SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

|X|      Annual report under Section 13 or 15(d) of the Securities  Exchange Act
         of 1934 (No fee required). For the fiscal year ended January 31, 1998.

|_|      Transition report under Section 13 or 15(d) of the Securities  Exchange
         Act  of  1934  (No  fee  required).  For  the  transition  period  from
         _____________ to ______________.

Commission file number 1-13437

                    THE SOURCE INFORMATION MANAGEMENT COMPANY
                 (Name of Small Business Issuer in its Charter)

          Missouri                                               43-1710906
 (State or Other Jurisdiction of                              (I.R.S. Employer
 Incorporation or Organization)                              Identification No.)

 11644 Lilburn Park Road
 St. Louis, Missouri                                              63146
 (Address of Principal Executive Offices)                      (Zip Code)

                                 (314) 995-9040
                (Issuer's Telephone Number, Including Area Code)

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

                                                        Name of Each Exchange
        Title of Each Class                             on Which Registered
        -------------------                             ---------------------
     Common Stock, $0.01 par value                    The Boston Stock Exchange

Securities  registered  under Section  12(g) of the Act:  Common Stock $0.01 par
value

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 X No

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B 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. |_|

The issuer's revenues for its most recent fiscal year are $11,803,844.

At March 5,  1998,  the  aggregate  market  value of the  voting  stock  held by
non-affiliates of The Source Information  Management Company (the "Company") was
approximately  $27,700,000,  based on the last sale  price of the  Common  Stock
reported by the Nasdaq  SmallCap  Market on March 5, 1998. At March 5, 1998, the
Company had outstanding 8,016,367 shares of Common Stock.


<PAGE>



                                TABLE OF CONTENTS

                                     PART I

                                                                         Page

ITEM 1.  Description of Business                                           

ITEM 2.  Description of Property

ITEM 3.  Legal Proceedings

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

                                     PART II

ITEM 5.  Market for Common Equity and Related Stockholder Matters

ITEM 6.  Management's Discussion and Analysis of Financial Condition 
         and Results of Operations

ITEM 7.  Financial Statements

ITEM 8.  Changes In and Disagreements With Accountants on Accounting 
         and Financial Disclosure

                                    PART III

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

ITEM 10. Executive Compensation

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

ITEM 12. Certain Relationships and Related Transactions

ITEM 13. Exhibits and Reports on Form 8-K


<PAGE>

The  information  contained in this Form 10-KSB  includes  statements  regarding
matters  which are not  historical  facts  (including  statements  regarding the
plans, beliefs or expectations of The Source Information Management Company (the
"Company"))  which are  forward-looking  statements  within  the  meaning of the
federal securities law. Because such forward-looking  statements involve certain
risks and uncertainties,  the Company's actual results and the timing of certain
events could differ materially from those discussed  herein.  Factors that could
cause or contribute to such differences  include,  but are not limited to, those
discussed in the Sections  captioned  "Description  of Business,"  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations,"
"Certain  Relationships  and Related  Transactions,"  those discussed in Exhibit
99.1 and those  discussed in the Company's  Form SB-2 filed with the  Securities
and Exchange Commission on October 7, 1997.

                                     PART I

Item 1.  Description of Business.

         For more than 20 years, The Source Information  Management Company (the
"Company") and its predecessors have provided information gathering,  consulting
and other information based services to operators of mass merchandise,  grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 725 retailers,  such as Wal-Mart Stores,  Inc., Kmart Corporation,
Target Stores,  Inc., Food Lion, Inc., and W.H. Smith,  Inc., in connection with
processing  and  collection of incentive  payments  from magazine  publishers on
single copy sales of  approximately  6,000 magazine  titles offered in more than
65,000  stores.  As an extension of this service,  the Company  established  its
Advance Pay Program,  under which the Company advances an agreed upon percentage
of the incentive payments due to the retailer from magazine publishers.  It then
collects directly from the publishers the claims due to the retailer.  In fiscal
1997 and 1998, the Company  advanced  approximately  $15,000,000 and $38,900,000
under the Advance Pay  Program,  respectively.  In  October,  1996,  the Company
expanded its services and  potential  client base with the  introduction  of the
Periodical  Information  Network  ("PIN"),  an information  service in which the
Company offers and provides  subscribing  magazine  publishers,  advertisers and
others with  industry-wide,  single copy magazine  sales  information  in a user
friendly  format.  Based  on  discussions  with  representatives  of  magazine
publishers,  the Company believes that publishers and advertisers  perceive that
PIN  provides a valuable  basis on which to formulate  marketing,  distribution,
advertising and other policies.

Formation of the Company

         The  Company  was  organized  in  1995  by  the  consolidation  of  two
significant   providers  of  services  to  retailers  of  magazines   and  other
periodicals.  The Company has expanded through the acquisition of businesses and
technologies that addressed additional services or products,  market segments or
geographic  regions  in which  the  Company  was not  previously  active.  These
acquisitions  have  allowed  the Company to expand the  services  offered to its
clients and enhanced its ability to support  existing and planned  services.  In
1995, the Company acquired the businesses of Dixon's Modern Marketing  Concepts,
Inc. and Tri-State Stores, Inc., both of Chicago Heights, Illinois. In 1996, the
Company acquired the businesses of Magazine Marketing,  Inc. of Canton, Ohio and
Readers  Choice,  Inc.,  a  subsidiary  of United  Magazine  Company  located in
Columbus,  Ohio. In May 1997, the Company  acquired the business of Mike Kessler
and Associates, Inc. of Fair Lawn, New Jersey.

Growth Opportunities

         Expansion  of  Services  to  New  Product  Categories.   The  Company's
information  services are designed to efficiently and accurately  accumulate and
manage  sales  data with  respect  to sales of low cost,  high  volume  consumer
products.  While the  Company's  services,  including  PIN and the  Advance  Pay
Program,  were developed for use in the magazine industry,  the Company has been
engaged to provide its  services in  connection  with  integrated  magazine  and
confections  displays and expects to offer its  services  for use in  connection
with other consumer products, such as soft drinks and batteries.

                                       1
<PAGE>

         Development  of New and  Enhanced  Products and  Services.  The Company
believes  that  its  future  success  will be  dependent  upon  its  ability  to
anticipate  the  informational  needs of existing and  potential  clients and to
develop and  introduce,  in a timely  manner,  new products  and services  which
address such needs.  The Company  encourages  creativity and  originality in its
sales  personnel  and believes that one of the keys to the growth of the Company
has been the willingness of senior  management to implement  product and service
solutions suggested by the Company's personnel to address the needs of customers
with whom they interact. In addition, Messrs. Flegel and Lee, as well as various
members of the Company's senior  management and sales staff,  periodically  meet
with its customers to discuss  industry trends and  informational  requirements.
After identifying an unsatisfied  customer need, members of the Company's senior
management  and sales team meet to design new or enhanced  products and services
addressing such need.  Thereafter,  a team is appointed to develop such products
and services for introduction to the market.

The Magazine Industry

         Based on its  knowledge of the industry and  discussions  with magazine
publishers  and  retailers,  management  of the Company  believes  that magazine
publishers  are placing an increasing  degree of importance on revenues  derived
from single copy  newsstand  sales and that the  emphasis  placed on single copy
sales by publishers  will continue to increase as: (i) mailing costs continue to
rise with respect to subscription  distribution;  and (ii) magazine  advertisers
continue to value the improved  target market accuracy  achieved  through single
copy sales.

         The distribution of the  approximately  6,000 magazine titles currently
published for single copy sales on a national basis is dominated by six national
distributors, which distribute to over 200 local independent distributors, which
in turn  supply  copies  to  magazine  retailers.  Although  the  nature  of the
businesses in which magazine retailers are engaged is wide ranging,  the largest
volume of single copy sales  historically  is achieved by grocery  retailers and
mass merchandise  stores. The primary function of the retailer is the display of
available  titles  in two  store  locations,  at a  dedicated  section  called a
"mainline display" and at displays located within the merchandise checkout area.
Because magazines are frequently purchased on impulse,  publishers  increasingly
compete for display spaces, referred to as "pockets," at the checkout.

         National  distributors  receive  a  brokerage  fee  based on sales  and
distribution to local  distributors.  Local  independent  distributors  purchase
copies at a discount to the suggested retail price and resell to retailers, also
at a discount to the suggested retail price. Unsold copies are returnable by the
retailer  for full credit to all parties in the  distribution  chain,  such that
payments are made only with respect to copies  actually sold. All accounting for
copies is done by the local distributors  which invoice for distributed  copies,
credit retailers for returns and credit national  distributors for sales through
a computer-assisted single entry information system.

         To provide further incentives to retailers to prominently display their
respective  titles,  publishers  typically  enter into Retail Display  Allowance
("RDA") programs under which the retailer is entitled to receive, on a quarterly
basis,  a cash rebate  directly from the publisher  equal to a percentage of the
retailer's  actual net sales of the  publisher's  titles  upon  submission  of a
properly  documented  claim.  Conversely,  certain  publishers  of  high  volume
magazines  essentially  rent "pocket"  space from  retailers for the display and
sale of specific titles.  Such rent,  referred to as "pocket payments" (or "RDP"
payments),  is a fixed  amount  per  pocket,  per  store  based on the  verified
location and other criteria of the pocket, and is paid quarterly.  A majority of
RDA and RDP  programs  are  administered  on  behalf  of the  publishers  by the
national distributors.

         Publishers  have also  implemented  programs to encourage  retailers to
upgrade  their  checkout  and  mainline  display  fixtures  by  making  one-time
incentive  payments,  based on the pockets allocated to their respective titles.
Similar  to RDA and RDP,  such  payments  are made  only  upon  submission  of a
properly documented claim.

Client Services

         The Company is dedicated to providing full information  services to its
clients. Such services include the following:

                                       2
<PAGE>

         Claim Submission.  Through its information  system, the Company assists
retailers  in  accurately  monitoring,   documenting,  claiming  and  collecting
publisher incentive payments.  The claim submission process begins at the end of
each  calendar  quarter  when the  Company  obtains  information  from the local
distributors detailing the titles and number of copies actually sold
by the  client  retailer.  Based  on  this  information,  the  Company  prepares
publisher  supplied  claim  forms  and  submits  the  documented  claim  to  the
appropriate national distributor, which acts as payment agent for the publisher.
After verification of the claim, the national  distributor remits payment to the
order of the  retailer  in care of the  Company,  which  records the payment and
forwards it to the  retailer.  The Company  charges  the  retailer a  negotiated
percentage of the cash collected.

         As an  extension  of its claim  submission  service,  the  Company  has
established  an  Advance  Pay  Program.  Under  the  provisions  of the  written
agreement  signed by each  participating  retailer,  the  Company  collects  the
incentive payments otherwise due the retailer directly from magazine  publishers
with respect to the sale and display of magazines.  In return,  the Company pays
to the retailer a negotiated  fixed  percentage of the total incentive  payments
otherwise due the retailer with respect to each calendar  quarter  generally not
later than ninety days after the end of each such quarter.  The funds  necessary
to make such payments are derived from cash flow from  operations and borrowings
under  the  Company's  existing  $15,000,000  credit  facility.  Typically,  the
agreement  provides for a minimum term of one year and  thereafter is terminable
by either party on not less than ninety days notice.  This service  relieves the
retailer from the  burdensome  administrative  task of processing  multitudes of
small  publisher  checks.  Service  fees  earned  under the  Advance Pay Program
generally  exceed those  charged  under the  traditional  method;  however,  the
Company  generally  assumes  the  risk  of  uncollectibility  of  the  incentive
payments.  Based on historical  experience,  the Company maintains a reserve for
doubtful accounts equal to approximately 2% of outstanding  accounts receivable.
The Company believes such reserve will be adequate.

         Space Design.  Through its Display Group,  the Company offers to assist
retailers in the  placement of displays and the  selection of titles to optimize
available  display space,  and thereby to maximize  sales and incentive  payment
revenues. Based on its knowledge of local consumer preferences and the terms and
conditions of publisher  incentive  payment  programs,  the Company analyzes the
retailer's  store  layout,  customer  traffic  patterns  and  available  display
alternatives.  Thereafter,  the Company  consults  with its  retailer  client to
develop an appropriate  display  program.  Space design  services  accounted for
approximately 13% of the Company's 1998 revenues.

         Generally, retailers undertake a comprehensive redesign of the checkout
display space on three-year cycles. As a result of its marketing experience, the
Company is  frequently  engaged to provide  services  with respect to the entire
redesign process  including fixture design and assisting the retailer in product
selection,   plan-o-gramming  and  vendor  negotiations.  The  Company  provides
additional  services to  retailers  including  vendor  billing  and  collection,
fixture prototype reviews and supervision of fixture installation in the stores.
In June 1997,  Kmart  Corporation  contracted  with the Company to provide  such
services with respect to the reconfiguration of display fixtures in the checkout
area of its  stores.  The  new  merchandising  units  which  display  magazines,
confections and selected general merchandise illustrate the applicability of the
Company's  existing  services  beyond  magazines  to other high volume  consumer
products.

         Periodical   Information  Network  ("PIN").  The  Company's  large  and
sophisticated  database  of magazine  industry  information  has  resulted in it
becoming a magazine information center which management believes is used by many
companies  in  the  magazine   industry  to  formulate   their   publishing  and
distribution  strategies.  PIN is a comprehensive system designed to use current
computer  technologies,  including CD-ROM, to effectively manage all elements of
the Company's  database including  information  packaging and efficient inbound,
outbound access. The network provides access to periodically  updated historical
information  concerning  the titles and quantity of each title sold by retailers
for analysis  purposes.  Several leading  publishers have subscribed to PIN. The
PIN  subscription   agreement  provides  that  the  Company  will  furnish  each
subscriber with a historical database of sales information and quarterly updates

                                       3
<PAGE>

         capable of  generating  three  general  types of reports:  total sales,
sales by class of trade,  and sales by  retailer.  Each report  ranks  titles in
order of sales volume, and provides other sales related  information,  including
sales efficiencies,  category contributions and total sales ranking. Subscribers
pay service fees equal to a one-time  enrollment fee and quarterly  update fees.
Subscriptions  have a term of one year,  which  are  automatically  renewed  for
successive  one-year terms unless either party terminates by notice to the other
not later than ninety days before  commencement  of the next renewal  term.  PIN
accounted for approximately 4% of the Company's 1998 revenues.

         Marketing  and  Promotional   Program.  As  part  of  its  full-service
philosophy,  the Company  offers its clients advice and  suggestions  concerning
specialized  marketing and promotional  programs which may include, for example,
special  mainline or checkout  displays and  cross-promotions  of magazines  and
products of interest to the readers of such magazines. Such services are offered
to enhance  single copy  magazine  sales by the Company's  clients,  and thereby
increase  service  revenues due the Company in connection with the submission of
incentive  payment  claims;  accordingly,  no separate  charge is made for these
services.

         Administrative   Support.   The  Company  assists   retailers  to  more
efficiently  conduct  their  magazine  sales  operations  through   computerized
inventory  control,  automated  pricing  updates and management  reporting.  The
Company  intends to  introduce a new  administrative  support  service  enabling
publishers  and  retailers to  efficiently  verify and correct price changes and
other  information  contained in the  magazine's  uniform  product code ("UPC").
Administrative support services accounted for less than 1% of the Company's 1998
revenues.

Customers/Clients

         The Company provides  services to  approximately  725 operators of mass
merchandise,  grocery,  convenience and pharmacy  stores located  throughout the
United States and eastern Canada. Such retailers include Wal-Mart Stores,  Inc.,
Kmart Corporation,  Target Stores, Inc., Food Lion, Inc. and W.H. Smith, Inc. In
addition,  the  Company  provides  market  data to  publishers,  including  Time
Distribution Services, ICD/The Hearst Corp. and Globe Marketing Services. All of
the  Company's  services  are  rendered  pursuant to short term  contracts  and,
accordingly, the Company's clients are under no long term contractual obligation
to continue to employ the Company's services.

Marketing and Sales

         The Company  markets its  services  through its own direct sales force.
The Company's sales group consists of ten regional managers and three divisional
vice presidents. Each manager is assigned to a specific geographic territory and
is responsible for the preparation of quotations,  program presentations and the
general  development  of sales,  as well as  maintenance  of existing  accounts,
within his or her assigned territory.

Competition

         Competition  among  providers  of many of the  Company's  products  and
services,  particularly  the processing of incentive  payment claims,  is highly
competitive.  While such  competition  is  fragmented,  the  Company  recognizes
approximately  32  direct  competitors,  all of which are  closely-held  private
companies.  The Company  believes  that, in virtually all cases,  it is the sole
provider of magazine  incentive  payments  claim services to its clients and the
Company's clients do not perform such services on their own behalf. Based on its
review of the industry and informal  discussions  with magazine  publishers  and
retailers, the Company believes that none of its direct competitors have greater
financial,  technological,  marketing  and  sales  resources  than the  Company.
However,  it is possible that certain  services  offered by the Company could be
performed  directly by its retail customers or otherwise offered or performed in
the future by publishers,  distributors or other organizations, such as Nielsen,

                                       4

<PAGE>

IRI and Audit Bureau of  Circulation.  Many of such  organizations  have greater
financial,  technological,  marketing  and  sales  resources  than the  Company.
Additionally,  competitors may develop new or different  service  programs which
are  perceived by customers to be of similar or superior  quality at the same or
lower prices than the Company's services.

         Management further believes that the principal  competitive  factors in
the  retail  information  industry  include  information  access,  technological
support, accuracy, system flexibility, financial stability, customer service and
reputation. The Company believes it competes effectively with respect to each of
the above factors.

Management Information Systems

         The Company  uses a customized  information  system to  accumulate  and
manage sales data in connection with its processing of claims and maintenance of
the PIN database  under a license from a third party which has been  retained by
the  Company to service  and  upgrade the  Company's  information  system.  This
sophisticated  information system is of a type used by several companies engaged
in the collection of sales incentive payments in the magazine  industry.  In May
1998, the Company intends to introduce its proprietary  SOURCEPRO software which
will enable  retailers to visualize  alternative  checkout  configurations  in a
three-dimensional  graphic  environment and analyze  relative profit  potential.
Management  believes that  currently none of the Company's  competitors  utilize
comparable technology to assist retailers in space design.  Although the Company
uses several service marks in connection with its business, it believes that its
business is not  dependent  on the  strength of its service  marks or any of its
intellectual property rights.

Employees

         As of January 31, 1998,  the Company  employed 115 persons,  of whom 94
were employed on a full-time basis and 21 were employed on a part-time basis. Of
such  persons,  31 are engaged in  administrative  activities  and two devote at
least a portion of their  efforts to research and  development  activities.  The
Company's employees are not subject to a collective  bargaining  agreement.  The
Company considers its relations with its employees to be good.

Item 2. Description of Property.

         The Company conducts its operations from 11 office facilities,  located
in  St.  Louis,  Missouri;  New  York,  New  York;  Chicago  Heights,  Illinois;
Schaumburg,  Illinois;  Oklahoma City, Oklahoma;  San Antonio,  Texas; Cranberry
Township, Pennsylvania; Canton, Ohio; Woodstock, Georgia; Fair Lawn, New Jersey;
and  Mississauga,  Ontario,  Canada.  These  facilities  contain an aggregate of
approximately 19,000 square feet of space. Each of the facilities is occupied by
the  Company  under  leases  containing  terms  and  conditions  believed  to be
comparable  to those  prevailing in the market in which the facility is located.
The Company  believes  that each of such  facilities  may be  relocated  without
material expense or delay, and that suitable  alternative  office facilities are
available in each market on comparable terms, if required.

         In addition,  the Company's  data  processing  center,  located in High
Point, North Carolina, contains approximately 13,900 square feet and is occupied
under a written lease with 711 Gallimore  Partnership,  a North Carolina general
partnership, expiring in 2012.  Such lease  provides  for the payment of monthly
rent of approximately  $14,000,  subject to adjustment for taxes,  insurance and
utilities. See "Item 12: Certain Relationships and Related Transactions."

Item 3. Legal Proceedings.

         The Company is not a party to any legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that such claims and  lawsuits,  individually  or in the  aggregate,
will have a material adverse effect on the Company's business.

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

         No matters were submitted to a vote of the  securityholders  during the
fourth quarter of fiscal 1998.

                                       5

<PAGE>

                                     PART II

Item 5.  Market For Common Equity and Related Stockholder Matters.

         From June 22, 1995, until February 12, 1996, the Company's Common Stock
was quoted on the Nasdaq OTC Bulletin Board. Beginning on February 12, 1996, the
Common Stock was quoted on the Nasdaq  SmallCap  Market under the symbol "SORC."
Beginning  on October 7, 1997,  the Common  Stock was listed on the Boston Stock
Exchange.  The following table sets forth, for the periods  indicated,  the high
and low  closing  bid prices for the Common  Stock as reported on the Nasdaq OTC
Bulletin Board or Nasdaq SmallCap Market, as applicable.

Fiscal 1997                                    High             Low
-----------                                    ----             ---
First Quarter                                  $6.96            $5.30
Second Quarter                                 $5.75            $4.84
Third Quarter                                  $5.75            $3.18
Fourth Quarter                                 $3.93            $2.72

Fiscal 1998                                    High             Low
-----------                                    ----             ---
First Quarter                                  $3.48            $2.58
Second Quarter                                 $3.71            $1.21
Third Quarter                                  $4.75            $3.18
Fourth Quarter                                 $5.38            $3.56

         As of March 5,  1998,  there  were 114  holders of record of the Common
Stock.

         The Board of Directors presently intends to retain all of its earnings,
if any,  for the  development  of the  Company's  business  for the  foreseeable
future.  The  declaration and payment of cash dividends in the future will be at
the discretion of the Company's Board of Directors and will depend upon a number
of  factors,  including  among  others,  future  earnings,  operations,  capital
requirements,  the  general  financial  condition  of the Company and such other
factors that the Board of Directors may deem relevant.

Sales of Unregistered Shares

         In  November  1997,  the Company  issued a warrant to  purchase  75,000
shares  of  Common  Stock  beginning  February,  1998 to  Herbert  A.  Hardt  in
connection  with a  consulting  agreement  under  which Mr.  Hardt will  provide
$51,750 of consulting  services to the Company.  The issuance of the warrant was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

Overview

         For more than 20 years, The Source Information  Management Company (the
"Company") and its predecessors have provided information gathering,  consulting
and other information based services to operators of mass merchandise,  grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 725 retailers,  such as Wal-Mart Stores,  Inc., Kmart Corporation,
Target Stores,  Inc., Food Lion, Inc., and W.H. Smith,  Inc., in connection with
processing  and  collection of incentive  payments  from magazine  publishers on
single copy sales of  approximately  6,000 magazine  titles offered in more than
65,000  stores.  As an extension of this service,  the Company  established  its
Advance Pay Program,  under which the Company advances an agreed upon percentage
of the incentive payments due to the retailer from magazine publishers.  It then
collects directly from the publishers the claims due to the retailer.  In fiscal
1997 and 1998, the Company  advanced  approximately  $15,000,000 and $38,900,000
under the  Advance  Pay  Program,  respectively.  In October  1996,  the Company
expanded its services and  potential  client base with the  introduction  of the
Periodical  Information  Network  ("PIN"),  an information  service in which the
Company offers and provides  subscribing  magazine  publishers,  advertisers and
others with  industry-wide,  single copy magazine  sales  information  in a user
friendly  format.   Based  on  discussions  with   representatives  of  magazine
publishers,  the Company believes that publishers and advertisers  perceive that
PIN  provides a valuable  basis on which to formulate  marketing,  distribution,
advertising and other policies.

                                       6
<PAGE>

         A majority of the  Company's  revenues  are derived  from  service fees
earned in  connection  with the  collection  of incentive  payments  owed to the
Company's  retailer  clients from magazine  publishers.  Most incentive  payment
programs  offer  the  retailer  a cash  rebate,  equal  to a  percentage  of the
retailer's net sales of the publisher's titles,  which is payable quarterly upon
submission of a properly  documented  claim.  Under agreements with its retailer
clients,  the Company gathers sales data,  submits claims for payment,  collects
payments and receives a percentage  of the aggregate  payments  collected on the
retailers' behalf.  Claims for incentive payments are generally submitted to the
publisher quarterly based on net sales of the publishers' titles recorded in the
previous  calendar  quarter.  Except in connection with its Advance Pay Program,
the Company does not  guarantee to its retailer  clients any payments due to the
client from magazine  publishers,  and  accordingly,  does not assume any credit
risk associated with such incentive payments. In substantially all the contracts
under the Advance Pay Program,  which is  continuing  to represent an increasing
percentage of payments collected, the Company bears the risk of uncollectibility
associated  with  collecting  payments  from  publishers.  To  date,  management
believes that the reserve maintained by the Company as an allowance for doubtful
accounts in the amount of approximately 2% of accounts receivable is adequate to
satisfy  any  losses  incurred  by  the  Company  from  uncollectible   accounts
receivable.

         Under  both the  standard  arrangement  and the  Advance  Pay  Program,
commission  revenue is recognized at the time claims for incentive  payments are
substantially  completed for  submission to the  publishers  based on the amount
claimed,  less an  estimated  reserve  necessary  to maintain an  allowance  for
doubtful  accounts of  approximately 2% of trade accounts  receivable.  However,
under the standard arrangement, invoices for services provided by the Company in
connection  with the claim  process are not issued  until the  Company  receives
settlement of the claim.  Under the Advance Pay Program,  the revenue recognized
by the Company  represents  the  difference  between the amount  advanced to the
retailer customer and the amount claimed against the publisher.

Results of Operations

         The  following  table sets forth,  for the periods  presented,  certain
information  relating to the operations of the Company expressed as a percentage
of Total Revenues:

                                                 Fiscal Year Ended January 31,
                                                1998                     1997
                                                ----                     ----
Service Revenues                                99.9%                    96.7%

Merchandise Revenues                             0.1%                     3.3%

Total Revenues                                 100.0%                   100.0%

Cost of Service Revenues                        49.4%                    66.6%

Cost of Merchandise Sold                         0.3%                     2.8%

Gross Profit                                    50.3%                    30.6%

Selling, General & Administrative
  Expense                                       19.9%                    39.8%

Operating Income (Loss)                         30.4%                   (9.2)%

Interest, Net                                  (5.9)%                   (3.9)%

Other Income (Expense), Net                    (0.7)%                   (0.4)%

Income (Loss) Before Income Taxes               23.8%                  (13.4)%

Net Income (Loss)                               13.5%                   (8.3)%

                                       7
<PAGE>

Service Revenues

         Increased  retailer  participation  in the  Advance  Pay  Program,  the
acquisition of Mike Kessler and Associates, Inc. and the growth in subscriptions
to  PIN  contributed  to  an  increase  in  service  revenues  of  approximately
$4,739,000,  or 67%, over fiscal 1997. Of the total, claims, PIN and Advance Pay
Program revenue increased approximately $3,898,000, or 61%, over the prior year.
Space design revenue  increased from $636,000 in the prior year to $1,477,000 in
the  current  year,  or  132%,  resulting  from an  increase  in the  number  of
reconfiguration  programs  undertaken  by the Company on behalf of its  retailer
clients, including the Kmart program.  Historically,  space design revenues have
fluctuated  as a result  of a  variety  of  factors  including  the  number  and
magnitude of  reconfiguration  programs  undertaken  by the  Company's  retailer
clients and the timely  shipping of  displays  by  manufacturers.  Consequently,
variations  in the timing  and  amounts of space  design  revenues  could have a
material  positive  or  negative  effect on the  operating  results of any given
quarter. In May 1998, the Company intends to introduce its proprietary SOURCEPRO
software,   which  will  enable  retailers  to  visualize  alternative  checkout
configurations  in a  three-dimensional  graphic  environment  and  analyze  the
relative profit potential which can be achieved by the retailer from alternative
configurations.

Merchandise Revenues and Cost of Merchandise Sold

         As a result of its  relationships  with the  leading  retailers  in the
United States,  the Company has had opportunities  from time to time to purchase
merchandise,  such as gift and  greeting  cards,  caps and  other  leisure  time
products for resale to its retailer clients. However, at the end of fiscal 1997,
management  decided to  de-emphasize  this  portion of its  business in order to
dedicate more resources to its core services.  As a result, the revenues derived
from  merchandising  sales  declined in fiscal  1998 as the related  merchandise
inventory was liquidated.

Cost of Service Revenues and Selling, General and Administrative Expense 
("Total Costs")

         Despite a 67% increase in Service Revenues,  Total Costs increased only
$412,000, or 5%. Increased costs incurred in connection with the acquisitions of
Magazine Marketing,  Inc., Readers Choice, Inc. and Mike Kessler and Associates,
Inc.,  including  wages,  amortization,  rent and  depreciation,  were more than
offset by the related  revenue  increases.  In  addition,  wages  increased as a
result of bonuses and the hiring of individuals  formerly employed by Data-Pros,
Inc., a data processing  service company purchased on January 1, 1997.  However,
the increase in wages in connection with this  acquisition was largely offset by
a decrease in data processing expenses.

Interest Expense

         Interest  Expense  increased  $402,000,  principally  due to  increased
borrowings  necessary  to fund the growth in the Advance  Pay Program  and, to a
lesser extent, to fund the acquisition of Mike Kessler and Associates, Inc.

Income Tax Expense (Benefit)

         The effective income tax rate for fiscal year 1998 was 43.7%. This rate
varied from the federal  statutory  rate due to state  income taxes and expenses
not deductible for income tax purposes.  Such  non-deductible  expenses  include
meals and  entertainment,  goodwill  amortization , and officers' life insurance
premiums.

                                       8
<PAGE>

Earnings Per Share

         In calculating  earnings per share, net income for the year was reduced
by a constructive dividend of $109,937,  which resulted from the exchange of all
5,600  outstanding  shares of Preferred Stock for 186,667 shares of Common Stock
and non-transferable  warrants,  expiring in 2000, to purchase 310,710 shares of
Common Stock at an exercise price of $3.00 per share.

Year 2000 Readiness

         The  Company  is aware  of the Year  2000  issues  associated  with the
practice  of  encoding  only  the  last  two  digits  of four  digit  years in a
computer-based system. Year 2000 issues, if not properly addressed, could result
in  disruptions  of  operations.   Currently,   management  estimates  that  the
incremental  cost to  renovate  systems  and  encoded  applications  and to test
replacement  systems and  applications to become Year 2000 ready will not have a
material effect on the Company's financial  condition,  results of operations or
liquidity.  No assurance can be given that the Company will  successfully  avoid
all problems with the Year 2000 issue.

Liquidity and Capital Resources

         The  Company's  primary cash  requirements  are for meeting the working
capital  required in  connection  with the costs  incurred in obtaining  service
revenues,  selling,  general and administrative expenses (particularly salaries,
travel and  entertainment)  incurred in the maintenance of existing accounts and
in connection with the solicitation of new clients,  and for funding the Advance
Pay Program.  Historically,  the Company has  financed  its business  activities
through cash flow from operations,  short-term  borrowings under available lines
of credit and through the issuance of equity securities.

         Net cash used by operating  activities  was  $5,520,000  and $6,511,000
during the years ended January 31, 1998 and 1997, respectively.  If, and so long
as, the Advance Pay Program  continues to grow at the rate experienced in fiscal
1998,  management  anticipates  cash used by operations  will continue to exceed
cash provided by operations. However, if and when the conversion of existing and
new  customer  accounts  to the  Advance  Pay  Program  has  been  substantially
completed,  management anticipates,  based on its existing operations, that cash
provided by operations will exceed cash used by operations.

         Accounts receivable increased $5,500,000 as a result of the significant
growth of the Advance Pay Program.  The average  collection  period for 1998 was
136 days (considered to be within an acceptable range by management based on the
nature of the Company's business and historical experience) compared to 153 days
for 1997. The collection periods were calculated as follows: 365 days/(Revenues/
Average  Accounts  Receivable),  where  accounts  receivable  includes all trade
accounts  receivable,  but only  the  commission  portion  of  amounts  due from
publishers in association with the Advance Pay Program.

         The Company is primarily engaged in the business of providing  services
to its retailer clients;  therefore,  its capital  expenditure  requirements are
minimal.  At  January  31,  1998,  the  Company  had  no  outstanding   material
commitments for capital expenditures.

         The Company has a credit  agreement  that provides for a revolving loan
of up to  $15,000,000  with Wachovia Bank,  N.A.  Wachovia Bank has the right to
terminate the agreement upon not less than thirteen months prior written notice.
Borrowings  bear interest at a rate related to the monthly LIBOR index rate plus
a percentage  ranging from 2.5% to 3.5%  depending upon the ratio of funded debt
to earnings before interest,  taxes,  depreciation and amortization.  Borrowings
are secured by a security interest in substantially all of the Company's assets,
including  receivables,  inventory,  equipment,  goods and  fixtures,  software,
contract rights, notes, and general intangibles. Under the credit agreement, the
Company is required to maintain certain  financial  ratios. At January 31, 1998,
the Company was in compliance  with all financial  ratios  imposed by the credit
agreement.

                                       9
<PAGE>

         At January 31, 1998, the Company's  total  long-term  debt  obligations
were  $8,635,054.  Of such  amount,  $30,997 will mature  within 12 months.  The
Company  anticipates that the funds necessary to satisfy these  obligations will
be derived from cash flows from operations.

         At January  31,  1998,  the Company  had total  deferred  tax assets of
$214,000 and total  deferred  tax  liabilities  of $378,000,  resulting in a net
deferred tax liability of $164,000  reflecting  the net tax effects of temporary
differences  between  the  carrying  amount of the  assets and  liabilities  for
financial  reporting purposes and the amounts used for income tax reporting.  Of
this liability, $316,000 results from a change in accounting method from cash to
accrual by (i) the Company's  predecessors  in connection  with the formation of
the  Company,  (ii)  Magazine  Marketing,   Inc.  and  (iii)  Mike  Kessler  and
Associates,  Inc. This  liability is expected to be paid  $222,000,  $72,000 and
$22,000 over the next three years,  respectively.  The Company  anticipates that
the funds  necessary to satisfy this tax  obligation  will be derived  primarily
from cash flows from operations.

         In July 1997,  the holders of the Company's  1996 Series 7% Convertible
Preferred  Stock  exchanged all 5,600  outstanding  shares for 186,667 shares of
Common  Stock at an  effective  price of $3.00 per  share  and  non-transferable
warrants,  expiring in 2000,  to purchase  310,710  shares of Common Stock at an
exercise  price  of  $3.00  per  share.  The  exchange  resulted  in a  one-time
constructive  dividend of  $109,937,  which was  reported in the fiscal  quarter
ended July 31, 1997.

         In September 1997, the Company issued to Aron Katzman,  Harry L. Franc,
III and Timothy A.  Braswell,  each a director of the Company,  non-transferable
warrants,  expiring in 2000, to purchase an aggregate of 89,289 shares of Common
Stock at an exercise  price of $3.00 per share.  These  warrants  will vest at a
rate of 25% on August 1, 1998,  25% on November 1, 1998, 25% on February 1, 1999
and 25% on May 1, 1999. The related expense  incurred of  approximately  $54,000
will be recognized ratably over those periods.

         The Company  believes  that it will be  necessary  to raise  additional
funds through the sale of its equity securities in order to achieve management's
goals with respect to (i) expanding  the Company's  business in new and existing
services,  particularly the Advance Pay Program, new products and new geographic
areas, directly or by acquisition,  and (ii) increasing its shareholder base and
the market and liquidity of its securities.  Accordingly, the Company intends to
offer  approximately  1,500,000 shares of its Common Stock to the public through
an underwriter on a firm  commitment  basis.  The Company  anticipates  that the
offering will commence in June, 1998, and will provide the Company with proceeds
of  approximately   $9,300,000,   after  deducting  underwriting  discounts  and
commissions and other offering expenses.

                                       10
<PAGE>


Item 7.  Consolidated Financial Statements.


The Report of the Independent Certified Public Accountants


Board of Directors
The Source Information Management Company
St. Louis, Missouri

We have  audited  the  consolidated  balance  sheet  of The  Source  Information
Management  Company  as  of  January  31,  1998  and  the  related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
two years in the period ended  January 31, 1998.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  position  of  The  Source
Information  Management  Company  at  January  31,  1998 and the  results of its
operations  and its cash  flows  for each of the two years in the  period  ended
January 31, 1998 in conformity with generally accepted accounting principles.



                                            /s/ BDO Seidman, LLP
St. Louis, Missouri
March 27, 1998

                                       11
<PAGE>




                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                     Consolidated Balance Sheet

                                                               January 31, 1998
-------------------------------------------------------------------------------

Assets (Note 2)

Current

     Cash                                                     $         31,455

     Trade receivables (net of allowance for 
        doubtful accounts of $460,898) (Note 9)                     18,874,764

     Income taxes receivable                                           492,688

     Notes receivable - officers (Note 1)                                7,351

     Other current assets                                              187,876

-------------------------------------------------------------------------------
Total Current Assets                                                19,594,134
-------------------------------------------------------------------------------
Office equipment and furniture (Note 3)                              2,249,688

Less accumulated depreciation and amortization                       1,445,005
------------------------------------------------------------------------------
Net Office Equipment and Furniture                                     804,683
------------------------------------------------------------------------------
Other Assets

     Notes receivable - officers (Note 1)                              14,742

     Goodwill, net of accumulated amortization of 
       $250,579 (Note 7)                                            3,227,354

     Other                                                            166,944
-----------------------------------------------------------------------------
Total Other Assets                                                  3,409,040
-----------------------------------------------------------------------------
                                                             $     23,807,857
-----------------------------------------------------------------------------


See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                       12
<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                     Consolidated Balance Sheet

                                                              January  31, 1998
-------------------------------------------------------------------------------

Liabilities and Stockholders' Equity

Current

     Checks issued against future deposits                           132,189

     Accounts payable and accrued expenses                           680,055

     Due to retailers (Note 10)                                      993,846

     Deferred income taxes (Note 6)                                  769,000

     Current maturities of long-term debt 
       (Note 2)                                                       30,997

----------------------------------------------------------------------------
Total Current Liabilities                                          2,606,087

----------------------------------------------------------------------------
Long-term Debt, less current maturities 
  (Note 2)                                                         8,604,057

----------------------------------------------------------------------------
Deferred Income Taxes (Note 6)                                       103,000
----------------------------------------------------------------------------
Total Liabilities                                                 11,313,144
----------------------------------------------------------------------------
Commitments (Notes 3 and 4)
----------------------------------------------------------------------------

Preferred Stock, $.01 par - shares authorized, 
  2,000,000; outstanding, none (Note 8)                                   -

Stockholders' Equity

     Common Stock, $.01 par - shares authorized,
       16,528,925; outstanding 8,016,367 (Note 11)                    80,163

     Additional paid-in-capital                                   10,513,949

     Retained earnings                                             1,900,601
----------------------------------------------------------------------------
Total Stockholders' Equity                                        12,494,713
----------------------------------------------------------------------------

                                                            $     23,807,857
----------------------------------------------------------------------------


See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                       13
<PAGE>

                                       THE SOURCE INFORMATION MANAGEMENT COMPANY

                                           Consolidated Statements of Operations

Years Ended January 31,                           1998                   1997
-------------------------------------------------------------------------------

Service Revenues                              $  11,795,496       $  7,056,270
Merchandise Revenues                                  8,348            242,177
-------------------------------------------------------------------------------
                                                 11,803,844          7,298,447

-------------------------------------------------------------------------------
Cost of Service Revenues                          5,827,933          4,862,207
Cost of Merchandise Sold                             32,720            202,381
-------------------------------------------------------------------------------
                                                  5,860,653          5,064,588

-------------------------------------------------------------------------------
                                                  5,943,191          2,233,859
Selling, General and Administrative 
  Expense (Notes 1, 3 and 4)                      2,350,622          2,904,372
-------------------------------------------------------------------------------
Operating Income (Loss)                           3,592,569          (670,513)
-------------------------------------------------------------------------------
Other Income (Expense)
            Interest income                          21,164             30,628
            Interest expense                      (714,404)          (311,737)
            Other                                  (79,321)           (28,883)
-------------------------------------------------------------------------------
Total Other Income (Expense)                      (772,561)          (309,992)
-------------------------------------------------------------------------------
Income (Loss) Before Income Taxes                 2,820,008          (980,505)
Income Tax (Expense) Benefit (Note 6)           (1,231,000)            377,188
-------------------------------------------------------------------------------
Net Income (Loss)                           $     1,589,008       $  (603,317)
-------------------------------------------------------------------------------

Earnings (Loss) per Share - Basic           $          0.23       $     (0.11)
-------------------------------------------------------------------------------

Weighted Average of Shares 
  Outstanding - Basic                             6,561,761          5,557,223
-------------------------------------------------------------------------------

Earnings (Loss) per Share - Diluted         $          0.22       $     (0.11)
-------------------------------------------------------------------------------

Weighted Average of Shares 
  Outstanding - Diluted                           6,693,666          5,557,223
-------------------------------------------------------------------------------


See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                       14
<PAGE>
<TABLE>

                                       THE SOURCE INFORMATION MANAGEMENT COMPANY

                                 Consolidated Statements of Stockholders' Equity
                                   As Restated For Reverse Stock Split (Note 11)
<CAPTION>


                                                                                                     
                                                        Common Stock       Additional                          Total
                                          ------------------------------   Paid - in         Retained      Stockholders'
                                              Shares         Amount         Capital          Earnings         Equity
---------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>           <C>              <C>             <C>

Balance, January 31, 1996                      5,268,090     $   52,681    $     988,021    $     976,924    $   2,017,626

Issuance of Common Stock                           6,612             66           29,934                -           30,000

Conversion of 7% Preferred Stock to Common
Stock                                            349,750          3,498        1,396,071                -        1,399,569

Issuance of Common Stock to purchase
Magazine Marketing, Inc. (Note 7)                 82,644            826          249,174                -          250,000

Issuance of Common Stock in payment
of services                                       12,506            125           51,625                -           51,750

Dividend on Preferred Stock                        7,863             79           42,382          (42,467)             (6)

Net loss for the year                                  -              -                -         (603,317)       (603,317)
---------------------------------------------------------------------------------------------------------------------------

Balance, January 31, 1997                      5,727,465     $   57,275    $   2,757,207     $     331,140   $   3,145,622

Issuance of Common Stock (Note 11)             2,000,000         20,000        6,700,602                 -       6,720,602

Issuance of Common Stock in payment of
services                                           1,811             18            7,982                 -           8,000

Issuance of Common Stock for exercise of
stock options                                      2,182             21            5,259                 -           5,280

Dividend on Preferred Stock                        6,381             64           19,480          (19,547)             (3)

Exchange of 7% Preferred Stock to Common
Stock (Note 8)                                   186,667          1,867          520,639                -          522,506

Redeemable Common Stock converted to
Common Stock (Note 7)                             91,938            919          502,901                -          503,820

Purchase fractional shares from reverse
stock split                                         (77)            (1)            (321)                -            (322)

Issuance of Common Stock Warrants                      -              -              200                -              200

Net income for the year                                -              -                -        1,589,008        1,589,008
---------------------------------------------------------------------------------------------------------------------------

Balance, January 31, 1998                      8,016,367     $   80,163    $  10,513,949    $   1,900,601    $  12,494,713
---------------------------------------------------------------------------------------------------------------------------

</TABLE>

See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                       15
<PAGE>
<TABLE>
<CAPTION>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                          Consolidated Statements of Cash Flows

Years Ended January 31,                                              1998            1997
-------------------------------------------------------------------------------------------
<S>                                                    <C>                   <C>            
Operating Activities

     Net income (loss)                                   $     1,589,008       $  (603,317)

     Adjustments to reconcile net cash

       provided by operating activities:

          Depreciation and amortization                          432,632           246,599

          Loss on disposition of equipment                         1,338               299

          Provision for losses on accounts
             receivable                                           97,311           224,387

          Impairment of investment in 
            limited partnership                                   20,000            20,000

          Deferred income taxes                                  470,000          (259,064)

          Services received in exchange for 
            Common Stock                                           8,000            51,750

          Changes in assets and liabilities:

              Increase in accounts receivable                 (5,537,689)       (8,789,885)
              Increase in other assets                          (421,882)         (230,004)
              (Decrease) increase in checks issued
                 against future deposits                      (3,093,479)        3,225,668
              Increase (decrease) in accounts 
                 payable and accrued expenses                    120,614          (513,110)
              Increase in amounts due customers                  794,271           116,120
-------------------------------------------------------------------------------------------
Cash Used in Operating Activities                             (5,519,876)       (6,510,557)
-------------------------------------------------------------------------------------------

Investment Activities

     Acquisition of Mike Kessler & 
       Associates, Inc., net of cash acquired                 (608,650)                -

     Acquisition of Magazine Marketing, Inc.                        -           (275,000)

     Capital expenditures                                     (344,847)         (276,729)

     Loans to officers                                         (10,000)                -

     Collection on officers notes receivable                   221,485            29,715

     Collections from related party                                  -            53,171

     Proceeds from sale of fixed assets                          2,000                 -

     Increase in cash surrender value of 
       life insurance                                          (55,333)          (32,740)

     Proceeds from surrender of life insurance
        policies                                                83,959                 -

----------------------------------------------------------------------------------------
Cash Used in Investing Activities                             (711,386)         (501,583)
----------------------------------------------------------------------------------------
</TABLE>

See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                       16
<PAGE>
<TABLE>
<CAPTION>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                          Consolidated Statements of Cash Flows


Years Ended January 31,                                             1998                    1997
-------------------------------------------------------------------------------------------------------
<S>                                                             <C>                      <C>
Financing Activities

     Proceeds from issuance of Common Stock                          6,720,602                  30,000

     Proceeds from issuance of Preferred Stock                               -               1,922,075

     Borrowings under credit facility                               37,777,000               9,791,000

     Principal payments on credit facility                        (36,303,000)             (2,756,121)

     Borrowings under short-term debt agreements                             -               2,836,366

     Repayments under short-term debt agreements                   (2,221,961)             (4,550,081)

     Other financing activities                                          5,155                     (6)

-------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities                                5,977,796               7,273,233

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

(Decrease) Increase in Cash                                          (253,466)                 261,093


Cash, beginning of period                                              284,921                  23,828

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

Cash, end of period                                        $            31,455    $            284,921

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

</TABLE>

See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                       17
<PAGE>
                                      THE SOURCE INFORMATION MANAGEMENT COMPANY
 
                                                 Summary of Accounting Policies


Basis of          The   consolidated   financial   statements   of  The   Source
Presentation      Information   Management   Company  reflect  the  accounts  of
                  companies  formerly  known  as  Display   Information  Systems
                  Corporation (DISC),  Periodical  Management & Marketing,  Inc.
                  (PMM)  and  Dixon's  Modern  Marketing   Concepts,   Inc.  and
                  Tri-State Stores,  Inc. (MMC). DISC and PMM merged on February
                  1,  1995 and the net  assets  of MMC were  merged  on June 15,
                  1995.

Business          The Source  Information  Management Company (the Company) is a
                  provider of  merchandise  management  information  and related
                  services   primarily  in  connection   with  the  display  and
                  marketing  of  magazines  and other  periodicals.  The Company
                  assists  retailers in  monitoring,  documenting,  claiming and
                  collecting  incentive  payments,  primarily from publishers of
                  periodicals,  and performs  consulting  and other  services in
                  exchange for  commissions.  The Company  also obtains  revenue
                  from (a) consulting and other services  rendered to clients on
                  other than a commission  basis and (b) the sale,  as principal
                  or broker,  of merchandise to the Company's  retailer  clients
                  for resale by them.

Principles of     The consolidated  financial statements include the accounts of
Consolidation     The Source Information Management Company and its wholly-owned
                  subsidiaries,   all  of  which  are  currently  inactive.  All
                  material  intercompany  accounts  and  transactions  have been
                  eliminated in consolidation.

Concentrations    Substantially  all of the Company's  revenues are derived from
of Credit         the  services  provided  in  connection  with  the  collection
Risk              of  payments  owed  to the  Company's  retailer  clients  from
                  magazine  publishers under programs designed by the publishers
                  to provide  incentives to increase single copy magazine sales.
                  The  incentive  programs,  although  part  of the  publishers'
                  marketing   strategy  for  over  20  years,  are  governed  by
                  short-term  contracts.  If magazine publishers  discontinue or
                  significantly  modify the incentive  programs in such a manner
                  which  makes  the  Company's  services  incompatible  with the
                  modified  programs,  the Company's  results of operations  and
                  financial condition may be materially and adversely affected.

                  The Company's retailer clients, who are located throughout the
                  United States and eastern Canada,  are periodically  evaluated
                  for extension of unsecured  credit. At the balance sheet date,
                  the Company had no concentration of credit with any individual
                  retailer client.

                  In the Advance Pay Program  (Note 9), the Company  assumes the
                  risk otherwise borne by the retailer that magazine  publishers
                  will  refuse  or be  unable  to pay the  amount  of  incentive
                  payments claimed. Based on historical experience,  the Company
                  maintains a reserve for claims submitted but subject to such a
                  refusal or inability to pay. However,  if a prominent magazine
                  publisher   files  a  petition  in  bankruptcy,   seeks  other
                  protection  from its  creditors or  otherwise  refuses to pay,
                  this reserve may be inadequate.  The results of operations and
                  the  financial  condition of the Company  could be  materially
                  affected.

                                       18
<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Summary of Accounting Policies


Revenue           Service  revenues  are  recognized  during the period in which
Recognition       services are performed.  Merchandising revenues are recognized
                  in  the  period  in  which  the  merchandising   services  are
                  provided.

                  Under  both  the  standard  arrangement  and the  Advance  Pay
                  Program,  commission  revenue is recognized at the time claims
                  for  incentive   payments  are  substantially   completed  for
                  submission  to  the   publishers.   The   commission   revenue
                  recognized is based on the amount  claimed,  less an estimated
                  reserve  necessary  to  maintain  an  allowance  for  doubtful
                  accounts of  approximately  2% of trade  accounts  receivable.
                  Under the standard arrangement,  invoices for claim processing
                  services are not issued until the Company receives  settlement
                  of the claim.  However,  under the  Advance Pay  Program,  the
                  customer  is not  invoiced  for the  commission,  which is the
                  difference between the claim and the advance amount.

Equipment and     Equipment and furniture  are stated at cost.  Depreciation  is
Furniture         computed   using  the   straight-line   method  for  financial
                  reporting and accelerated methods for income tax purposes over
                  the estimated useful lives of 5 to 7 years.

Income Taxes      Income  taxes are  calculated  using  the asset and  liability
                  method   specified  by   Statement  of  Financial   Accounting
                  Standards No. 109, "Accounting for Income Taxes."

Goodwill          Goodwill  represents  the  excess  of the  cost  of a  company
                  acquired over the fair value of the net assets  acquired which
                  is amortized over 15 years.

Stock-Based       The Company  grants stock options for a fixed number of shares
Compensation      to employees  with an exercise  price greater than or equal to
                  the fair value of the shares at the date of grant. The Company
                  accounts for stock option grants in accordance with Accounting
                  Principles Board Opinion No. 25,  "Accounting for Stock Issued
                  to Employees" (APB Opinion No. 25). That Opinion requires that
                  compensation  cost  related  to fixed  stock  option  plans be
                  recognized  only to the  extent  that  the  fair  value of the
                  shares  at  the  grant  date  exceeds  the   exercise   price.
                  Accordingly,  the Company  recognizes no compensation  expense
                  for its stock option grants.

                  In October 1995,  the Financial  Accounting  Standards  Board,
                  issued Statement of Financial  Accounting Standards (SFAS) No.
                  123, "Accounting for Stock-Based  Compensation".  SFAS No. 123
                  allows companies to continue to account for their stock option
                  plans in  accordance  with APB Opinion No. 25, but  encourages
                  the adoption of a new accounting method based on the estimated
                  fair value of  employee  stock  options.  Pro forma net income
                  (loss) and  earnings  (loss) per share,  determined  as if the
                  Company had applied the new method,  are disclosed within Note
                  4.

                                       19

<PAGE>
                                       THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                  Summary of Accounting Policies



Accounting        The  preparation  of financial  statements in conformity  with
Estimates         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.
 
Long-Lived        In March 1995,  SFAS No. 121 "Accounting for the Impairment of
Assets            Long-Lived  Assets and for Long-Lived  Assets Disposed Of" was
                  issued.  SFAS No.  121  requires  that  long-lived  assets and
                  certain  identifiable  intangibles  to be  held  and  used  or
                  disposed of by an entity be reviewed for  impairment  whenever
                  events or changes in circumstances  indicate that the carrying
                  amount of an asset may not be recoverable. During fiscal 1997,
                  the Company adopted this statement. The Company has determined
                  that no  impairment  loss need be  recognized  for  applicable
                  assets of continuing operations.
 
Earnings Per      In February 1997,  the Financial  Accounting  Standards  Board
Share             issued SFAS No. 128,  "Earnings per Share," which requires the
                  presentation  of  "basic"  earnings  per  share,  computed  by
                  dividing net income  available to common  shareholders  by the
                  weighted  average number of common shares  outstanding for the
                  period,  and "diluted"  earnings per share, which reflects the
                  potential  dilution  that could occur if  securities  or other
                  contracts to issue  common  stock were  exercised or converted
                  into common  stock or resulted in the issuance of common stock
                  that then shared in the  earnings  of the entity.  The Company
                  adopted SFAS No. 128 in the fourth  quarter of fiscal 1998 and
                  has  restated  all  prior  period   earnings  per  share  data
                  presented.  The  adoption  of SFAS  No.  128  did  not  have a
                  material effect on the Company's  previously reported earnings
                  per share information.

Reclassi-         Certain 1997 amounts have been  reclassified to conform to the
fications         1998 presentation.


New Accounting    SFAS No. 130, "Reporting  Comprehensive Income," was issued in
Standards         June 1997.  Comprehensive  income is  defined  as net  income 
                  plus certain items that are recorded directly to shareholders'
                  equity,  such as  unrealized  gains and  losses on  available-
                  for-sale securities. Components of the Company's comprehensive
                  income will be included in a financial  statement that has the
                  same prominence as other financial  statements starting in the
                  first  quarter  of  fiscal  1999.  SFAS No.  130's  disclosure
                  requirements  will have no impact on the  Company's  financial
                  condition or results of operations.

                  SFAS No. 131,  "Disclosure about Segments of an Enterprise and
                  Related  Information,"  is effective for financial  statements
                  for periods  beginning  after  December 15, 1997,  but interim
                  reporting  is not required in 1998.  An  operating  segment is
                  defined  under SFAS No. 131 as a  component  of an  enterprise
                  that engages in business  activities that generate revenue and
                  expense for which operating  results are reviewed by the chief
                  operating  decision  maker in the  determination  of  resource
                  allocation   and   performance.   The  Company  is   currently
                  evaluating  the  impact of SFAS No.  131 on  future  financial
                  statement disclosures.

                                       20

<PAGE>
                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                  Notes to Financial Statements

 
1.     Related Party     The Company purchased data processing  services from an
       Transactions      employment service company owned by certain officers of
                         the Company.  There were approximately $275,000 of such
                         purchases made during 1997. The Company  purchased this
                         employment  service  company  for $45,000 on January 1,
                         1997.

                         One of the Company's  stockholders also owns a majority
                         of the  stock  of FMG,  Inc.,  primarily  an  investing
                         company.  At  January  31,  1996,  the  Company  had  a
                         receivable  from FMG of $53,171 at prime plus .5%.  The
                         receivable was collected in full on November 5, 1996.

                         The Company  currently  leases certain office space and
                         from time to time leases an airplane from  partnerships
                         controlled by stockholders of the Company. Amounts paid
                         for the office  space were  approximately  $223,000 and
                         $207,000 for 1998 and 1997, respectively.  Amounts paid
                         for the airplane were approximately  $12,000 and $0 for
                         1998 and 1997, respectively.

                         Certain  officers  of the  Company,  have  from time to
                         time,  received  cash  advances  from the Company.  The
                         officers  executed  promissory  notes  in  favor of the
                         Company  in  the   aggregate   amounts   of   $295,293.
                         Collections  on these notes  totaled  $273,200  through
                         January  31,  1998,  leaving a balance  outstanding  of
                         $22,093.  The  remaining  notes bear  interest at rates
                         varying from 6.96% to 7.34% per annum.


2.     Long-term Debt    Long-term debt consists of:
       and Revolving
       Credit Facility

January 31,                                                                1998
-------------------------------------------------------------------------------

Revolving Credit Facility                                      $      8,598,000

Unsecured  note  payable to  stockholder  (former  
  owner of Magazine  Marketing, Inc.), non-interest 
  bearing, payable in eight quarterly installments 
  of $10,000, discounted based on the Company's 
  effective borrowing rate                                                9,774

Term note payable in monthly installments of $629
through November 1999, collateralized by an automobile                   12,800

Obligations under capital lease (Note 3)                                 14,480
-------------------------------------------------------------------------------
                                                               
Total Long-term Debt                                                  8,635,054

Less current maturities                                                  30,997
-------------------------------------------------------------------------------

Long-term Debt                                                 $      8,604,057
-------------------------------------------------------------------------------

                                       21

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


                         Annual  maturities  of  long-term  debt are as follows:
                         1999 - $30,997; 2000 - $8,604,057.

                         The Company has an agreement  providing  for  revolving
                         loans up to  $15,000,000.  The  bank  has the  right to
                         terminate  the  agreement  upon not less than  thirteen
                         months prior written  notice.  Borrowings bear interest
                         at a rate related to the monthly  LIBOR index rate plus
                         a percentage ranging from 2.5% to 3.5%,  depending upon
                         the ratio of funded debt to earnings  before  interest,
                         taxes,   depreciation  and  amortization   (effectively
                         8.4727% at January 31, 1998). Borrowings are secured by
                         a security  interest in substantially all the Company's
                         assets  including  receivables,  inventory,  equipment,
                         goods and fixtures,  software,  contract rights, notes,
                         and general intangibles.

                         The revolving  loan  agreement  requires the Company to
                         maintain  certain  ratios and a specified  level of net
                         worth,  restricts  payment  of  dividends,  and  limits
                         additional indebtedness.  The Company was in compliance
                         with such ratios at January 31, 1998.

3.     Commitments       Leases

                         The Company leases office space, an apartment, computer
                         equipment,  and vehicles  under leases that expire over
                         the  next  five  years.  The  Company  also  leases  an
                         administrative  facility  from a related party under an
                         operating  lease that  expires in 2012.  In most cases,
                         management   expects  that  in  the  normal  course  of
                         business, leases will be renewed or replaced with other
                         leases.  Rent  expense was  approximately  $462,000 and
                         $427,000 for the years ended January 31, 1998 and 1997,
                         respectively.  Amounts paid to related parties included
                         in total rent expense were  approximately  $223,000 and
                         $207,000 for 1998 and 1997, respectively.

                         Office  equipment  and  furniture  includes  $71,066 at
                         January 31, 1998 for  equipment  leases which have been
                         capitalized.  Accumulated  amortization  was $63,626 at
                         January 31,  1998.  Lease  amortization  is included in
                         depreciation and amortization expense.

                         Future minimum payments,  by year and in the aggregate,
                         under capital leases and noncancelable operating leases
                         with  initial  or  remaining  terms of one year or more
                         consisted of the following at January 31, 1998:


                                       22

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


                                          Capital             Operating
Year Ending January 31,                    leases               leases
----------------------------------------------------------------------------

1999                                   $      15,523      $         410,569
2000                                               -                250,584
2001                                               -                173,148
2002                                               -                155,215
2003                                               -                150,300
Thereafter                                         -              1,327,650
----------------------------------------------------------------------------

Total minimum lease payments                  15,523      $       2,467,466
                                                    ------------------------
Amount representing interest                   1,043
-----------------------------------------------------

Present Value of Net Minimum
   Lease Payments                      $      14,480
-----------------------------------------------------

                         Litigation

                         The  Company  has  pending  certain  legal  actions and
                         claims incurred in the normal course of business and is
                         actively  pursuing the defense thereof.  In the opinion
                         of  management,  these  actions  and  claims are either
                         without  merit or are covered by insurance and will not
                         have  a  material   adverse  effect  on  the  Company's
                         financial position.

                         Employment agreements

                         The Company has entered into employment agreements with
                         certain  officers and key employees.  These  agreements
                         expire in January 1999 and require annual salary levels
                         and termination benefits, should a termination occur.

                         Consulting agreement

                         On May 31, 1997, the Company  entered into a three year
                         consulting agreement with a company owned by the former
                         shareholder  of Mike Kessler and  Associates,  Inc. The
                         agreement   requires  the  Company  to  make   payments
                         aggregating  $75,000,  $65,000 and $50,000 annually for
                         the first, second and third years of the agreement.

                                       23

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements



4.  Employee Profit      Sharing and 401(k) Plan 
    Benefit Plans

                         The  Company has a combined  profit  sharing and 401(k)
                         Plan.  Annual   contributions  to  the  profit  sharing
                         portion  of the Plan  are  determined  by the  Board of
                         Directors  and may not exceed  the  amount  that may be
                         deducted for federal income tax purposes. There were no
                         profit sharing contributions charged against operations
                         for  the  years  ended   January  31,  1998  and  1997.
                       
                         Under the  401(k)  portion  of the Plan,  all  eligible
                         employees  may elect to  contribute  2% to 20% of their
                         compensation  up  to  the  maximum  allowed  under  the
                         Internal  Revenue Code. The Company matches one half of
                         an  employee's  contribution,  not to  exceed 5% of the
                         employee's  salary.  The amounts matched by the Company
                         during  the  years  ended  January  31,  1998  and 1997
                         pursuant  to this Plan were  approximately  $63,000 and
                         $50,000, respectively.

                         Deferred Compensation Plan

                         During  fiscal year 1997,  the Company  established  an
                         unfunded   deferred   compensation   plan  for  certain
                         officers,  who  elect  to defer a  percentage  of their
                         current   compensation.   The  Company  does  not  make
                         contributions  to the plan and is responsible  only for
                         the  administrative  costs  associated  with the  plan.
                         Benefits are payable to the participating officers upon
                         their  death or  termination  of  employment.  From the
                         deferred funds, the Company has purchased  certain life
                         insurance policies. However, the proceeds and surrender
                         value  of  these  policies  are not  restricted  to pay
                         deferred compensation benefits when they are due.

                         Stock Option Plan

                         In  August  1995,  the  Company  established  its  1995
                         Incentive  Stock  Option  Plan  for key  employees  and
                         reserved  520,661 shares of Common Stock for such plan.
                         Under the plan,  the Stock Option  Committee  may grant
                         stock  options  to key  employees  at not less than one
                         hundred  percent (100%) of the fair market value of the
                         Company's  Common  Stock  at the  date  of  grant.  The
                         durations  and   exercisability   of  the  grants  vary
                         according to the individual options granted.


                                       24

<PAGE>
<TABLE>
<CAPTION>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


                                                                              Weighted
                                                         Range of             Average
                                   Number of             Exercise             Exercise
                                    Options               Prices               Price
                            -----------------------------------------------------------------
<S>                               <C>                  <C>                  <C>  
Options outstanding at
  January 31, 1996                             -0-          -                    -

Options granted                            227,271      4.84-5.60               5.28
Options expired                             61,983         4.84                 4.84

                            -----------------------------------------------------------------
Options outstanding at
  January 31, 1997                         165,288      5.30-5.60               5.45

Options granted                            327,273      1.66-5.60               2.97
Options expired                             92,554      2.42-5.60               5.26
Options exercised                            2,182         2.42                 2.42

                            -----------------------------------------------------------------
Options outstanding at
  January 31, 1998                         397,825      1.66-5.60               3.47
                            -----------------------------------------------------------------
</TABLE>

<TABLE>

                         The following table  summarizes  information  about the
                         stock options outstanding at January 31, 1998:

<CAPTION>
                                                        Remaining
                                   Number              Contractual           Options
           Exercise Prices         Outstanding         Life (Months)       Exercisable
<S>       <C>                     <C>                <C>                 <C> 
                1.66                    89,256                52                   -0-
                2.42                    75,454               113                15,091
                2.42                    27,000               113                 9,000
                2.66                    49,091                53                   -0-
                5.30                    82,644               112                82,644
                5.60                    74,380                36                24,793
                                        ------                                  ------
                                       397,825                                 131,528
</TABLE>

                         The options above were issued at exercise  prices which
                         approximate  fair market value at the date of grant. At
                         January 31,  1998,  122,836  shares are  available  for
                         grant under the plan.


                                       25

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


                         As discussed in the Summary of Accounting Policies, the
                         Company   applies   APB  Opinion  No.  25  and  related
                         interpretations    in   accounting   for   this   plan.
                         Accordingly,  no compensation  cost has been recognized
                         for its incentive  stock option plan. Had  compensation
                         cost for the Company's stock- based  compensation  plan
                         been  determined  based on the fair  value at the grant
                         dates for  awards  under the plan  consistent  with the
                         method of SFAS No. 123, the Company's  consolidated net
                         income (loss) and consolidated  income (loss) per share
                         would  have  been  reduced  to the  pro  forma  amounts
                         indicated below:

<TABLE>
<CAPTION>

Year Ended January 31,                                              1998         1997
--------------------------------------------------------------------------------------
<S>                               <C>                 <C>                 <C>   
Net income (loss)                    As reported        $      1,589,008    (603,317)
                                     Pro forma                 1,575,534    (637,373)

Basic earnings (loss) per share      As reported                     .23       (0.11)
                                     Pro forma                       .22       (0.11)

Diluted earnings (loss) per share    As reported                     .22       (0.11)
                                     Pro forma                       .22       (0.11)
--------------------------------------------------------------------------------------
</TABLE>

                         The  pro  forma   amounts   reflected   above  are  not
                         representative of the effects on reported net income in
                         future years  because in general,  the options  granted
                         typically do not vest for several years and  additional
                         awards  are made  each  year.  The  fair  value of each
                         option  grant is  estimated on the grant date using the
                         Black-Scholes  option  pricing model with the following
                         assumptions:


Year Ended January 31,                                   1998            1997
-------------------------------------------------------------------------------

Dividend yield                                             0%              0%
Range of expected lives (years)                        3.6-10               1
Range of expected volatility                        0.40-0.60            0.30
Risk-free interest rate                                 5.90%           4.88%
-------------------------------------------------------------------------------

                         Stock Award Plan

                         In September  1996, the Company adopted its Stock Award
                         Plan for all  employees  and reserved  41,322 shares of
                         Common Stock for such plan.  Under the plan,  the Stock
                         Award Committee, appointed by the Board of Directors of
                         the  Company,  shall  determine  the  employees to whom
                         awards shall be granted.

                         On  September  18,  1996,  8,306 shares of Common Stock
                         were awarded to certain employees under the plan.


                                       26

<PAGE>

                                     THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                Notes to Financial Statements


5.     Supplemental      Supplemental  information  on interest and income taxes
       Cash Flow         paid is as follows:
       Information

                         
Years Ended January 31,                        1998                   1997
---------------------------------------------------------------------------

Interest                             $      700,000        $       285,000

Income Taxes                         $    1,081,000        $       264,000
---------------------------------------------------------------------------

                         Capital lease  obligations  of $15,687 were incurred in
                         1997  when the  Company  entered  into  leases  for new
                         office equipment.

                         On August 30,  1996,  7,863 shares of Common Stock were
                         issued as a dividend to the preferred  shareholders  as
                         of that date.  On February  28,  1997,  6,381 shares of
                         Common Stock were issued as a dividend to the preferred
                         shareholders as of that date.

                         During 1997, in  connection  with the  acquisitions  of
                         Magazine Marketing,  Inc. and Readers Choice, Inc., the
                         Company  issued  86,644  shares  and  91,938  shares of
                         Common Stock (Note 7).

                         As  part  of  the   acquisition   of  Mike   Kessler  &
                         Associates,  Inc. the Company entered into a short-term
                         debt agreement for $2,150,000.  The obligation was paid
                         in full at its due date in January 1998.

6.     Income Taxes      Provision for federal and state income taxes  (benefit)
                         in the consolidated statements of operations consist of
                         the following components:


Year Ended January 31,                            1998              1997
------------------------------------------------------------------------------
Current

    Federal                                 $       606,000   $     (102,768)
    State                                           155,000          (15,356)
------------------------------------------------------------------------------
Total Current                                       761,000         (118,124)

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

Deferred

    Federal                                         376,000         (225,386)
    State                                            94,000          (33,678)
------------------------------------------------------------------------------
Total Deferred                                      470,000         (259,064)
-------------------------------------------------------------------------------

Total Income Tax Expense (Benefit)          $     1,231,000   $     (377,188)

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


                                       27

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


                         Deferred  income  taxes  reflect the net tax effects of
                         temporary  differences  between the carrying  amount of
                         the  assets and  liabilities  for  financial  reporting
                         purposes and the amounts used for income tax  purposes.
                         The  sources  of the  temporary  differences  and their
                         effect on deferred taxes are as follows:


January 31,                                                      1998
----------------------------------------------------------------------
Deferred Tax Assets
    Allowance for doubtful accounts                  $        165,000
    Deferred compensation                                      33,000
    Other                                                      16,000
----------------------------------------------------------------------
Total Deferred Tax Assets                                     214,000
----------------------------------------------------------------------
Deferred Tax Liabilities
    Internal Revenue Code
       Section 83 adjustment                                 708,000
    Income not previously taxed under cash
       basis of accounting for income tax purposes           316,000
    Depreciation                                              30,000
    Other                                                     32,000
---------------------------------------------------------------------
Total Deferred Tax Liabilities                             1,086,000
---------------------------------------------------------------------
Net Deferred Tax Liability                                   872,000
---------------------------------------------------------------------
Classified as
    Current                                                  769,000
    Non-current                                              103,000

---------------------------------------------------------------------
Net Deferred Tax Liability                          $        872,000
---------------------------------------------------------------------

                         The following  summary  reconciles  income taxes at the
                         maximum federal statutory rate with the effective rates
                         for 1998 and 1997:


Year Ended January 31,                                 1998            1997
----------------------------------------------------------------------------

Income tax expense (benefit) at  
  statutory rate                              $       960,000   $   (333,372)

State income tax expense (benefit),
   net of federal income tax benefit                  200,000        (80,421)

Non-deductible meals and entertainment                 30,000          35,320

Non-deductible officers' life insurance                 7,000         (3,250)

Non-deductible goodwill amortization                   61,000           2,306

Utilization of NOL carryforwards                     (19,000)              -

Other, net                                            (8,000)           2,229
----------------------------------------------------------------------------

Income Tax Expense (Benefit)                  $     1,231,000   $   (377,188)

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

                                       28

<PAGE>
                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


7.     Business          Acquisition of Magazine Marketing, Inc.
       Combinations
                         On June 28, 1996, the Company acquired all of the stock
                         of Magazine  Marketing,  Inc.  in  exchange  for 82,644
                         shares of Common  Stock of the Company and  $275,000 in
                         cash. In addition, the Company shall pay $10,000 at the
                         end of each quarter for a two year period following the
                         closing date (or a total of $80,000).

                         The  transaction  has been  accounted for as a purchase
                         and, accordingly,  the assets and liabilities have been
                         recorded at fair market  value.  Results of  operations
                         have  been  included  as of the  effective  date of the
                         transaction.  The  purchase  price  of the  transaction
                         exceeded  the fair value of the assets  acquired in the
                         amount  of  $704,748  and is  being  amortized  over 15
                         years.

                         Acquisition of Readers Choice, Inc.

                         On June  30,  1996,  the  Company  acquired  all of the
                         issued and outstanding shares of Readers Choice,  Inc.,
                         a wholly owned  subsidiary of United Magazine  Company,
                         in  exchange  for 91,938  shares of  Redeemable  Common
                         Stock  of  the  Company.   This  transaction  has  been
                         accounted for as a purchase and accordingly, the assets
                         and  liabilities  have  been  recorded  at fair  market
                         value.  Results of operations  have been included as of
                         the  effective  date of the  transaction.  The purchase
                         price of the transaction exceeded the fair value of the
                         assets  acquired in the amount of $280,507 and is being
                         amortized over 15 years.

                         Acquisition of Mike Kessler and Associates, Inc.

                         On May 30, 1997, the Company  acquired all of the stock
                         of  Mike  Kessler  and   Associates,   Inc.  (MKA)  for
                         $2,500,000 of which  $350,000 was paid upon closing and
                         the balance  was paid on January 5, 1998 with  interest
                         at 6.25%. The seller operated MKA as a business engaged
                         in the  collection  of retail  display  allowances  for
                         retail  store  chains.  The Company has  continued  the
                         operation of such business and has continued  servicing
                         MKA's customer base.

                         This  transaction has been accounted for as a purchase,
                         and  accordingly,  the assets and liabilities have been
                         recorded at fair market  value.  Results of  operations
                         have  been  included  as of the  effective  date of the
                         transaction. The purchase price exceeded the fair value
                         of the assets  acquired in the amount of $2,382,900 and
                         is being amortized over 15 years.

                         Unaudited pro forma results of operations  for 1998 and
                         1997 for the Company and MKA is listed below:

                                       29

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


Year Ended January 31,                              1998                   1997
-------------------------------------------------------------------------------

Total Revenues      (As reported)     $       11,804,000    $         7,298,000
                    (Pro forma)               12,304,000              8,796,000
Net Income (Loss)   (As reported)              1,589,000              (603,000)
                    (Pro forma)                1,637,000              (438,000)
Earnings (Loss) Per Share
    Basic (As reported)                             0.23                 (0.11)
    Diluted (As reported)                           0.22                 (0.11)
    Basic (Pro forma)                               0.23                 (0.08)
    Diluted (Pro forma)                             0.23                 (0.08)


8.  Preferred Stock      The Company has authorized 2,000,000 shares of $.01 par
                         Preferred Stock. On March 13, 1996,  65,000 shares were
                         designated  as 1996  Series  7%  Convertible  Preferred
                         Stock.  Rights and restrictions on the remaining shares
                         will be  established  if,  and  when,  any  shares  are
                         issued.

                         Each share of the 1996 Series 7% Convertible  Preferred
                         Stock   entitles   its  holder  to  receive  an  annual
                         dividend,   when  and  as  declared  by  the  Board  of
                         Directors,  of $7 per  share  payable  in shares of the
                         Company's  Common  Stock;  to convert it into shares of
                         Common Stock; to receive $100 per share in the event of
                         dissolution, liquidation, or winding up of the Company,
                         whether  voluntary  or  involuntary;   and  subject  to
                         certain  conditions in the Certificate of Designations,
                         Preferences  and  Relative  Rights  of 1996  Series  7%
                         Convertible  Preferred  Stock,  may be  redeemed at the
                         option  of the  Company  at a price of $100  per  share
                         within 30 days following the effective date of a merger
                         or  consolidation  in  which  the  Company  is not  the
                         surviving entity.

                         Each share of the 1996 Series 7% Convertible  Preferred
                         Stock shall be convertible, at the option of the holder
                         thereof,  into  shares  of  the  Common  Stock  of  the
                         Company,  at the  conversion  price equal to 80% of the
                         current  market  price of the Common  Stock,  provided,
                         however,  the  conversion  price shall not be less than
                         $4.24  nor more than  $6.66 per share of Common  Stock.
                         For purposes of such conversion, each share of the 1996
                         Series 7% Convertible Preferred Stock shall be accepted
                         by the Company for surrender at its Liquidation  Amount
                         of $100 per share.

                         During March 1996,  the Company issued 20,000 shares of
                         1996 Series 7% Convertible Preferred Stock for $100 per
                         share.  Commissions and expenses totaling $137,925 were
                         incurred  in  connection  with the stock  issuances  of
                         which  $77,925 was paid in cash and $60,000 was paid by
                         issuance of another 600 shares of Preferred Stock.

                         On June 3, 1996, an investor  converted 5,000 shares of
                         the  Company's  1996  Series 7%  Convertible  Preferred
                         Stock into Common Stock of the Company.  The conversion
                         price  was  $4.30  per  share,  which  resulted  in the
                         issuance  of  116,293  shares  of  Common  Stock.  This
                         conversion  also resulted in the issuance to certain of
                         

                                       30
<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


                         the  Company's   financial   advisors  of  warrants  to
                         purchase an additional 2,326 shares of the Common Stock
                         of the Company. These warrants to purchase Common Stock
                         are  exercisable  for a two year  period at an exercise
                         price equal to $5.15 per share.

                         On July 29, 1996, two investors converted 2,250 and 500
                         shares of the  Company's  1996  Series  7%  Convertible
                         Preferred  Stock into Common Stock of the Company.  The
                         conversion price was $4.42 per share, which resulted in
                         the issuance of 50,945 and 11,320 shares, respectively,
                         of Common Stock.

                         On August 30, 1996,  the Company  issued a Common Stock
                         dividend  to  investors  who  held the  Company's  1996
                         Series 7%  Convertible  Preferred  Stock.  At this date
                         there were 12,850 shares of such stock outstanding. The
                         7%  dividend  resulted  in a Common  Stock  dividend of
                         7,863  shares  based on an issuance  price of $5.40 per
                         share.

                         On September  11,  1996,  an investor  converted  5,000
                         shares of the  Company's  1996  Series  7%  Convertible
                         Preferred  Stock into Common Stock of the Company.  The
                         conversion price was $4.24 per share, which resulted in
                         the issuance of 118,064  shares of Common  Stock.  This
                         conversion  also resulted in the issuance to certain of
                         the  Company's   financial   advisors  of  warrants  to
                         purchase an additional 2,361 shares of the Common Stock
                         of the Company. These warrants to purchase Common Stock
                         are  exercisable  for a two year  period at an exercise
                         price equal to $5.08 per share.

                         On September  22,  1996,  an investor  converted  2,250
                         shares of the  Company's  1996  Series  7%  Convertible
                         Preferred  Stock into Common Stock of the Company.  The
                         conversion price was $4.24 per share, which resulted in
                         the issuance of 53,128 shares of Common Stock.

                         On February 28, 1997, the Company issued a Common Stock
                         dividend  to  investors  who  held the  Company's  1996
                         Series 7%  Convertible  Preferred  Stock.  At this date
                         there were 5,600 shares of such stock outstanding.  The
                         7%  dividend  resulted  in a Common  Stock  dividend of
                         6,381  shares  based on an issuance  price of $3.06 per
                         share.

                         In  July  1997,   the  Company   exchanged   all  5,600
                         outstanding  shares  of the  Company's  1996  Series 7%
                         Convertible Preferred Stock for an aggregate of 186,667
                         shares of Common Stock and  non-transferable  warrants,
                         expiring in 2000, to purchase  310,710 shares of Common
                         Stock at an  exercise  price of $3.00 per  share.  Such
                         exchange resulted in a constructive dividend,  based on
                         the    independently    appraised    value    of    the
                         non-transferable   warrants,   of  $109,937  which  was
                         reported in the fiscal quarter ended July 31, 1997.
 
9.   Advance Pay         The Company  has  established  an Advance Pay  Program.
     Program             Under this program the Company  advances an agreed upon
                         percentage of the incentive  payments otherwise due the
                         retailer  from  magazine   publishers   upon  quarterly
                         submission  of claims  for such  payments.  The  claims
                         otherwise  due the  retailer  become  due the  Company.
                         Included  in trade  receivables  at January 31, 1998 is
                         $14,587,531  due the  Company  under  the  Advance  Pay
                         Program   (net   of   $3,859,154    due   the   program
                         participants).  Service  revenues from the program were
                         approximately $4,576,000 and $1,150,000 during 1998 and
                         1997, respectively.

                                       31

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


10.  Due to  Retailers   The  Company  has  arrangements  with  certain  of  its
                         customers  whereby the Company is authorized to collect
                         and deposit in its own accounts,  checks payable to its
                         customers for incentive  payments.  The Company retains
                         the  commission  related to such  payments and pays the
                         customer the  difference.  The Company  owes  retailers
                         $993,846 at January 31, 1998 under such arrangements.

11.  Common Stock        In September  1997, the Company issued to Aron Katzman,
                         Harry L.  Franc,  III and Timothy A.  Braswell,  each a
                         director  of the  Company,  non-transferable  warrants,
                         expiring in 2000,  to purchase an  aggregate  of 89,289
                         shares of Common  Stock at an  exercise  price of $3.00
                         per share. These warrants will vest at a rate of 25% on
                         August  1,  1998,  25%  on  November  1,  1998,  25% on
                         February  1, 1999 and 25% on May 1, 1999.  The  related
                         cost,  as  determined  by  independent  appraisal,   of
                         approximately  $54,000 will be recognized  ratably over
                         those periods.

                         In October 1997, the Company sold in a public  offering
                         (the  "Offering"),  2,000,000  shares of the  Company's
                         Common Stock. Concurrent with the Offering, the Company
                         effected the 1 for 1.21 reverse stock split  previously
                         approved by the  Company's  shareholders.  The weighted
                         average  number  of  common  shares  presented  in  the
                         financial  statements have been retroactively  restated
                         to give effect to such reverse stock split.


12.  Fair Values of      The  following  methods  and  assumptions  were used to
     Financial           estimate  the fair  values of each  class of  financial
     Instruments         instruments  for which it is  practicable  to  estimate
                         that value:

                         Trade Receivables

                         The carrying amounts  approximate fair value because of
                         the short maturity of those instruments.

                         Notes Receivable - Officers

                         The fair value is estimated by  discounting  the future
                         cash flows  using the current  interest  rates at which
                         similar  loans would be made to borrowers  with similar
                         credit ratings and for the same remaining maturities.

                         Accounts Payable and Accrued Expenses,  and Amounts Due
                         to Retailers

                         Carrying amounts are reasonable estimates of fair value
                         due to the relatively short period between  origination
                         and expected repayment of these instruments.


                                       32

<PAGE>
                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements


                         Long-term Debt and Revolving Credit Facility (Excluding
                         Obligations Under Capital Leases)

                         The carrying amount of the long-term debt  approximates
                         the fair value  because the  financial  instrument  was
                         originally recorded at its discounted value.

                         It  is  presumed  that  the  carrying   amount  of  the
                         revolving  credit facility is a reasonable  estimate of
                         fair value  because the  financial  instrument  bears a
                         variable interest rate.

                         The estimated  fair values of the  Company's  financial
                         instruments are as follows:


                                                      Carrying          Fair
January 31, 1998                                      Value             Value
--------------------------------------------------------------------------------
Financial Assets
  Trade receivables                               $ 18,874,764      $ 18,874,764
  Notes receivable - officers                     $     22,093      $     20,100

Financial Liabilities
  Accounts payable and accrued expenses           $    680,055      $    680,055
  Due to retailers                                $    993,846      $    993,846
  Long-term debt (excluding obligations
     under capital leases)                         $ 8,589,577       $ 8,589,577
--------------------------------------------------------------------------------


13. Earnings Per Share   In calculating  earnings per share,  Net Income for the
                         year  ended   January   31,   1998  was  reduced  by  a
                         constructive dividend of $109,937,  which resulted from
                         the  exchange  of  all  5,600  outstanding   shares  of
                         Preferred  Stock for 186,667 shares of Common Stock and
                         non-transferable warrants.

                         A reconciliation  of the denominators of the basic  and
                         diluted earnings per share computations are as follows:


January 31, 1998                                            1998         1997
-------------------------------------------------------------------------------

Weighted average number of 
  common shares outstanding                              6,561,761    5,557,223

Effect of dilutive securities - 
stock options and warrants                                 131,905            -

-------------------------------------------------------------------------------
Weighted average number of common shares
outstanding - as adjusted
                                                         6,693,666    5,557,223

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

14.  Subsequent Event    Subsequent to year end, the Board of Directors approved
                         a  plan  in  which  the Company  would sell  additional
                         shares  of  its  Common  Stock.  The  Company  will  be
                         required to file a registration  statement for the sale
                         of  these  securities.   It  is  anticipated  that  the
                         aggregate  selling price of all of the securities  will
                         approximate  $10,500,000.  The  proposed  issue date of
                         these securities is expected to be in June 1998.

                                       33

<PAGE>

                                      THE SOURCE INFORMATION MANAGEMENT COMPANY

                                                 Notes to Financial Statements
<TABLE>
<CAPTION>

15.    Quarterly Financial                             Quarters Ended
       Data (unaudited)

 1998                                 April 30      July 31   October 31    January 31
 -------------------------------------------------------------------------------------
<S>                                <C>           <C>        <C>            <C>

 Net Sales                           $2,527,879   $2,940,137  $2,943,766     $3,392,062
 Gross Profit                         1,233,933    1,349,506   1,421,565      1,938,187
 Net Income                             256,127      333,426     377,256        622,199
 Earnings per common
   share - Basic                            .04          .04         .06            .08
 Weighted average number
   of common shares
   outstanding - Basic                5,823,777    5,827,872   6,535,980      8,015,371
 Earnings per common
   shares - Diluted                        0.04         0.04        0.06           0.08
 Weighted average number
   of common shares
   outstanding - Diluted              5,823,777    5,890,443   6,724,638      8,290,369

 1997

 Net Sales                           $1,453,968   $1,304,530  $2,100,190     $2,439,759
 Gross Profit                           249,130      147,022     795,390      1,042,317
 Net Income (Loss)                    (470,229)    (435,311)      62,410        239,813
 Earnings (loss) per common
   share - Basic                         (0.09)       (0.08)        0.01           0.04
 Weighted average number of
   common shares
   outstanding - Basic                5,272,645    5,409,994   5,723,099      5,817,030
 Earnings (loss) per common
   share - Diluted                       (0.09)       (0.08)        0.01           0.04
 Weighted average number of
   common shares
   outstanding - Diluted              5,272,645    5,409,994   5,809,050      5,946,659

</TABLE>

                                       34

<PAGE>


Item 8.  Changes In and Disagreements With Accountants on Accounting and 
         Financial Disclosures.

         Not applicable.

                                    PART III

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

         The  following  table sets forth  certain  information  concerning  the
directors and executive officers of the Company:

Name                           Age      Position

S. Leslie Flegel               60       Director, Chairman and Chief 
                                        Executive Officer

William H. Lee                 47       Director, President and Chief 
                                        Operating Officer

John P. Watkins                42       Chief Administrative Officer and 
                                        President - Retail Services

Dwight L. DeGolia              53       Executive Vice President

W. Brian Rodgers               32       Assistant Secretary and Chief 
                                        Financial Officer

Jason S. Flegel                32       Sr. Vice President of RDA Operations

Stephen E. Borjes              48       President - Display Group

Timothy A. Braswell            69       Director

Harry L. "Terry" Franc, III    62       Director

Aron Katzman                   60       Director

Randall S. Minix               48       Director


S. Leslie Flegel has been a director,  Chairman and Chief  Executive  Officer of
the Company  since its  inception  in March  1995.  For more than 14 years prior
thereto,  Mr.  Flegel was the  principal  owner and chief  executive  officer of
Display Information Systems Company ("DISC"), a predecessor of the Company.

William H. Lee has been a director, President and Chief Operating Officer of the
Company  since its  inception in March 1995.  For  approximately  14 years prior
thereto,  Mr.  Lee was the  principal  owner  and  chief  executive  officer  of
Periodical Marketing and Management, Inc. ("PMM"), a predecessor of the Company.

John P.  Watkins  has served as Chief  Administrative  Officer  and  President -
Retail  Services  since  February 1, 1996. For more than 16 years prior thereto,
Mr. Watkins served in several senior management  positions with Food Lion, Inc.,
a seven billion dollar retail grocery chain. From September,  1992 to July 1995,
Mr. Watkins served as Senior Vice  President and Chief  Operating  Officer and a
member of the Board of Directors of Food Lion, Inc.

Dwight L. DeGolia has served as Executive  Vice  President of the Company  since
its  commencement  of  operations  in May  1995.  For more  than 10 years  prior
thereto,  Mr.  DeGolia served as executive vice president of sales and marketing
for DISC.  From 1986 to 1993,  Mr. DeGolia also served as a director of Advanced
Marketing Services, a leading supplier of books to wholesale clubs.

                                       35

<PAGE>


W. Brian  Rodgers  has served as  Assistant  Secretary  of the Company and Chief
Financial Officer since October 1996. Prior to joining the Company,  Mr. Rodgers
practiced  for seven years as a certified  public  accountant  with BDO Seidman,
LLP.

Jason S. Flegel has served as Senior Vice President of RDA Operations since June
1996. Prior thereto, and since the Company's inception in March 1995, Mr. Flegel
served as Vice  President - Western  Region.  Mr.  Flegel was an owner and chief
financial officer of DISC, a predecessor of the Company.  Jason S. Flegel is the
son of S. Leslie Flegel.

Stephen E. Borjes has served as President - Display Group since  September 1997.
For more than 20 years,  Mr. Borjes held several  positions  with Dixie News Co.
("Dixie  News") and the News  Group,  which  purchased  Dixie News in 1994.  His
latest  position  at the News Group was Vice  President  of  Operations  for the
distribution  centers  in  Charlotte  and  Winston-Salem,  North  Carolina,  and
Johnston City, Tennessee.

Timothy  A.  Braswell  has been a director  of the  Company  since it  commenced
operations in May 1995. He established Braswell Investment Company, a consultant
and broker of wholesale  magazine  businesses in 1994 and is its owner. For more
than five years prior thereto,  Mr.  Braswell was the principal  owner and chief
executive  officer  of City  News Co.  and Dixie  News  Co.,  each of which is a
wholesale periodical company.

Harry L.  "Terry"  Franc,  III,  has been a  director  of the  Company  since it
commenced  operations  in May 1995.  Mr.  Franc is one of the founders of Bridge
Information  Systems,  Inc.,  ("BIS") a St. Louis,  Missouri  based  provider of
information services to the securities industry and of BIS's subsidiary,  Bridge
Trading Company ("BTC"),  a registered  broker-dealer and member of the New York
Stock Exchange.  For more than 20 years,  Mr. Franc has served as a director and
an Executive Vice President of BIS and an Executive Vice President of BTC.

Aron  Katzman  has  served  as a  director  of the  Company  since it  commenced
operations in May 1995. Mr.  Katzman is the President of New Legends,  Inc., one
of St. Louis' leading country club/residential  communities.  For more than five
years prior to April 1994,  when it was sold, Mr. Katzman served as the chairman
and chief executive officer of Roman Company,  a manufacturer and distributor of
fashion  custom  jewelry.  Mr.  Katzman is a member of the board of directors of
Phonetel Technologies, Inc., a company listed on the American Stock Exchange.

Randall  S. Minix has served as a director  of the  Company  since it  commenced
operations in May 1995. For more than six years, Mr. Minix has been the managing
partner  of  Minix,  Morgan &  Company,  LLP,  an  independent  accounting  firm
headquartered in Greensboro, North Carolina.

         The Board of Directors of the Company consists of six members,  each of
whom serve in such  capacity for a three year term or until a successor has been
elected and qualified,  subject to earlier  resignation,  removal or death.  The
number of  directors  comprising  the Board of  Directors  may be  increased  or
decreased by  resolution  adopted by the  affirmative  vote of a majority of the
Board of Directors.  The Company's  Articles of Incorporation and Bylaws provide
for three classes of directorships  serving staggered three year terms such that
one-third of the directors are elected at each annual  meeting of  shareholders.
The terms of Messrs.  Flegel and Lee will continue until the 1998 annual meeting
of shareholders,  the terms of Messrs. Katzman and Minix will continue until the
1999 annual meeting of shareholders and the terms of office of Messrs.  Braswell
and Franc will continue until the 2000 annual meeting of shareholders.

         The  Board  of  Directors  of the  Company  has  established  an  Audit
Committee,  a  Compensation  Committee,  a Finance  Committee and an Acquisition
Committee.  The Audit  Committee  is comprised  of two  non-employee  directors,
presently Messrs.  Minix and Katzman, and has the responsibility of recommending
the firm that will serve as the Company's  independent  auditors,  reviewing the
scope  and  results  of  the  audit  and  services  provided  by  the  Company's
independent accountants,  and meeting with the financial staff of the Company to
review  accounting  procedures  and  policies.  The  Compensation  Committee  is
comprised of three non-employee directors,  presently Messrs. Katzman,  Braswell
and Franc,  and has been given the  responsibility  of reviewing  the  financial
records of the  Company to  determine  overall  compensation  and  benefits  for
executive  officers of the Company and to establish and  administer the policies

                                       36

<PAGE>

which govern  employee  salaries  and benefit  plans.  The Finance  Committee is
comprised of two directors, Messrs. Franc and Katzman. The Finance Committee has
been given the  responsibility  of monitoring the Company's  capital  structure,
reviewing available  alternatives to satisfy the Company's liquidity and capital
requirements and  recommending  the firm or firms which will provide  investment
banking  and  financial   advisory  services  to  the  Company.   The  Company's
Acquisition Committee is comprised of three directors,  presently Messrs. Franc,
Braswell  and  Katzman, and has been given the responsibility of monitoring the
Company's  search for  attractive  acquisition  opportunities,  consulting  with
members of management to review plans and strategies for the  achievement of the
Company's  external growth  objectives and  recommending  the firm or firms that
will serve as advisors  to the  Company in  connection  with the  evaluation  of
potential business combinations.

Compliance with Section 16(a) of the Exchange Act

Based solely upon a review of Forms 3 and 4 and amendments  thereto furnished to
the  Company  during  its most  recent  fiscal  year  and Form 5 and  amendments
thereto, or written  representations that no Form 5 is required, one person, Mr.
Stephen  E.  Borjes,  failed  to  timely  file a Form 3,  Initial  Statement  of
Beneficial  Ownership of  Securities.  Four  persons,  Messrs.  Dixon,  Katzman,
Braswell  and  Franc,  failed to timely  file Form 4,  Statement  of  Changes in
Beneficial Ownership.

Item 10.  Executive Compensation.

         The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive  officers
for all services rendered in all capacities to the Company and its predecessors.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                     Annual Compensation
Name of Principal                                                                         Other Annual
   Position                                   Year     Salary           Bonus           Compensation(a)
<S>                                         <C>       <C>             <C>                  <C>  

S. Leslie Flegel                               1998     $275,000         $ 76,300              $25,643
Chairman and Chief Executive                   1997     $227,500         $176,398              $30,624
  Officer                                      1996     $200,000          $26,543              $30,995

William H. Lee                                 1998     $255,876          $60,000              $12,629
President and Chief Operating                  1997     $224,830          $30,000              $13,944
  Officer                                      1996     $192,646              ---              $19,006

Dwight L. DeGolia                              1998     $150,000          $29,200              $10,777
Executive Vice President                       1997     $140,000           $4,773              $11,223
                                               1996     $134,884              ---              $16,739

John P. Watkins                                1998     $150,000          $25,000               $9,986
Chief Administrative Officer and               1997     $150,000              ---              $11,891
  President - Retail Services                  1996          ---              ---                  ---

Robert B. Dixon (b)                            1998     $150,000           $5,500              $12,797
Executive Vice President and                   1997     $150,000              ---              $13,907
  President - Periodical                       1996     $114,000          $50,000               $5,458
  Information Management
------------------------

                                       37

<PAGE>

<FN>

(a)      Reflects  personal  benefits derived by Messrs.  Flegel,  Lee, DeGolia,
         Watkins and Dixon  primarily in connection with personal use of Company
         automobiles,  country club membership dues and life insurance premiums.
         In fiscal 1998,  the estimated  incremental  cost to the Company of the
         use by  Messrs.  Flegel,  Lee,  DeGolia,  Watkins  and Dixon of Company
         automobiles   was   $9,566,   $8,523,   $6,312,   $7,800  and   $8,597,
         respectively.  In fiscal  1997,  such cost to the Company was  $10,339,
         $8,650, $6,090, $7,800 and $8,597,  respectively.  In fiscal 1996, such
         cost was $11,444, $6,234, $6,360, $0 and $3,158, respectively.

         In fiscal 1998,  the estimated  incremental  cost to the Company of the
         membership dues paid on behalf of Messrs. Flegel, Lee, DeGolia, Watkins
         and Dixon was $6,984, $1,050, $4,465, $1,425 and $4,200,  respectively.
         In fiscal 1997, such cost to the Company was $11,192,  $2,239,  $5,133,
         $3,330 and $5,310, respectively. In fiscal 1996, such cost was $11,503,
         $4,738, $4,751, $0 and $2,300, respectively.

         In fiscal 1998, the estimated  incremental  cost to the Company of life
         insurance  premiums  paid on behalf of Messrs.  Flegel,  Lee,  DeGolia,
         Watkins and Dixon was $9,093, $3,056, $0, $761 and $0, respectively. In
         fiscal 1997, such cost to the Company was $9,093,  $3,056, $0, $761 and
         $0, respectively. In fiscal 1996, such cost was $8,048, $8,033, $5,628,
         $0 and $0, respectively.

(b)      Mr. Dixon died February 26, 1998.
</FN>
</TABLE>

<TABLE>

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
                                INDIVIDUAL GRANTS
<CAPTION>


                                                              % of Total
                              Number of Securities           Options/SARS
                                   Underlying                 Granted to             Exercise or
                                  Options/SARS               Employees in             Base Price               Expiration
           Name                   Granted #                   Fiscal Year               ($/Sh)                    Date
<S>                                  <C>                   <C>                      <C>   

S. Leslie Flegel                            89,256(1)            27%                            $1.66            5-14-02
William H. Lee                              49,091(2)             15                             2.66            6-24-02
Dwight L. DeGolia                           10,909(3)             3                              2.42            6-24-07
John P. Watkins                             13,636(3)             4                              2.42            6-24-07
John P. Watkins                             74,380(4)             23                             5.60            2-01-01
Robert B. Dixon                                     0             0                               n/a              n/a

----------------------------
<FN>

(1) Options were granted May 15, 1997 and are exercisable as follows:  29,572 on
or after May 15,  1998,  29,752 on or after May 15,  1999 and 29,752 on or after
May 15, 2000.

(2) Options were granted June 25, 1997 and are exercisable as follows: 16,364 on
or after June 25, 1998,  16,364 on or after June 25, 1999 and 16,363 on or after
June 25, 2000.

(3)  Options  were  granted  June  25,  1997  and  are  exercisable  20% a year,
cumulatively, for a period of five years.

(4) Options were granted June 25, 1997 and are  exercisable as follows:  24,793,
immediately, 16,529 on or after February 1, 1998, 16,529 on or after February 1,
1999, and 16,529 on or after February 1, 2000.

</FN>
</TABLE>
                                       38

<PAGE>

<TABLE>

               AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                           AND FYE OPTION/SAR VALUES
                                                                                 
<CAPTION>
                                                                         Number of            Value of Unexercised
                                                                        Unexercised                In-the Money
                                                                   Option/SARs at Fiscal         Options/SARs at
                                Shares                                  Year End (#)            Fiscal Year End ($)
                              Acquired on             Value             Exercisable/                Exercisable/
      Name                   Exercise (#)         Realized ($)          Unexercisable              Unexercisable
      ----                   ------------         ------------          -------------              -------------
<S>                          <C>                  <C>              <C>                        <C>    

S. Leslie Flegel                  0                    0                 0/89,256                   0/309,272
William H. Lee                    0                    0                 0/49,091                   0/121,009
Dwight L. DeGolia                 0                    0                2,182/8,727                5,902/23,607
John P. Watkins                   0                    0               27,520/60,496               7,377/29,509
Robert B. Dixon                   0                    0                    0/0                        0/0
</TABLE>


Director Compensation

         Under the Company's present policy, each director of the Company who is
not also an employee of the Company will receive  $1,000 payable in Common Stock
of the Company,  with the  exception of Mr. Minix who will be paid in cash,  for
each meeting of the Board of Directors attended.  Directors are also entitled to
be reimbursed for expenses  incurred by them in attending  meetings of the Board
of Directors and its committees.


Employment Agreements with Named Executive Officers.

         Pursuant to an agreement effective February 1, 1996, John P. Watkins is
to be employed by the Company for a minimum  period of two years as President of
the Retail Services Group and Chief Administrative  Officer. As compensation for
services  rendered to the Company,  the  agreement  provides for Mr.  Watkins to
receive an annual base salary of $150,000. In addition,  Mr. Watkins is eligible
to receive a pay performance  bonus of up to 50% of his base salary in an amount
which is determined by reference to specified  criteria including total revenue,
net income  and stock  performance.  Mr.  Watkins  has  agreed to  refrain  from
disclosing  information  confidential  to the Company or  engaging,  directly or
indirectly,  in  activities  competitive  to the Company  during the term of his
employment and for two years thereafter.

         Under the  terms of a written  agreement  with the  Company,  Dwight L.
DeGolia has agreed to refrain from  disclosing  information  confidential to the
Company  or  engaging,   directly  or  indirectly,  in  any  activity  which  is
competitive  with the business of the Company  during the term of his employment
and for two years thereafter.

         In  October,   1997,  the  Company  entered  into  separate  employment
agreements with S. Leslie Flegel,  William H. Lee and W. Brian Rodgers,  each of
which expire January 31, 1999 (subject to renewal).  Under the  agreements,  Mr.
Flegel will serve as the  Chairman of the Board and Chief  Executive  Officer of
the Company in exchange for annual base  compensation of $255,000,  Mr. Lee will
serve as President  and Chief  Operating  Officer of the Company in exchange for
annual base  compensation of $240,573,  and W. Brian Rodgers will serve as Chief
Financial  Officer of the Company in exchange  for annual base  compensation  of
$100,000,  subject to annual  adjustment  by the  Compensation  Committee of the
Board of  Directors.  In the event the  employment  of any such  person with the
Company is terminated for reasons other than for cause,  permanent disability or
death or  there  occurs a  significant  reduction  in the  position,  duties  or
responsibilities  thereof (a "Termination") within two years following a "Change
of  Control"  (as  defined in the  agreement),  the  discharged  person  will be
entitled  to an  additional  bonus  of  300% of his  then  current  annual  base
compensation. Such person also will agree to refrain from disclosing information
confidential  to  the  Company  or  engaging,  directly  or  indirectly,  in the
rendition of services  competitive  with those offered by the Company during the
term of his employment agreement and for two years thereafter, without the prior
written consent of the Company.

                                       39
<PAGE>
Item 11.  Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth certain  information as of March 5, 1998
concerning the beneficial  ownership of the Company's  Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the  outstanding  Common  Stock,  (ii) each  executive  officer  named in the
Summary  Compensation  Table  contained  in this  Form  10-KSB,  and  (iii)  all
directors  and executive  officers of the Company as a group.  Each person named
has sole  voting  and  investment  power with  respect to the shares  indicated,
except as otherwise stated in the notes to the table:

                                                      Beneficial Ownership
Name and Address
of Beneficial Owner                        Number of Shares              Percent
-------------------                        ----------------              -------
S. Leslie Flegel                              1,361,470                    16.9
  11644 Lilburn Park Road
  St. Louis, Missouri 63146

William H. Lee                                1,095,615                    13.6
  711 Gallimore Dairy Road
  High Point, North Carolina 27265

Cameron Capital Ltd                             712,829(a)                  8.8
   10 Cavendish Rd
   Hamilton Hm 19
   Bermuda

Timothy A. Braswell                             473,131                     5.9
  711 Gallimore Dairy Road
  High Point, North Carolina 27265

Dwight L. DeGolia                              149,340(b)                   1.9
  11644 Lilburn Park Road
  St. Louis, Missouri 63146

Aron Katzman                                   129,941                      1.6
  10 Layton Terrace
  St. Louis, Missouri 63124

John P. Watkins                                44,049(c)                     *
   711 Gallimore Dairy Road
   High Point, North Carolina  27265

Harry L. Franc, III                            33,238                        *
  19 Briarcliff
  St. Louis, Missouri 63124

Randall S. Minix                                8,485                        *
  5502 White Blossom Drive
  Greensboro, North Carolina 27410

All directors and executive                 3,445,881(d)                   42.7
officers as a group (11 persons)
------------------------

*Less than 1%

(a)      Includes exercisable options to acquire 300,000 shares of Common 
         Stock at an exercise price of $3.00 per share.

(b)      Includes exercisable options to acquire 2,182 shares of Common 
         Stock at an exercise price of $2.42 per share.

(c)      Includes  exercisable options to acquire 41,322 shares and 2,727 shares
         of Common  Stock at an exercise  price of $5.60 per share and $2.42 per
         share, respectively.

(d)      Includes  exercisable  options not listed  separately  above to acquire
         4,001 shares of Common Stock at an exercise  price of $2.42 per share.


                                       40

<PAGE>

Item 12. Certain Relationships and Related Transactions.

         From time to time, the Company has engaged in various transactions with
its directors,  executive officers and other affiliated  parties.  The following
paragraphs  summarize  certain  information  concerning  such  transactions  and
relationships  which have occurred during the past two fiscal years or which are
presently proposed.

         S. Leslie Flegel,  Chairman and Chief Executive  Officer of the Company
and Dwight L. DeGolia,  Executive Vice President of the Company,  have from time
to time received cash advances from the Company. The largest aggregate amount of
such  indebtedness  outstanding  at any time since February 1, 1997 was $270,675
and $22,093, respectively. At January 31, 1998, the outstanding balances of such
indebtedness were $0 and $22,093,  respectively. All such advances are evidenced
by promissory  notes in favor of the Company.  Such notes bear interest at rates
varying from 6.96% to 7.34% per annum.

         On June 28, 1991,  PMM entered into a written  lease with 711 Gallimore
Partnership,  in which William H. Lee,  President and Chief Operating Officer of
the  Company,  is a partner,  whereby 711  Gallimore  Partnership  leases to the
Company  certain  office  space in High Point,  North  Carolina.  The lease,  as
amended in January  1996,  provides  for annual rent of $168,072  and expires in
2012.  In fiscal  1998 and 1997,  the  Company  paid 711  Gallimore  Partnership
$174,888 and $157,498, respectively, in rent.

         2532  Partnership,  a North Carolina  partnership in which Mr. Lee is a
partner has  occasionally  provided the Company with the use of an airplane.  In
fiscal 1998, the Company paid 2532 Partnership  $11,692 in consideration for the
use of the airplane.

         Data-Pros,  Inc.  ("Data-Pros"),  a  corporation  in which Mr. Lee is a
shareholder, provided the Company with data processing services. In fiscal 1997,
the Company paid Data-Pros  $274,893 for such  services.  On January 1, 1997 the
Company purchased the assets of Data-Pros for $45,000.

         In July 1997,  the holders of the Company's  1996 Series 7% Convertible
Preferred  Stock  exchanged all 5,600  outstanding  shares for 186,667 shares of
Common   Stock  at  an  effective   exchange   price  of  $3.00  per  share  and
non-transferable  warrants,  expiring  in 2000,  to purchase  310,710  shares of
Common Stock at an exercise price of $3.00 per share.

         In September  1997,  the Company issued to Messrs.  Katzman,  Franc and
Braswell, each a director of the Company, non-transferable warrants, expiring in
2000,  to purchase an aggregate of 89,289  shares of Common Stock at an exercise
price of $3.00 per share.  Such warrants will vest at a rate of 25% on August 1,
1998, 25% on November 1, 1998, 25% on February 1, 1999 and 25% on May 1, 1999.

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

(a)      Exhibits.

         See Exhibit Index.

(b)      Reports on Form 8-K.

         None


                                       41

<PAGE>
                                   SIGNATURES


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


                                      THE SOURCE INFORMATION MANAGEMENT COMPANY


Date:  May 1, 1998                    /S/ W. BRIAN RODGERS
                                      --------------------
                                      W. Brian Rodgers
                                      Chief Financial Officer

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


May 1, 1998                            /S/ S. LESLIE FLEGEL
                                       --------------------
                                       S. Leslie Flegel
                                       Chief Executive Officers and
                                       Chairman of the Board
                                       (Principal Executive Officer)


May 1, 1998                            /S/ W. BRIAN RODGERS
                                       ----------------------------------
                                       W. Brian Rodgers
                                       Chief Financial Officer
                                       (Principal Financial and 
                                        Accounting Officer)


May 1, 1998                             /S/ WILLIAM H. LEE
                                        --------------------------------
                                        William H. Lee
                                        President, Chief Operating Officer
                                        and Director


May 1, 1998                             /S/ HARRY L. "TERRY" FRANC, III
                                       --------------------------------
                                        Harry L. "Terry" Franc, III
                                        Director


May 1, 1998                             /S/ ARON KATZMAN
                                        -------------------------------
                                        Aron Katzman
                                        Director


May 1, 1998                             /S/ RANDALL S. MINIX
                                        -------------------------------
                                        Randall S. Minix

                                       42

<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number            Description                                            Page
-------           -----------                                            ----
3.1(1)            Articles of Incorporation of the Company

3.2(1)            Bylaws of the Company

3.3(3)            Amendment to Articles of Incorporation of the Company

3.4(3)            Amendments to Bylaws of the Company

3.5(2)            Amendment to Articles of Incorporation

4.1(3)            Form of Common Stock Certificate

4.4(3)            Form of Representative's Warrants

4.5(3)            Form of Privately Issued Warrant

10.1(1)           Form of Promissory Note with Dwight DeGolia

10.2(1)           Form of Indemnity Agreement with Officers and Directors

10.3(1)           Lease Agreement dated June 28, 1991 with 711 Gallimore
                  Partnership

10.8(2)           Addendum to the Lease Agreement, dated as of
                  January 1, 1994, with 711 Gallimore Partnership

10.9(2)           Addendum to the Lease Agreement, dated as of
                  January 1, 1996, with 711 Gallimore Partnership

10.10(2)          Addendum to the Lease Agreement, dated as of
                  April 1, 1996, with 711 Gallimore Partnership

10.11(2)          Addendum to the Lease Agreement, dated as of
                  April 25, 1996, with 711 Gallimore Partnership

10.13(4)          $8,700,000 Credit Agreement dated as of November 14, 
                  1996 between The Source Company and Wachovia Bank 
                  of North Carolina, N.A.

10.14(4)          Amendment to Credit  Agreement  dated December 19, 1996
                  by and between  The  Source   Company  and  Wachovia  
                  Bank  of  North Carolina, N.A.

10.15(4)          Amendment to Credit Agreement dated January 31, 1997 
                  by and between The Source Company and Wachovia Bank of 
                  North Carolina, N.A.

10.16(5)          The Source Company Stock Award Plan.

10.17(5)          The Source Company 1995 Incentive Stock Option Plan

10.18(3)          Employment Agreement, effective February 1, 1996,
                  with John P. Watkins

10.19(3)          Employment Agreement dated as of August 30, 1995, 
                  with Robert G. Shupe

10.20(3)          Agreement with Dwight L. DeGolia.

                                       43

<PAGE>

10.21(3)          Front End Management Agreement with Kmart Corporation.

10.22(3)          Amendment to Credit Agreement dated July 31, 1997 by 
                  and between The Source Company and Wachovia Bank, N.A.

10.23(3)          Form of Financial Consulting Agreement with Donald & 
                  Co. Securities, Inc. 

10.24(3)          Amendment to Credit Agreement dated May 29, 1997
                  by and between  The  Source   Company  and  Wachovia
                  Bank  of  North Carolina, N.A.

10.25(3)          Form of Employment Agreement with S. Leslie Flegel, 
                  William H. Lee and W. Brian Rodgers

21.1(3)           Subsidiaries of the Company

23.1              Consent of BDO Seidman, LLP

27.1              Financial Data Schedule

99.1(4)           Cautionary Statement  Identifying Important Factors 
                  that Could Cause  the  Company's  Actual  Results  
                  to Differ  from  those Projected in Forward Looking 
                  Statements

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

(1)      Incorporated by reference to Registration Statement on 
         Form 10-SB (File no. 0-26238).

(2)      Incorporated by reference to Form 10-KSB for the fiscal year
         ended January 31, 1996.

(3)      Incorporated by reference to Registration Statement on 
         Form SB-2 (file no. 333-     ).

(4)      Incorporated by reference to Form 10-KSB for the fiscal year
         ended January 31, 1997.

(5)      Incorporated by reference to Form S-8 (File No. 333-16039)
         filed on November 13, 1996, as exhibit 4.4 thereof.


                                       44