U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-QSB

 (Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
    1934

For the quarterly period ended April 30, 1997

|_| Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from _________ to _________

Commission file number   0-26238

                               The Source Company
        (Exact Name of Small Business Issuer as Specified 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)


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


                                 Not Applicable
         (Former Name, Former Address and Former Fiscal Year, if Changed
                               Since Last Report)

         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   |_|

                      APPLICABLE ONLY TO CORPORATE ISSUERS

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest  practicable  date:  7,049,199 (as of May 31,
1997)

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


<PAGE>


                               THE SOURCE COMPANY

                                      INDEX

                         PART I - FINANCIAL INFORMATION

                                                                            Page

ITEM 1.       Financial Statements

              Unaudited Balance Sheet as of April 30, 1997                   

              Unaudited Statements of Operations for the three
              months ended April 30, 1997 and 1996                           

              Unaudited Statements of Cash Flows for the three
              months ended April 30, 1997 and 1996                           

              Notes to Financial Statements                                  

ITEM 2.       Management's Discussion and Analysis                          


                           PART II - OTHER INFORMATION

ITEM 6.       Exhibits and Reports on Form 8-K                              
<PAGE>
                                                              THE SOURCE COMPANY
                                                         Unaudited Balance Sheet

                                                                  April 30, 1997
--------------------------------------------------------------------------------

Assets (Note 3)
     Cash                                                       $         78,816
     Trade receivables (net of allowance 
       for doubtful accounts of $312,940)(Note 5)                     13,559,544
     Notes recevable - officers (Note 1)                                 108,530
     Other current assets                                                182,762
--------------------------------------------------------------------------------
Total Current Assets                                                  13,929,652
--------------------------------------------------------------------------------
Office equipment and furniture                                         1,888,713
Less accumulated depreciation and amortization                         1,250,554
--------------------------------------------------------------------------------
Net Office Equipment and Furniture                                       638,159
--------------------------------------------------------------------------------

Other Assets
     Notes receivable - officers (Note 1)                                125,048
     Goodwill, net of accumulated amortization of $90,325              1,004,708
     Other                                                               192,791
--------------------------------------------------------------------------------
Total Other Assets                                                     1,322,547
--------------------------------------------------------------------------------

                                                                $     15,890,358
--------------------------------------------------------------------------------

                                       1
<PAGE>
                                                              THE SOURCE COMPANY
                                                         Unaudited Balance Sheet
                                                                  April 30, 1997
--------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current
     Revolving line of credit (Note 3)                          $      9,696,000
     Checks issued against future deposits                               793,358
     Accounts payable and accrued expenses                               389,177
     Due to retailers (Note 6)                                           188,303
     Income tax payable (Note 7)                                         154,466
     Deferred income taxes (Note 7)                                       20,000
     Current maturities of long-term debt (Note 2)                        70,816
--------------------------------------------------------------------------------
Total Current Liabilities                                             11,312,120
--------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 2)                           5,166
--------------------------------------------------------------------------------
Deferred Income Taxes (Note 7)                                           145,000
--------------------------------------------------------------------------------
Total Liabilities                                                     11,462,286
--------------------------------------------------------------------------------

Commitments and Contingencies         
--------------------------------------------------------------------------------

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

Stockholders' Equity
     Common Stock, $.01 par - shares authorized, 20,000,000; 
         outstanding 6,937,954                                            69,379
     Additional paid-in-capital                                        2,764,646
     Retained earnings                                                   567,721
--------------------------------------------------------------------------------
Total Stockholders' Equity                                             3,401,746
--------------------------------------------------------------------------------

                                                                $     15,890,358
--------------------------------------------------------------------------------


                                       2
<PAGE>
<TABLE>

                                                                                                 THE SOURCE COMPANY
                                                                                 Unaudited Statements of Operations
<CAPTION>

Three Months Ended April 30,                                                            1997                1996
--------------------------------------------------------------------------------------------------------------------

<S>                                                                               <C>                 <C>          
Service Revenues                                                                  $   2,519,531       $   1,424,030
Merchandise Revenues                                                                      8,348              29,938
--------------------------------------------------------------------------------------------------------------------
                                                                                      2,527,879           1,453,968
--------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues                                                              1,261,226           1,204,838
Cost of Merchandise Sold                                                                 32,720                   0
--------------------------------------------------------------------------------------------------------------------
                                                                                      1,293,946           1,204,838
--------------------------------------------------------------------------------------------------------------------
Gross Profit                                                                          1,233,933             249,130
Selling, General and Administrative Expense                                             527,786             876,902
--------------------------------------------------------------------------------------------------------------------
Operating Income (Loss)                                                                 706,147           (627,772)
--------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
            Interest income                                                               6,258               8,956
            Interest expense                                                          (202,136)            (42,322)
            Other                                                                      (19,142)             (5,955)
--------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense)                                                          (215,020)            (39,321)
--------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes                                                       491,127           (667,093)
Income Tax Expense (Benefit) (Note 7)                                                   235,000           (196,864)
--------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                                                 $     256,127       $   (470,229)
--------------------------------------------------------------------------------------------------------------------

Earnings (Loss) per Share - Primary and Fully Diluted                             $         .04       $
                                                                                                             (0.07)
--------------------------------------------------------------------------------------------------------------------

Weighted Average of Shares Outstanding - Primary and Fully Diluted                    6,935,525           6,379,900
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       3
<PAGE>
<TABLE>

---------------------------------------------------------------------------------------------------------------------------
                                                                                                 THE SOURCE COMPANY

                                                                                 Unaudited Statements of Cash Flows
<CAPTION>

Three Months Ended April 30,                                                       1997                  1996
--------------------------------------------------------------------------------------------------------------------

<S>                                                                         <C>                  <C>   
Operating Activities
     Net income (loss)                                                      $         256,127    $        (470,229)
     Adjustments to reconcile net income to
       cash used in operating activities:
         Depreciation and amortization                                                 77,165                44,566
         Provision for losses on accounts receivable                                 (10,647)              (16,376)
         Impairment of investment in limited partnership                                5,000                 5,000
         Increase in cash surrender value of life insurance                          (21,027)                     -
         Deferred income taxes                                                       (32,000)              (41,000)
         Changes in assets and liabilities:
             (Increase) decrease in accounts receivable                             (626,159)               327,263
             Decrease (increase) in other assets                                      119,365             (307,540)
             Decrease in checks issued against future deposits                    (2,432,310)
                                                                                                                  -
             Decrease in accounts payable and accrued expenses                       (15,798)             (525,698)
             (Decrease) increase in amounts due customers                            (11,272)               111,571
--------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities                                                 (2,691,556)             (872,443)
--------------------------------------------------------------------------------------------------------------------

Investment Activities
     Loan to affiliate                                                                (9,843)                     -
     Loans to officers                                                                      -              (54,034)
     Collections on notes receivable                                                        -                 3,417
     Proceeds from surrender of life insurance policies                                83,959                     -
     Capital expenditures                                                           (115,079)              (53,559)
--------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities                                                    (40,963)             (104,176)
--------------------------------------------------------------------------------------------------------------------

Financing Activities
     Proceeds from issuance of Common Stock                                                 -                30,000
     Proceeds from issuance of Preferred Stock                                              -             1,922,075
     Borrowings under credit facility                                               9,740,000                     -
     Principal payments on credit facility                                        (7,168,000)              (19,714)
     Borrowings under short-term debt agreements                                            -               311,000
     Repayments under short-term debt agreements                                     (16,035)             (217,000)
     Registration costs                                                              (29,548)                     -
     Preferred Stock dividends                                                            (3)                     -
--------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities                                               2,526,414             2,026,361
--------------------------------------------------------------------------------------------------------------------

(Decrease) Increase in Cash                                                         (206,105)             1,049,742

Cash, beginning of period                                                             284,921                23,828
--------------------------------------------------------------------------------------------------------------------

Cash, end of period                                                         $          78,816    $        1,073,570
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       4
<PAGE>
--------------------------------------------------------------------------------
                                                              THE SOURCE COMPANY
--------------------------------------------------------------------------------

                                                   Notes to Financial Statements

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

1.     Related Party              
       Transactions       The  Company  purchased  $110,000  in data  processing
                          services from an employment  service  company owned by
                          certain  officers  of the  Company  during  the  three
                          months ended April 30, 1996. The Company acquired 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  April  30,  1996,  the  Company  had  a
                          receivable  from FMG of $53,171 at prime plus .5%. The
                          receivable was collected in full on November 5, 1996.

                          The Company currently leases certain office space from
                          businesses  controlled by stockholders of the Company.
                          Amounts paid for the office  space were  approximately
                          $57,300 and $46,600 for the three  months  ended April
                          30,   1997  and  1996,   respectively.   The   Company
                          occasionally   charters   an   airplane   owned  by  a
                          partnership in which one of the Company's stockholders
                          owns an interest. Amounts paid to the partnership were
                          $2,700  and $0 for the three  months  ended  April 30,
                          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.


2.     Long-term          Long-term debt consists of:
       Debt
                          April 30,                                      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      $  37,790

                          Obligations  under capital lease              38,192
                          ------------------------------------------------------
                          Total Long-term Debt                          75,982

                          Less current maturities                       70,816
                          ------------------------------------------------------

                          Long-term Debt                              $  5,166
                          ------------------------------------------------------

                                       5
<PAGE>

3.     Revolving Credit           
       Facility           The Company has an agreement providing for a revolving
                          loan 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
                          9.1875% at April 30, 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 April 30, 1997, and,
                          consequently, the debt has been classified as current.


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

                          Three Months Ended April 30,       1997        1996
                          ------------------------------------------------------

                          Interest Paid                    $173,000    $  41,000

                          Income Taxes Paid (Refunded)     $(59,000)   $ 222,000
                          ------------------------------------------------------

                          On February  28,  1997,  7,721  shares of Common Stock
                          were   issued   as  a   dividend   to  the   Preferred
                          Stockholders as of that date.


5.     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 April 30,  1997 is
                          $11,821,316  due the  Company  under the  Advance  Pay
                          Program   (net   of   $2,682,766   due   the   program
                          participants).    Income    from   the   program   was
                          approximately  $809,000 and $277,000  during the three
                          months ended April 30, 1997 and 1996, respectively.

                                       6
<PAGE>
6.     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
                          $188,303 at April 30, 1997 under such arrangements.


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

                          Quarter Ended April 30,        1997            1996
                          ------------------------------------------------------
                          Current
                             Federal                  $213,000        $(113,488)
                             State                      54,000          (42,376)
                          ------------------------------------------------------
                          Total Current                267,000         (155,864)
                          ------------------------------------------------------

                          Deferred
                             Federal                   (26,000)         (36,000)
                             State                      (6,000)          (5,000)
                          ------------------------------------------------------
                                                       (32,000)         (41,000)
                          ------------------------------------------------------

                          Total Income Tax (Benefit)
                            Expense                   $235,000        $(196,864)
                          ------------------------------------------------------

                                       7
<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:

                          April 30,                                        1997
                          ------------------------------------------------------
                          Deferred Tax Assets
                            Allowance for doubtful accounts           $  122,000
                            Deferred compensation                         18,000
                            Other                                         12,000
                          ------------------------------------------------------
                          Total Deferred Tax Assets                      152,000
                          ------------------------------------------------------

                          Deferred Tax Liabilities
                            Income not previously taxed 
                            under cash basis of accounting
                            for income tax purposes                      274,000
                          Depreciation                                    26,000
                          Other                                           17,000
                          ------------------------------------------------------
                          Total Deferred Tax Liabilities                 317,000
                          ------------------------------------------------------

                          ------------------------------------------------------
                          Net Deferred Tax Liability                     165,000
                          ------------------------------------------------------

                          Classified as:
                            Current                                       20,000
                            Non-current                                  145,000
                          ------------------------------------------------------

                          Net Deferred Tax Liability                  $  165,000
                          -----------------------------------------------------

                          The following  summary  reconciles income taxes at the
                          maximum federal statutory rate with the effective rate
                          for the first quarters of fiscal 1998 and 1997:

                          Quarter Ended April 30,          1997            1996
                          ------------------------------------------------------
                          Income tax expense (benefit) 
                            at statutory rate            $167,000     $(226,000)
                          State income tax expense 
                            (benefit), net of
                            federal income tax benefit     36,000       (27,000)
                          Non-deductible meals and 
                            entertainment                  10,000        15,000
                          Non-deductible goodwill
                            amortization                   10,000         1,000
                          Non-deductible officers'
                            life insurance                  4,000        10,000
                          Other, net                        8,000        30,136
                          ------------------------------------------------------

                          Income Tax Expense (Benefit)   $235,000     $(196,864)
                          ------------------------------------------------------

                                       8
<PAGE>
8. Subsequent Events      On May 30, 1997, the Company acquired all of the stock
                          of  Mike  Kessler  and  Associates,   Inc.  (MKA)  for
                          $2,500,000  of which  $350,000 was paid upon  closing.
                          The  balance is due  January 5, 1998 with  interest at
                          6.25%. Wachovia Bank of North Carolina,  N.A. issued a
                          standby  letter  of  credit  for  $2,231,912  for  the
                          benefit of the former owner of MKA covering the period
                          from May 30, 1997 through January 31, 1998.

                          The seller  operated MKA as a business  engaged in the
                          collection  of retail  display  allowances  for retail
                          store  chains.  The Company  intends to  continue  the
                          operation of such business.


9. Unaudited Financial    In the opinion of management,  the unaudited financial
    Statements            information  as of April  30,  1997  contained  herein
                          reflects all  adjustments  (consisting  only of normal
                          recurring  adjustments)  necessary  to fairly  present
                          such information in accordance with generally accepted
                          accounting  principles.  The results of operations for
                          the  three   months  ended  April  30,  1997  are  not
                          necessarily  indicative  of the results to be expected
                          for the entire year.

                          The  financial  statements  and notes are presented as
                          permitted by Form 10-QSB,  and do not contain  certain
                          information   included   in  the   Company's   audited
                          financial  statements  and notes for the  fiscal  year
                          ended January 31, 1997.

                                       9
<PAGE>
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

         THIS QUARTERLY  REPORT  CONTAINS  FORWARD LOOKING  INFORMATION  THAT IS
SUBJECT TO CERTAIN  RISKS,  TRENDS AND  UNCERTAINTIES  THAT COULD  CAUSE  ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. AMONG THESE RISKS, TRENDS AND
UNCERTAINTIES  ARE THOSE  RELATED  TO THE  ABILITY  OF THE  COMPANY  TO  ATTRACT
ADEQUATE CAPITAL RESOURCES TO FUND ITS GROWTH, AND THE DEPENDENCE OF THE COMPANY
ON THE TERMS OF  INCENTIVE  PROGRAMS  OVER WHICH IT HAS NO  CONTROL.  FOR A MORE
COMPLETE  DISCUSSION  OF  THESE  AND  OTHER  RISKS,  TRENDS  AND  UNCERTAINTIES,
INVESTORS ARE DIRECTED TO EXHIBIT 99.1  ATTACHED TO THE COMPANY'S  ANNUAL REPORT
ON FORM  10-KSB,  A COPY OF WHICH MAY BE  OBTAINED  WITHOUT  CHARGE  BY  WRITTEN
REQUEST TO THE COMPANY.

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 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
market presence and increase the number of its mid-sized chain retailer clients.
In June of 1995 the Company  acquired  all of the business and 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 Company expanded 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 May 30, 1997,
the Company  continued to expand by acquiring Mike Kessler and Associates,  Inc.
located in Fair Lawn, New Jersey.

         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.

                                       10
<PAGE>
         Under  both  the  standard  arrangement  and the  Advance  Pay  Program
commission  revenue is recognized at the time claims for incentive  payments are
substantially  completed for  submission to the  publishers  based on the amount
claimed,  less an  estimated  reserve  necessary  to maintain an  allowance  for
doubtful  accounts of  approximately 2% of trade accounts  receivable.  However,
under the standard arrangement, invoices for services provided by the Company in
connection  with the claim  process are not issued  until the  Company  receives
settlement  of the claim.  Under the Advance Pay  Program,  the  customer is not
invoiced for the commission,  which is the difference  between the claim and the
advance amount.

Results of Operations

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

                                                 Three Months Ended April 30,
                                                 ----------------------------
                                                1997                      1996
                                                ----                      ----

Service Revenues                                99.7%                     97.9%

Merchandise Revenues                             0.3%                      2.1%

Total Revenues                                 100.0%                    100.0%

Cost of Service Revenues                        49.9%                     82.9%

Cost of Merchandise Sold                         1.3%                      0.0%

Gross Profit                                    48.8%                     17.1%

Selling, General & Administrative 
  Expense                                       20.9%                     60.3%

Operating Income (Loss)                         27.9%                   (43.2)%

Interest Expense, Net                          (7.7)%                    (2.3)%

Other Income (Expense), Net                    (0.8)%                    (0.4)%

Income (Loss) Before Income Taxes               19.4%                   (45.9)%

Net Income (Loss)                               10.1%                   (32.3)%


                                       11
<PAGE>
Service 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 service  revenue  during the first  quarter of fiscal 1998 of
approximately  $817,000 over the comparable  period in fiscal 1997.  Also, space
design  revenue  increased  from $32,000 for the quarter ended April 30, 1996 to
$310,000  for the  quarter  ended  April 30,  1997.  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.

Merchandise Revenues and Cost of Merchandise Sold

         As a result of its  relationships  with the  leading  retailers  in the
United States,  the Company has had opportunities  from time to time to purchase
merchandise,  such as gift and  greeting  cards,  caps and  other  leisure  time
products for resale to its retailer clients. However,  management has decided to
de-emphasize this portion of its business in order to dedicate more resources to
its core services.

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

         Total  Costs  decreased   approximately   $293,000.  Bad  debt  expense
decreased  $151,000  causing the largest  decrease  in Total  Costs.  Travel and
entertainment  expenses  decreased  $23,000  and  $16,000,  respectively.   Life
insurance  expense  decreased  $26,000 due to the surrender of certain  policies
during the fourth  quarter of fiscal  year 1997.  Contract  labor and data entry
costs  decreased  $120,000  as a result of  permanent  hirings.  However,  these
decreases  were  partially  offset by increased  labor costs.  Depreciation  and
amortization   increased  $32,000  due  to  business  acquisitions  and  capital
expenditures that occurred subsequent to the first quarter of fiscal 1997.

Interest Expense

         Interest  Expense  increased  $160,000  due  to  increased   borrowings
necessary to fund the Advance Pay Program.

Income Tax Expense (Benefit)

         The effective  income tax rate for the quarter ended April 30, 1997 was
47.8%.  This rate varied from the statutory  rate due to expenses not deductible
for  income  tax  purposes.  Such  non-deductible  expenses  include  meals  and
entertainment, goodwill amortization, and officers' life insurance premiums.

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
and travel)  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.

                                       12
<PAGE>

         Net cash used by operating  activities  increased from $872,000  during
the quarter  ended April 30, 1996 to  $2,692,000  during the quarter ended April
30, 1997. During the quarter ended April 30, 1997,  $2,432,000 was used to cover
checks drawn against  future  deposits at January 31, 1997 and net cash used for
the Advance Pay Program was approximately $287,000.

         The average  collection  period for the three month  period ended April
30,  1997 was 127 days  compared to 122 days for the three  month  period  ended
April  30,  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.

         The Company is primarily engaged in the business of providing  services
to its retailer clients;  therefore,  its capital  expenditure  requirements are
minimal. At April 30, 1997, the Company had no outstanding  material commitments
for capital expenditures.

         The Company has a credit  agreement  that provides for a revolving loan
of up to $12,500,000 with Wachovia Bank of North Carolina, N.A. 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.

         On February 28, 1997,  the Company  issued 7,721 shares of Common Stock
as a dividend to the Preferred Stockholders as of that date.

         At April 30, 1997, the Company's total long-term debt  obligations were
$76,000.  Of such  amount,  $71,000  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.

         On May 30, 1997, the Company  acquired all of the stock of Mike Kessler
and  Associates,  Inc.  (MKA) for  $2,500,000  of which  $350,000  was paid upon
closing.  The  balance is due January 5, 1998 with  interest at 6.25%.  Wachovia
Bank of North  Carolina,  N.A.  issued a standby letter of credit for $2,231,912
for the benefit of the former owner of MKA covering the period from May 30, 1997
through January 31, 1998. The seller  operated MKA as a business  engaged in the
collection of retail  display  allowances  for retail store chains.  The Company
intends to continue the operation of such business.

         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.

                                       13
<PAGE>

                           PART II - OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K.

(a)      Exhibits.

         See Exhibit Index.

(b) No current reports on Form 8-K have been filed during the three months ended
    April 30, 1997.


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<PAGE>


                                   SIGNATURES

In accordance with the  requirements of the Exchange Act, the Registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                                              THE SOURCE COMPANY


Date:  June 16, 1997                          /s/ W. BRIAN RODGERS
                                              -----------------------------
                                              W. Brian Rodgers
                                              Chief Financial Officer



                                       15
<PAGE>
                                  EXHIBIT INDEX

Exhibit
Number                     Description

27.1                       Financial Data Schedule (Filed in EDGAR version only)



                                       16