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, 1997.

|_|      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 0-26238

                               THE SOURCE 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:  None

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 $7,298,447.

At March 31,  1997,  the  aggregate  market  value of the  voting  stock held by
non-affiliates   of  The  Source  Company  (the  "Company")  was   approximately
$5,715,304,  based on the closing bid price of the Common Stock  reported by the
Nasdaq  SmallCap  Market on March 31, 1997.  At March 31, 1997,  the Company had
outstanding 7,049,199 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 as to The Source
Company's  (the   "Company")   plans,   beliefs  or   expectations)   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 10-SB/A filed with the  Securities  and
Exchange Commission on January 17, 1996.

                                     PART I

Item 1.  Description of Business.

         The Source Company (the "Company") provides  monitoring,  documentation
and collection  services required to obtain single copy magazine sales incentive
payments   available  from  magazine   publishers  to  magazine  and  periodical
retailers.  The Company  provides  these services to  approximately  50,000 mass
merchandise,  grocery,  convenience and pharmacy  stores located  throughout the
United  States and in eastern  Canada.  It provides  such  services  and related
merchandising services on a frequent basis, in many cases daily, and holds power
of  attorney  from its  retailer  clients to  collect  incentive  payments  from
publishers.  The Company's integrated software system is designed to efficiently
and  accurately  monitor  sales of  low-cost,  high  volume  consumer  products,
allowing the Company's  retailer  clients to maximize sales  incentive  payments
offered by publishers and optimize the  effectiveness of their marketing effort.
While the  Company's  software  system was  developed  to aid  retailers  in the
merchandising  of  the  more  than  3,500  published  magazine  titles  and  the
collection of sales  incentive  payments,  it has been used in  connection  with
integrated  magazine  and  confections  displays  and is  adaptable  for  use in
connection with most other consumer  products,  including high volume items such
as soft  drinks  and  batteries.  The  Company  has  approximately  640  clients
(operating  approximately 50,000 stores),  many of which are among the country's
largest mass merchandise and grocery retailers.

Formation of the Company

         The Company is a Missouri corporation which was organized and commenced
operations in 1995. The Company was formed to effect the  combination of various
separate but compatible business entities.

Business Strategy

         The Company has adopted a  multi-faceted  business  strategy to achieve
its sales and  profitability  objectives,  which  consists of the  following key
elements:

         Increase Sales by Expanding Market. The Company intends to increasingly
expand its business  activities  beyond those markets and geographic  regions in
which it is presently  engaged.  Management  believes that many of its currently
offered  services  may be of value  to  retailers  outside  the  United  States.
Accordingly,  the Company has established  relationships  with several  Canadian
retailers  and may  explore  opportunities  to  solicit  new  clients in certain
European countries.

                                       1
<PAGE>

         Aggressive  Marketing of Additional  Services to Existing  Client Base.
Based on discussions with its clients,  requests from clients for services,  and
management's analysis of the retailing and product distribution industries,  the
Company believes that many of its existing clients could benefit from additional
services  presently offered or under  development by the Company.  In accordance
with applicable accounting principles, however, the Company has not recorded any
research and development  expenses during the two most recently concluded fiscal
years.  The  Company  intends to  develop,  introduce  and  aggressively  market
programs and services to its client base, including:

                  (i) a uniform  product code (UPC)  program  designed to assist
         retailers in  implementing  price changes and  collecting and reporting
         information  concerning  sales and  inventory  of  magazines  and other
         product  categories which contain a large number of stock keeping units
         (SKUs)  and  are  subject  to  frequent  changes  in  price,   such  as
         confections and greeting cards. As currently envisioned, subscribers to
         the Company's UPC program will receive  frequent,  on-line  updating of
         product information  collected by the Company directly from the product
         manufacturer.  In addition,  subscribers will receive reports generated
         by the Company  from data  received  by the Company  through a computer
         link to the retailers' check out systems; and

                  (ii) an incentive rebate,  advance payment program which would
         enable clients  possessing the necessary point of sale computer systems
         to receive  advances equal to the  discounted  amounts of the incentive
         payments  otherwise due to the retailer from magazine  publishers  upon
         quarterly submission and processing of claims for such payments.

         Acquisition of Complementary  Businesses and Technologies.  The Company
actively  explores  opportunities to acquire  businesses and  technologies  that
address additional  services or products,  market segments or geographic regions
in which the Company is not  currently  active and which would allow the Company
to expand  the  services  offered  to its  clients,  or its  ability  to support
existing or planned services.

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 increased  target market accuracy  achieved through single
copy sales.

         The distribution of the  approximately  3,500 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.

                                       2
<PAGE>

         National  distributors  receive  a  brokerage  fee  based on sales  and
distribution to local independent  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. All 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  independent
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 implemented  programs to encourage  retailers to update
their  checkout  and  mainline  display  fixtures  by making  one-time  payments
("IPOs") and periodic payments ("ISAs"), based on the pockets allocated to their
respective  titles.  Similar to RDA and RDP,  IPO and ISA 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:

         Claim  Submission.  Through its software system,  the Company offers to
assist 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
independent 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.

                                       3
<PAGE>

         Alternatively,  the Company  offers an Advance Pay 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. Approximately 83% of the Company's revenues in fiscal 1997 were derived
from the rendition of claim submission services.

         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 9% of the Company's fiscal 1997 revenues.

         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 many  companies  in the magazine
industry use 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 its database  including  information
packaging  and efficient  inbound,  outbound  access.  The network also provides
access to static historical information for analysis purposes. PIN accounted for
approximately 2% of the Company's fiscal 1997 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 commission revenue due the Company in connection with the submission of
incentive  payment  claims;  accordingly,  no separate  charge is made for these
services.

         Administrative  Support.  Through projects such as its UPC program, the
Company  assists  retailers to more  efficiently  conduct their  magazine  sales
operations through computerized inventory control, automated pricing updates and
management reporting. Administrative Support services accounted for less than 1%
of the Company's fiscal 1997 revenues.

         Under  agreements  with its  retailer  clients,  the Company  typically
receives a  percentage  of the  aggregate  incentive  payment  collected  on the
retailer's behalf as compensation for its claim submission services; however, in
a small number of cases, such agreements  provide for the payment to the Company
of a fixed sum or the combination of a fixed sum and percentage payment. Revenue
from claim  submission  services is  recognized at the time claims for incentive
payments are submitted to the  publishers  based on the amount  claimed,  less a
reserve   necessary   to  maintain  an  allowance   for  doubtful   accounts  of
approximately 2% of trade accounts receivables.  However,  invoices for services
rendered  by the  Company in  connection  with the claim  process are not issued
until the  Company  receives  settlement  of the claim,  typically  90-150  days

                                       4

<PAGE>
following  submission.  Except in  connection  with its  advance pay program the
Company  does not  guarantee  to its  retailer  clients any  payments due to the
clients 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  the Company  bears the risk of  uncollectibility
associated with collecting  payments from publishers.  Invoices for Space Design
and Administrative Support services provided by the Company are typically issued
and  payable  monthly  on the basis of a fixed  sum  agreement  or hourly  rates
established by the Company for the services performed.

Marketing and Sales

         The  Company  markets  its  services  through  a  variety  of  methods,
including  its own direct sales force.  The  Company's  sales group  consists of
eight 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

         While  its   competition   is   fragmented,   the  Company   recognizes
approximately  50  direct  competitors,  all of which are  closely-held  private
companies.  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.  There  can  be no  assurance,  however,  that  its  present
competitors or companies that choose to enter its marketplace in the future will
not exert significant competitive pressures on the Company. The Company believes
that,  in virtually  all cases,  it is the sole  provider of magazine  incentive
payment claim  services to its clients and the Company's  clients do not perform
such services on their own behalf.  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.  However,  the Company  does not  presently  foresee  this to any
significant or successful extent.

         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.

Proprietary Software

         The Company  regards its  information  software system as a proprietary
trade  secret and  confidential  information.  The  Company  relies upon its own
security  system,   confidentiality   procedures  and  employee  confidentiality
agreements to maintain the trade secrecy of its systems;  however, the Company's
software  rights  are not  protected  under  copyright  law and  there can be no
assurance that the means of protection employed by the Company will be effective
against unauthorized reproduction.

                                       5
<PAGE>
Employees

         As of February 1, 1997, the Company had 100 employees,  including 11 in
marketing and sales, and 81 in computer support, computer operation services and
administrative  support.  None of the Company's  employees is  represented  by a
labor union and management believes that its employee relations are good.

Item 2. Description of Property.

         The Company conducts its operations from 12 office facilities,  located
in St. Louis, Missouri;  High Point, North Carolina; New York, New York; Chicago
Heights, Illinois;  Schaumburg,  Illinois; Oklahoma City, Oklahoma; San Antonio,
Texas;  Cranberry  Township,  Pennsylvania;   Canton,  Ohio;  Phoenix,  Arizona;
Valrico, Florida; and Mississauga,  Ontario, Canada. These facilities contain an
aggregate of approximately 33,000 square feet of space. Of such facilities,  the
Company's principal executive and operations  facilities,  located in St. Louis,
Missouri and High Point, North Carolina, contain approximately 11,667 and 13,900
square feet,  respectively.  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
its existing facilities are adequate to support its present business strategies.

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 security-holders  during the
fourth quarter of fiscal 1997.

                                       6

<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."
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 1996                                          High             Low

Second Quarter (beginning June 22, 1995)            $7.00           $6.00
Third Quarter                                       $8.50           $6.25
Fourth Quarter                                      $7.50           $3.50

Fiscal 1997                                          High             Low

First Quarter                                       $5.75           $4.38
Second Quarter                                      $4.75           $4.00
Third Quarter                                       $4.75           $2.63
Fourth Quarter                                      $3.25           $2.25

         As of March 31,  1997,  there were 184  holders of record of the Common
Stock.

         During the last two years,  the  Company  has not  declared or paid any
cash  dividends  on its Common  Stock.  Prior to January  31,  1995,  two of the
Company's  predecessors  were  treated as  Subchapter S  corporations  under the
Internal  Revenue  Code of 1986.  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

         During  February of 1996,  the Company  issued  8,000  shares of Common
Stock to  Dennis  Mensch  for  $3.75  per  share in a  transaction  exempt  from
registration pursuant to Section 4(2) of the Securities Act of 1933.

         During March of 1996, the Company issued 2,250, 2,250 and 500 shares of
1996 Series 7% Convertible  Preferred  Stock for $100 per share to Messrs.  Aron
Katzman, Timothy A. Braswell and Harry L. Franc, III pursuant to Section 4(2) of
the  Securities  Act of 1933. As of October 1, 1996,  all 5,000 shares have been
converted to Common Stock.

                                       7
<PAGE>

         In a series of  transactions  taking place in August 1996 and September
1996,  the Company  issued a total of 5,082  shares of Common Stock to Financial
Power Network in exchange for $21,600 of marketing  services.  The  transactions
were exempt from registration  pursuant to Section 4(2) of the Securities Act of
1933.

         During June 1996,  the Company issued 100,000 shares of Common Stock to
James W. Looman in connection with the purchase of Magazine Marketing, Inc. in a
transaction exempt from registration  pursuant to Section 4(2) of the Securities
Act of 1933.

         Also during  June 1996,  the Company  issued  111,245  shares of Common
Stock to United  Magazine  Company in  connection  with the  purchase of Readers
Choice, Inc. in a transaction 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

         The Company provides monitoring,  documentation and collection services
required to obtain single copy magazine sales incentive  payments available from
magazine  publishers  to  magazine  and  periodical  retailers.  The Company has
developed a contractual relationship with approximately 50,000 mass merchandise,
grocery,  convenience and pharmacy  stores located  throughout the United States
and in  eastern  Canada  under  which it  provides  such  services  and  related
merchandising services on a frequent basis, in many cases daily, and holds power
of  attorney  from its  retailer  clients to  collect  incentive  payments  from
publishers.

         The Company has engaged in several  acquisitions in order to expand its
presence in the upper  midwest and  increase the number of its  mid-sized  chain
retailer  clients.  In June of 1995 the Company acquired all of the business and

                                       8
<PAGE>
assets of Dixon's Modern Marketing  Concepts,  Inc. and Tri-State Stores,  Inc.,
both of Chicago Heights,  Illinois, in exchange for the issuance of an aggregate
of 300,000  shares of Common  Stock (the  "MMC/TSS  Acquisition").  The  MMC/TSS
Acquisition  has been accounted for as a pooling of interests and,  accordingly,
financial  statements of the Company prepared as if the MMC/TSS  Acquisition had
been  consummated  on February 1, 1995,  have been  included  elsewhere  in this
statement.

         The Company has continued to expand its operations in the upper midwest
through the acquisitions of Magazine Marketing,  Inc. and Readers Choice,  Inc.,
formerly a wholly owned subsidiary of United Magazine Company.  On June 28, 1996
the Company issued  100,000  shares of its common stock,  cash of $275,000 and a
note payable  totaling  $80,000  payable  quarterly  over a two year period,  in
exchange for all the stock of Magazine Marketing, Inc. This transaction has been
accounted for as a purchase and,  accordingly,  the financial statements reflect
the  combined  results  of  operations  as of June 28,  1996.  Assets  have been
recorded  at fair  value and the  purchase  price in excess of fair value in the
amount of $704,748 has been recorded as goodwill.

         On June 30, 1996 the Company  issued 111,245 shares of its common stock
in exchange for all the stock of Readers Choice,  Inc. This transaction has been
accounted for as a purchase, and, accordingly,  the financial statements reflect
the  combined  results  of  operations  as of June 30,  1996.  Assets  have been
recorded  at fair  value and the  purchase  price in excess of fair value in the
amount of $280,507 has been recorded as goodwill.

         A majority  of the  Company's  revenues  are derived  from  commissions
earned in  connection  with the  collection  of incentive  payments  owed to the
Company's retailer clients from magazine publishers. Most such incentive payment
programs  offer  the  retailer  a cash  rebate,  equal  to a  percentage  of the
retailer's  actual  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  publishers  quarterly  based  on  actual  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 the
Company bears the risk of  uncollectibility  associated with collecting payments
from publishers.

         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 of 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  customer is not
invoiced for the commission,  which is the difference  between the claim and the
advance amount.

                                       9
<PAGE>
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 Revenue:

                                            Fiscal Year Ended January 31,
                                               1997              1996
                                               ----              ----

Commission Revenues                            96.7%             88.6%

Merchandise Revenues                            3.3%             11.4%

Total Revenues                                100.0%            100.0%

Cost of Commission Revenues                    66.6%             47.5%

Cost of Merchandise Sold                        2.8%              6.8%

Gross Profit                                   30.6%             45.7%

Selling, General & Administrative Expense      39.8%             34.5%

Operating Income (Loss)                       (9.2)%             11.2%

Interest Expense, Net                         (3.9)%            (1.2)%

Other Income (Expense), Net                   (0.4)%            (2.7)%

Income (Loss) Before Income Taxes            (13.4)%              7.4%

Net Income (Loss)                             (8.3)%              2.4%


Commission Revenues

         Increased  retailer  participation  in the  Advance  Pay  Program,  the
acquisitions  of Magazine  Marketing,  Inc.  and Readers  Choice,  Inc.  and the
implementation  of PIN during the third quarter of fiscal year 1997  contributed
to an  increase  in revenue  from claims  submission  services of  approximately
$468,000.  However,  space design revenue  decreased from  $1,243,000 in 1996 to
$636,000 in 1997 causing an overall decrease in Commission Revenues of $139,000.
Currently,   the  Company  is  negotiating  flat  fee   arrangements;   however,
historically,  space design  revenues have been  recognized as front end display
manufacturers  ship the  displays to the  retailers,  the timing of which is not
within  the  Company's  control.  Based  on  management's  understanding  of the
anticipated  shipment dates for proposed and planned programs  expected to occur
during the next year,  space  design  revenue  should  exceed both 1996 and 1997
levels.

Merchandise Revenues

         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

                                       10
<PAGE>
merchandise,  such as gift and  greeting  cards,  caps and  other  leisure  time
products for resale to its retailer clients. However,  management has decided to
de-emphasize this portion of its business in order to dedicate more resources to
its core services.  Thus,  Merchandise Revenues decreased $684,000 from $926,000
in 1996 to $242,000 in 1997.

Cost of Merchandise Sold

         The  Cost of  Merchandise  Sold  decreased  primarily  as a  result  of
de-emphasizing this portion of the business as noted above.  Comparing the gross
profit percentage  associated with Merchandise Revenues to the prior year is not
considered  meaningful by management  since a wide variety of items with varying
profit margins have been purchased and resold.

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

         Total Costs  increased  approximately  $1,100,000.  Wages accounted for
$840,000 of the increase.  New hires,  including  personnel formerly employed by
Magazine Marketing,  Inc.,  comprised  approximately  $579,000 of this increase,
while the balance of the increase was the result of wage  increases and bonuses.
Insurance costs increased  approximately $152,000 resulting from the addition of
directors and officers  insurance,  additional  life  insurance  policies and an
increase in the package policy due to the Company's  expansion into other states
and Canada.  Rent,  telephone and utilities have increased  $100,000 as a direct
result of  expanding  the square  footage  rented in North  Carolina  and adding
regional  offices in Canada,  Arizona  and  California  (which was  subsequently
closed as a result of de-emphasizing the merchandising portion of the business).
Computer  hardware  and  software   acquisitions  combined  with  equipment  and
furniture acquisitions related to the additional regional offices contributed to
a $48,000 increase in depreciation  expense.  Lastly, bad debt expense increased
approximately  $40,000.  Such  increases were mitigated by decreases in contract
labor and data entry costs.  During 1997,  permanent  hires  reduced the need to
utilize  temporary  employees as frequently  as in 1996,  and an increase in the
number of wholesalers  supplying sales data on tape contributed to a decrease in
data entry costs.

Interest Expense

         Interest  Expense  increased  $191,000  due  to  increased   borrowings
necessary to fund the Advance Pay Program.

Income Tax (Benefit) Expense

         The  effective  income tax rate  decreased to 38.5% for 1997 from a pro
forma effective rate of 47.5% for 1996. This decrease was a result of a decrease
in expenses not  deductible  for income tax  purposes as a percentage  of income
(loss) before  income  taxes.  Such  non-deductible  expenses  include meals and
entertainment, officers' life insurance premiums, and goodwill amortization.

                                       11
<PAGE>
Earnings Per Share

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). The new standard  simplifies the standards for computing  earnings per
share and requires  presentation of two new amounts,  basic and diluted earnings
per share.  The Company will be required to  retroactively  adopt this  standard
when it reports its  operating  results  for the fiscal  quarter and year ending
January 31, 1998. When the Company adopts SFAS No. 128, it expects to report the
following restated amounts:

                                      1997                  1996
                                      ----                  ----

    Basic                            (.09)                   .03

    Diluted                          (.09)                   .03

Liquidity and Capital Resources

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

         Cash   advanced   under  the  Advance  Pay  Program   during  1997  was
approximately $14,057,000 versus $1,090,000 advanced during 1996. As a result of
increased participation in the Advance Pay Program, the Company's trade accounts
receivable  increased  approximately  $8,764,000  since January 31, 1996.  These
factors caused net cash used by operating activities to increase from $1,391,075
during 1996 to $6,543,297 during 1997.

         The  average  collection  period for 1997 was 153 days  compared to 132
days  for  1996.  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.  During 1997, the
Company  merged the  operations of the once separate  entities that now comprise
the Company.  This process demanded  resources which, now that the consolidation
is  complete,  may be  utilized,  in part,  to improve the  collection  process.
Management  plans to increase  resources in the collection area with the goal of
reducing the average collection period to 90 to 150 days.

         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,  1997,  the  Company  had  no  outstanding   material
commitments for capital expenditures.

                                       12
<PAGE>
         In response to the increased  cash  requirements  necessary to fund the
Advance Pay  Program,  the Company  entered  into a new credit  agreement  dated
November 14, 1996 with Wachovia Bank of North Carolina, N.A. The initial funding
took  place on  December  6, 1996 in the  amount of  $4,550,000  and was used to
retire then outstanding balances under a former credit facility.

         The  new  credit  agreement  provides  for  revolving  loans  of  up to
$12,500,000.  The borrowing base  calculation  under this credit facility allows
for a higher percentage of the accounts receivable to be eligible than under the
former credit  facility.  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.  Borrowings  are  secured by
personal  guarantees  of Messrs.  S. Leslie  Flegel and William H. Lee and their
spouses and 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.

         During March 1996,  the Company  sold an aggregate of 20,000  shares of
its 1996 Series 7% Convertible  Preferred Stock,  $0.01 par value per share (the
"Preferred  Stock"),  in a series of transactions  exempt from the  registration
requirements of the Securities Act of 1933, as amended.  The Preferred Stock was
sold for an  aggregate  purchase  price  of  $2,000,000,  resulting  in net cash
proceeds to the Company of $1,922,075  after deducting  commissions and expenses
of $77,925.  Additional broker fees of $60,000 were paid through the issuance of
another 600 shares of preferred  stock.  Of the 20,600 shares of Preferred Stock
issued,  15,000 share have been converted by the holders thereof to Common Stock
pursuant  to the  terms of the  Certificate  of  Designations,  Preferences  and
Relative Rights of 1996 Series 7% Convertible Preferred Stock.

         On February 28, 1996, the Company sold 8,000 shares of its Common Stock
in a private  transaction  in reliance on Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. The transaction resulted in net proceeds to
the Company of $30,000.

         During June 1996,  the Company issued 100,000 shares of Common Stock to
James W. Looman in connection with the purchase of Magazine Marketing, Inc. in a
transaction exempt from registration  pursuant to Section 4(2) of the Securities
Act of 1933.  Pursuant to the terms of the Purchase  Agreement,  Mr.  Looman was
granted  an option to sell his  shares  to the  Company  at a price of $1.00 per
share if, at any time during the two year period following the acquisition date,
the market  value of all shares  acquired in the  transaction  becomes less than
$100,000 for ten consecutive trading days.

         Also during  June 1996,  the Company  issued  111,245  shares of Common
Stock to United  Magazine  Company  ("United  Magazine") in connection  with the
purchase of Reader's  Choice,  Inc. in a  transaction  exempt from  registration
pursuant to Section 4(2) of the Securities Act of 1933. Pursuant to the terms of
the Purchase Agreement, United Magazine was granted an option to sell its shares
to the  Company at a price of $4.00 per share if the  Company's  stock price for
the last five days of any calendar  quarter during the two year period following
the acquisition date is less than $4.00 per share.

                                       13
<PAGE>

         At January 31, 1997, the Company's  total  long-term  debt  obligations
were $92,017. Of such amount, $69,203 matures in the next 12 months. The Company
anticipates  that the funds  necessary  to  satisfy  these  obligations  will be
derived primarily from cash flows from operations.

         At January  31,  1997,  the Company  had total  deferred  tax assets of
$143,000  and total  deferred  tax  liabilities  of $340,000  resulting in a net
deferred tax liability of $197,000  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, $312,000 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 and (ii)  Magazine  Marketing,  Inc. The Company  elected to pay its
deferred income tax liabilities  related to the changes in accounting  method in
four equal annual installments. The Company anticipates that the funds necessary
to satisfy this tax  obligation  will be derived  primarily from cash flows from
operations.

         During the year ended  January 31,  1997,  the Company  experienced  an
operating  loss of $670,513.  Expenses for the first two quarters were at levels
that anticipated revenues from space design commissions and merchandise revenues
in excess of revenues realized for those periods.  Expense reduction initiatives
favorably  impacted  results of  operations  in the third and  fourth  quarters.
Additionally,  commission  revenues  during  the  last  half  of the  year  have
increased  due to the  conversion  of several of the  Company's  largest  retail
customers  to the Advance Pay Program and the  introduction  of the PIN program.
Net sales,  gross profit and net income for the last two quarters  combined were
$4,539,949,  $1,837,707  and $302,223,  respectively.  Management  expects these
trends to continue.

         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,  products and 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  2,000,000 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  September,  1997,  and will provide the Company with
proceeds of approximately  $7,000,000 after deducting underwriting discounts and
commissions and other offering expenses.

                                       14
<PAGE>
Item 7.  Financial Statements.

The Report of the Independent Certified Public Accountants


Board of Directors
The Source Company
St. Louis, Missouri

We have audited the balance  sheet of The Source  Company as of January 31, 1997
and the related  statements of operations,  stockholders'  equity and cash flows
for each of the two years in the period ended January 31, 1997.  These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of The Source Company at January
31,  1997 and the results of its  operations  and its cash flows for each of the
two years in the period  ended  January 31, 1997 in  conformity  with  generally
accepted accounting principles.



BDO Seidman, LLP
St. Louis, Missouri
March 27, 1997

                                       15
<PAGE>
<TABLE>

                               THE SOURCE COMPANY
                                  BALANCE SHEET
<CAPTION>

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

<S>                                                                                               <C>
Assets (Note 4)
Current
     Cash                                                                                          $        284,921
     Trade receivables (net of allowance for doubtful accounts of $323,587)                              12,922,738
            (Note 11)
     Income taxes receivable (Note 8)                                                                       171,305
     Notes receivable - officers (Notes 1 and 2)                                                             58,395
     Other current assets                                                                                    87,306
---------------------------------------------------------------------------------------------------------------------
Total Current Assets                                                                                     13,524,665
---------------------------------------------------------------------------------------------------------------------
Office equipment and furniture (Note 5)                                                                   1,823,004
Less accumulated depreciation and amortization                                                            1,191,668
---------------------------------------------------------------------------------------------------------------------
Net Office Equipment and Furniture                                                                          631,336
---------------------------------------------------------------------------------------------------------------------

Other Assets
     Notes receivable - officers (Notes 1 and 2)                                                            175,183
     Goodwill, net of accumulated amortization of $72,209 (Note 9)                                        1,022,824
     Cash surrender value of life insurance                                                                 104,358
     Other                                                                                                  111,283
---------------------------------------------------------------------------------------------------------------------
Total Other Assets                                                                                        1,413,648
---------------------------------------------------------------------------------------------------------------------
                                                                                                   $     15,569,649 
---------------------------------------------------------------------------------------------------------------------


                                          See accompanying summary of accounting
                                     policies and notes to financial statements.
</TABLE>
                                       16
<PAGE>
<TABLE>
                               THE SOURCE COMPANY

                                  Balance Sheet
<CAPTION>
                                                                                                  January  31, 1997
--------------------------------------------------------------------------------------------------------------------

<S>                                                                                                <C>   
Liabilities and Stockholders' Equity
Current
     Revolving Line of Credit (Note 4)                                                             $      7,124,000
     Checks issued against future deposits                                                                3,225,668
     Accounts payable and accrued expenses                                                                  559,441
     Due to retailers (Note 12)                                                                             199,575
     Deferred income taxes (Note 8)                                                                          24,000
     Current maturities of long-term debt (Note 3)                                                           69,203
--------------------------------------------------------------------------------------------------------------------
Total Current Liabilities                                                                                11,201,887
--------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3)                                                             22,814
--------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes (Note 8)                                                                              173,000
--------------------------------------------------------------------------------------------------------------------
Total Liabilities                                                                                        11,397,701
--------------------------------------------------------------------------------------------------------------------

Commitments (Note 5 and 6)
--------------------------------------------------------------------------------------------------------------------

Redeemable Preferred Stock, $.01 par - shares authorized, 2,000,000;
     outstanding, 5,600 (Note 10)                                                                           522,506
Redeemable Common Stock
     111,245 shares outstanding (Note 13)                                                                   503,820
--------------------------------------------------------------------------------------------------------------------
                                                                                                          1,026,326
--------------------------------------------------------------------------------------------------------------------

Stockholders' Equity
     Common Stock, $.01 par - shares authorized, 20,000,000;
          outstanding, 6,930,233                                                                             69,302
     Additional paid-in-capital                                                                           2,745,180
     Retained earnings                                                                                      331,140
--------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity                                                                                3,145,622
--------------------------------------------------------------------------------------------------------------------

                                                                                                   $     15,569,649
--------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       17
<PAGE>

<TABLE>


                               THE SOURCE COMPANY

                            Statements of Operations
<CAPTION>
Years Ended January 31,                                                                  1997                1996
--------------------------------------------------------------------------------------------------------------------

<S>                                                                               <C>                 <C>          
Commission Revenues                                                               $   7,056,270       $   7,195,176
Merchandise Revenues                                                                    242,177             926,008
--------------------------------------------------------------------------------------------------------------------
                                                                                      7,298,447           8,121,184
--------------------------------------------------------------------------------------------------------------------
Cost of Commission Revenues                                                           4,862,207           3,859,409
Cost of Merchandise Sold                                                                202,381             549,813
--------------------------------------------------------------------------------------------------------------------
                                                                                      5,064,588           4,409,222
--------------------------------------------------------------------------------------------------------------------
Gross Profit                                                                          2,233,859           3,711,962
Selling, General and Administrative Expense (Notes 1, 2, 5 and 6)                     2,904,372           2,799,841
--------------------------------------------------------------------------------------------------------------------
Operating Income (Loss)                                                                (670,513)            912,121
--------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
            Interest income                                                              30,628              25,403
            Interest expense                                                           (311,737)           (120,427)
            Registration expense                                                              -            (213,666)
            Other                                                                       (28,883)             (5,437)
--------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense)                                                           (309,992)           (314,127)
--------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes                                                      (980,505)            597,994
Income Tax (Benefit) Expense (Note 8)                                                  (377,188)            406,000
--------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                                                 $    (603,317)      $     191,994
--------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary and Fully Diluted                             $      (0.09)       $        0.03
--------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Primary and Fully Diluted                $  6,658,891        $   6,084,542
--------------------------------------------------------------------------------------------------------------------
Pro Forma Amounts (unaudited)
     Income before income taxes                                                                       $     597,994
     Provision for income taxes (Note 8)                                                                    284,000
--------------------------------------------------------------------------------------------------------------------
Net Income (unaudited)                                                                                $     314,706
--------------------------------------------------------------------------------------------------------------------
Net Income per Share (unaudited)                                                                      $        0.05
--------------------------------------------------------------------------------------------------------------------
</TABLE>


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

                                       18
<PAGE>
<TABLE>

                               The Source Company

                       Statements of Stockholders' Equity
<CAPTION>

                                                                        Additional                       Total
                                                   Common Stock         Paid - in       Retained     Stockholders'
                                           ---------------------------
                                              Shares       Amount        Capital        Earnings        Equity
--------------------------------------------------------------------------------------------------------------------

<S>                                           <C>          <C>          <C>           <C>             <C>       
Balance, February 1, 1995                     5,340,000    $53,400      $ 195,520     $1,377,587      $1,626,507

Issuance of Common Stock (Note 9)               959,389      9,594         (9,594)             -               -

Issuance of Common Stock                         75,000        750        225,375              -         226,125

Reclassification of Subchapter S retained
earnings, net of tax, net of
distributions to stockholders (Note 9)                -          -        565,657       (592,657)        (27,000)

Net income for the year                               -          -              -        191,994         191,994
--------------------------------------------------------------------------------------------------------------------

Balance, January 31, 1996                     6,374,389    $63,744      $ 976,958     $  976,924      $2,017,626

Issuance of Common Stock                          8,000         80         29,920              -          30,000

Conversion of 7% Preferred Stock to Common
Stock                                           423,197         4,232   1,395,337              -       1,399,569

Issuance of Common Stock to purchase
Magazine Marketing, Inc. (Note 9)               100,000         1,000     249,000              -         250,000

Issuance of Common Stock in payment
of services                                      15,132           151      51,599              -          51,750

Dividend on Preferred Stock                       9,515            95      42,366        (42,467)             (6)

Net loss for the year                                 -             -           -       (603,317)       (603,317)
--------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997                     6,930,233    $   69,302  $2,745,180      $ 331,140      $3,145,622
--------------------------------------------------------------------------------------------------------------------
</TABLE>
 
                                         See accompanying summary of accounting
                                     policies and notes to financial statements.

                                       19
<PAGE>
<TABLE>

                               THE SOURCE COMPANY

                            Statements of Cash Flows
<CAPTION>

Years Ended January 31,                                                            1997                 1996
---------------------------------------------------------------------------------------------------------------

<S>                                                                           <C>                <C>    
Operating Activities
     Net income (loss)                                                        $   (603,317)      $     191,994
     Adjustments to reconcile net cash
       provided by operating activities:
         Depreciation and amortization                                              246,599            140,622
         Loss on disposition of equipment                                               299
                                                                                                             -
         Provision for losses on accounts receivable                                224,387           (35,149)
         Impairment of investment in limited partnership                             20,000             20,000
         Increase in cash surrender value of life insurance                        (32,740)           (22,696)
         Write-off of uncollectible note receivable                                       -             92,063
         Shareholder distribution                                                                     (27,000)
                                                                                          -
         Deferred income taxes                                                    (259,064)           (59,000)
         Services received in exchange for common stock                              51,750
                                                                                                             -
         Changes in assets and liabilities:
             Increase in accounts receivable                                    (8,789,885)        (1,765,173)
             Increase in other assets                                             (230,004)           (63,463)
             Increase in checks issued against future deposits                    3,225,668
                                                                                                             -
             Increase (decrease) in accounts payable
               and accrued expenses                                               (513,110)            107,590
             Increase in amounts due customers                                      116,120             29,137
---------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities                                               (6,543,297)        (1,391,075)
---------------------------------------------------------------------------------------------------------------

Investment Activities
     Acquisition of Magazine Marketing, Inc.                                      (275,000)
                                                                                                             -
     Loans to officers                                                                                (33,900)
                                                                                          -
     Collections on notes receivable                                                 29,715                483
     Collections from related party                                                  53,171            280,884
     Capital expenditures                                                         (276,729)          (197,331)
---------------------------------------------------------------------------------------------------------------
Cash (Used in) Provided by Investing Activities                                   (468,843)             50,136
---------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       20
<PAGE>
<TABLE>


                               THE SOURCE COMPANY

                            Statements of Cash Flows
<CAPTION>
Years Ended January 31,                                             1997                  1996
-------------------------------------------------------------------------------------------------

<S>                                                           <C>                   <C> 
Financing Activities
     Proceeds from issuance of Common Stock                   $     30,000          $    226,125
     Proceeds from issuance of Preferred Stock                   1,922,075                     -
     Borrowings under long-term debt agreements                  9,791,000                     -
     Principal payments on long-term debt                      (2,756,121)             (183,387)
     Borrowings under short-term debt agreements                 2,836,366             2,739,844
     Repayments under short-term debt agreements               (4,550,081)           (1,670,370)
     Preferred Stock dividends                                         (6)                     -
-------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities                            7,273,233             1,112,212
-------------------------------------------------------------------------------------------------

Increase (Decrease) in Cash                                        261,093             (228,727)

Cash, beginning of period                                           23,828               252,555
-------------------------------------------------------------------------------------------------

Cash, end of period                                           $    284,921           $    23,828
-------------------------------------------------------------------------------------------------
</TABLE>

                                       21
<PAGE>
                               THE SOURCE COMPANY

                         Summary of Accounting Policies

Basis of Presentation         The  financial  statements  of The Source  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, as discussed in Note 9.

Business                      The Source  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
                              obtains  merchandising 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.

Concentrations 
of Credit Risk                Services   are   provided  to  mass   merchandise,
                              grocery,    convenience    and   pharmacy   stores
                              throughout   the  United  States  and  in  Eastern
                              Canada.  Management  periodically  performs credit
                              evaluations  of its customers  and generally  does
                              not require collateral. At the balance sheet date,
                              the Company had no  concentrated  credit risk with
                              any individual customer.

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

Equipment and                 
Furniture                     Equipment   and  furniture  are  stated  at  cost.
                              Depreciation  is 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.

                                       22
<PAGE>
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.

Pro Forma Information         Pro  forma  data  is  presented   for  1996  which
                              reflects a provision  for income taxes as if DISC,
                              an S corporation  prior to the merger discussed in
                              Note 9, had not been an S corporation in 1996. Pro
                              forma  net  income  per  share  for  1996 has been
                              determined by dividing pro forma net income by the
                              weighted   average   number   of   common   shares
                              outstanding during the year.

Stock-Based Compensation      The  Company  grants  stock  options  for a  fixed
                              number  of shares 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  options
                              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  No.  123,  "Accounting  for
                              Stock-Based Compensation" (SFAS No. 123). 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 option. Pro forma net loss
                              and loss per share,  determined  as if the Company
                              had applied the new method,  are disclosed  within
                              Note 6.

                                       23
<PAGE>
Accounting 
Estimates                     The   preparation   of  financial   statements  in
                              conformity  with  generally  accepted   accounting
                              principles  requires  management to make estimates
                              and assumptions  that affect the reported  amounts
                              of  assets  and   liabilities  and  disclosure  of
                              contingent  assets and  liabilities at the date of
                              the financial  statements and the reported amounts
                              of  revenues  and  expenses  during the  reporting
                              period.  Actual  results  could  differ from those
                              estimates.

Long-Lived Assets             In March 1995,  Statement of Financial  Accounting
                              Standards No. 121  "Accounting  for the Impairment
                              of  Long-Lived  Assets and for  Long-Lived  Assets
                              Disposed  Of" (SFAS No. 121) 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  and
                              determined   that  no  impairment   loss  need  be
                              recognized  for  applicable  assets of  continuing
                              operations.

Reclassifications             Certain  1996 amounts  have been  reclassified  to
                              conform to the 1997 presentation.

                                       24
<PAGE>
                               THE SOURCE COMPANY
                          Notes to Financial Statements

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

1.     Related Party              
       Transactions           The Company  purchased  data  processing  services
                              from  an  employment   service  company  owned  by
                              certain  officers  of  the  Company.   There  were
                              approximately   $275,000   and  $307,000  of  such
                              purchases made during 1997 and 1996, respectively.
                              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  has  been   engaged  by   Specialty
                              Marketing Co., Inc., a corporation in which Robert
                              B. Dixon is the principal shareholder,  to provide
                              consulting  services.  In  fiscal  1996  Specialty
                              Marketing  Co., Inc.  paid the Company  $85,611 in
                              consideration for the Company's services.

                              The Company  currently leases certain office space
                              and has,  in the  past,  leased an  airplane  from
                              partnerships  controlled  by  stockholders  of the
                              Company.  Amounts  paid for the office  space were
                              $207,498   and   $183,275   for  1997  and   1996,
                              respectively.  Amounts paid for the airplane  were
                              $0 and $57,926 for 1997 and 1996, 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 $233,578. Such
                              notes bear interest at the rate of 7.34% per annum
                              and are payable in five equal  installments  which
                              began April 1996.


2.     Notes
       Receivable             Officers

                              The notes receivable relate to advances to certain
                              officers of the Company.  The notes bear  interest
                              at 7.34%  and are  payable  in five  equal  annual
                              payments of $69,489 which began April 1996.  These
                              notes are  current  and the  Company is unaware of
                              any circumstances that would negatively impact the
                              collectibility of these notes.

                                       25
<PAGE>
                              Other

                              The Company had a $120,000 unsecured, non-interest
                              bearing note from a  non-affiliated  company which
                              required quarterly  installments of $6,000 through
                              June 2000.  The note was stated net of discount of
                              $27,454  which was  computed  using a 10%  imputed
                              interest  rate.  On  March  31,  1996  the  debtor
                              defaulted  on the  note.  Based  on the  financial
                              condition of the debtor,  the note was written off
                              resulting  in a charge  to  selling,  general  and
                              administrative  expenses  during  the  year  ended
                              January 31, 1996 of $92,063.

3.     Long-term              Long-term debt consists of:
       Debt
                              January 31,                                 1997
                              --------------------------------------------------

                              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        $ 46,710

                              Obligations under capital lease (Note 5)    45,307
                              --------------------------------------------------
                              Total Long-term Debt                        92,017

                              Less current maturities                     69,203
                              --------------------------------------------------

                              Long-term Debt                            $ 22,814
                              --------------------------------------------------

                              Annual   maturities  of  long-term   debt  are  as
                              follows: 1998 - $69,203; 1999 - $22,814.

                                       26
<PAGE>
4.     Revolving Line             
       of Credit              The  Company  has  an  agreement   providing   for
                              revolving  loans up to  $12,500,000.  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 8.0039%
                              at January 31,  1997).  Borrowings  are secured by
                              personal  guarantees  of Messrs.  S. Leslie Flegel
                              and  William  H. Lee and  their  spouses  and 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
                              not in compliance  with certain  ratios at January
                              31,  1997,  and,  consequently,  the debt has been
                              classified  as current.  However,  the Company has
                              received  a  waiver  from the  bank  stating  that
                              noncompliance  with these ratios is not considered
                              a default at January 31, 1997.

5.     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 over
                              the  next  16  years.  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  $427,000
                              and $410,000 for the years ended  January 31, 1997
                              and 1996,  respectively.  Amounts  paid to related
                              parties   included  in  total  rent  expense  were
                              approximately  $207,000  and $240,000 for 1997 and
                              1996, respectively.

                              Office equipment and furniture includes $71,066 at
                              January 31, 1997 for  equipment  leases which have
                              been  capitalized.  Accumulated  amortization  was
                              $35,148 at January 31, 1997. Lease amortization is
                              included in depreciation and amortization expense.


                                       27

<PAGE>
                              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, 1997:

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

                                  1998            $  37,481      $  458,791
                                  1999               13,688         261,300
                                  2000                    -         184,600 
                                  2001                    -         163,891
                                  2002                    -         155,215
                                  Thereafter              -       1,477,950
                               -------------------------------------------------

                               Total minimum 
                                lease payments       51,169      $2,701,747
                                                                 ---------- 
                               Amount representing 
                                interest              5,862
                               -------------------------------------------------

                               Present Value of 
                                Net Minimum
                                Lease Payments    $  45,307
                               -------------------------------------------------

                              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.

                                       28
<PAGE>
6.     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.  Profit  sharing  contributions  charged
                              against  operations  were $0 and  $10,000  for the
                              years   ended   January   31,   1997   and   1996,
                              respectively.

                              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,
                              1997  and  1996   pursuant   to  this   Plan  were
                              approximately $50,000 and $40,000, respectively.

                              Deferred Compensation Plan

                              During the current year,  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 The Source
                              Company 1995  Incentive  Stock Option Plan for key
                              employees  and reserved  630,000  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
  
                                       29
<PAGE>
                              the individual  options  granted.  During 1997 the
                              Company granted  options for 225,000  shares,  but
                              had 125,000  shares  forfeited.  As of January 31,
                              1997, options with a remaining contractual life of
                              9 years to purchase  100,000  shares at a price of
                              $4.63  were  outstanding,  20,000  of  which  were
                              exercisable.

                              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'  net loss  and loss per  share
                              would have been  reduced to the pro forma  amounts
                              indicated below:

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

                              Net loss                 As reported   $ (603,317)
                                                       Pro forma       (611,369)

                              Primary loss per share   As reported        (0.09)
                                                       Pro forma          (0.09)

                              Fully diluted loss 
                                per share              As reported        (0.09)
                                                       Pro forma          (0.09)
                              --------------------------------------------------

                              The fair value of each  option  granted in 1996 is
                              estimated   on  the  date  of  grant   using   the
                              Black-Scholes   option-pricing   model   with  the
                              following   weighted-average   assumptions   used:
                              dividend  yield of 0 percent;  risk-free  interest
                              rate  of  4.88  percent;  volatility  of  .3;  and
                              expected  lives  of 1  year.  The  fair  value  of
                              options granted during the year is $.66.

                              Stock Award Plan

                              In September  1996, the Company adopted The Source
                              Company  Stock  Award Plan for all  employees  and
                              reserved  50,000  shares of Common  Stock for such
                              plan.  Under the plan, the stock award  committee,
 
                                       30
<PAGE>
                              appointed   by  the  board  of  directors  of  the
                              Company,  shall  determine  the  employees to whom
                              awards shall be granted.

                              On  September  18, 1996,  10,050  shares of Common
                              Stock were awarded to certain  employees under the
                              plan.

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

                              Years Ended 
                              January 31,                  1997          1996
                              --------------------------------------------------

                              Interest                  $ 285,000     $ 109,000

                              Income Taxes              $ 264,000     $  254,000
                              --------------------------------------------------

                              Capital lease  obligations  of $15,687 and $59,095
                              were incurred in 1997 and 1996, respectively, when
                              the  Company  entered  into  leases for new office
                              equipment.

                              On August 30,  1996,  9,515 shares of common stock
                              were  issued  as  a  dividend  to  the   preferred
                              stockholders as of that date.

                              During 1997 the Company  issued 100,000 shares and
                              111,245 shares of common stock in connection  with
                              the acquisitions of Magazine  Marketing,  Inc. and
                              Readers  Choice,  Inc.  (Note 9).  During 1996 the
                              Company  issued  959,389 shares of common stock in
                              connection  with the acquisition of the Company by
                              Periodico, Inc. (Note 9).

                                       31
<PAGE>
8.     Income Taxes           Provision  for  federal  and  state  income  taxes
                              (benefit) in the statements of operations  consist
                              of the following components:

                              Year Ended 
                              January 31,                1997          1996
                              --------------------------------------------------
                              Current
                               Federal                $(102,768)    $ 355,000
                               State                    (15,356)      110,000
                              --------------------------------------------------
                              Total Current            (118,124)      465,000
                              --------------------------------------------------

                              Pro Forma (Unaudited)
                               Federal                               (105,000)
                               State                                  (17,000)
                              --------------------------------------------------
                              Total Pro Forma                        (122,000)
                              --------------------------------------------------

                              Deferred
                               Federal                 (225,386)      (46,000)
                               State                    (33,678)      (13,000)
                              --------------------------------------------------
                                                       (259,064)      (59,000)
                              --------------------------------------------------

                              Total Income Tax
                               (Benefit)Expense       $(377,188)    $ 284,000
                              --------------------------------------------------

                                       32
<PAGE>
                    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,                             1997         1996
                    ------------------------------------------------------------
                    Deferred Tax Assets
                     Allowance for doubtful accounts     $126,000     $ 38,000
                     Deferred compensation                 14,000            -
                     Other                                  3,000            -
                    ------------------------------------------------------------
                    Total Deferred Tax Assets             143,000       38,000
                    ------------------------------------------------------------

                    Deferred Tax Liabilities
                     Income not previously taxed under
                      cash basis of accounting for
                      income tax purposes                 312,000      446,000
                     Depreciation                          28,000       28,000
                    ------------------------------------------------------------
                    Total Deferred Tax Liabilities        340,000      474,000
                    ------------------------------------------------------------

                    Net Deferred Tax Liability            197,000      436,000
                    ------------------------------------------------------------

                    Classified as:
                     Current                               24,000      110,000
                     Non-current                          173,000      326,000
                    ------------------------------------------------------------

                    Net Deferred Tax Liability           $197,000     $436,000
                    ------------------------------------------------------------

                                       33
<PAGE>
                    The following  unaudited summary  reconciles income taxes at
                    the maximum  federal  statutory rate with the effective rate
                    for 1997 and the pro forma effective rate for 1996:

                    Year Ended January 31,                1997         1996
                    ------------------------------------------------------------
                    Income tax (benefit) expense
                     at statutory rate                 $(333,372)   $204,000
                    State income tax (benefit)
                     expense, net of federal 
                     income tax benefit                  (80,421)     52,000
                    Non-deductible meals and 
                     entertainment                        35,320      26,000
                    Non-deductible officers' life 
                     insurance                            (3,250)      4,300
                    Non-deductible goodwill 
                     amortization                          2,306       2,300
                    Other, net                            (4,600)      2,229
                    ------------------------------------------------------------

                    Income Tax (Benefit) Expense       $(377,188)   $284,000
                    ------------------------------------------------------------

9.     Business              Pooling of Interests of DISC and PMM
       Combinations    
                              On  February  1, 1995 DISC and PMM merged into The
                              Source Company. DISC stockholders exchanged all of
                              their shares of common stock for 2,520,000  shares
                              of Common  Stock of The  Source  Company,  and PMM
                              stockholders  exchanged  all of  their  shares  of
                              common stock for 2,520,000  shares of Common Stock
                              of  The  Source  Company.   The  merger  has  been
                              accounted  for  as a  pooling  of  interests  and,
                              accordingly,  the Company's  financial  statements
                              have been  restated  for all periods  prior to the
                              merger  to  include  the  results  of  operations,
                              financial  position,  and  cash  flows of DISC and
                              PMM.

                              The  S  corporation   retained  earnings  of  DISC
                              totaling   $462,389   representing   undistributed
                              earnings on February 1, 1995 has been  credited to
                              additional  paid-in  capital net of deferred taxes
                              of   approximately   $122,000   which   has   been
                              recognized through a charge to income tax expense.


                                       34
<PAGE>
                              Acquisition of the Company by Periodico, Inc.

                              On May 1, 1995 Periodico,  Inc.  (formerly  Garner
                              Investments, Inc.) acquired the Company through an
                              exchange of stock. Periodico then changed its name
                              to The Source Company.

                              Since  Periodico  had  no  significant  assets  or
                              operations   at   the   transaction    date,   the
                              transaction  was  accounted  for as an issuance of
                              959,389  shares of Common  Stock by the Company in
                              exchange  for the net assets of  Periodico,  which
                              were  recorded  at  Periodico's   cost  basis  and
                              amounted to $0 at the transaction date.

                              Acquisition of Dixon's Modern Marketing  Concepts,
                              Inc. and Tri-State Stores, Inc.

                              On June 15, 1995 the Company  acquired  the assets
                              of Dixon's  Modern  Marketing  Concepts,  Inc. and
                              Tri-State  Stores,  Inc.  (MMC)  in  exchange  for
                              300,000  shares  of  Common  Stock  of The  Source
                              Company and the  assumption  by the Company of all
                              the  liabilities of MMC. The  transaction has been
                              accounted  for  as a  pooling  of  interests  and,
                              accordingly,  the Company's  financial  statements
                              have been  restated  for all periods  prior to the
                              acquisition  to include the results of operations,
                              financial  position,  and cash flows of The Source
                              Company and MMC.

                              The  S  corporation   retained   earnings  of  MMC
                              totaling  approxi-mately  $225,000,   representing
                              undistributed  earnings  on June  15,  1995 net of
                              $27,000   distributed   in   lieu  of   taxes   to
                              shareholders,  has  been  credited  to  additional
                              paid-in capital.

                                       35
<PAGE>

                    Revenues and net income (loss) for the  individual  entities
                    and combined prior to the mergers were as follows:

                                              The
                                             Source
                                             Company        MMC        Combined
                    ------------------------------------------------------------
                    February 1 to 
                    June 15, 1995
                      Revenues            $2,175,383    $ 435,529     $2,610,912
                      Net income (loss)   $   96,829    $  (5,609)    $   91,220
                    ------------------------------------------------------------

                    Acquisition of Magazine Marketing, Inc.

                    On June 28,  1996 the Company  acquired  all of the stock of
                    Magazine  Marketing,  Inc. in exchange for 100,000 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
                    111,245  shares  of  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.  This
                    transaction  did  not  meet  any  of  the  conditions  to be
                    considered a significant business combination.  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.

10.    Redeemable                 
       Preferred 
       Stock        The  Company  has  authorized  2,000,000  shares of $.01 par
                    Preferred  Stock.  On March  13,  1996  65,000  shares  were

                                       36
<PAGE>

                    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  $3.50 nor more than  $5.50 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 $3.55
                    per share,  which resulted in the issuance of 140,714 shares
                    of  Common  Stock.  This  conversion  also  resulted  in the
                    issuance to certain of the Company's  financial  advisors of
                    options to purchase an additional 2,814 shares of the Common
                    Stock of the Company. This option to purchase is exercisable
                    for a two year  period at an  exercise  price equal to $4.26
                    per share.

                                       37
<PAGE>
                    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 $3.65 per  share,  which  resulted  in the  issuance  of
                    61,643 and 13,698 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 9,515  shares  based on an
                    issuance price of $4.46 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
                    $3.50 per share,  which  resulted in the issuance of 142,857
                    shares of Common Stock. This conversion also resulted in the
                    issuance to certain of the Company's  financial  advisors of
                    options to purchase an additional 2,857 shares of the Common
                    Stock of the Company. This option to purchase is exercisable
                    for a two year  period at an  exercise  price equal to $4.20
                    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
                    $3.50 per share,  which  resulted in the  issuance of 64,285
                    shares of Common Stock.

11.    Advance Pay  
       Program      The Company has  established  an Advance Pay 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, 1997 is  $11,206,666  due the Company  under the Advance
                    Pay   Program   (net   of   $2,314,727   due   the   program
                    participants).  Income from the  program  was  approximately
                    $1,150,000 during 1997 and was not material in 1996.


                                       38
<PAGE>
12.    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  $199,575 at January
                    31, 1997 under such arrangements.

13.    Redeemable   
       Common 
       Stock        During  June 1996,  the  Company  issued  100,000  shares of
                    Common  Stock to  James W.  Looman  in  connection  with the
                    purchase of Magazine  Marketing,  Inc. (Note 9). Pursuant to
                    the terms of the Purchase Agreement,  Mr. Looman was granted
                    an option to sell his  shares to the  Company  at a price of
                    $1.00 per share if, at any time  during the two year  period
                    following the acquisition  date (June 28, 1996),  the market
                    value of all shares acquired in the transaction becomes less
                    than $100,000 for ten consecutive trading days.

                    Also during June 1996,  the Company issued 111,245 shares of
                    Common Stock to United Magazine Company ("United  Magazine")
                    in  connection  with the purchase of Reader's  Choice,  Inc.
                    (Note 9).  Pursuant to the terms of the Purchase  Agreement,
                    United  Magazine was granted an option to sell its shares to
                    the  Company at a price of $4.00 per share if the  Company's
                    stock price for the last five days of any  calendar  quarter
                    during the two year period  following the  acquisition  date
                    (June 30, 1996)is less than $4.00 per share.

                    The  stock  which  was  issued  in  each  of  the  foregoing
                    transactions  is recorded at the value which was assigned in
                    each of the respective transactions.

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

                    Trade Receivables and Cash Surrender Value of Life Insurance

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

                                       39
<PAGE>
                    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.

                    Long-term Debt (Excluding Obligations Under Capital Leases)

                    The carrying amount  approximates the fair value because the
                    financial   instrument  was   originally   recorded  at  its
                    discounted value.

                    Revolving Line of Credit

                    It is  presumed  that the  carrying  amount 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, 1997                      value          value
                    ------------------------------------------------------------

                    Financial Assets
                     Trade receivables                 $12,922,738   $12,922,738
                     Notes receivable - officers       $   233,578   $   207,600
                     Cash surrender value of 
                      life insurance                   $   104,358   $   104,358

                    Financial Liabilities
                     Accounts payable and accrued
                      expenses                         $   559,441   $   559,441
                     Due to retailers                  $   199,575   $   199,575
                     Long-term debt (excluding 
                      obligations under capital 
                      leases)                          $    46,710   $    46,710
                     Revolving line of credit          $ 7,124,000   $ 7,124,000

                                       40
<PAGE>
15.      Earnings 
         Per Share  In February 1997, the Financial  Accounting  Standards Board
                    issued Statement of Financial  Accounting Standards No. 128,
                    "Earnings  Per  Share"  (SFAS  No.  128).  The new  standard
                    simplifies  the standards  for computing  earnings per share
                    and  requires  presentation  of two new  amounts,  basic and
                    diluted  earnings per share. The Company will be required to
                    retroactively  adopt  this  standard  when  it  reports  its
                    operating  results  for the fiscal  quarter  and year ending
                    January 31, 1998.  When the Company  adopts SFAS No. 128, it
                    expects to report the following restated amounts:

                                                     1997             1996
                                                     ----             ----

                            Basic                   (.09)              .03

                            Diluted                 (.09)              .03

                                       41
<PAGE>

16.    Quarterly
       Financial Data
       (unaudited)

                                              Quarters Ended
                         -------------------------------------------------------

1997                       April 30      July 31       October 31    January 31
--------------------------------------------------------------------------------

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
                               (0.07)        (0.07)          0.01          0.04
Weighted average
  number of common
  shares outstanding        6,379,900    6,508,607      6,793,267     6,879,147


1996
-------------------------

Net Sales                  $2,032,637   $1,887,799     $2,487,985    $1,712,763

Gross Profit                1,101,895    1,086,215      1,064,531       459,321
Net Income (Loss)              80,435      155,726        187,845     (232,012)

Earnings (loss) per
  common share                   0.02         0.02           0.03        (0.04)
Weighted average
  number of common
  shares outstanding        5,340,000    6,299,389      6,324,389    6,374,389

                                       42
<PAGE>
Item 8.   Changes  In and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosures.

          Not applicable.



                                       43
<PAGE>
                                    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                 59       Director, Chairman and Chief Executive
                                          Officer

William H. Lee                   46       Director,    President    and    Chief
                                          Operating Officer

John P. Watkins                  41       Chief Administration Officer

Dwight L. DeGolia                52       Executive Vice President

Robert B. Dixon                  46       Senior Vice President and President - 
                                          Periodical Information Management

W. Brian Rodgers                 31       Assistant    Secretary    and    Chief
                                          Financial Officer

Jason S. Flegel                  31       Sr. Vice President of RDA Operations

Robert G. Shupe                  50       Sr.  Vice  President  and  President -
                                          Display Group

Timothy A. Braswell              68       Director

Harry L. "Terry" Franc, III      61       Director

Aron Katzman                     59       Director

Randall S. Minix                 47       Director

S. Leslie Flegel has been a director,  Chairman and Chief  Executive  Officer of
the Company  since its  inception  in April  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. From
January 1992 to June 1993, Mr. Flegel also served as the chief executive officer
of NationsMart Corporation, an operator and franchiser of dry cleaning, laundry,
shoe repair and formal wear service centers,  prior to its December 1993 initial
public offering of securities.

William H. Lee has been a director, President and Chief Operating Officer of the
Company  since its  inception in April 1995.  For  approximately  14 years prior

                                       44
<PAGE>
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  Administration  Officer  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.

Robert B.  Dixon  became  Senior  Vice  President  and  President  -  Periodical
Information  Management in June 1995. For more than 13 years prior thereto,  Mr.
Dixon served as President and was the principal  shareholder  of Dixon's  Modern
Marketing Concepts, Inc. and related entities.

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 April 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.

Robert G. Shupe has served as Senior Vice  President  since February 1996 and as
President - Display Group of the Company since commencement of its operations in
May 1995.  From February  1985 to January  1995,  Mr. Shupe held the position of
Executive  Vice  President - Sales for PMM.  Prior to joining PMM, Mr. Shupe was
employed in the marketing division of McCall's Magazine.

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. For more than 20 years,  Mr. Franc has served
as a director and senior executive officer of Bridge Information Systems,  Inc.,
a St. Louis,  Missouri based provider of information  services to the securities
industry.  In  addition,  Mr. Franc has served as  executive  vice  president of
Bridge Trading Company,  a registered  broker-dealer  and member of the New York
Stock  Exchange.  Bridge Trading  Company is a subsidiary of Bridge  Information
Systems, Inc.

                                       45

<PAGE>
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  five  years,  Mr.  Minix has been the
managing partner of Minix, Morgan & Company, LLP, an independent accounting firm
headquartered in Greensboro, North Carolina, and its predecessors.

         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 office of Messrs.  Braswell and Franc will continue  until the 1997
annual  meeting  of  shareholders,  the  terms of  Messrs.  Flegel  and Lee will
continue until the 1998 annual meeting of shareholders, and the terms of Messrs.
Katzman and Minix will continue until the 1999 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
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.



                                       46


<PAGE>
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,  two persons,
Messrs. Jason S. Flegel and W. Brian Rodgers,  each failed to timely file a Form
3, Initial Statement of Beneficial Ownership of Securities.

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>

                                             SUMMARY COMPENSATION TABLE
<CAPTION>

                                                 Annual Compensation
Name of Principal                                                                                      Other Annual
   Position                                    Year     Salary            Bonus                        Compensation(a)

<S>                                            <C>      <C>              <C>                                <C>    
S. Leslie Flegel                               1997     $227,500         $176,398                           $30,624
Chairman and Chief Executive                   1996     $200,000          $26,543                           $30,995
  Officer                                      1995     $171,875              ---                           $22,425

William H. Lee                                 1997     $224,830          $30,000                           $13,944
President and Chief Operating                  1996     $192,646              ---                           $19,006
  Officer                                      1995     $145,000          $60,000                           $25,937

Dwight L. DeGolia                              1997     $140,000           $4,773                           $11,223
Executive Vice President                       1996     $134,884              ---                           $16,739
                                               1995      $97,358              ---                            $9,790

John P. Watkins                                1997     $150,000              ---                           $11,891
Chief Administration Officer                   1996          ---              ---                               ---
                                               1995          ---              ---                               ---

Robert B. Dixon                                1997     $150,000              ---                           $13,907
Senior Vice President and                      1996     $114,000          $50,000                            $5,458
  President - Periodical                       1995      $36,000         $128,500                           $26,982
  Information Management
------------------------
<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 1997,  the estimated  incremental  cost to the Company of the

                                       47
<PAGE>
         use by  Messrs.  Flegel,  Lee,  DeGolia,  Watkins  and Dixon of Company
         automobiles   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  1995,  such  cost was  $10,417,
         $8,753, $5,728, $0 and $0, respectively.

         In fiscal 1997,  the estimated  incremental  cost to the Company of the
         membership dues paid on behalf of Messrs. Flegel, Lee, DeGolia, Watkins
         and Dixon 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 1995, such cost was $8,212, $4,356, $4,751, $0
         and $2,300, respectively.

         In fiscal 1997, 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  1996,  such  cost  was  $8,048,  $8,033,  $5,628,  $0  and  $0,
         respectively.  No life  insurance  premiums  were paid on behalf of the
         officers in fiscal 1995.
</FN>
</TABLE>
<TABLE>

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

                           Number of Securities          % of Total
                                Underlying          Options/SARS Granted        Exercise or
                           Options/SARS Granted    to Employees in Fiscal       Base Price                   Expiration
                                  #(1)                      Year                  ($/Sh)                       Date
                                  ----                      ----                  ------                       ----

<S>                                  <C>                      <C>                      <C>                        
S. Leslie Flegel                     0                        0                        0                         -
William H. Lee                       0                        0                        0                         -
Dwight L. DeGolia                    0                        0                        0                         -
John P. Watkins                   100,000                    44%                     $4.63                    2-01-01
Robert B. Dixon                      0                        0                        0                         -

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

(1)  Options  were  granted  February  1, 1996 and are  exercisable  20% a year,
     cumulatively, for a period of five years.
</FN>
</TABLE>
<TABLE>

               AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                            AND FYE OPTION/SAR VALUES
<CAPTION>
                                                                                                       Value of Unexercised
                                                                             Number of Unexercised         In-the Money
                                                                             Option/SARs at Fiscal    Options/SARs at Fiscal
                                  Shares                                          Year End (#)             Year End ($)
                                Acquired on                Value                  Exercisable/             Exercisable/
         Name                  Exercise (#)             Realized ($)             Unexercisable             Unexercisable
         ----                  ------------             ------------             -------------             -------------
         
<S>                                  <C>                      <C>                     <C>                       <C>
S. Leslie Flegel                     0                        0                       0/0                       0/0
William H. Lee                       0                        0                       0/0                       0/0
Dwight L. DeGolia                    0                        0                       0/0                       0/0
John P. Watkins                      0                        0                  40,000/60,000                  0/0
Robert B. Dixon                      0                        0                       0/0                       0/0

</TABLE>


                                       48
<PAGE>
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.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth certain information as of March 31, 1997
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                           1,764,600                 25.0
  11644 Lilburn Park Road
  St. Louis, Missouri 63146

William H. Lee                             1,350,695                 19.2
  711 Gallimore Dairy Road
  High Point, North Carolina 27265

Timothy A. Braswell                          572,201                  8.1
  711 Gallimore Dairy Road
  High Point, North Carolina 27265

Cameron Capital Ltd                          440,713(a)               6.2
   10 Cavendish Rd
   Hamilton Hm 19
   Bermuda

Robert B. Dixon                              301,000                  4.3
  907 Park Drive
  Flossmoor, Illinois 60422

                                       49
<PAGE>
Dwight L. DeGolia                            178,400                  2.5
  11644 Lilburn Park Road
  St. Louis, Missouri 63146

Jason S. Flegel                              177,400                  2.5
   711 Gallimore Dairy Road
   High Point, North Carolina 27265

Aron Katzman                                  81,643                  1.2
  10 Layton Terrace
  St. Louis, Missouri 63124

Robert G. Shupe                               44,727                    *
  4109 Pheasant Run
  Greensboro, North Carolina 27408


John P. Watkins                               40,000(b)                 *
   711 Gallimore Dairy Road
   High Point, North Carolina  27265

Harry L. Franc, III                           31,398                    *
  19 Briarcliff
  St. Louis, Missouri 63124

Randall S. Minix                               7,000                    *
  5502 White Blossom Drive
  Greensboro, North Carolina 27410

All directors and executive                4,549,064                 64.5
officers as a group  (11 persons)

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

         *Less than 1%

                                       50
<PAGE>

(a)      Includes  142,857  shares  of  Common  Stock  which  are or may  become
         issuable to Cameron  Capital Ltd.  upon  conversion  of 5,000 shares of
         Preferred  Stock  calculated  based on the Market Value (as defined) of
         the Common Stock as of March 31, 1997.

 (b)     Includes exercisable  options to acquire  40,000 shares of Common Stock
         at an exercise price of $4.63 per share.

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, 1995 was $270,675
and $14,618,  respectively.  All such advances are evidenced by promissory notes
in favor of the  Company.  Such  notes  bear  interest  at the rate of 7.34% per
annum, and are payable in five equal annual installments.

         The Company  incurred a debt to Timothy A. Braswell on March 1, 1991 in
the amount of $300,000, which accrued interest at the rate of 10% per annum. The
indebtedness  matured on  January  1, 1996 and was paid in full on the  maturity
date.

         711 Gallimore  Partnership,  a North  Carolina  general  partnership in
which William H. Lee and Robert G. Shupe are partners, provides the Company with
certain office space in Greensboro,  North Carolina under the terms of a written
lease dated June 28, 1991. The lease,  as amended in January 1996,  provides for
annual  rent of  $150,300  and  expires in 2012.  In fiscal  1996 and 1997,  the
Company paid 711 Gallimore Partnership $147,275 and $157,498,  respectively,  in
rent.

         2532 Investments,  Inc., a North Carolina  corporation in which William
H. Lee and Robert G.  Shupe are  shareholders,  had  occasionally  provided  the
Company  with the use of an  airplane.  In fiscal  1996,  the Company  paid 2532
Investments $57,926 in consideration for the use of the airplane.

         Data-Pros,  Inc.  ("Data-Pros"),  a corporation in which William H. Lee
and Robert G. Shupe are shareholders,  provided the Company with data processing
services.  In fiscal 1996 and 1997,  the Company  paid  Data-Pros  $306,751  and
$274,893,  respectively,  for such  services.  On  January  1, 1997 the  Company
purchased the assets of Data-Pros for $45,000.

         On June 15, 1995,  the Company  acquired all of the business and assets
of Dixon's  Modern  Marketing  Concepts,  Inc.  and  Tri-State  Stores,  Inc. in
exchange for the issuance of an  aggregate  of 300,000  shares of Common  Stock.
Robert B. Dixon was the  President and  principal  shareholder  of each of these
corporations.

                                       51


<PAGE>
         Robert B. Dixon,  Executive  Vice  President  and  President-Periodical
Information  Management,  provided  the  Company  with  office  space in Chicago
Heights,  Illinois under the terms of a written lease dated January 1, 1993. The
lease  provided  for annual rent of $36,000 and  expired on December  31,  1996.
Currently,  the space is leased on a  month-to-month  basis.  In fiscal 1996 and
1997, the Company paid Mr. Dixon $36,000 and $36,000, respectively, in rent.

         From time to time, the Company has been engaged by Specialty  Marketing
Co., Inc., a corporation in which Robert B. Dixon is the principal  shareholder,
to provide consulting  services.  In fiscal 1996,  Specialty Marketing Co., Inc.
paid the Company $85,611 in consideration for the Company's services.

         FMG,  Inc., a North  Carolina  corporation  in which William H. Lee and
Robert G. Shupe are  shareholders,  has from time to time received cash advances
from the Company. There were no such outstanding advances at January 31, 1997.

         On March 11, 1996, the Company sold an aggregate of 5,000 shares of its
Preferred Stock in transactions exempt from the registration requirements of the
Securities  Act of 1933,  as amended,  to Messrs.  Braswell,  Franc and Katzman.
Messrs.  Braswell,  Franc and Katzman  purchased  2,250,  500 and 2,250  shares,
respectively.  The  Company  received  payment  for the shares  from each of the
purchasers  in the amount of $100 per share.  During the year Messrs.  Braswell,
Franc and Katzman  converted their Preferred Stock to 64,285,  13,698 and 64,643
shares of common stock, respectively.

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

(a)      Exhibits.
         See Exhibit Index.

(b)      Reports on Form 8-K.

         None

                                       52
<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 COMPANY


Date:  April    , 1997                   /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.


April      , 1997                        /s/ S. Leslie Flegel
                                         _______________________________________
                                         S. Leslie Flegel
                                         Chief Executive Officers and
                                         Chairman of the Board
                                         (Principal Executive Officer)



April      , 1997                        /s/ W. Brian Rodgers
                                         _______________________________________
                                         W. Brian Rodgers
                                         Chief Financial Officer
                                         (Principal Financial and Accounting 
                                         Officer)



April      , 1997                        /s/ William H. Lee
                                         _______________________________________
                                         William H. Lee
                                         President, Chief Operating Officer
                                         and Director



April      , 1997                                               
                                         _______________________________________
                                         Timothy A. Braswell
                                         Director


<PAGE>

April      , 1997                        /s/ Harry L. "Terry" Franc, III
                                         _______________________________________
                                         Harry L. "Terry" Franc, III
                                         Director




April      , 1997                        /s/ Aron Katzman
                                         _______________________________________
                                         Aron Katzman
                                         Director



April      , 1997                        /s/ Randall S. Minix
                                         _______________________________________
                                         Randall S. Minix
                                         Director
<PAGE>
                         EXHIBIT INDEX

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

3.1*              Articles of Incorporation of the Company

3.2*              Bylaws of the Company

4.1*              Form of Common Stock Certificate

4.2**             Form of 1996 Series 7% Convertible Preferred Stock
                    Certificate

4.3**             Certificate of and Designations, Preferences and Relative
                    Rights of 1996 Series 7% Convertible Preferred Stock

10.1*             Form of Promissory Notes with S. Leslie Flegel and
                    Dwight DeGolia

10.2*             Form of Indemnity Agreement with Officers and Directors

10.3*             Lease Agreement dated June 28, 1991 with 711 Gallimore
                    Partnership

10.6*             Lease Agreement dated January 1, 1993 with Robert B. Dixon

10.7**            1995 Incentive Stock Option Plan adopted as of
                    August 23, 1996

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

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

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

10.11**           Addendum to the Lease Agreement, dated as of
                    April 25, 1996, with 711 Gallimore Partnership
<PAGE>

10.12            Stock Acquisition Agreement dated as of June 20, 1996
                    among James Looman, the sole shareholder of Magazine
                    Marketing, Inc., Magazine Marketing, Inc. and The
                    Source Company, filed as exhibit 10.14 to the Company's
                    Form 8-K dated June 28, 1996, and incorporated herein 
                    by this reference.

10.13            $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            Amendment To Credit Agreement dated December 19, 1996
                    by and between The Source Company and Wachovia Bank
                    of North Carolina, N.A.

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

10.16            The Source Company Common Stock Award Plan filed as
                    exhibit 4.4 to the Company's Registration Statement on Form
                    S-8 (File no. 333-16039) and incorporated herein by this
                    reference.

10.17            The Source Company 1995 Incentive Stock Option Plan filed as 
                    exhibit 4.5 to the Company's Registration Statement on Form
                    S-8 (File no. 333-16039) and incorporated herein by this 
                    reference.

11.1              Statement re: computation of per share earnings

21.1              Subsidiaries of the registrant

23.1              Consent of BDO Seidman, LLP

27.1              Financial Data Schedule (Filed in EDGAR version only)

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

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

*        Incorporated by reference to Registration Statement on Form 10-SB
         (Commission file no. 0-26238) first filed on June 12, 1995.

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