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 October 31, 1996

   |_| 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:  7,041,478 (as of November 27,
1996)

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


<PAGE>


                               THE SOURCE COMPANY


           QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION

                              FOR THE QUARTER ENDED
                                October 31, 1996



                         PART I - FINANCIAL INFORMATION


ITEM 1.           Financial Statements                                     Page

                  Unaudited Balance Sheet as of October 31, 1996            3

                  Unaudited Statements of Income for the three
                  months ended October 31, 1996 and 1995 and for the
                  nine months ended October 31, 1996 and 1995               5

                  Unaudited Statements of Cash Flows for the nine
                  months ended October 31, 1996 and 1995                    6

                  Notes to Financial Statements                             7

ITEM 2.           Management's Discussion and Analysis                     14


                           PART II - OTHER INFORMATION

ITEM 5.           Other Information                                        20

ITEM 6.           Exhibits and Reports on Form 8-K                         20

SIGNATURE PAGE                                                             21

EXHIBIT INDEX                                                              22



<PAGE>



                               THE SOURCE COMPANY

                             Unaudited Balance Sheet

                                October 31, 1996
--------------------------------------------------------------------------

Assets
Current
     Cash                                                     $   176,866
     Receivables:
         Trade (net of allowance for doubtful accounts 
           of $196,836)                                         6,668,776
         Income Taxes                                             334,200
         Related Parties                                           31,171
         Employees                                                  8,045
         Interest Receivable                                       14,032
         Notes Receivable - Officers                               58,395
     Prepaid Expenses                                             129,542
     Other current assets                                          62,934
--------------------------------------------------------------------------
Total Current Assets                                            7,483,961
--------------------------------------------------------------------------
Office Equipment and Furniture                                  1,709,834
Less Accumulated Depreciation and Amortization                  1,132,833
--------------------------------------------------------------------------
Net Office Equipment and Furniture                                577,001
--------------------------------------------------------------------------

Other Assets
     Notes Receivable - Officers                                  175,183
     Investment in limited partnership                             52,956
     Goodwill, net of accumulated amortization                     77,579
     Unallocated purchase price of acquisitions                   973,413
     Cash surrender value of life insurance                        71,618
     Other                                                         67,478
--------------------------------------------------------------------------
Total Other Assets                                              1,418,227
--------------------------------------------------------------------------

TOTAL ASSETS                                                  $ 9,479,189
--------------------------------------------------------------------------


<PAGE>



                               THE SOURCE COMPANY

                             Unaudited Balance Sheet

                                October 31, 1996
---------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current
     Note payable - bank (Note 3)                              $ 4,272,715
     Accounts payable                                              299,463
     Due to Retailers (Note 9)                                     113,213
     Accrued liabilities:
         Compensation                                              140,167
         Other                                                     127,138
     Deferred income taxes                                          72,000
     Current maturities of long-term debt (Note 4)                 152,834
---------------------------------------------------------------------------
Total Current Liabilities                                        5,177,530
---------------------------------------------------------------------------
Long-term Debt (Note 4)                                            342,507
     Less current maturities                                       152,834
---------------------------------------------------------------------------
Total Long-term Debt                                               189,673
---------------------------------------------------------------------------
Deferred income taxes                                              210,000
---------------------------------------------------------------------------
Total Liabilities                                                5,577,203
---------------------------------------------------------------------------

Redeemable Common Stock
     211,245 Shares Issued and Outstanding                         753,820
---------------------------------------------------------------------------

Stockholders' Equity
     Preferred stock (Note 7)                                           56
     Common stock                                                   70,314
     Additional paid-in-capital                                  2,986,468
     Retained Earnings                                              91,328
---------------------------------------------------------------------------
Total Stockholders' Equity                                       3,148,166
---------------------------------------------------------------------------

TOTAL LIABILITIES, REDEEMABLE COMMON
      STOCK & STOCKHOLDERS' EQUITY                             $ 9,479,189
---------------------------------------------------------------------------



<PAGE>


<TABLE>

                               THE SOURCE COMPANY

                         Unaudited Statements of Income

----------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                            Three Months Ended October 31,           Nine Months Ended October 31,
                                               1996                1995                 1996                 1995
                                            --------------------------------        ----------------------------------

<S>                                      <C>                 <C>                  <C>                  <C>           
Commission Revenues                      $    2,004,343      $    2,014,017       $     4,750,601      $    5,591,922
Merchandise Revenues                             95,847             473,968               108,088             816,501
----------------------------------------------------------------------------------------------------------------------
                                              2,100,190           2,487,985             4,858,689           6,408,423
----------------------------------------------------------------------------------------------------------------------
Cost of Commission Revenues                   1,222,833           1,051,916             3,573,925           2,608,100
Cost of Merchandise Sold                         81,967             371,538                93,221             547,680
----------------------------------------------------------------------------------------------------------------------
                                              1,304,800           1,423,454             3,667,146           3,155,780 
----------------------------------------------------------------------------------------------------------------------
Gross Profit                                    795,390           1,064,531             1,191,543           3,252,643
Selling, General and Administrative
  Expense                                       649,027             728,324             2,320,529           2,300,802
----------------------------------------------------------------------------------------------------------------------
Operating Income (Loss)                         146,363             336,207           (1,128,986)             951,841
----------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
            Interest income                      10,158               6,356                26,398              14,337
            Interest expense                   (88,276)            (36,788)             (202,454)            (83,970)
            Other                               (3,589)             (2,082)              (14,304)               2,200
----------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense)                   (81,707)            (32,514)             (190,360)            (67,433)
----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes                64,656             303,693           (1,319,346)             884,408
Provision for Income Taxes                      (2,246)           (115,848)               476,217           (460,500)
----------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                        $       62,410      $      187,845       $     (843,129)      $      423,908
----------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary      $         0.01      $         0.03       $        (0.13)      $         0.07
----------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares
   Outstanding - Primary                      7,008,518           6,324,389             6,611,849           6,307,722
----------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Fully
    Diluted                              $         0.01             N/A           $        (0.13)             N/A
----------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares
   Outstanding - Fully Diluted                7,008,518             N/A                 6,611,849             N/A
----------------------------------------------------------------------------------------------------------------------


</TABLE>

<PAGE>

<TABLE>


                               THE SOURCE COMPANY


                       Unaudited Statements of Cash Flows

----------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                        Nine Months Ended October 31,
                                                                                  ------------------------------------------
                                                                                         1996                    1995
<S>                                                                               <C>                    <C>

Operating Activities
     Net income (loss)                                                            $       (843,129)      $          423,908
     Adjustments to reconcile net cash provided by
       operating activities:
          Depreciation and amortization                                                     167,711                 111,159
          Provision for losses on accounts receivable                                        97,636                  81,004
          Impairment of investments in limited partnership                                   15,000                  15,000
          Write-off related party receivable                                                      0                  10,644
          Shareholder Distribution                                                                0                (27,000)
          Deferred income taxes                                                           (195,191)                (44,000)
          Services received in exchange for common stock                                     21,600                       0
          Changes in assets and liabilities:
              (Increase)/Decrease in accounts receivable                                (2,361,834)             (2,112,973)
              (Increase)/Decrease in other assets                                         (519,834)               (231,707)
              Increase/(Decrease) in A/P and accrued expenses                             (545,734)                 916,182
              Increase/(Decrease) in amounts due customers                                   29,758                       0
----------------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities                                                       (4,134,017)               (857,783)
----------------------------------------------------------------------------------------------------------------------------

Investment Activities
     Acquisition of Magazine Marketing, Inc.                                              (275,000)                       0
     Repayments on Notes Receivable                                                          29,715                   3,582
     Repayments from related party                                                           22,000                 270,240
     Advances to employees                                                                  (1,005)                 (3,000)
     Capital expenditures                                                                 (176,780)               (171,570)
----------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Investing Activities                                           (401,070)                  99,252
----------------------------------------------------------------------------------------------------------------------------

Financing Activities
     Issuance of Common Stock                                                                30,000                 268,500
     Issuance of preferred convertible stock                                              1,922,075                       0
     Borrowings under long-term debt agreements                                             281,317                       0
     Principal payments on long-term debt                                                 (104,261)                (97,652)
     Borrowings under short-term debt agreements                                          3,206,000                 417,474
     Repayments under short-term debt agreements                                          (647,000)                       0
     Preferred stock dividends                                                                  (6)                       0
----------------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities                                                     4,688,125                 588,322
----------------------------------------------------------------------------------------------------------------------------

Increase/(Decrease) in Cash                                                                 153,038               (170,209)

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

Cash, end of period                                                               $         176,866      $           82,346
----------------------------------------------------------------------------------------------------------------------------

</TABLE>

<PAGE>




                               THE SOURCE COMPANY


                    Notes to Financial Statements (Unaudited)




1.  Related Party                 
    Transactions            The Company purchases data processing  services from
                            an  employment  service  company  owned  by  certain
                            officers of the  Company.  There were  $276,049  and
                            $226,817  of such  purchases  made  during  the nine
                            months ended October 31, 1996 and 1995 respectively.

                            At January 31,  1995,  the  Company was  indebted to
                            director and stockholder  Timothy A. Braswell in the
                            amount of $56,192.  Such debt bore interest at 10.0%
                            and  matured  on  January  1,  1996.  The  Company's
                            indebtedness  under the promissory  note was secured
                            by an interest  in the  accounts  receivable  of the
                            Company.  This obligation was fully satisfied as the
                            final payment was made on December 29, 1995.

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

                            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
                            $138,780  and  $110,250  for the nine  months  ended
                            October  31,  1996 and 1995,  respectively.  Amounts
                            paid for the  airplane  were $0 and  $57,926 for the
                            nine  months   ended   October  31,  1996  and  1995
                            respectively.

                            Three  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                   OFFICERS
    Receivable
                            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.

<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.  Notes Payable           The  Company had a  revolving  loan credit  facility
                            providing  for  aggregate  borrowings  of $5,000,000
                            that  was  scheduled  to  expire  on July  1,  1997.
                            Borrowings  under the  loans  bore  interest  at the
                            bank's prime plus 1%  (effectively  9.25% at October
                            31,  1996)  and were  secured  by an  assignment  of
                            interest  in  the  limited  partnership  investment,
                            personal  guarantees of certain of the  stockholders
                            of the Company,  and a security agreement  including
                            equipment,  fixtures,  personal  property,  accounts
                            receivable,   contract  rights,  notes  and  general
                            intangibles.

                            Borrowings  under the revolving  credit  facility at
                            October 31, 1996 were $4,272,715.

                            The revolving  credit facility  required the Company
                            to maintain  specified levels of working capital and
                            net  worth,  restricted  capital  additions  and the
                            payment  of   dividends,   and  limited   additional
                            indebtedness.  At October 31, 1996,  the Company was
                            not   in   compliance    with   certain   of   these
                            requirements.  However,  as discussed at Note 10, on
                            December 6, 1996 the outstanding balance,  including
                            interest,  was paid by the Company with the proceeds
                            from the initial funding under a new credit facility
                            with another bank. The credit  facility which was in
                            place  at  October  31,   1996  was   simultaneously
                            terminated.


<PAGE>




4.  Long-term               Long-term debt consists of:
     Debt

                            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      $    55,428

                            Term   note    payable   in   monthly
                            installments  of $7,639 plus interest
                            at the bank's corporate base rate plus
                            1%, due June 1, 1999                         244,440

                            Obligations under capital lease               42,639
                            ----------------------------------------------------
                            Total Long Term Debt                         342,507

                            Less Current Maturities                      152,834
                            ----------------------------------------------------
                            
                            Long Term Debt                        $      189,673
                            ----------------------------------------------------




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

                            Nine Months Ended October 31,     1996        1995
                            ----------------------------------------------------

                            Interest                        $200,000    $ 84,000

                            Income Taxes                    $264,000    $460,500
                            ----------------------------------------------------



6.  Business                ACQUISITION OF THE COMPANY BY PERIODICO, INC.
    Combination
                            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. In addition,  the  pre-transaction
                            date financial statements of the combined entity are
                            those of the Company.

<PAGE>

                            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
                            approximately  $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.

                            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 Source 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 first such payment was made on July
                            29, 1996.

                            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  exceeds  the fair  value of the  assets
                            acquired in the amount of $762,368.

                            The following schedule reflects pro forma statements
                            of income:


                                           Six Months Ended July 31,
                                          1996                       1995
                                  ---------------------------------------------

       Revenue                       $     2,995,433           $     4,371,347
       Net income (loss)             $     (883,911)           $       278,188
       Net income (loss) per share   $        (0.14)           $        (0.04)



                            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

<PAGE>

                            Company,  in exchange  for 111,245  shares of common
                            stock of The Source  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  exceeds  the fair  value of the  assets
                            acquired in the amount of $233,169.


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

                            Each  share  of  the  1996  Series  7%   Convertible
                            Preferred  Stock  entitles  its holder to receive an
                            annual  dividend,  when and as declared by the Board
                            of  Directors,  of $7 per share payable in shares of
                            the  Company's  common  stock;  to  convert  it into
                            shares of common  stock  subject  to the  conversion
                            rights described in the  Certificates  Designations,
                            Preferences  and  Relative  Rights of 1996 Series 7%
                            Convertible  Preferred Stock (the  Certificate);  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,  may be redeemed at
                            the  option  of the  Company  at a price of $100 per
                            share or at the  option of the  holder 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.

                            During March 1996,  the Company issued 20,000 shares
                            of 1996 Series 7%  Convertible  Preferred  Stock for
                            $100 per share. Brokers' fees totaling $120,000 were
                            incurred in connection with the stock  issuance's of
                            which  $60,000 was paid in cash and $60,000 was paid
                            by issuance of an additional 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. 

                            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.
<PAGE>

                            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.


8.  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  and processing of claims for
                             such  payments.   The  claims   otherwise  due  the
                             retailer become due the Company.  Included in trade
                             receivables  at October 31, 1996 is $2,124,204  due
                             the Company  under the advance pay program  (net of
                             $3,455,125  due the program  participants).  Income
                             from  the  program  was  $731,482  during  the nine
                             months ended  October 31, 1996 and was not material
                             in 1995.


9.  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  $113,213 at October 31, 1996
                            under such arrangements.


10.  Subsequent Events      BANK FINANCING

                             On  December  6,  1996  the  Company  received  its
                             initial funding under a new credit  agreement dated
                             November   14,   1996.   The  initial   funding  of
                             $4,550,000  was  used to pay the  then  outstanding
                             debt  under  the old  credit  agreement  which  was
                             simultaneously terminated.
<PAGE>

                            The new  credit  agreement  provides  for  revolving
                            loans of up to $8,700,000. 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.  Borrowings  are  secured by  personal
                            guarantees  of certain  stockholders  of the Company
                            and by a security agreement  including  receivables,
                            inventory,  equipment, goods and fixtures, software,
                            contract rights, notes, and general intangibles.

                            The  credit   agreement   requires  the  Company  to
                            maintain certain  financial ratios and to maintain a
                            specified minimum tangible net worth. As of the date
                            of this filing,  the Company was in compliance  with
                            these requirements.


11.  Unaudited              Recently,   the  Company  has   discovered   certain
     Financial              deviations   from  its   accounting   practices  and
     Statements             policies  which  affected  the  Company's  financial
                            reporting  at July 31, 1996 and the  interim  fiscal
                            periods then ended.  The Company  subsequently  made
                            correcting  entries  and has  implemented  stringent
                            initiatives  designed to prevent a  reoccurrance  of
                            such   deviations.   After  giving   effect  to  the
                            correcting  entries,  the Company's  total revenues,
                            operating loss, net loss and loss per  share-primary
                            for  the  six  months   ended  July  31,  1996  were
                            $2,758,499;   $1,275,349;   $905,539;   and   $0.14,
                            respectively. Shortly, the Company will file amended
                            Forms  10-QSB  for the  affected  periods  with  the
                            Securities and Exchange Commission.

                            In  the  opinion  of   management,   the   unaudited
                            financial   information   as  of  October  31,  1996
                            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 nine
                            months  ended  October 31, 1996 are not  necessarily
                            indicative  of the  results to be  expected  for the
                            entire year.


<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 for
magazine  publishers  to  magazine  and  periodical  retailers.  The Company has
developed a contractual relationship with approximately 50,000 mass merchandise,
grocery 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.  To further
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 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 has  continued to
expand its operations in the upper midwest through the  acquisitions of Magazine
Marketing,  Inc. and Readers Choice,  Inc., a wholly owned  subsidiary of United
Magazine Company.

         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, the  transaction  date.
Assets have been recorded at fair value and the purchase price in excess of fair
value has been recorded as unallocated purchase price of acquisitions.

         The Company  issued  111,245 shares of its common stock in exchange for
all issued and outstanding  stock of Readers Choice,  Inc. This  transaction has
been accounted for as a purchase and, accordingly, the assets have been recorded
at fair  value  and the  results  of  operations  reflect  combined  results  of
operations  from June 30, 1996,  the  transaction  date.  The purchase  price in
excess of the fair value of the assets has been recorded as unallocated purchase
price of acquisitions.

         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
expanded  Advance  Pay  Program,  the Company does  not guaranty to its retailer
clients  any  payments  due  to  the  client  from  magazine   publishers,   and

<PAGE>

accordingly,  does not assume any credit  risk  associated  with such  incentive
payments.

         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.

          Recently,  the  Company has  discovered  certain  deviations  from its
accounting  practices  and  policies  which  affected  the  Company's  financial
reporting  at July 31,  1996 and the interim  fiscal  periods  then  ended.  The
Company  subsequently  made  correcting  entries and has  implemented  stringent
initiatives designed to prevent a reoccurrance of such deviations.  After giving
effect to the correcting entries, the Company's total revenues,  operating loss,
net loss, and loss per share-primary for the six months ended July 31, 1996 were
$2,758,499; $1,275,349; $905,539; and $0.14, respectively.

         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:

<TABLE>
<CAPTION>

                                                            Three Months                      Nine Months
                                                         Ended October  31,               Ended October  31,
                                                         ------------------               ------------------
                                                       1996              1995            1996              1995
                                                       ----              ----            ----              ----

<S>                                                   <C>               <C>             <C>                <C>  
Commission Revenues                                   95.4%             80.9%           97.8%              87.3%

Merchandise Revenues                                   4.6%             19.1%            2.2%              12.7%

Total Revenue                                        100.0%            100.0%          100.0%             100.0%

Cost of Commission Revenues                           58.2%             42.3%           73.6%              40.7%

Cost of Merchandise Sold                               3.9%             14.9%            1.9%               8.5%

Gross Profit                                          37.9%             42.8%           24.5%              50.8%

Selling, General &
  Administrative Expenses                             30.9%             29.3%           47.8%              35.9%

Operating Income                                       7.0%             13.5%          (23.3)%             14.9%

Interest Expense, Net                                 (3.7)%            (1.2)%          (3.6)%             (1.1)%

Other Income/(Expense), Net                           (0.2)%            (0.1)%          (0.3)%             (0.0)%

 Earnings Before Income
    Taxes                                              3.1%             12.2%          (27.2)%             13.8%

Net Income                                             3.0%              7.6%          (17.4)%              6.6%


</TABLE>

<PAGE>



Commission Revenues

          Although Commission Revenues for the third fiscal quarters of 1996 and
1997 were  comparable,  Commission  Revenues for the nine month period decreased
$841,000 from the comparable  period of Fiscal 1996  primarily  resulting from a
decrease in space  design  revenues  of  $571,000.  Space  design  revenues  are
recognized  as  front  end  display  manufacturers  ship  the  displays  to  the
retailers,  the  timing of which is not within the  Company's  control.  Another
significant  factor  contributing  to the  decrease in  Commission  Revenues was
magazine  wholesaler  consolidation.  During calendar year 1996 many wholesalers
were purchased by or merged with  competing  wholesalers.  These  consolidations
made it difficult, if not impossible,  at times to gather sales data. Currently,
this unusual  activity in the wholesaler  industry has slowed  considerably  and
accurate sales data is being collected in a timely manner.

          The decreases  discussed  above were  mitigated by increased  retailer
participation in the Advance Pay Program.  Commission Revenues from this program
increased from $200,000 for the nine month period ended October 1995 to $700,000
for the same period in the current  year.  Advance pay revenues  increased  from
$70,000 for the prior year third  quarter to $250,000 for the current year third
quarter.


Merchandise Revenues

          Merchandise  Revenues decreased by $378,121 and $708,413 for the three
months and nine months  ended  October 31,  1996,  respectively,  over the prior
period.  Such  decreases  are  expected to continue as a result of  management's
decision to de-emphasize this portion of its business.


Cost of Commission Revenues

          The Cost of Commission Revenues increased approximately $1,000,000 and
$170,000 for the nine month period compared to the same period in the prior year
and the three  month  period  compared  to the same  period  in the prior  year,
respectively.  These increases were primarily the result of the Company's effort
to more precisely identify and reclassify categories of costs as direct costs of
commission  revenues.  Costs of producing commission revenues are inelastic and,
therefore, are not directly proportional to revenue.


Selling, General and Administrative Expense

          As discussed above, the Company has reclassified certain categories of
costs as direct costs of commission  revenues.  Thus,  certain costs included in
selling,  general and  administrative  expense  during the prior periods are now
classified as direct costs of commission revenues.

          Selling,  General and  Administrative Expense plus Costs of Commission
Revenue (or "total costs") for the nine month period increased $986,000 over the
comparable  period  in the prior  year.  Wages  accounted  for  $650,000  of the
increase.   New  hires,   including  personnel  formerly  employed  by  Magazine
Marketing,  Inc., comprised  approximately $370,000 of this increase,  while the
balance of the increase was the result of raises and  bonuses.  Rent,  telephone
and utilities have increased $130,000 as a direct result of expanding the square
footage rented in North Carolina and adding regional offices in Canada,  Arizona
and  California.  Computer  hardware and  software  acquisitions  combined  with
equipment and furniture  acquisitions related to the additional regional offices

<PAGE>

contributed to a $30,000  increase in  depreciation  expense.  Lastly,  bad debt
expense  increased  approximately  $140,000 over the comparable prior nine month
period.

         The total costs for the third quarter  increased $90,000 over the third
quarter of the prior year. Wages, rent, telephone,  utilities,  and depreciation
combined  to  account  for an  increase  of  $213,000  over the prior year third
quarter for the reasons noted above.  Also,  marketing expense increased $29,000
primarily due to costs related to an advertising  agreement with Financial Power
Network to  increase  awareness  of the  Company.  Although  professional  fees,
including  accounting,  legal and data entry fees,  were comparable for the nine
month  periods,  these  expenses  decreased  $140,000 in the current  year third
quarter as compared to the prior year third quarter.


Interest Expense

         Interest  expense  for the  third  quarter  and the nine  month  period
increased $51,000 and $118,000, respectively, over the comparable periods in the
prior year.  This  increase is due primarily to the  increased  borrowings  from
approximately  $1,100,000  at October 31,  1995 to  approximately  $4,300,000 at
October 31,  1996.


Provision for Income Taxes

         The Provision for Income Taxes for all periods  presented  differs from
the statutory rate due to non-deductible meals and entertainment, officers' life
insurance, country club dues, and auto lease expense.


Liquidity and Capital Resources

         The Company's  primary cash  requirements are for funding the Company's
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 cash flow
from  operations,  short-term  borrowings  under  available  lines of credit and
through the issuance of equity securities.

          Net cash used by operating activities was approximately $4,134,000 for
the nine months ended  October 31, 1996 compared to  approximately  $858,000 for
the same period in 1995.  Cash advanced under the Advance Pay Program during the
period was approximately  $4,162,000.  As a result of increased participation in
the Advance Pay Program,  the  Company's  trade  accounts  receivable  increased
$2,500,000 since January 31, 1996. Another factor  contributing to the increased
accounts  receivable  balance was a delay in filing  claims during the first two
quarters caused by wholesaler  consolidation  and by internal  consolidation  of
operations  of the once  separate  entities  that now comprise the Company.  The
average  collection  period for the nine months ended October 31, 1996 was 304.6
days (calculated as follows: 365 days/(Revenues/Average  A/R)) compared to 143.9
days for the nine month period  ended  October 31,  1995.  However,  the average
daily cash  collections for the period August 1, 1996 through  December 17, 1996
was $56,790.  Based on this average daily cash  collection  amount it would take
182 days to collect the October 31, 1996 accounts  receivable.  Management  does
not  consider   this   collection   period   acceptable.   However,   wholesaler
consolidation  and  internal  consolidation  of  operations  contributed  to the
increase  in  the  average  collection  period.  Management  plans  to  increase
resources  in the  collection  area  with  the  goal of  reducing  this  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  October  31,  1996,  the  Company  had  no  outstanding   material
commitments for capital expenditures.


<PAGE>

          In response to the increased cash  requirements  necessary to fund the
Advance Pay Program,  the Company  replaced its credit  facility with  Boatmen's
with 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 the former
credit facility.

          The  new  credit  agreement  provides  for  revolving  loans  of up to
$8,700,000. The borrowing base calculation under this credit facility allows for
a higher  percentage  of the accounts  receivable  to be eligible than under the
Boatmen's agreement.  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 agreement 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 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 proceeds to the Company
of $1,802,075  after  deducting  commissions and expenses  totaling  $137,925 of
which $77,925 has been paid in cash and $60,000 was paid through the issuance of
an additional 600 shares of 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.

         From time to time,  the Company has made cash advances to the Company's
Chief Executive  Officer totaling  $221,485 at October 31, 1996. The Company has
made similar advances to the Company's Executive Vice President totaling $12,093
at October 31, 1996.  Such  advances are  evidenced by  promissory  notes,  bear
interest  at the rate of 7.34%,  are  payable  in four  remaining  equal  annual
installments.  The Company also made  advances to FMG,  Inc.,  a North  Carolina
corporation in which Company officers hold a controlling interest. Such advances
bore  interest at an annual  rate equal to prime plus  one-half  percent,  had a
balance at October  31,  1996 of  $31,571,  and was paid in full on  November 5,
1996. Each of the related parties  including  those described  above,  which are
indebted to the Company are current  with  respect to all  payments of principal
and  interest,  and the  Company  is  unaware  of any  circumstances  which  are
reasonably likely to negatively impact the collectibility of such indebtedness.

          At October 31, 1996, the Company's  total  long-term debt  obligations
were $342,507  which  included a $244,440 note payable which was paid in full on
December 6, 1996 in  connection  with the initial  funding of the  Company's new
credit facility.  The remaining  long-term debt totals $98,607, of which $61,154
is due in the next  twelve  months.  The  Company  anticipates  that  the  funds
necessary to satisfy these obligations will be derived primarily from cash flows
from operations.

<PAGE>



          During the nine months ended October 31, 1996, the Company experienced
an operating  loss of  $1,128,986.  The Company's  expenses were at a level that
anticipated  revenues from space design commissions and merchandise revenues far
in excess of revenues  realized for the period.  The Company  believes  that its
expense reduction  initiative began to impact results of operations in the third
quarter. Further reductions in wages, rents, travel and entertainment,  and auto
leases are expected to impact future quarters. Additionally, commission revenues
from the Advance Pay Program are expected to exceed third quarter  levels due to
the recent conversion of two large retailers to the program.


<PAGE>


                                     PART II
                                OTHER INFORMATION


Item 5.    Other Information

             Recently,  the Company has discovered  certain  deviations from its
             accounting  practices  and policies  which  affected the  Company's
             financial reporting at July 31, 1996 and the interim fiscal periods
             then ended. The Company  subsequently  made correcting  entries and
             has  implemented   stringent  initiatives  designed  to  prevent  a
             reoccurrance  of  such  deviations.  After  giving  effect  to  the
             correcting entries,  the Company's total revenues,  operating loss,
             net loss and loss per  share-primary  for the six months ended July
             31,  1996  were  $2,758,499;   $1,275,349;   $905,539;  and  $0.14,
             respectively.  Shortly,  the Company will file amended Forms 10-QSB
             for  the  affected   periods  with  the   Securities  and  Exchange
             Commission.
  
             In  October,  1996,  W. Brian  Rodgers  joined the Company as Chief
             Financial Officer  replacing Lance C. McCord.  Prior to joining the
             Company,  Mr.  Rodgers  practiced  for  more  than  six  years as a
             certified public accountant with BDO Seidman, LLP.
 
Item 6.    Exhibits and Reports on Form 8-K

           (a)       See Exhibit Index.

           (b)       A report on Form 8-K/A  dated June 28, 1996  reporting  the
                     acquisition of Magazine Marketing, Inc. was filed September
                     11, 1996.

                     FINANCIAL STATEMENTS FILED IN CONNECTION WITH FOREGOING 
                     REPORT

                     Balance  sheet of Magazine  Marketing,  Inc. as of December
                     31, 1995 and the related  statements of income and retained
                     earnings and cash flows for the year then ended.

                     Balance  sheet of Magazine  Marketing,  Inc. as of June 28,
                     1996 and the  related  statements  of income and cash flows
                     for the period January 1, 1996 through June 28, 1996.



<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  December 20, 1996                       /s/ W. Brian Rodgers
                                              -----------------------
                                              W. Brian Rodgers
                                              Chief Financial Officer




<PAGE>


                                  EXHIBIT INDEX



Exhibit No.                        Description                      Page
-----------                        -----------                      ----

27                             Financial Data Schedule               23