)    (4,118,587)
                                                                   -----------    -----------
                                                                     1,171,268      4,002,308
                                                                   -----------    -----------
                                           TOTAL LIABILITIES AND
                                            STOCKHOLDERS' EQUITY   $ 4,490,382    $ 9,207,264
                                                                   ===========    ===========
</TABLE>






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



                                     F - 5

<PAGE>

               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------
<TABLE>
<CAPTION>
                                                                              Year ended
                                                                     ----------------------------
                                                                      February 2,    January 28,
                                                                          1997           1996
                                                                     ------------    ------------
<S>                                                                  <C>             <C>         
Net sales                                                            $  8,069,316    $ 11,040,366

Cost of goods sold                                                      5,621,528       7,138,108
                                                                     ------------    ------------
                                                      GROSS PROFIT      2,447,788       3,902,258

Selling, general and administrative expenses                            4,100,893       5,030,044

Other expenses                                                          1,025,818         305,637
                                                                     ------------    ------------
                                              LOSS FROM OPERATIONS     (2,678,923)     (1,433,423)

Other income (expense):
  Sundry                                                                    9,258          65,654
  Interest expense                                                       (122,716)       (111,869)
  Amortization of debt issuance costs                                     (23,781)       (171,500)
  Loss on disposal of property and equipment                               (8,378)           --
                                                                     ------------    ------------
                                                                         (145,617)       (217,715)
                                                                     ------------    ------------
                                          LOSS BEFORE INCOME TAXES     (2,824,540)     (1,651,138)

Income taxes                                                                6,500           3,591
                                                                     ------------    ------------
                                                          NET LOSS   $ (2,831,040)   $ (1,654,729)
                                                                     ============    ============

Net loss per common share                                            $      (0.76)   $      (0.48)
                                                                     ============    ============

Weighted average number of common shares outstanding                    3,741,255       3,428,294
                                                                     ============    ============

</TABLE>

















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


                                     F - 6

<PAGE>

               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
           ----------------------------------------------------------

                YEARS ENDED FEBRUARY 2, 1997 AND JANUARY 28, 1996
                -------------------------------------------------


<TABLE>
<CAPTION>
                                                                           Additional                         Total
                                                               Par          paid-in        Accumulated  stockholders'
                                             Shares           value          capital         deficit         equity
                                           -----------     -----------     -----------     -----------   ----------
<S>                                         <C>           <C>             <C>             <C>            <C>        
Balance at January 29, 1995                 1,710,880     $     1,711     $ 3,232,573     $(2,463,858)   $   770,426

Exercise of warrants                              100            --                50            --               50

Issuance of common
  stock                                     2,216,775           2,216       5,195,845            --        5,198,061

Purchase and retirement
  of common stock                            (186,500)           (186)       (186,314)           --          
(186,500)

Payment to stockholder                           --              --          (125,000)           --          
(125,000)

Net loss for the year                            --              --              --        (1,654,729)     
(1,654,729)
                                          -----------     -----------     -----------     -----------    -----------
                       BALANCE AT
                      JANUARY 28, 1996      3,741,255           3,741       8,117,154      (4,118,587)     4,002,308

Net loss for the year                            --              --              --        (2,831,040)    (2,831,040)
                                          -----------     -----------     -----------     -----------    -----------
                       BALANCE AT
                      FEBRUARY 2, 1997      3,741,255     $     3,741     $ 8,117,154     $(6,949,627)   $ 1,171,268
                                          ===========     ===========     ===========     ===========    ===========

</TABLE>





























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


                                     F - 7

<PAGE>

               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
<TABLE>
<CAPTION>
                                                                                 Year ended
                                                                         ---------------------------
                                                                         February 2,     January 28,
                                                                             1997           1996
                                                                         -----------    -----------
<S>                                                                      <C>            <C>   
CASH FLOWS - OPERATING ACTIVITIES
  Net loss                                                               $(2,831,040)   $(1,654,729)
  Adjustments to reconcile net loss to net cash (used for)
    operating activities:
      Depreciation and amortization                                          437,788        480,274
      Other expenses                                                         293,141        305,637
      Security deposits forfeited                                             80,002           --
      Loss on disposal of property and equipment                               8,378           --
      Changes in operating assets and liabilities:
        Receivables                                                           74,249         72,287
        Inventories                                                        3,522,277     (1,574,604)
        Other current assets                                                 194,547        (96,946)
        Accounts payable                                                  (1,586,263)       (15,830)
        Accrued payroll expense                                              (29,988)        22,135
        Accrued sales taxes payable                                          (23,908)        15,452
        Other current liabilities                                           (279,100)       120,022
                                                                         -----------    -----------
                                                  NET CASH (USED FOR)
                                                 OPERATING ACTIVITIES       (139,917)    (2,326,302)

CASH FLOWS - INVESTING ACTIVITIES
  Purchases of property and equipment                                        (58,347)    (1,117,472)
  Other                                                                         --            1,216
                                                                         -----------    -----------
                                                  NET CASH (USED FOR)
                                                 INVESTING ACTIVITIES        (58,347)    (1,116,256)

CASH FLOWS - FINANCING ACTIVITIES
  Proceeds from borrowings of long-term debt                                 300,000           --
  Payments on long-term debt                                                (345,237)    (1,826,168)
  Proceeds from issuance of common stock, net of expenses                       --        5,361,674
  Purchase and retirement of common stock, net                                  --         (103,500)
  Payment to stockholder                                                        --         (125,000)
                                                                         -----------    -----------
                                    NET CASH (USED FOR) PROVIDED FROM
                                                 FINANCING ACTIVITIES        (45,237)     3,307,006
                                                                         -----------    -----------

                                               NET (DECREASE) IN CASH       (243,501)      (135,552)

Cash at beginning of year                                                    383,918        519,470
                                                                         -----------    -----------
                                                  CASH AT END OF YEAR    $   140,417    $   383,918
                                                                         ===========    ===========
</TABLE>








                                     F - 8

<PAGE>


               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

                  CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
                  ---------------------------------------------




<TABLE>
<CAPTION>
                                                                               Year ended
                                                                        -------------------------
                                                                        February 2,   January 28,
                                                                           1997          1996
                                                                         --------      --------
<S>                                                                      <C>           <C>  
NON-CASH OPERATING, INVESTING AND
  FINANCING ACTIVITIES
    Receivable acquired in connection with sale of property
      and equipment                                                      $ 24,000      $   --
                                                                         ========      ========
                                                                                     
    Equipment acquired under capital lease obligation                    $ 78,654      $   --
                                                                         ========      ========
                                                                                     
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for:                    
    Interest                                                             $ 66,045      $111,869
                                                                         ========      ========
                                                                                     
    Income taxes                                                         $  3,133      $    850
                                                                         ========      ========
</TABLE>
























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








                                     F - 9

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

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

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE A:  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------

    The Company
    -----------
    The Company  was  organized  in 1982 to acquire the  business of the Village
    Green Bookstore,  a Rochester based proprietorship which had been engaged in
    the bookstore business since 1973. The Company's  corporate name was changed
    in February 1986 to The Village Green  Bookstore,  Inc. In 1996, the Company
    introduced Kideology(TM),  with the opening of two stores.  Kideology(TM) is
    an educational retail system which the Company developed to sell educational
    toys and products to children from ages 14 and under.

    The  Company  competes  with a diverse  group of  national  book  retailers,
    including  WaldenBooks,   Borders  Bookshop,   Barnes  &  Noble,  B.  Dalton
    Booksellers, Crown Books, Encore Books and Books-A-Million. In recent years,
    many competing  national chains have expanded in size and number of outlets,
    and have  developed and opened  superstores  within the  Company's  existing
    markets.  The  Company's  strategic  objective  is to attempt to continue to
    operate retail bookstores in the areas in which it currently competes.

    Each Company store is situated and merchandised to specifically  address the
    tastes and demand  characteristics  of its clientele.  The Company's  stores
    feature a diversified  retail mix. The Company's basic store format includes
    (i) an inventory of several  thousand book titles and magazines,  periodical
    and newspaper titles per store per year; (ii) a stationery  department which
    carries a number of lines of greeting  cards,  boxed  stationery and writing
    papers;  (iii)  a  gift  department,  which  offers  unusual,  humorous  and
    traditional gift items; (iv) a gourmet and packaged food department  selling
    fresh and packaged desserts,  gourmet chocolates,  coffees and ice creams as
    well as other food items; and (v) special services such as special orders of
    books and newspapers. The Company also offers books-on-tape, selective video
    tape rentals and multimedia products in several of its locations.

    The Company  currently  carries on business at four  locations in Rochester,
    New  York,  two  locations  in  Buffalo,  New  York,  and  one  location  in
    Doylestown, Pennsylvania.

    Principles of consolidation
    ---------------------------
    The consolidated  financial  statements  include the accounts of The Village
    Green  Bookstore,  Inc. and its wholly-owned  subsidiaries.  All significant
    intercompany   transactions   and   balances   have   been   eliminated   in
    consolidation.

    Fiscal year
    -----------
    The  Company  has a 52/53 week  fiscal  year which ends on the Sunday  which
    falls closest to January 31.

    Concentration of credit risk - cash
    -----------------------------------
    The Company  maintains  its cash  balances in four  financial  institutions.
    These balances are insured by the Federal Deposit  Insurance  Corporation up
    to $100,000 at each financial  institution.  Uninsured  balances amounted to
    approximately $133,000 at February 2, 1997.


                                     F - 10

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE A:  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
-------------------------------------------------------------------

    Inventories
    -----------
    Inventories  are stated at the lower of cost,  determined  by the  first-in,
    first-out (FIFO) method, or market.  Certain merchandise,  such as books and
    magazines  are  returnable  to  vendors.   Books  and  magazines   represent
    approximately  $1,984,000,  or 71%, of the Company's inventories at February
    2, 1997.  The majority of books are  returnable  if held less than one year.
    Unsold magazines must generally be returned within six months.

    Property and equipment
    ----------------------
    Property and  equipment  are  recorded at cost,  or in the case of equipment
    under capital  leases,  the present value of minimum lease  payments or fair
    value, whichever is lower. Depreciation is recorded on a straight-line basis
    over the  estimated  useful  lives of the assets.  In the case of  leasehold
    improvements,  amortization is recorded on the straight-line  basis over the
    lesser of the estimated useful lives of the assets or the lease period.  The
    estimated useful lives of the Company's fixed assets range from three to ten
    years.

    Major  renewals and  betterments  are  capitalized,  while  maintenance  and
    repairs are charged to operations as incurred. Upon sale or retirement,  the
    related cost and accumulated  depreciation or amortization  are removed from
    the accounts and the related gain or loss is reflected in operations.

    Impairment of long-lived assets
    -------------------------------
    During fiscal 1997, the Company  adopted  Statement of Financial  Accounting
    Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
    and for Long-Lived  Assets to be Disposed Of". SFAS No. 121 prescribes  that
    an impairment  loss is recognized in the event that facts and  circumstances
    indicate that the carrying amount of an asset may not be recoverable, and an
    estimate of future  undiscounted cash flows is less than the carrying amount
    of the  assets.  Impairment  is  recorded  based on an  estimate  of  future
    discounted  cash flows.  The Company has determined  that no impairment loss
    needs to be recognized for applicable assets of continuing operations.

    Pre-opening expenses
    --------------------
    Incremental expenses related to the opening of new stores are capitalized as
    incurred up to the point that retail sales commence.  Once a store opens and
    retail sales commence,  the capitalized  pre-opening  expenses are amortized
    over a twelve  month  period.  Commissions  paid upon  signing of leases are
    amortized over the life of the lease.  Such costs have been fully  amortized
    or written off in connection with certain store closings (see Note F).

    Deferred debt issuance costs
    ----------------------------
    Deferred  debt  issuance  costs  were being  amortized  over the term of the
    related  debt  instruments.  Such costs were fully  amortized at February 2,
    1997.

    Loss per common share
    ---------------------
    Loss per  common  share is based on the  weighted  average  number of common
    shares considered to be outstanding during the year.
                                     F - 11

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE A:  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
-------------------------------------------------------------------

    Income taxes
    ------------
    Deferred income tax assets and liabilities arise from temporary  differences
    associated with differences between the financial statement and tax basis of
    assets  and  liabilities,  as  determined  by the  enacted  rates  which are
    expected to be in effect when these differences reverse. Deferred tax assets
    and  liabilities  are classified as current or noncurrent,  depending on the
    classification of the assets and liabilities to which they relate.  Deferred
    tax  assets  and  liabilities  not  related  to an  asset or  liability  are
    classified  as current or  noncurrent  depending on the periods in which the
    temporary  differences  are  expected to  reverse.  The  principal  types of
    temporary differences between assets and liabilities for financial statement
    and tax return purposes are detailed in Note G.

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

NOTE B:  BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
-----------------------------------------------------

    Basis of presentation
    ---------------------
    The accompanying  consolidated  financial statements have been prepared on a
    going concern basis which  contemplates  the  realization  of assets and the
    satisfaction  of liabilities  in the normal course of business.  The Company
    has incurred  significant  operating  losses in each of the last five fiscal
    years,  including net losses of $2,831,040 and $1,654,729 in fiscal 1997 and
    1996,  respectively.  In  addition,  the Company has been unable to generate
    sufficient  cash flows from operations and is currently in default on a debt
    obligation  to its  Debenture  holders which was due in April 1996 (see Note
    D).  Further,  the Company is currently  experiencing  difficulty  obtaining
    inventory  as payment  terms with  several of its vendors  have been changed
    from trade credit arrangements to cash-on-delivery  (C.O.D.). These factors,
    among others,  may indicate that the Company will be unable to continue as a
    going concern for a reasonable  period of time. The  consolidated  financial
    statements do not include any adjustments relating to the recoverability and
    classification  of recorded asset amounts or the amounts and  classification
    of  liabilities  that might be  necessary  should  the  Company be unable to
    continue as a going concern.

    Management's plans
    ------------------
    In an effort to improve  operating  performance and continue its operations,
    the  Company  has  been  and  will  be  implementing  certain  programs  and
    strategies in fiscal 1998. These strategies include:

      o     Optimization   of  Retail   Product  Mix  -  The  Company  seeks  to
            differentiate  itself from its  competition  by, among other things,
            offering a retail mix that is focused and  optimized  to address the
            tastes and demands of an affluent clientele.

                                     F - 12

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE B:  BASIS OF PRESENTATION AND MANAGEMENT'S PLANS, Cont'd
-----------------------------------------------------

      o     Emphasis on Social and Cultural  Meeting  Places;  Establishment  of
            Strong  Community  Ties The Company has  introduced  coffee cafes at
            certain of its stores.  By incorporating  this concept,  the Company
            hopes to take advantage of the changing social patterns evidenced by
            the  proliferation  of coffee cafes and  reemphasize  Village  Green
            stores  as   community   meeting   places   and   leisure   oriented
            establishments.  Accordingly,  the Company  has sought to  integrate
            each of its bookstores into their respective communities through the
            sponsorship of, and participation  in, community  activities such as
            book and  poetry  readings,  children's  programs,  book  fairs  and
            literature discussion groups.

      o     Operate  existing stores in a manner that will maximize  profits and
            cash flow by increasing sales and minimizing  expenses to the extent
            possible.

      o     Market aggressively to maximize sales for stores which are currently
            in operation.

      o     Close  stores  which  cannot be operated at a  profitable  level and
            generate cash flow.

      o     Continue  to  negotiate   terms  with  vendors  to  assure  adequate
            inventory levels are maintained at the Company's stores.

      o     Take all steps  necessary  to  facilitate  the merger of the Company
            into a subsidiary of CD Titles, Inc. (see Note J). Should the common
            stock offering cited in Note J be consummated,  the Company believes
            working  capital  will be  available  and the  Company  will be in a
            position to  negotiate  repayment  of the amounts due the  Debenture
            holders (see Note D) as well as other obligations.

NOTE C:  PROPERTY AND EQUIPMENT
-------------------------------

    Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                February 2,  January 28,
                                                                    1997         1996
                                                                -----------  -----------
<S>                                                             <C>          <C>        
      Equipment under capital lease                             $   179,020  $   100,366
      Equipment and vehicles                                        551,971      563,267
      Furniture and fixtures                                        855,842      933,782
      Rental videos                                                  66,404       65,271
      Leasehold improvements                                        836,555    1,170,974
                                                                -----------   ---------
                                                                  2,489,792    2,833,660
      Less accumulated depreciation and amortization              1,158,479      899,822
                                                                -----------  -- -------
                                   Net property and equipment   $ 1,331,313  $ 1,933,838
                                                                ============ ===========
</TABLE>

                                     F - 13

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE D:  DEBT
-------  ----

    On October 11, 1996, the Company and VGBS Acquisition  Corporation  ("VGBS")
    consummated a Credit Agreement dated as of September 25, 1996,  whereby VGBS
    agreed  to loan up to $1.2  million  to the  Company  pursuant  to a  Senior
    Secured Promissory Grid Note dated September 25, 1996 (the "Note"). Advances
    of $300,000 were scheduled to be made quarterly, contingent upon the Company
    complying with certain  representations,  warranties and covenants contained
    in the Credit  Agreement.  The first  $300,000 was advanced on September 26,
    1996. As of May 15, 1997, no subsequent amounts have been advanced under the
    Credit  Agreement.  The Note bears interest at the rate of 9% per annum with
    principal and interest  payable in equal quarterly  installments  commencing
    June 30,  1997  through  June 2000.  Pursuant to the Credit  Agreement,  the
    Company has agreed that all  amounts  advanced by VGBS  pursuant to the Note
    will be used by the Company  solely to repay  principal  amounts owed by the
    Company  to  the  holders  of  the  Company's  Convertible  Debentures  (the
    "Debentures") as cited below.

    The Company has also entered into a Security Agreement with VGBS pursuant to
    which the Company has granted VGBS a security  interest in all assets of the
    Company to secure the  indebtedness  incurred by the Company pursuant to the
    Credit  Agreement  and Note.  The  Security  Agreement is senior in right of
    payment and in  collateral  except for up to $500,000  for the  financing of
    merchandise  inventories.  VGBS  has  agreed  to  subordinate  its  security
    interest  under the Security  Agreement to the holders of the  Debentures in
    the event VGBS breaches its  obligation to fund any  installment  due to the
    Company under the Credit Agreement and Note.

    On  April  28,  1994,  the  Company   consummated  a  private  placement  of
    convertible  Debentures  with an aggregate  value of $1.2 million  (which in
    previous  years had been referred to as 7% Convertible  Senior  Subordinated
    Debentures).  These  Debentures are  convertible  into 240,000 shares of the
    Company's  common  stock  at a  conversion  price of $5.00  per  share.  The
    Debentures had an original  maturity date of April 1996.  During fiscal 1997
    and 1996,  the  debentures  were not  converted or redeemed,  in whole or in
    part. The Company was unable to pay its obligation for the Debentures  which
    was due in April 1996. In May 1996,  the Debenture  holders  entered into an
    agreement  with the Company  whereby the interest rate on the Debentures was
    increased  from 7% to 9%. In  accordance  with the  Credit  Agreement  cited
    above, a principal  payment of $300,000 was made to the Debenture holders on
    September 25, 1996.

    Long-term debt consists of the following:
                                                              Year ended
                                                    ----------------------------
                                                    February 2,      January 28,
                                                       1997              1996
                                                    ----------        ----------
     Convertible Debentures                         $  900,000        $1,200,000
     Note payable to VGBS                              300,000              --
     Obligations under capital leases                   78,609            45,192
                                                    ----------        ----------
                                                     1,278,609         1,245,192
     Less current portion                            1,001,519         1,231,227
                                                    ----------        ----------
                                                    $  277,090        $   13,965
                                                    ==========        ==========

                                     F - 14

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE D:  DEBT, Cont'd
-------------

    Maturities of long-term debt are scheduled as follows:

                                      1998                     $ 1,001,519
                                      1999                         115,629
                                      2000                         117,862
                                      2001                          43,599
                                                               -----------
                                                               $ 1,278,609
                                                               ===========



NOTE E:  STOCKHOLDERS' EQUITY
-----------------------------

    Concurrent  with the execution of the Credit  Agreement cited in Note D, the
    Company  executed a warrant allowing VGBS to purchase up to 2,400,000 shares
    of the Company's  common stock at a price of $.50 per share (the "Warrant").
    The Warrant is presently  exercisable and may be exercised through September
    15, 2001. The Warrant is subject to anti-dilution provisions and will not be
    registered  under the Securities Act of 1933, as amended.  To induce VGBS to
    enter  into the Credit  Agreement,  certain  of the  Company's  stockholders
    granted an irrevocable  proxy to VGBS pursuant to a Shareholders'  Agreement
    and  Irrevocable  Proxy  (the   "Shareholders'   Agreement")  to  vote  such
    stockholders'  shares of common stock. There are currently 156,000 shares of
    common stock subject to the Shareholders' Agreement.

    In May 1996,  the Debenture  holders cited in Note D were given  warrants to
    purchase up to 60,000  shares of the  Company's  common  stock at a price of
    $1.25  per  share.  These  warrants  are  presently  exercisable  and may be
    exercised through August 7, 2001.

    On  March  23,  1995,  the  Company   consummated  a  public  offering  (the
    "Offering")  of 2,216,755  Units,  each Unit  consisting of one share of the
    Company's common stock, par value $.001 per share and one Redeemable  Common
    Stock  Purchase  Warrant at a public  offering  price of $3.00 per Unit. The
    warrants  attached to the Offering may be exercised to purchase common stock
    of the Company at a price of $3.60 per share,  through  their  expiration in
    March 2000. The Company  received  proceeds of $5,198,061 from the offering,
    which were net of related expenses totaling $1,452,204.

    The Company entered into an agreement with an investor in September 1994, in
    which the investor  purchased for $300,000,  100,000 shares of the Company's
    common stock and a warrant to purchase an additional  100,000  shares of the
    Company's  common  stock.  The  Company had agreed to pay the  investor  any
    amount by which the net  proceeds  of the  entire  100,000  shares of common
    stock that were  subsequently  sold by the investor were less than $300,000.
    During fiscal 1996, the investor sold the 100,000 shares of common stock for
    $175,000.  Accordingly,  the  Company  made a  payment  of  $125,000  to the
    investor, which was charged to additional paid-in capital.


                                     F - 15

<PAGE>


               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE E:  STOCKHOLDERS' EQUITY, Cont'd
-----------------------------

    Option plans
    ------------
    Under the Village Green Bookstore, Inc. 1987 Stock Option Plan, an aggregate
    of 100,000  shares of common stock were  authorized  for  issuance.  Options
    issued under this Plan,  which is  non-compensatory  and involve only common
    stock, expire eight years from the date of grant.
    Future grants for this Plan are not expected.

    The  Company's  1993 Stock Option Plan provides for the issuance of up to an
    aggregate of 200,000 shares of common stock. The Committee administering the
    Plan is  authorized  under the Plan to grant  incentive  stock  options  and
    non-qualified options. The exercise price per share of common stock under an
    option  will be  established  by the  Committee  at the  time of the  grant,
    provided that with respect to incentive stock options, the option price will
    not be less than the fair market  value of the common  stock at the time the
    option is granted,  and with respect to  non-qualified  stock  options,  the
    option  price  will not be less  than 85% of the  fair  market  value of the
    common stock at the time the option is granted.  Options may be exercised in
    whole or in part at such date or dates as  determined by the  Committee.  No
    options shall be exercisable later than ten years from the date of the grant
    of such options. At February 2, 1997, 68,250 shares were reserved for future
    grant. A summary of option transactions is presented below:

<TABLE>
<CAPTION>
                                            Year ended                  Year ended
                                         February 2, 1997            January 28, 1996
                                     -----------------------      ----------------------
                                     1987 Plan     1993 Plan      1987 Plan    1993 Plan
                                     ---------     ---------      --------     ---------
<S>                                     <C>          <C>            <C>          <C>    
     Shares under option,
       beginning of year                64,500       188,250        76,500       138,250
     Options granted                      --            --            --          75,000
     Options expiring                  (16,000)      (56,500)      (12,000)      (25,000)
                                      --------      --------      --------      --------
             Shares under option,
                      end of year       48,500       131,750        64,500       188,250
                                      ========      ========      ========      ========

     Shares exercisable,
       end of year                      48,500       131,750        64,500       188,250
                                      ========      ========      ========      ========

     Exercise price of shares         $1.97 to      $2.00 to      $1.10 to      $2.00 to
       exercisable                    $  2.188      $  3.875      $  2.188      $  3.875
                                      ========      ========      ========      ========
</TABLE>

    In addition to the above  options,  under an agreement  dated June 28, 1993,
    the  Company's  President was granted a  non-qualified,  three year non-plan
    option to  purchase  103,500  shares  of the  Company's  common  stock at an
    exercise  price of $1.97 per share.  These  options were not  exercised  and
    expired on June 28, 1996.

                                     F - 16

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE F:  OTHER EXPENSES
-----------------------

    During fiscal 1997, the Company  closed four stores  (located in Ridgefield,
    CT,  Philadelphia,  PA,  Wilkes-Barre,  PA, and Greece,  NY), primarily as a
    result of the need to generate  working capital to sustain the operations of
    its other  locations.  These stores were closed between May 1996 and January
    1997.  Accordingly,  a pre-tax charge of $1,025,818 was recorded  during the
    year ended February 2, 1997 for costs  associated  with the store  closings,
    consisting  of lease  settlement  payments  and  obligations  ($84,592)  the
    write-off of fixed assets  ($293,141),  restocking and other charges related
    to the return of  inventories  ($419,045)  and other costs related to moving
    inventories  and fixed  assets  from the  closed  stores to other  operating
    locations of the Company ($229,040).

    In January 1996,  the Company  decided to close two  underperforming  stores
    (located  in  Blasdell,  NY and  Philadelphia,  PA) which were  subsequently
    closed by the end of March 1996.  Accordingly,  a pre-tax charge of $305,637
    was recorded in the fourth quarter of fiscal 1996 for costs  associated with
    the store closing  process,  consisting  of a reserve for lease  settlements
    ($165,000) and for the write-off of intangible and fixed assets ($140,637).

NOTE G:  INCOME TAXES
---------------------

    The  provision  for income  taxes for the years  ended  February 2, 1997 and
    January 28, 1996 consists of the following:


                                                   1997             1996
                                                 ----------      ---------

     Federal                                     $   --          $  --
     State                                           6,500           3,591
                                                 ---------       ---------
                                                 $   6,500       $   3,591
                                                 =========       =========

    Deferred  income tax  assets  resulting  from  temporary  differences  as of
    February 2, 1997 and January 28, 1996 are as follows:

                                                          Assets
                                               ---------------------------
                                                  1997              1996
                                               -----------     -----------

     Allowance for doubtful receivables        $     8,393     $     4,837
     Net operating loss carryforwards            2,047,959       1,165,466
     Less valuation allowance                   (2,056,352)     (1,170,303)
                                               -----------     -----------
                                               $      --       $      --
                                               ===========     ===========


                                     F - 17

<PAGE>


               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE G:  INCOME TAXES, Cont'd
---------------------

    Income taxes were computed at rates other than the statutory  federal income
    tax rate due to the following items:

<TABLE>
<CAPTION>
                                                       1997                    1996
                                               -------------------     --------------------
                                                Amount     Percent      Amount      Percent
                                               ---------   -------     ---------    -------
<S>                                            <C>           <C>       <C>           <C>    
       Tax benefit at federal statutory rate   $(958,891)    (34.0)%   $(562,607)    (34.0)%
       State taxes, net of federal benefit         6,500        .2         3,591        .2
       Net operating loss carryforward
         not utilized                            958,891      34.0       562,607      34.0
                                               ---------    ------     ---------      ----
                                               $   6,500        .2 %   $   3,591      .2 %
                                               =========    ======     =========      ====
</TABLE>

    At February 2, 1997,  the amount of net  operating  losses  available  to be
    carried   forward  to  offset  future  taxable   income  was   approximately
    $6,023,000.  These losses  expire in various  years  through  January  2012.
    Utilization  of the net  operating  losses is subject  to certain  change of
    ownership  requirements  of the  Internal  Revenue  Code which may limit the
    amount of net  operating  losses  which could be utilized in a year.  If the
    full amount of the net operating loss allowable with the change of ownership
    limitation  is not used in any  year,  the  amount  not used  increases  the
    allowable limit in the subsequent year.


NOTE H:  PROFIT-SHARING PLAN
----------------------------

    The  Company  had  a  defined  contribution   profit-sharing  plan  covering
    employees who met certain  eligibility  requirements.  The Plan provided for
    discretionary   annual   contributions   up  to  15%   of  a   participants'
    compensation.  The Plan was terminated on October 31, 1995. No contributions
    were made for the fiscal year ended January 28, 1996.
















                                     F - 18

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------


NOTE I:  COMMITMENTS AND CONTINGENCIES
--------------------------------------

    The Company conducts all retail  operations on leased  premises.  Leases are
    for  varying  periods  and are  generally  renewable  at the  option  of the
    Company.  The leases  usually  provide that the Company pay a portion of the
    taxes,  insurance and maintenance costs associated with the leased premises.
    Most leases provide for additional rents based upon a percentage of sales.

    Lease expenses for the Company's  retail and  administrative  locations were
    approximately  $693,000 and $864,000 for the fiscal years ended  February 2,
    1997 and January 28, 1996, respectively.  At February 2, 1997, future annual
    minimum  rentals  for  noncancellable  operating  leases  for the  Company's
    operating facilities are as follows:



                       Fiscal Year                                     
                       -----------                                   
                                                                     
                            1998                        $   526,356  
                            1999                            534,379  
                            2000                            493,896  
                            2001                            467,337  
                            2002                            479,067  
                         Thereafter                       1,614,006  
                                                        -----------  
                                                        $ 4,115,041  
                                                        ===========  

    On June 28, 1993, the Company entered into an employment  agreement with its
    President  which expired on June 27, 1996 but was extended for an additional
    year through June 30, 1997. This agreement provides for a base annual salary
    of $125,000 with salary  increases and bonuses to be determined by the Board
    of Directors at their discretion.

    In August  1994,  the  Company was named a  defendant  in a personal  injury
    litigation  involving  a "slip  and  fall" on the  Company's  property.  The
    plaintiff  is  claiming  damages in the amount of  $2,000,000.  The  Company
    carries $1,000,000 worth of liability  insurance which it believes should be
    sufficient  to cover any  possible  award of damages to the  plaintiff.  The
    Company  believes it has  meritorious  defenses  and  intends to  vigorously
    defend this  action.  Accordingly,  no  liability  has been  recorded in the
    accompanying consolidated financial statements.

    On March 31, 1995, the Company  entered into an agreement (the  "Agreement")
    with Mr. Paul Adams ("Adams"), a former principal stockholder and officer of
    the Company,  in order to resolve  certain  disputes with respect to (i) the
    Affiliate  Agreement  between the Company and Adams dated June 28, 1993 (the
    "Affiliate  Agreement")  and (ii) their  relationship as landlord and tenant
    with respect to the premises  located at 746-766 Monroe  Avenue,  Rochester,
    New York (the "Monroe Avenue Lease").





                                     F - 19

<PAGE>
               THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
               --------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
               --------------------------------------------------

                      FOR THE YEARS ENDED FEBRUARY 2, 1997
                      ------------------------------------
                              AND JANUARY 28, 1996
                              --------------------

NOTE I:  COMMITMENTS AND CONTINGENCIES, Cont'd
--------------------------------------

    Under the terms and conditions provided for in the Adams Agreement,  (i) the
    parties terminated the Affiliate  Agreement;  (ii) the Company exercised its
    option with Adams and acquired  186,500 shares of the Company's common stock
    held by Adams at an exercise  price of $186,500,  which  exercise  price was
    offset by the repayment by Adams of $83,000 in loans  previously made by the
    Company to Penfield  Realty  Holding Co., Inc. and William Yager (the "Yager
    Loans"),  resulting  in the net  payment  from the  Company  to Adams in the
    amount of $103,500;  (iii) the Collateral  Assignment of Mortgage  Agreement
    between the parties dated June 28, 1993, which secured Adams'  obligation to
    repay the Yager  Loans,  was  terminated;  (iv) the Option to Purchase  Real
    Property  Agreement  dated June 28, 1993 between the parties,  which secured
    certain of Adam's obligations under the Affiliate Agreement, was terminated;
    (v) the  parties  executed a Further  Modification  Agreement  to the Monroe
    Avenue Lease; (vi) the parties and Lyndon Guaranty Bank of New York, the new
    mortgagee  of  the  Monroe  Avenue   premises,   executed  a  Subordination,
    Non-Disturbance  and  Attornment  Agreement;  and (vii) Adams  executed  and
    delivered  general releases in favor of the Company,  its Board of Directors
    and executive  officers and its subsidiaries  and the Company,  its Board of
    Directors and executive officers and its subsidiaries executed and delivered
    general releases in favor of Adams.

    The  Company has been named a defendant  in an action  commenced  during the
    first quarter of fiscal 1997 in Delaware  County,  PA. The  plaintiff,  Glen
    Eagle, is the landlord of the Company's  former Glen Eagle, PA store,  which
    the Company  closed  during  fiscal 1997.  Glen Eagle has brought a suit for
    lease termination  damages in excess of $1 million for unpaid rent scheduled
    to be  paid  over  the  remaining  term  of the ten  year  lease  agreement.
    Discovery  proceedings in the case are just getting underway.  At this time,
    the outcome of this matter  cannot be assessed  with  certainty,  especially
    with  respect to open  issues  such as  potential  mitigation  of damages by
    reletting of the premises.


NOTE J:  SUBSEQUENT EVENT
-------------------------

    On April 18, 1997, the Company announced that it had reached an agreement in
    principle with CD Titles, Inc. and H.J. Meyers & Co. (an underwriter,  which
    is also a market maker for the Company's common stock),  whereby the Company
    will be merged into a  subsidiary  of CD Titles,  Inc.  The new  corporation
    created as a result of the merger, plans to issue and sell $5,000,000 of its
    common  stock to the public.  The  agreement  in principle is subject to the
    customary contingencies, including due diligence by the parties, stockholder
    approval and market factors. Upon execution of a definitive  agreement,  the
    Company  plans  to  submit  the  proposed  merger  to its  stockholders  for
    approval.










                                     F - 20

<PAGE>


ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE.

        On April 22, 1997, the Company dismissed its former auditors, Deloitte &
Touche LLP and replaced such auditors  with Mengel,  Metzger,  Barr and Co. LLP.
Deloitte  & Touche  LLP's  report on the year  ended  January  28,  1996 did not
contain an adverse  opinion or disclaimer of opinion,  nor was it modified as to
audit  scope  or  accounting  principles,   except  that  their  report  on  the
consolidated  financial  statements  for the fiscal year ended  January 28, 1996
expressed  substantial  doubt as to the Company's ability to continue as a going
concern.














































                                      -19-

<PAGE>


                                    PART III

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


        The names, ages and principal occupations of the Directors and Executive
Officers of the Company are as follows:

   Name of Director                Age                  Position
---------------------            ------     ------------------------------------
Raymond C. Sparks                  46        Chairman of the Board of Directors,
                                             President, Chief Executive Officer,
                                             Treasurer, Chief Financial Officer
                                             and Chief Operating Officer
Steven B. Sands                    38        Director
John P. Holmes                     59        Director
Michael S. Smith                   43        Director

        The term of office of each person  elected as a Director  will  continue
until the Company's next Annual Meeting of  Shareholders  or until his successor
has been elected.

        RAYMOND C. SPARKS  became the  Company's  President,  Chairman and Chief
Executive  Officer  on June 28,  1993.  Mr.  Sparks  has  eight  years of public
accounting  experience in South Africa with Ernst & Young and later, with Webb &
Company.  Since  1979,  Mr.  Sparks has  concentrated  in the  retail  industry,
primarily in supermarket and specialty stores, in both operational and financial
capacities.  Mr. Sparks was Financial Director for Burlington Industries in Cape
Town,  South Africa until 1983.  From 1983 to 1987,  Mr.  Sparks was  Divisional
Financial Manager for Checkers Supermarkets Ltd. in Cape Town, South Africa. Mr.
Sparks moved to the United States in 1987, and became Chief Financial Officer of
Checkers Restaurants in Brooklyn, New York. In 1989, he was named Vice President
of Finance at Tie Rack (U.S.), Inc. Mr. Sparks was the Chief Operating/Financial
Officer of Burke & Burke (New York) in 1991.  Mr. Sparks was Vice  President and
Chief Financial Officer of Conston  Corporation,  an apparel retailer located in
Philadelphia  before he joined the Company in June 1993.  Mr.  Sparks  holds the
professional qualification of Chartered Accountant (C.A.(S.A.)), and was awarded
a Bachelor of Commerce  (with  honors)  degree in  Financial  Accounting  by the
University of Cape Town, South Africa.

        STEVEN B. SANDS became a Director of the Company on June 28,  1993.  Mr.
Sands has been engaged in the  investment  banking  business  since 1980.  Since
1990,  Mr.  Sands has been  Co-Chairman  and Chief  Executive  Officer  of Sands
Brothers & Co.,  Ltd.,  an investment  banking firm.  Mr. Sands is a director of
Semi-Conductor Packaging Materials Co. (semiconductor  components manufacturer),
Digital Solutions,  Inc. (payroll and related services),  Command Security Corp.
(security guard  services),  Wholesale  Cellular USA, Inc.  (cellular  telephone
distributor) and Financing for Science International,  Inc. (high technology and
scientific equipment leasing), each a publicly traded company.


                                      -20-

<PAGE>

        JOHN P.  HOLMES has been a Director  of the  Company  since  October 29,
1993.  Mr.  Holmes has been a Managing  Director of Sands  Brothers & Co.,  Ltd.
since  January  1993.  Mr.  Holmes has been  engaged in the  investment  banking
business since 1962 and also is a private investor.

        MICHAEL  S.  SMITH  is  President   and  Chief   Executive   Officer  of
International  Capital and Management,  Inc. ("ICM"), a financial consulting and
investment  banking  firm.  Prior to Mr.  Smith's  association  with ICM, he was
Managing  Director of Corporate Finance at H.J. Meyers & Co., Inc. (f/k/a Thomas
James Associates,  Inc.) ("H.J. Meyers"), an investment banking firm which acted
as the managing  underwriter  of the Company's 1995 public  offering.  Mr. Smith
serves on the Board of  Directors of The Bhirud  MidCap  Growth Fund, a publicly
traded  mutual fund.  Mr.  Smith was with H.J.  Meyers from May 1991 to February
1997,  and from 1987  until  1991 was an  attorney  with the law firm of Harter,
Secrest & Emery.  Mr. Smith  received a B.A. from Cornell  University and a J.D.
from Cornell University of Law.

        Each  Director  is  elected  for a period  of one year at the  Company's
Annual Meeting of shareholders and serves until his successor is duly elected by
the  shareholders.  Officers are elected by and serve at the  discretion  of the
Board of Directors.  Directors of the Company  currently receive no compensation
for their service as a Director.

        The Board of Directors  does not have a standing  audit,  nominating  or
compensation committee.































                                      -21-

<PAGE>


ITEM 10.       EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

        The  following  table  discloses  the  compensation  for the persons who
served as the Company's Chief  Executive  Officer during Fiscal Years 1997, 1996
and 1995. No other  executive  officer of the Company had total  compensation in
excess of $100,000 for the Fiscal Years 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                               SUMMARY COMPENSATION TABLE

                               Annual Compensation                     Long-Term Compensation
                 -------------------------------------------------    -------------------------
  Name and          Fiscal       Salary     Bonus        Other        Securities    All Other
 Principal           Year          ($)        ($)       Annual        Underlying   Compensation
  Position          Ending                           Compensation     Options          ($)
                  1/28, 1/30,                             ($)            (#)
                      2/2
-------------    -------------  ---------   -------  --------------   -----------  ------------
<S>                  <C>        <C>            <C>      <C>              <C>            <C>
Raymond C. Sparks    1997       125,500        0          (1)
Raymond C. Sparks    1996       119,065        0        (1)(2)
Raymond C. Sparks    1995       100,096        0        (1)(2)            30,000        20,400


        (1)     Other annual  compensation for Mr. Sparks,  including the use of a Company car
                and health  insurance  benefits is not reported  because the aggregate of such
                amounts  does not exceed the  lesser of $50,000 or 10% of Mr.  Sparks'  annual
                salary and bonus for the periods indicated.

        (2)     Also  includes  $17,522  which  Mr.  Sparks  received  as  reimbursement   for
                relocation expenses.

</TABLE>
























                                      -22-

<PAGE>


        The  following  table sets  forth  information  concerning  the value of
unexercised stock options held by the Named Executive as of February 2, 1997. No
stock options were exercised by the Named Executive in Fiscal 1997.

                 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
                                                         Number of          Value of
                                                        Securities         Unexercised
                                                        Underlying        In-the-Money
                                                        Unexercised        Options at
                                                        Options at         Fiscal Year
                                                      Fiscal Year End        End(1)
                                                      ----------------    --------------
     Name               Shares           Value         Exercisable/        Exercisable
                      Acquired on     Realized ($)     Unexercisable      Unexerciable
                     Exercise (#)
------------------   --------------   -------------   ----------------    --------------
<S>                       <C>             <C>          <C>                    <C>    
Raymond Sparks             -              N/A          150,000/30,000         $0/$0

</TABLE>

The  Company  does not have a stock  appreciation  rights  plan,  any  long-term
compensation plan, or any pension plan requiring funding.

EMPLOYMENT AGREEMENTS

        On June 28, 1993, the Company entered into an employment  agreement with
Mr. Raymond C. Sparks,  who became the Company's  President,  Chairman and Chief
Executive  Officer on that date.  This  agreement,  which has an initial term of
three  years,  provides  for a base  annual  salary  of  $125,000,  with  salary
increases  and  bonuses  to be  determined  by the  Board  of  Directors  in its
discretion.  In Fiscal 1997 this  contract was  extended by the Company  through
June 30, 1997. In addition,  pursuant to Mr. Sparks' employment  agreement,  the
Company  reimbursed  $17,522  to Mr.  Sparks  during  Fiscal  1996  and 1995 for
expenses  related  to the  relocation  of  Mr.  Sparks  and  his  family  to the
Rochester, New York area.

1993 STOCK OPTION PLAN

        In September  1993, the Company  adopted the 1993 Stock Option Plan (the
"1993 Plan") which provided for the grant by the Company of options  ("Options")
to purchase up to an aggregate of 200,000 shares of the Company's authorized but
unissued  Common Stock (subject to adjustment in certain cases,  including stock
splits, recapitalizations and reorganizations) to officers, directors, employees
and consultants of the Company. The 1993 Plan is intended as an incentive and to
encourage stock ownership by officers and certain other employees of the Company
in order to  increase  their  proprietary  interest in the  Company's  continued
growth and success and to  encourage  such  employees to remain in the employ of
the Company.







                                      -23-

<PAGE>

        It is intended  that certain  options  granted  under the 1993 Plan will
qualify as "incentive  stock options" under Section 422 of the Internal  Revenue
Code of 1986,  as amended (the "Code")  (hereinafter  referred to as  "Incentive
Stock  Options").  The Company makes no warranty as to the  qualification of any
options as Incentive  Stock Options.  Those options  granted under the 1993 Plan
which do not qualify as Incentive Stock Options are  hereinafter  referred to as
"Non-Qualified Stock Options."

        The 1993 Plan is  administered  by a committee (the  "Committee") of two
Directors,  currently  consisting of Steven B. Sands and John P. Holmes, who are
"disinterested  persons" within the meaning of Rule 16b-3  promulgated under the
Securities  Exchange Act of 1934 (the  "Exchange  Act").  The  Committee has the
authority to select the recipients of options and determine the terms of options
granted  under the 1993 Plan.  The Board of  Directors  may, in its  discretion,
reserve  to  itself  any  or  all of the  authority  and  responsibility  of the
Committee  with respect to awards of options to employees who are not subject to
liability  under  the  Exchange  Act at the  time  any  such  responsibility  is
exercised.

        The  Committee  is  authorized  under the 1993 Plan to grant to eligible
employees  options to  purchase  shares of Common  Stock.  Such  options  may be
Incentive Stock Options and Non-Qualified Stock Options.  The exercise price per
share of Common Stock under an Option will be  established  by the  Committee in
its sole discretion at the time of grant;  provided,  however, that with respect
to  Incentive  Stock  Options,  the Option  Price will not be less than the fair
market  value of the Common  Stock at the time the Option is  granted,  and with
respect to Non-Qualified  Stock Options,  the Option Price will not be less than
eighty-five  (85%)  percent of the fair market  value of the Common Stock at the
time the Option is granted. Options may be exercised in whole or in part at such
time or  times  as will be  determined  by the  Committee  and set  forth in the
applicable  option  agreement,  except  that the term of any Option  will not be
longer than ten years from the date of its grant.  Options  will be exercised in
accordance   with   procedures   established  by  the  Committee.   Options  are
nontransferable  other than by will or the laws of descent and distribution,  or
pursuant to a qualified domestic relations order, as defined in the Code and the
Employee Retirement Income Security Act of 1974, as amended.

        Except as otherwise  permitted by the Code,  the  aggregate  fair market
value (determined as of the time the Option is granted) of the Common Stock with
respect to which any  Incentive  Stock Option may be  exercisable  for the first
time by the grantee in any calendar year (under the 1993 Plan or any other stock
option  plan of the  Company  or any or  subsidiary  thereof)  will  not  exceed
$100,000.

        No Incentive  Stock Option may be granted to an  individual  who, at the
time the Option is granted, owns, directly or indirectly,  stock possessing more
than ten  percent  (10%) of the total  combined  voting  power of all classes of
Common Stock of the Company or of any subsidiary thereof, unless such Option (i)
has an Option  price of at least 110  percent  of the fair  market  value of the
Common  Stock  on the date of the  grant  of such  Option  and  (ii)  cannot  be
exercised  more than five years after the date it is granted.  The Committee may
grant  options  under  the  1993  Plan to any  officer,  Director,  employee  or
consultant  of the  Company  or its  subsidiaries,  who is not a  member  of the
Committee.  Directors of the Company who are not also  officers or employees are
not  eligible  for  awards  under the 1993  Plan.  There  currently  is only one
executive  officer of the Company who is eligible for the grant of options under
the 1993 Plan.
                                      -24-

<PAGE>

        The  aggregate  number of shares of Common  Stock which may be purchased
pursuant to options  granted under the 1993 Plan, the number of shares of Common
Stock  covered by each  outstanding  Option,  and the price per share thereof of
each such Option will be appropriately adjusted, if necessary,  for any increase
or decrease in the number of outstanding shares of Common Stock resulting from a
stock split or other  subdivision or  consolidation of shares of Common Stock or
for other capital adjustments or payments of stock dividends or distributions or
other increases or decreases in the outstanding  shares of Common Stock effected
without receipt of consideration by the Company.  Subject to any required action
by the  shareholders,  if the Company will be the surviving  corporation  in any
merger or consolidation, any Option granted will cover the securities to which a
holder of the number of shares of Common  Stock  covered by the  unexercised  or
invested portion of the Option would have been entitled pursuant to the terms of
the merger or consolidation.

        Options  to  purchase  up to an  aggregate  of  113,250  shares  of  the
Company's authorized but unissued Common Stock (subject to adjustment in certain
cases,  including  stock  splits,  recapitalizations  and  reorganizations)  are
outstanding  under the 1993 Plan.  The  Company  has an  effective  registration
statement  on Form S-8 under the  Securities  Act covering up to an aggregate of
200,000  shares under 1993 Stock Option  Plans  permitting  the resale of shares
issued under such Plans by  affiliates  and  nonaffiliates  in the public market
without restriction under the Securities Act.

1987 STOCK OPTION PLAN

        Prior to the  adoption  of the 1993 Plan,  the  Company had in place the
1987 Incentive  Stock Option Plan, as amended (the "1987 Plan").  The purpose of
the 1987  Plan was to  advance  the  interests  of the  Company  by  encouraging
qualified  personnel to become affiliated with the Company and its subsidiaries,
to provide an incentive for directors,  officers,  key employees and consultants
to remain with the Company and its  subsidiaries,  and to stimulate  the maximum
efforts of those  employees  and  consultants  on which the  success  and future
growth of the Company and its subsidiaries are dependent through the granting of
stock options.  All options granted under the 1987 Plan are non-qualified  stock
options ("1987  Options").  The term of the 1987 Plan  originally was five years
but was extended by  amendment to eight years.  The 1987 Plan expired on May 18,
1995.

        Options to purchase up to an aggregate of 48,500 shares of the Company's
authorized  but unissued  Common Stock  (subject to adjustment in certain cases,
including stock splits,  recapitalizations  and reorganizations) are outstanding
under the 1987 Plan as of the date hereof. No additional  options may be granted
under the 1987 Plan.











                                      -25-

<PAGE>

        The  1987  Plan is  administered  by a  committee  of  three  Directors,
currently  consisting  of Raymond C. Sparks,  Steven B. Sands and John P. Holmes
(the "1987 Plan  Committee").  The 1987 Plan Committee is appointed from time to
time by a majority of the whole Board of Directors.  Any member of the 1987 Plan
Committee  may be removed by a majority of the whole Board of  Directors  at any
time with or without cause.

        The  1987  Plan  Committee  has the  responsibility,  subject  to  Board
approval to: (a) determine (i) the  Participants  to whom options under the 1987
Plan will be granted;  and (ii) the number of 1987 Options to be awarded to each
Participant  and the  number of shares  subject  to each such 1987  Option;  (b)
interpret,  construe,  and  implement the  provisions of the 1987 Plan;  and (c)
establish,  amend, and rescind appropriate rules and regulations consistent with
and relating to the 1987 Plan.

        Options  granted  under  the 1987 Plan are  evidenced  by  minutes  of a
meeting  or the  written  consent  of the 1987  Plan  Committee,  ratified  by a
resolution  of the Board of Directors,  and by written  stock option  agreements
consistent  with the terms of the 1987 Plan, each of which have been executed by
the Company and the Participant.

        1987  Options will be  exercisable  at such time  following  the date of
grant, as will be established and fixed by the 1987 Plan Committee.  The date on
which any 1987 Option becomes  exercisable will be the "Date Exercisable." On or
after the Date  Exercisable,  a  Participant  may exercise a 1987 Option at such
time or times as determined by the 1987 Plan Committee at the time of the grant,
provided,  however,  all rights to exercise a 1987 Option will expire  eight (8)
years after the date such option  granted by the 1987 Plan Committee is approved
by the Board of Directors.

        The 1987 Plan  provides  that  purchase  price per share of Common Stock
deliverable  upon the exercise of a 1987 Option will be no less than Fair Market
Value of the Common Stock on the date of grant,  or in the event the Participant
owns more than ten (10%) percent of the  outstanding  Common  Stock,  the option
price will be no less than 110% of the Fair  Market  Value on the date of grant.
The date of grant will be the date on which the Board of  Directors  approves of
each option authorized by the 1987 Plan Committee. "Fair Market Value" will mean
the closing  market value on NASDAQ,  or such other exchange on which the Common
Stock may then be listed.

        The  aggregate  number of shares of Common  Stock which may be purchased
pursuant to options  granted under the 1987 Plan, the number of shares of Common
Stock  covered by each  outstanding  Option,  and the price per share thereof of
each such Option will be appropriately  adjusted,  if necessary,  for changes in
capital structure,  reorganization,  merger or consolidation of the Company with
one or more corporations in which the Company is not the surviving  corporation,
or of a transfer of substantially  all of the property or more than eighty (80%)
percent of the then  outstanding  shares of the Company to another  corporation,
reclassifications and stock dividends.







                                      -26-

<PAGE>


ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The following table sets forth the beneficial  ownership of Common Stock
as of May 15, 1997 of (a) each  Director and nominee for election as a Director,
(b) each  executive  officer,  and (c) each  person  known by the Company to own
beneficially more than five percent of the Company's  outstanding  Common Stock.
The Company believes that,  except as otherwise stated,  the beneficial  holders
listed  below have sole  voting and  investment  power  regarding  the shares of
Common Stock reflected as being beneficially owned by them.

         Name and Address of Beneficial          Number of         Percent of
                     Owner                       Shares(1)           Shares
         ------------------------------          ---------        -----------
         Raymond C. Sparks                        46,500(2)             1.24%
         Steven B. Sands                          59,500(3)             1.59%
         John P. Holmes                           50,000                1.34%
         All Directors and Executive
           Officers as a Group (4 persons)       157,600(4)             4.21%
________________

(1)     Shares  of  Common  Stock  that an  individual  or group  has a right to
        acquire within 60 days pursuant to the exercise of options,  warrants or
        other rights are deemed to be  outstanding  for the purpose of computing
        the percentage ownership of such individual or group, but are not deemed
        to be outstanding  for computing the  percentage  ownership of any other
        person shown in the table.

(2)     Does not include 30,000 shares of Common Stock underlying  options which
        Mr.  Sparks  does not have the right to acquire  within 60 days from the
        date of this Form 10-KSB.

(3)     Includes  an  aggregate  of  50,000  shares  of  Common  Stock and 9,500
        Redeemable  Warrants owned by three private limited  partnerships  which
        Mr.  Steven B.  Sands may be deemed to  control.  Does not  include  any
        shares that may be held from time to time by Sands  Brothers & Co., Ltd.
        in connection with market making activities.

(4)     Consists  of Raymond C.  Sparks,  Steven B.  Sands,  John P.  Holmes and
        Michael S. Smith.














                                      -27-

<PAGE>

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        On June 28, 1993 (the "1993 Closing  Date"),  the Company  consummated a
private placement (the "1993 Private  Placement") of 20 Units with 34 investors,
including four investors  affiliated with Mr. Steven B. Sands, a Director of the
Company, in the aggregate amount of $2.0 million,  each Unit consisting of (i) a
7.5%  Senior  Secured  Subordinated  Note in the  principal  amount  of  $90,000
(collectively,  the "1993  Notes") and (ii) 20,000  shares of Common  Stock at a
purchase  price of $0.50 per  share.  To secure the  obligations  under the 1993
Notes, the Company granted a security  interest in substantially  all the assets
of the  Company  and  pledged  the  capital  stock  in  each  of  the  Company's
subsidiaries in favor of the investors of the 1993 Private  Placement.  The 1993
Notes were retired from a portion of the net  proceeds of the  Company's  Public
Offering and such security interests and pledges were released at such time.

        Sands Brothers & Co., Ltd.  ("Sands  Brothers") acted as placement agent
for the 1993 Private Placement.  Mr. Sands is a principal of Sands Brothers. Mr.
John P.  Holmes,  a Director  of the  Company,  is a Managing  Director of Sands
Brothers.  In  addition  to  receiving  a ten  percent  (10%)  sales  commission
($200,000)  and a three percent (3%) expense  allowance  ($60,000),  on the 1993
Closing Date,  Sands Brothers  received,  directly and as nominee for certain of
its  employees,  warrants  to purchase  500,000  shares of Common  Stock,  at an
exercise price of $0.50 per share. On the 1993 Closing Date, the closing bid and
asked prices for the Common Stock as reported by NASDAQ were $1 13/16 and $2 1/8
per  share,  respectively.  These  warrants  were  exercisable  for  five  years
commencing  September 27, 1993. On July 28, 1993, Sands Brothers divided 215,000
Placement Agent Warrants among certain of its employees.

        On March 31, 1994,  Sands Brothers  exercised all of the Placement Agent
Warrants  which it held on such  date and was  issued  285,000  shares of Common
Stock. Mr. Holmes held 130,000  Placement Agent Warrants,  which he exercised on
March 31, 1994 and was issued  130,000  shares of Common Stock.  An aggregate of
488,500  Placement  Agent Warrants have been  exercised  since March 31, 1994 by
Sands  Brothers and certain of its employees.  A Registration  Statement on Form
S-3 covering the 400,000 shares of Common Stock comprising a portion of the 1993
Private  Placement  units and the 500,000 shares of Common Stock  underlying the
Placement  Agent Warrants was declared  effective by the Commission on March 17,
1994.

        On April 28, 1994,  the Company  consummated  a private  placement  (the
"1994 Private Placement") with 37 investors with respect to an aggregate of $1.2
million Principal Amount 7% Convertible  Senior  Subordinated  Debentures of the
Company (the "Debentures") due two years from the date of issuance,  convertible
into shares of the Common Stock at any time prior to maturity, unless previously
redeemed,  at an initial  conversion  price of $5.00 per share.  Sands  Brothers
acted as placement  agent in the sale of the Debentures and received a placement
fee of 8% ($96,000) for placing the Debentures plus a 2% non-accountable expense
allowance ($24,000).









                                      -28-

<PAGE>



        The Debentures  are expressly  senior in right of payment to all Company
obligations (but subordinated to the payment of any future bank or institutional
indebtedness up to $1 million).  The Debentures are  redeemable,  in whole only,
from time to time at the option of the  Company at a  redemption  price equal to
100% of the principal  amount thereof plus accrued  interest,  provided that the
Debentures may not be redeemed prior to maturity unless, during any period of 20
consecutive trading days ending within 30 days prior to the giving of the notice
of  redemption,  the market  price for the Common  Stock is at least 125% of the
conversion  price, or $6.00 per share.  The shares of Common Stock issuable upon
conversion of the  Debentures  have been  registered  pursuant to a registration
statement on Form S-3 which was declared  effective by the SEC on March 15, 1995
(the "Resale Prospectus").

        On March 23, 1995, the Company  consummated the Public Offering  through
H.J.  Meyers.  Sands Brothers acted as a selected  dealer in connection with the
Public Offering and received aggregate selling concessions of $52,500.

        On March 21, 1995, the SEC declared  effective a Registration  Statement
on Form S-3 containing a "market making" prospectus. This prospectus may be used
by  Sands  Brothers  in  connection  with  offers  and  sales  in  market-making
transactions in the Common Stock and Redeemable  Warrants of the Company.  Sands
Brothers may act as a principal or agent in such  transactions.  Sands  Brothers
has no obligation to make a market in the Common Stock and  Redeemable  Warrants
and may discontinue its market-making  activities at any time without notice, in
its sole discretion.

        On October  11,  1996,  The  Company  and VGBS  Acquisition  Corporation
("VGBS")  consummated a Credit Agreement dated as of September 25, 1996, whereby
VGBS agreed to loan up to $1,200,000 to the Company pursuant to a Senior Secured
Promissory Grid Note dated  September 25, 1996 (the "Grid Note").  The Grid Note
bears  interest at the rate of 9% per annum with  principal  and interest due in
arrears in quarterly  installments  commencing  June 30,  1997.  Pursuant to the
Credit  Agreement,  the Company has agreed that the $1,200,000 loan amount to be
provided by VGBS pursuant to the Grid Note will be used by the Company solely to
repay the entire  principal  amount  owed by the  Company to the  holders of the
Company's 1995 7% Convertible Senior Subordinated Debentures (the "Debentures").
To date, VGBS has made one installment loan on the Grid Note and the Company has
reduced the amount due to its  Debentureholders to approximately  $900,000.  The
Company owes approximately $300,000 to VGBS pursuant to the Grid Note.

        Concurrent with the  consummation of the Credit  Agreement,  the Company
executed a Warrant to purchase up to 2,400,000  shares of the  Company's  Common
Stock at the purchase price of $.50 per share in favor of VGBS (the "Warrant").











                                      -29-

<PAGE>


        The  Company  has also  entered  in to a  Security  Agreement  with VGBS
pursuant  to which the  Company  has  granted  VGBS a security  interest  on the
indebtedness  incurred by the Company pursuant to the Credit Agreement and Note.
The Security  Agreement is senior in right of payment and in  collateral  except
for up to $500,000 of inventory  financing for working capital.  VGBS has agreed
to subordinate its security interest under the Security agreement to the holders
of the  Debentures  in the  event  VGBS  breaches  its  obligation  to fund  any
installment due to the Registrant under the Credit Agreement and Note.

        Additionally, to induce VGBS to enter into the Credit Agreement, certain
of the Company's shareholders have granted an irrevocably proxy to VGBS pursuant
to a Shareholders'  Agreement and Irrevocable  Proxy to vote such  shareholders'
shares of Common  Stock (the  "Shareholders'  Agreement").  The total  number of
shares of Common  Stock  subject  to the  Shareholders'  Agreement  is  156,000.
Subsequent to the execution of the credit  Agreement,  however,  certain of such
shareholders sold their shares in violation of the Shareholders' Agreement.

        Furthermore, under the terms of the Credit Agreement, VGBS has the right
to  reconstitute  the entire Board of  Directors  of the Company,  and, as such,
three  of  the  four  current  directors  of the  Company  have  tendered  their
resignations  from the Board of Directors to the Company,  including  Raymond C.
Sparks,  such  resignations to be held by the Company pending  acceptance by the
Company.

        VGBS is an affiliate of H.J. Meyers & Co., Inc., the Placement Agreement
in the 1995 Public Offering.  The consideration  for the transactions  described
above was the result of arms-length negotiations between the Company and VGBS.

        All  future  transactions  and/or  loans  between  the  Company  and its
officers,  Directors and 5% shareholders will be on terms no less favorable than
could be  obtained  from  independent  third  parties  and will be approved by a
majority of the independent, disinterested directors of the Company.





















                                      -30-

<PAGE>


                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits


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

3.1     Certificate of Incorporation. [Incorporated by reference to Exhibit 2(a)
        to  the  Company's   Registration  Statement  on  Form  S-18  (File  No.
        33-4560-NY) (the "S-18 Registration Statement")].

3.2     Certificate  of Amendment as filed by the  Secretary of the State of New
        York on February 20, 1986. [Incorporated by reference to Exhibit 2(b) to
        the Company's S-18 Registration Statement].

3.3     Revised  Certificate of Amendment as filed by the Secretary of the State
        of New York on March 31,  1986.  [Incorporated  by  reference to Exhibit
        2(c) to the Company's S-18 Registration Statement].

3.4     Certificate   of  Amendment  to  the   Certificate   of   Incorporation.
        [Incorporated  by reference to Exhibit 3 to the Company's  Annual Report
        on Form 10-K for the year ended January 31, 1993].

3.5     Certificate of Amendment to the Certificate of Incorporation  filed with
        the  Secretary  of State of the State of New York on November  12, 1993.
        [Incorporated by reference to Exhibit 3.3 to the Company's Annual Report
        on Form 10-KSB for the year ended January 30, 1994 ("1994 10-KSB")].

3.6     Certificate of Amendment to the  Certificate of  Incorporation  filed by
        the  Secretary  of State of the State of New York on  January  3,  1995.
        [Incorporated by reference to Exhibit 3.3 of the Company's  Registration
        Statement  on Form SB-2  (File No.  33-88376)  (the  "SB-2  Registration
        Statement")].

3.7     By-Laws of Registrant. [Incorporated by reference to Exhibit 2(d) to the
        Company's S-18 Registration Statement].

3.8     Amendment  to  Article  II,  Section  4 of the  By-Laws  of  Registrant.
        [Incorporated  by  reference  to  Exhibit  3.5 of the SB-2  Registration
        Statement].

4.1     Form of  Common  Stock  certificate  of the  Company.  [Incorporated  by
        reference to Exhibit 3(a) to the Company's S-18 Registration Statement].






                                      -31-

<PAGE>



4.2     Form of Note issued to investors in the Company's 1993 Private Placement
        [Incorporated by reference to Exhibit 4.2 to the Company's 1994 10-KSB].

4.3     Form of  Debenture  issued to investors  in the  Company's  1994 Private
        Placement.  [Incorporated  by reference to Exhibit 4.1 to the  Company's
        Current Report on Form 8-K dated April 28, 1994].

4.4     Form of Redeemable Warrant. [Incorporated by reference to Exhibit 4.4 of
        the SB-2 Registration Statement].

4.5     Form  of  Thomas  James  Associates,  Inc.  Warrant.   [Incorporated  by
        reference to Exhibit 4.5 of the SB-2 Registration Statement].

4.6     Warrant  to  Purchase  up to  2,400,000  Shares of  Common  Stock of the
        Company, Par Value $.001 Per Share,  Executed by the Company in favor of
        VGBS Acquisition Corp. ("VGBS") as of September 25, 1996.  [Incorporated
        by reference to Exhibit 2(c) of the Company's Current Report on Form 8-K
        dated October 11, 1996].

10.1    Lease dated  January 24, 1986 between Paul Adams,  as Landlord,  and the
        Company as Tenant,  together with  modifications  dated January 10, 1986
        and May 7, 1986 (Buffalo).  [Incorporated  by reference to Exhibit 10(a)
        to the Company's S-18 Registration Statement].

10.2    Lease dated  September  16,  1985  between  Paul Adams as  Landlord  and
        Buffalo Books, Inc. as Tenant, together with modifications dated January
        10,  1986 and May 7,  1986  (Buffalo).  [Incorporated  by  reference  to
        Exhibit 10(b) to the Company's S-18 Registration Statement].

10.3    Buy-Out  Agreement for Buffalo  Books,  Inc.  between Paul Adams and the
        Company.  [Incorporated  by reference to Exhibit  10(e) to the Company's
        S-18 Registration Statement].

10.4    Documents  evidencing loan arrangement  between Buffalo Books,  Inc. and
        Marine Midland Bank, N.A., including the following:

        Marine Midland  letter dated May 8, 1986  verifying  existence and basic
        terms of credit  arrangement,  as well as status as of January  31, 1986
        and April 30, 1986;

        Security  Agreements  dated  February 12, 1986  covering the  Inventory,
        Equipment and Accounts of Buffalo Books, Inc.;

        Unlimited  Continuing  Guaranties of the  indebtedness of Buffalo Books,
        Inc. to Marine Midland,  given by the Company and Paul Adams on February
        1, 1986;




                                      -32-

<PAGE>

        Collateral  Security  Mortgage  covering  Rochester  property,   granted
        January 24, 1986 by Paul Adams to Marine Midland Bank, N.A.

        [Incorporated  by  reference  to  Exhibit  10(f) to the  Company's  S-18
        Registration Statement].

10.5    Note  Receivable  due to The Village  Green  Bookstore,  Inc.  from Paul
        Adams, dated April 30, 1993.  [Incorporated by reference to Exhibit 10.1
        to the  Company's  Annual Report on Form 10-K for the year ended January
        31, 1993].

10.6    Agreement  between The Village  Green  Bookstore,  Inc.  and Paul Adams,
        relating to the note  referenced in Exhibit 10.4,  dated April 30, 1993.
        [Incorporated  by  reference  to Exhibit  10.2 to the  Company's  Annual
        Report on Form 10-K for the year ended January 31, 1993].

10.7    Employment  Agreement  between The Village  Green  Bookstore,  Inc.  and
        Raymond  Sparks  dated June 28,  1993.  [Incorporated  by  reference  to
        Exhibit 10.3 to the Company's  Current  Report on Form 8-K dated July 7,
        1993].

10.8    Employment Agreement between The Village Green Bookstore,  Inc. and Paul
        Adams dated June 28, 1993. [Incorporated by reference to Exhibit 10.4 to
        the Company's Current Report on Form 8-K dated July 7, 1993].

10.9    Employment Agreement between The Village Green Bookstore,  Inc. and John
        Borek dated June 28, 1993. [Incorporated by reference to Exhibit 10.5 to
        the Company's Current Report on Form 8-K dated July 7, 1993].

10.10   Affiliate  Agreement between The Village Green Bookstore,  Inc. and Paul
        Adams dated June 28, 1993. [Incorporated by reference to Exhibit 10.6 to
        the Company's Current Report on Form 8-K dated July 7, 1993].

10.11   Lease Agreement dated September 25, 1993, between the Company and Marcia
        M.  Chapman,  concerning  premises of  Doylestown,  Pennsylvania  store.
        [Incorporated by reference to Exhibit 10.8 to the Company's Registration
        Statement on Form S-3 (File No.  33-73318),  filed with the SEC on March
        9, 1994].

10.12   Lease Agreement dated August 25, 1993, between Wilkes-Barre Books, Inc.,
        d/b/a  Village  Green  Bookstore  and  Five  Star  Realty   Corporation,
        concerning premises of Edwardsville,  Pennsylvania store.  [Incorporated
        by reference to Exhibit 10.7 to the Company's  Registration Statement on
        Form S-3 (File No. 33-73318)].

10.13   1987  Incentive  Stock  Option Plan.  [Incorporated  by reference to the
        Company's Definitive Proxy Statement, dated April, 1987].







                                      -33-

<PAGE>


10.14   1993 Stock Option  Plan.  [Incorporated  by  reference to the  Company's
        Definitive Proxy Statement, dated September 28, 1993].

10.15   Lease Agreement  dated September 23, 1993,  between the Company and U.S.
        Realty  Company,  concerning  premises of new corporate  offices at 1357
        Monroe  Avenue,  Rochester,  New York.  [Incorporated  by  reference  to
        Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the year
        ended January 30, 1994].

10.16   Lease  Agreement  dated March  1994,  between the Company and Park Plaza
        Limited  Partnership,  concerning  premises  of  Scranton,  Pennsylvania
        store.  [Incorporated  by  reference to Exhibit  10.14 to the  Company's
        Annual Report on Form 10-KSB for the year ended January 30, 1994].

10.17   Modification and Extension of Lease Agreement with Paul Adams dated June
        17, 1994.  [Incorporated  by reference to Exhibit 10.15 to the Company's
        Current Report on Form 8-K for the event reported on June 17, 1994].

10.18   Form of Lease  Agreement  with Glen Eagle  Center  Limited  Partnership.
        [Incorporated  by reference to Exhibit  10.15 to the  Company's  Current
        Report on Form 8-K for the event reported on August 17, 1994].

10.19   Form of Lease Agreement with Willett Properties,  L.P.  [Incorporated by
        reference to Exhibit 10.16 to the Company's  Current  Report on Form 8-K
        for the event reported on October 12, 1994].

10.20   Lease Agreement  dated December 1994,  between the Company and Daniel R.
        Neducsin,  concerning  premises  of  Philadelphia,  Pennsylvania  store.
        [Incorporated  by  reference to Exhibit  10.19 of the SB-2  Registration
        Statement].

10.21   Letter   Agreement   with  Mark   Kalimian,   dated  January  10,  1995.
        [Incorporated  by  reference to Exhibit  10.20 of the SB-2  Registration
        Statement].

10.22   Form of Merger and Acquisition  Agreement with Thomas James  Associates,
        Inc.   [Incorporated   by  reference  to  Exhibit   10.21  of  the  SB-2
        Registration Statement].

10.23   Form of Financial  Consulting  Agreement  with Thomas James  Associates,
        Inc.   [Incorporated   by  reference  to  Exhibit   10.22  of  the  SB-2
        Registration Statement].

10.24   Amendment  to  Article V of 1993 Stock  Option  Plan.  [Incorporated  by
        reference to Exhibit 10.23 of the SB-2 Registration Statement].

10.25   Agreement  between the  Company  and Paul Adams  dated  March 31,  1995.
        [Incorporated  by reference to Exhibit  10.24 of the  Company's  Current
        Report  on Form  8-K,  dated  March  31,  1995].  10.26  Termination  of
        Collateral Assignment Agreement between the Company and Paul Adams dated
        March 31,  1995.  [Incorporated  by  reference  to Exhibit  10.25 of the
        Company's  Current  Report on Form 8-K,  dated  March 31,  1995].  10.27
        Further Lease Modification  Agreement between the Company and Paul Adams
        dated March 31, 1995. [Incorporated by reference to Exhibit 10.26 of the
        Company's Current Report on Form 8-K, dated March 31, 1995].

                                      -34-

<PAGE>

10.28   Termination of Option to Purchase Real Property  between the Company and
        Paul Adams dated March 31, 1995.  [Incorporated  by reference to Exhibit
        10.27 of the  Company's  Current  Report  on Form 8-K,  dated  March 31,
        1995].

10.29   Subordination,   Non-Disturbance  and  Attornment  Agreement  among  the
        Company,  Paul Adams and Lyndon  Guaranty Bank of New York,  dated March
        31, 1995.  [Incorporated  by reference to Exhibit 10.28 of the Company's
        Current Report on Form 8-K, dated March 31, 1995].

10.30   General  Releases  of  Adams  in  favor  of the  Company,  its  board of
        directors  and  executive  officers  and its  subsidiaries  and  General
        Releases of the Company,  its board of directors and executive  officers
        and its subsidiaries executed and delivered general releases in favor of
        Adams, each dated March 31, 1995.  [Incorporated by reference to Exhibit
        10.29 of the  Company's  Current  Report  on Form 8-K,  dated  March 31,
        1995].

10.31   Amendment  to  1987  Incentive  Stock  Option  Plan.   [Incorporated  by
        reference to the Company's  Definitive Proxy  Statement,  dated June 25,
        1990].

10.32   Credit Agreement between the Company and VGBS Acquisition Corp. ("VGBS")
        dated as of September  25, 1996.  [Incorporated  by reference to Exhibit
        2(a) of the  Company's  Current  Report  on Form 8-K dated  October  11,
        1996].

13.33   Senior Secured  Promissory  Grid Note for $1.2 million,  executed by the
        Company in favor of VGBS and dated September 25, 1996.  [Incorporated by
        reference to Exhibit 2(b) of the  Company's  Current  Report on Form 8-K
        dated October 11, 1996].

13.34   Shareholders'  Agreement and  Irrevocable  Proxy between  Certain of the
        Company's  Shareholders  and  VGBS  dated  as  of  September  25,  1996.
        [Incorporated  by  reference to Exhibit  2(d) of the  Company's  Current
        Report on Form 8-K dated October 11, 1996].

13.35   Security  Agreement  between the Company  and VGBS dated  September  25,
        1996.  [Incorporated  by  reference  to  Exhibit  2(e) of the  Company's
        Current Report on Form 8-K dated October 11, 1996].













                                      -35-

<PAGE>



22      List of  Subsidiaries  of the  Company.  [Incorporated  by  reference to
        Exhibit 22 of SB-2 Registration Statement].

27      Financial Data Schedule. The Financial Data Schedule is qualified in its
        entirety by the audited financial statements attached hereto.














































                                      -36-


<PAGE>


(B)  REPORTS ON FORM 8-K

        The  Company  filed a Current  Report on Form 8-K  dated  June 27,  1996
relating to the resignation of John W. Borek as a Director of the Company.

        The Company  filed a Current  Report on Form 8-K dated  October 11, 1996
relating to the consummation of a Credit Agreement  between the Company and VGBS
Acquisition Corp.

        The Company  filed a Current  Report on Form 8-K dated  January 24, 1997
relating to the  delisting of the  Company's  Common Stock from the NASDAQ Small
Cap Market.







































                                      -37-

<PAGE>



                                   Signatures
                                   ----------

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


                                              THE VILLAGE GREEN BOOKSTORE, INC.




Dated:         May 18, 1997                    By:    /s/ Raymond C. Sparks
                                                   -----------------------------
                                               Raymond C. Sparks, President


        In accordance with the Securities  Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  Registrant  and in
the capacities and on the dates indicated:

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

/s/Raymond C. Sparks       Chairman of the Board (Principal         May 18, 1997
--------------------
Raymond C. Sparks          Executive Officer), President, Chief
                           Executive Officer, Chief Financial
                           Officer (Principal Financial Officer),
                           Chief Operating Officer, Principal
                           Accounting Officer and Treasurer

/s/Steven B. Sands         Director                                 May 18, 1997
-----------------------
Steven B. Sands

/s/ John P. Holmes         Director                                 May 18, 1997
-----------------------
John P. Holmes

/s/Michael S. Smith        Director                                 May 18, 1997
-----------------------
Michael S. Smith

                                      -38-