SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K


[X]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 or  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended: July 31, 2001

[  ]     TRANSITION REPORT  PURSUANT TO SECTION 13 or 15(d)  OF  THE  SECURITIES
         EXCHANGE ACT OF 1934 For the transition period from:

                         Commission File No. 2-96510-NY

                              DG LIQUIDATION, INC.
                (Name of registrant as specified in its charter)

          New Jersey                                      11-2269958
(State of other jurisdiction of                (IRS Employer Identification No.)
Incorporation or organization)




c/o Med-Care, Building #3, 3535 Route 66, Neptune, NJ              07753
       (Address of principal executive offices)                 (Zip Code)


Issuer's telephone number, including area code:                (732) 918-7555


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

                                                     Name of exchange on
  Title of each class                                  which registered
  -------------------                                  ----------------

         None                                                None

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

                               Title of each class

                     Common Stock, par value $1.00 per share



                                       1
<PAGE>


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 (the
"Act")  during the  preceding  12 months (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes__ No X

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). [ ]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common  equity,  as of
the last business day of the registrant's most recently  completed second fiscal
quarter.

      There  is no  trading  market  and  therefore  no  market  value  for  the
registrant's voting common equity securities.

Indicate the number of shares  outstanding of each of the registrant's  class of
common stock, as of the latest practicable date:

      As  of  July  14,  2004  there  were  9,274,863  shares  of  common  stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.


                                       2
<PAGE>


                                     PART I

ITEM 1. BUSINESS.

General

         DG  Liquidation,  Inc.  (formerly  known as "Drug  Guild  Distributors,
Inc.",  and  sometimes  referred to as the "Company" or the  "Registrant"),  was
previously  engaged in  wholesale  distribution  of a wide  variety of  products
almost  exclusively to drugstores and health and beauty product stores primarily
in the State of New Jersey and the Greater New York City metropolitan area.

         Since the sale of assets to Neuman  Health  Services,  Inc.  and Neuman
Distributors,  Inc.  in July  1997,  the  Company  has  been  operating  under a
liquidation plan and its financial  reporting is now made in accordance with the
liquidation  basis of  accounting.  Therefore,  all  discussions  in this annual
report relate to the Company in liquidation.

Asset Sale

         On July 3, 1997,  the Company sold  substantially  all of its operating
assets,  subject to substantially  all of the Company's  liabilities,  to Neuman
Health Services,  Inc. and Neuman Distributors,  Inc.  (collectively  "Neuman"),
wholesale distributors of pharmaceuticals and health and beauty products. A Plan
of Complete  Liquidation (the "Liquidation Plan") was approved by the holders of
a majority of the Company's outstanding shares of common stock on June 27, 1997.
The Liquidation Plan provided for: (1) sale of the Company's  operating  assets,
(2) payment of or provision for all of the Company's  remaining  liabilities and
obligations,  (3) payment of $100 per share to holders of preferred  stock prior
to any amount distributed to the common  stockholders and (4) the dissolution of
the Company.

         The purchase  price was composed of $4,000,000 in cash paid on closing,
an unsecured $1,000,000 non-interest bearing promissory note due in August 2001,
and an  adjustable  value  promissory  note recorded at  $10,646,000  payable in
quarterly installments over four years and collateralized by a standby letter of
credit.  Neuman also agreed to assume and to pay,  perform or discharge  certain
specified liabilities of the Company,  including leases, trade accounts payable,
accrued  expenses as  reflected on the closing  balance  sheet,  the  collective
bargaining  agreement  with  the  union  local  representing  former  employees,
expenses  incurred in the ordinary  course of business,  bank debt and long term
notes. However, Neuman did not assume severance or termination payments,  worker
compensation  claims,   liability  for  any  federal,   state  or  local  taxes,
environmental claims,  undisclosed or contingent  liabilities,  penalties,  Drug
Enforcement  Administration  fines or liabilities  with respect to the preferred
stock of the Company.

         The  adjustable  value note provided for interest at a rate  determined
quarterly  equal to the higher of 1% plus the 180-day London  Interbank  Offered
Rate or the rate  specified for U.S.  Treasury  Notes with maturity equal to the
remaining term of the note,  but no lower than the Federal rate as  disseminated
by the Internal  Revenue  Service from time to time.  Payments on the adjustable
value  promissory were made by Neuman until May 2000,  when Neuman  defaulted in
making the required payments.  The Company received  $7,084,000 from the standby
letter of credit as result of Neuman's default.


                                       3
<PAGE>

         In connection with the sale, the Company received an option in favor of
the Company's stockholders to purchase,  under certain conditions,  an aggregate
of 10% of Neuman shares to be made  available in a public  offering in the event
Neuman  filed  a  registration   statement  with  the  Securities  and  Exchange
Commission  prior to July 3,  2001,  at a price  equal  to 85% of the per  share
public offering price. Since no registration  statement was been filed by Neuman
prior to July 3, 2001, the option lapsed.

         The asset  purchase  agreement  provided  that the  purchase  price was
subject to adjustment based upon a final valuation of the assets and liabilities
sold.  The terms of sale also provided that Neuman had one year from the date of
purchase to return to the Company any accounts receivable balances which had not
then  been  collected  and  reduce  the  amount of the  adjustable  note by such
uncollected balances.

         On or about July 1, 1998,  Neuman  proposed  to reassign to the Company
uncollected   accounts   receivable  of  four  customers   which  accounted  for
approximately  $1,486,000.  The Company rejected  Neuman's  proposal and claimed
that,  pursuant  to the  provisions  of the  asset  purchase  agreement,  it was
entitled  to  receive  the full  amount of the  pre-acquisition  balance  due of
$1,486,000 out of a pending  payment by a major  pharmaceutical  retail chain to
Neuman of approximately  $2,500,000.  This  disagreement  between Neuman and the
Company was ended by Neuman's bankruptcy in 2000 (see below) and the uncollected
accounts receivable of $1,486,000 were not reassigned to the Company.

         On April 6, 2000,  Neuman  filed a petition  for  reorganization  under
Chapter 11 of the Bankruptcy  Code. As a result,  the Company wrote off the then
$880,000 carrying value of Neuman's unsecured  promissory note as uncollectible.
Neuman's bankruptcy  petition  constituted an "event of default" under the terms
of the secured  adjustable value promissory note. By reason of Neuman's default,
and on May 22, 2000,  the Company made a drawing on the standby letter of credit
which collateralized the note. On May 25, 2000, the Company received $7,084,000,
of which $2,794,000  represented the carrying value of the adjustable rate note,
$102,000  represented  accrued interest thereon through such date and $4,188,000
represented additional proceeds.

         Within  the  ninety-day  period  prior  to the  filing  of  the  Neuman
bankruptcy  petition,  the Company had received  $885,000 of quarterly  payments
from Neuman in  connection  with the  adjustable  value note.  Subsequent to the
filing of the  Neuman  bankruptcy  petition,  the  Chapter  11  Trustee  filed a
complaint  against the Company in the  Bankruptcy  Court  seeking to recover the
$885,000 as a preference payment. The Company filed an answer including defenses
against the Trustee's  claims and filed a motion for summary  judgment.  October
20, 2000,  the Company also filed a general  unsecured  claim against the Neuman
bankruptcy  estate which reflected  $7,657,000 due from Neuman on the adjustable
value note at March 31, 2000,  including $576,000 of additional accrued interest
through  such date  based on the  increased  amount  of the  note,  prior to the
receipt  of the  $7,084,000  letter of  credit  proceeds,  leaving a balance  of
$573,000 due the Company. In addition,  the Company filed a claim for $1,000,000
in connection with the unsecured note.


                                       4
<PAGE>

         On September 24, 2002, a settlement agreement was entered into pursuant
to which the Company and the Trustee  released each other from all  pre-petition
or  post-petition  claims,  except  that the  Company  was  entitled  to receive
distribution  from the bankruptcy  estate with respect to its unsecured  claims,
referred to above,  which were allowed in full.  The  settlement  agreement  was
approved by the Bankruptcy Court on October 9, 2002.

         As of the date of this report, no additional distribution has been made
to the Company from the Neuman  bankruptcy estate and there is no assurance that
any additional distributions will be made in the future.

Employees

         The Company has oral consulting  agreements with its President,  Harold
Blumenkrantz,  and a director,  Michael Katz, and a written consulting agreement
with  Jay  Reba,  its  former  Vice   President-Finance,   for  the  purpose  of
implementing  the Liquidation  Plan. The terms of the consulting  agreement with
Mr. Blumenkrantz provided for his part-time employment on a month-to-month basis
for a  consulting  fee of  $5,000  per  month,  plus  reasonable  and  customary
expenses.  Mr.  Blumenkrantz ceased collecting his consulting fee after July 31,
2001.  Michael Katz received a consulting fee of $1,000 per month for assistance
in liquidation  activities  until the end of April 2002. The written  consulting
agreement  with Mr. Reba is dated June 4, 1998,  and provided for his consulting
services  for  a  minimum  of  three  months,  and  on  a  month-to-month  basis
thereafter,  for a  consulting  fee of $11,400 per month  (beginning  in January
1999),  plus  reasonable  and  customary  expenses  and a  severance  payment of
$34,200.  Mr. Reba's  consulting  agreement  terminated  August 31, 1999. He was
thereafter  engaged by the Company on a  month-to-month  basis to render limited
consulting  services for a fee of $2,750 per month from  September 1, 1999 until
April 30, 2002.  His current  engagement by the Company  provides for payment to
him of $125  per  hour,  plus  expense  reimbursement,  for  work he is asked to
perform.

Competition.

         Competition is no longer a material factor for the Company, since it is
engaged only in implementing its Liquidation Plan and is not actively engaged in
business as a going concern.

ITEM 2.  PROPERTIES.

         The Company  occupies office space, on a  month-to-month  basis, in the
offices of its President,  Harold  Blumenkrantz,  in Neptune,  New Jersey and in
Boca Raton, Florida, at an annual cost, including telephone service, photocopies
and postage, of $1,200.


                                       5
<PAGE>


ITEM 3.  LEGAL PROCEEDINGS.

DG Liquidation, Inc. v. Anchin, Block & Anchin, LLP.

         On March 3, 1998,  the  Company  filed a  complaint  in New York County
Supreme  Court against its former  auditors,  Anchin,  Block & Anchin,  LLP (the
"Anchin Firm"), seeking to recover damages for professional malpractice,  breach
of fiduciary  duty and breach of contract  exceeding  $16,000,000  in connection
with inventory  defalcations during the period of October 1992 through May 1996.
The Anchin Firm had previously  acted in the  capacities of financial  advisors,
auditors and  accountants for the Company for a continuous  period  beginning in
1977 and ending on July 2, 1996.

         On April 30, 1998, the Anchin Firm filed an answer denying the material
allegations,  and  commenced  a  third-party  lawsuit  against  members  of  the
Company's  Executive Committee during the period of January 1990 through May 31,
1996, and the Company's  corporate  attorneys,  alleging that if the Company was
successful  in its claims  against  the  Anchin  Firm,  then  these  third-party
defendants  should be held  liable for the losses to the Company by reason of an
alleged failure to reasonably  perform their  respective  fiduciary  duties.  On
October 27, 1998, the court dismissed all of the third-party  claims against the
Company's  corporate  attorneys and the Anchin Firm withdrew its claims  against
the former members of the Executive Committee.

         The Company's  claims  against the Anchin Firm were tried before a jury
in Supreme Court,  New York County in October and November 2002,  which resulted
in a verdict  in favor of the  Company.  Judgment  in favor of the  Company  and
against  the  Anchin  Firm was  entered  in Supreme  Court,  New York  County on
February 4, 2003. The judgment was paid in full on May 16, 2003 in the total sum
of $297,000.

Claim of Daniel Kantor

         Mr.  Kantor is a former  director  of the  Company who owns or controls
approximately 134,000 shares of the Company's common stock. In October 1996, the
Company received a letter from an attorney for Mr. Kantor alleging mismanagement
of the  Company  and  requesting  additional  information.  In  June  1997,  the
attorney, acting on behalf of Mr. Kantor and other stockholders who appear to be
related to Mr. Kantor,  asked for copies of the Company's  financial  statements
over the past three years,  which the Company  supplied.  As of the date of this
report, no other action has taken place with regard to this matter.

Michael's Pharmacy and Michael Scicutella v. Drug Guild  Distributors,  Inc., et
al.

         The  plaintiff,  a customer of Drug Guild,  initiated  this  lawsuit in
February  1997 in the  United  States  District  Court for the  District  of New
Jersey,  alleging that the Company has conspired with co-defendant  wholesalers,
McKesson Corp.,  Cardinal  Health Company,  W. Daly, Inc. and Remo Drug Corp. to
deny credit to the  plaintiff  that was  allegedly  due to it,  amounting  to an
alleged "group boycott" in violation of the federal  Sherman  Anti-trust Act and
New Jersey's Anti-trust Act, as well as an alleged breach of an implied covenant
of good faith and fair dealing,  and tortious  interference with the plaintiff's
contracts.


                                       6
<PAGE>

         The plaintiff asked for  preliminary and permanent  injunctions as well
as a money  judgment  against each  defendant for what were described as actual,
compensatory,  punitive and trebled damages, attorney's fees and costs, and such
other relief as the court found  appropriate.  The court denied the  plaintiff's
requests for a preliminary  injunction.  The Company filed an answer denying all
of the material allegations of the complaint,  setting forth various affirmative
defenses,  alleging a  counterclaim  against  the  plaintiff  for  approximately
$48,000 owed to the Company, and asked for a dismissal of the complaint.

         The  defendants,  including  the  Company,  made  motions  for  summary
judgment seeking  dismissal of all of the plaintiff's  claims.  The Company also
asked for summary judgment on its  counterclaim.  On August 12, 2002, all of the
claims were formally dismissed by the court.

         The Company has been a party to several other  pending  legal  actions,
principally motor vehicle accidents  involving vehicles owned or operated by the
Company, and other claims,  including products liability,  for which the Company
is covered by insurance.  The results of these various  lawsuits and claims will
not materially affect the financial position of the Company.

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

         There were no matters  submitted  to a vote of the  Company's  security
holders during the fiscal year ended July 31, 2001 through the  solicitation  of
proxies or otherwise.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         There is no existing public market for any of the Company's securities.

         As of July 14, 2004, there were  approximately 366 holders of record of
the Company's  common stock,  and all of the Company's  preferred stock has been
redeemed.

         The Company has never paid a cash  dividend  and does not expect to pay
cash  dividends  in the  future.  As of the  date  of this  report,  liquidation
payments  have been  made to  preferred  stockholders  ($2,262,000)  and  common
stockholders  ($15,785,000,  with a reserve of $39,000 for certain  stockholders
who could not be located),  and additional  liquidation payments will be made to
the  Company's  common  shareholders  in accordance  with the  provisions of the
Liquidation Plan.

ITEM 6.  SELECTED FINANCIAL DATA

         This table has been omitted because the Company's  financial  reporting
is now being made on the liquidation basis of accounting. See Item 8 - Financial
Statements and Supplementary Data.


                                       7
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         Since  July  1,  1997,  the  Company  has  been  operating   under  the
Liquidation  Plan and its financial  reporting is being made in accordance  with
the liquidation basis of accounting. Therefore, the following discussion relates
to the financial  statements  presented on a liquidation basis, since statements
previously  presented  on a  going  concern  basis  are no  longer  material  to
stockholder value.

         Statement of Net Assets in Liquidation

         Pursuant to the Liquidation Plan, the Company sold substantially all of
its  operating  assets on July 3,  1997,  subject  to  substantially  all of the
Company's liabilities,  for an aggregate price of $4,000,000 in cash paid at the
closing,  an unsecured,  non interest bearing promissory note for $1,000,000 due
June 30, 2001 and an adjustable  value  promissory note recorded for $10,646,000
payable  over four years with  interest at 1% above the  180-day  Libor rate and
collateralized  by an  irrevocable  standby  letter of  credit.  The  $1,000,000
promissory  note  was  recorded  at its  then  present  value  of  approximately
$766,000.  The purchase price was subject to additional  adjustment based on the
final valuation of the assets and liabilities  sold. In addition,  the buyer had
the right to return any receivables not paid after one year from the sale. As of
July 31, 2001,  the Company has collected an aggregate  total of  $12,063,000 of
payments made on the adjustable rate promissory  note, of which  $10,646,000 was
applied to notes  receivable  and the  remaining  $1,417,000  to  interest.  Any
adjustment for the final  valuation of the assets and  liabilities  sold will be
recognized  in the period in which the  adjustment  is  determined.  In the year
ended July 31, 2000, the Company wrote off the carrying value of $880,000 of the
unsecured promissory note.

         The Company set aside as accrued and estimated  liquidation expenses an
amount  believed to be  adequate  for  payment of all  expenses  and other known
liabilities as well as likely and quantifiable contingent obligations, including
potential tax obligations.  In the event this accrued and estimated  liquidation
expense is not adequate for payment of the Company's  expenses and  liabilities,
each  stockholder  could be held liable for pro rata payments to creditors in an
amount not to exceed the stockholder's prior distributions from the Company. The
Company has  therefore  adopted a  conservative  policy of retaining  sufficient
assets to insure against any unforeseen and non-quantifiable contingencies.

         Statement of Changes in Net Assets in Liquidation

              As of July 31, 2001,  the Company had net assets in liquidation of
$102,000.  This represented a decrease in estimated  liquidation value of assets
over liabilities of $4,888,000 from the net assets at July 31, 2000. This change
was attributed to the distribution to stockholders of $5,101,000,  offset by the
increase in net assets for the year.  The  increase in net assets  consisted  of
interest  and other  income of $302,000  and  collection  of $80,000 of accounts
receivable previously written off. This was offset by expenses of $37,000 mainly
costs in connection with the lawsuit  against  Anchin.  Income tax provision for
the year was $132,000.


                                       8
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK.

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See the index constituting a part of Item 15.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS   WITH   ACCOUNTANTS  ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

         As required by Rule 13a-15  under the Act,  within the 90 days prior to
the filing date of this report,  the Company  carried out an  evaluation  of the
effectiveness of the design and operation of the Company's  disclosure  controls
and  procedures.  This  evaluation was carried out under the  supervision of the
Company's  management,  the President and Chief Executive Officer and Secretary,
Treasurer,   Principal  Financial  and  Accounting  Officer.   Based  upon  that
evaluation,  the  Company's  President,  Chief  Executive  Officer and Principal
Financial and Accounting  Officer have  concluded that the Company's  disclosure
controls and  procedures  are  currently  effective in timely  alerting  them to
material  information  relating  to the  Company  required to be included in the
Company's periodic SEC filings.

         Disclosure  controls and procedures  are controls and other  procedures
that are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Act is recorded, processed,  summarized and
reported,  within  the  time  periods  specified  in the SEC  rules  and  forms.
Disclosure  controls and procedures include,  without  limitation,  controls and
procedures  designed to ensure that  information  required  to be  disclosed  in
Company  reports  filed  under  the  Act  is  accumulated  and  communicated  to
management,  which consists only of the Company's  President and Chief Executive
Officer and Secretary, Treasurer, Principal Financial and Accounting Officer, to
allow timely decisions regarding required disclosures.

Changes in Internal Controls.

         There have been no changes in  internal  controls  or in other  factors
that could  significantly  affect these controls subsequent to the date of their
evaluation,   including  any  corrective  actions  with  regard  to  significant
deficiencies and material weaknesses.

                                    PART III



                                       9
<PAGE>


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         In connection with adoption of the  Liquidation  Plan in June 1997, the
Company's  shareholders  approved  elimination of staggered terms for members of
the Board of Directors and reduced the number of members from 34 to 7.

         The following individuals served as directors and executive officers of
the Company during the fiscal year ended July 31, 2001:

 Name                   Age   Position
 -------------------    ---   -----------------------------------------------
 Harold Blumenkrantz     68   President, Chief Executive Officer and Director
 Alfred Hertel           77   Chairman of the Board and Director
 Michael Katz            67   Vice President and Director
 Howard Sternheim        72   Vice President and Director (deceased April 2002)
 Gerald Koblin           69   Secretary, Treasurer, Chief Accounting and
                              Financial Officer and Director
 Paul Emanuel            80   Director
 Ernest Wyre             82   Director

         The Company's officers hold office until the next annual meeting of the
Company's Board of Directors and until their respective successors are elected.

         Harold Blumenkrantz has been a member of the Executive Committee of the
Company's Board of Directors for more than the past five years and was appointed
President  in June 1997.  He has been a principal  of West End Family  Pharmacy,
Inc., Long Branch, New Jersey, since 1962.

         Alfred  Hertel has been an officer  and  director of the Company and an
officer and a principal  shareholder  of Oakland Drug Inc.,  located in Oakland,
New Jersey, for more than the past five years.

         Michael Katz was principal of Katz Drug, Brooklyn,  New York and is now
retired.  Mr.  Katz has been a  director  of the  Company  since 1976 and a vice
president of the Company since June 1997.

         Howard Sternheim  (deceased April 22, 2002) was president and principal
shareholder of Vanderveer Pharmacy, Inc. in Brooklyn, New York, as well as other
drugstores  and one variety story in the New York City  metropolitan  area,  for
more than the past five years.  He had been a director of the Company since 1976
and a vice president since June 1997.

         Gerald  Koblin has been a principal  of Koblin  Pharmaceuticals,  Inc.,
Nyack,  New York  for more  than the past  five  years.  Mr.  Koblin  has been a
director of the Company since 1995, the Secretary and Treasurer since July 1997,
and the Chief Accounting and Financial Officer of the Company since August 1997.


                                       10
<PAGE>

         Paul  Emmanuel had been the owner of Town and Country  Pharmacy,  Inc.,
Ridgewood,  New  Jersey,  for more than the past five  years  before he sold the
store in 2000. Mr. Emmanuel has been a director of the Company since 1985.

         Ernest  Wyre was a  principal  of Lenox  Terrace  Drugstore,  Inc.  and
Fairview  Chemists,  Brooklyn,  New York for more than five years prior to 1987,
and since that time has been a private investor. Mr. Wyre has been a director of
the Company since 1976.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

         The  following  table sets forth,  for the fiscal  years ended July 31,
2001,  2000 and 1999,  the cash  compensation  paid by the  Company,  as well as
certain  other  compensation  paid with  respect  to those  years,  to the chief
executive officer and each of the four other most highly  compensated  executive
officers of the Company in all capacities in which they served.

                               Annual Compensation

Name
and Principal                                     Other Annual      All Other
Position               Years    Salary   Bonus    Compensation   Compensation
-------------          -----    ------   ------   ------------   ------------
Harold Blumenkrantz    1999-   $60,000       --             --             --
President and          2001
CEO(1)

All 2001 Executive
Officers as a
Group (2 persons)              $60,000       --             --             --

------------------
(1)  Mr.  Blumenkrantz  is  paid  pursuant  to  a  consulting   agreement  on  a
month-to-month basis at the rate of $5,000 per month.

         None of the  directors or members of the Executive  Committee  received
any direct  remuneration from the Company or reimbursement for expenses,  except
that Michael Katz received a consulting  fee of $1,000 per month for  assistance
in liquidation activities until the end of April 2002 and the Company reimburses
minor amounts of expenses on an infrequent basis.

ITEM 12. SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

         The following table sets forth certain information  regarding shares of
common stock beneficially  owned as of July 14, 2004, by (i) each person,  known
to the Company,  who  beneficially  owns more than 5% of the common stock,  (ii)
each of the Company's directors and (iii) all officers and directors as a group:


                                       11
<PAGE>

<TABLE>
<CAPTION>

Name and Address of
Beneficial Owner                        Shares Beneficially Owned (1)     Percentage of Stock Outstanding (1)
----------------------------------      -------------------------         -------------------------------
<S>                                     <C>                               <C>
Sharon Sternheim, Executrix of The                        492,784                                   5.31%
Estate of Howard Sternheim
1020 Park Avenue
New York, NY  10028
----------------------------------      -------------------------         -------------------------------
Paul Emanuel                                               24,480                                     .26%
468 Churchill Road
Teaneck, NJ  07666
----------------------------------      -------------------------         -------------------------------
Harold Blumenkrantz                                        36,685                                     .40%
7411 Orangewood Lane
Boca Raton, FL  33433

Alfred Hertel                                             113,358                                    1.22%
84 Shoreline Drive
Hilton Head Island, SC  29928

Michael Katz
3400 Galt Ocean Drive                                     101,196                                    1.09%
Apt. 1507S
Fort Lauderdale, FL 33308

Gerald Koblin
214 Jewett Road                                            43,997                                     .47%
Upper Nyack, NY 10960

Ernest Wyre
6613 Pullen Ct.                                           149,699                                    1.61%
Tampa, FL  33625
----------------------------------      -------------------------         -------------------------------
All Officers and Directors as a                           469,415                                    5.06%
Group (6 persons)
----------------------------------      -------------------------         -------------------------------
</TABLE>

-----------------
(1) All of these shares are owned of record.

   Common Stock

         The Company is authorized  to issue up to  25,000,000  shares of common
stock,  $1.00 par value each, of which 9,274,863 shares are currently issued and
outstanding. The holders of common stock are entitled to one vote for each share
held of record on all matters to be voted on by  shareholders,  and are entitled
to receive dividends when and if declared by the Board of


                                       12
<PAGE>

Directors  out of funds  legally  available  therefore.  The common stock has no
conversion, preemptive or other subscription rights, and there are no redemption
provisions  applicable to the common stock  (except for the  Company's  right of
first refusal,  discussed below).  There is no cumulative voting with respect to
the election of directors,  with the result that the holders of more than 50% of
the shares of common stock can elect all of the directors.

         Holders  of the  common  stock who are  customers  of the  Company  are
required to pledge their shares to the Company as security for their purchase of
products.  All  holders  who intend to sell their  shares are  required to first
offer them to the Company  (the "right of first  refusal")  at a purchase  price
equal to the lesser of (a) the book  value of the  shares or (b) the  greater of
cost or par value. If the Company elects to exercise its right of first refusal,
it must pay for the shares in three equal annual installments, without interest,
commencing 60 days after the offer is made.

         In the event of liquidation,  dissolution or winding up of the Company,
such as that being  implemented the Liquidation Plan, the owners of common stock
are entitled to share all assets remaining  available for distribution after the
payment of liabilities  and after  provision has been made for each class stock,
if any, having a preference over the common stock as such.

Preferred Stock

         The Company is  authorized  to issue up to 250,000  shares of preferred
stock,  $100 par  value  each.  Preferred  stockholders  are  entitled  to an 8%
cumulative  dividend  based on par  value,  payable  in  preferred  stock.  Upon
liquidation  of the Company,  holders of the  preferred  stock are entitled to a
payment  of $100 per share  before  any  amounts  are paid to  holders of common
stock.  The  preferred  stock  is not  entitled  to vote  and  does not have any
preemptive or conversion rights.

         Holders of  preferred  stock have the right to require  the  Company to
repurchase their shares at par value ($100.00)  commencing five years after full
payment for the stock has been made.

         The Company  may call  preferred  stock at any time.  The call price is
105% of par value if shares are called  within the first year of issue,  110% of
par value  within the second year,  115% within the third year,  120% within the
fourth year and 125% after four years.

         A holder of shares of preferred  stock desiring to sell his shares to a
third party must first offer them to the Company at the repurchase price. If the
Company  elects to accept such offer,  it is obligated to pay for such shares in
three equal annual installments, without interest, the first such installment to
be made 60 days after such offer.

         As of July 31, 2001, there were no shares issued and outstanding.


                                       13
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The Company has oral consulting  agreements with its President,  Harold
Blumenkrantz,  and a director,  Michael Katz, and a written consulting agreement
with  Jay  Reba,  its  former  Vice   President-Finance,   for  the  purpose  of
implementing  the Liquidation  Plan. The terms of the consulting  agreement with
Mr. Blumenkrantz provided for his part-time employment on a month-to-month basis
for a  consulting  fee of  $5,000  per  month,  plus  reasonable  and  customary
expenses.  Mr.  Blumenkrantz ceased collecting his consulting fee after July 31,
2001.  Michael Katz received a consulting fee of $1,000 per month for assistance
in liquidation  activities  until the end of April 2002. The written  consulting
agreement  with Mr. Reba is dated June 4, 1998,  and provided for his consulting
services  for  a  minimum  of  three  months,  and  on  a  month-to-month  basis
thereafter,  for a  consulting  fee of $11,400 per month  (beginning  in January
1999),  plus  reasonable  and  customary  expenses  and a  severance  payment of
$34,200.  Mr. Reba's  consulting  agreement  terminated  August 31, 1999. He was
thereafter  engaged by the Company on a  month-to-month  basis to render limited
consulting  services for a fee of $2,750 per month from  September 1, 1999 until
April 30, 2002.  His current  engagement by the Company  provides for payment to
him of $125  per  hour,  plus  expense  reimbursement,  for  work he is asked to
perform.

         The Company  occupies office space, on a  month-to-month  basis, in the
offices of its President, Harold Blumenkrantz,  in Neptune, New Jersey, and Boca
Raton, Florida, at an annual cost, including telephone service,  photocopies and
postage, of $1,200.

         No other officer or director received any direct  remuneration from the
Company or reimbursement for expenses,  except that the Company reimburses minor
amounts of expenses on an infrequent basis.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

         Audit Fees

         The aggregate fees billed by Eisner LLP for the annual audit and review
of interim financial  statements were approximately  $30,000 and $54,000 for the
fiscal years ended July 31, 2001 and 2000, respectively.

         Audit Related  Fees

         Eisner LLP did not render any professional  services to DG Liquidation,
Inc.  involving  "Audit  Related  Fees" other than as set forth in the preceding
paragraph.

         Tax Fees

         Eisner LLP did not render any professional  services to DG Liquidation,
Inc during the fiscal years ended July 31, 2001 and 2000 for tax compliance, tax
advice and tax planning services.

         All Other Fees

         The aggregate fees billed by Eisner LLP for all other services rendered
to DG Liquidation, Inc. during the fiscal years ended July 31, 2001 and July 31,
2000,  other  than  audit  services,   were  approximately  $6,000  and  $5,000,
respectively, for tax return preparation.


                                       14
<PAGE>


ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT

         Schedules and Reports on Form 8-K

         (a)(1) Financial Statements.

         The following are filed with this report:

         (i)      Independent Auditors' Report.

         (ii)     Statement of Net Assets  (liquidation  basis) at July 31, 2001
                  and 2000.

         (iii)    Statement of Changes in Net Assets (liquidation basis) for the
                  years ended July 31, 2001, 2000 and 1999.

         (iv)     Notes to the Financial Statements.

         (a)(2)   Financial Statement Schedules:

                  None

         (a)(3)   Exhibits.

         The following exhibits are filed as part of this report:

                  Exhibit Number   Exhibit
                  --------------   -------
                        31         Rule 13(a)-15(e)/15(d)-15(e) Certifications.

                        32         Section 1350 Certification

         (b)      Reports on Form 8-K

         No  reports on Form 8-K were  filed  during the last  quarter of fiscal
2001.

                                       15

<PAGE>


                                   SIGNATURES

         Pursuant  to the  requirements  of the  Securities  Act  of  1934,  the
Registrant  has duly  caused  this  amended  Section  13 or 15(d)  report  to be
executed on its behalf by the  undersigned,  thereunto duly  authorized,  in the
Town of Neptune, State of New Jersey, on July 14, 2004.


                                               DG LIQUIDATION, INC.

                                               By:  /s/ Harold Blumenkrantz
                                                 -------------------------------
                                                 Harold Blumenkrantz, President
                                                 and Chief Executive Officer



         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  amended  report has been signed by the  following  person on behalf of the
Registrant and in the capacity and on the date indicated.

/s/ Harold Blumenkrantz         President, Chief Executive         July 14, 2004
    --------------------        Officer and Director
     Harold Blumenkrantz

/s/ Gerald Koblin               Secretary, Treasurer,              July 14, 2004
    -------------------         Principal Financial and
     Gerald Koblin              Accounting Officer and Director

/s/ Alfred Hertel               Chairman of the Board              July 14, 2004
    -------------------         and Director
     Alfred Hertel

/s/ Michael Katz                Vice President and Director        July 14, 2004
    --------------------
     Michael Katz

/s/ Paul Emanuel                Director                           July 14, 2004
    --------------------
     Paul Emanuel

/s/ Ernest Wyre                 Director                           July 14, 2004
    --------------------
     Ernest Wyre

<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
DG Liquidation, Inc.


We have audited the accompanying statements of net assets (liquidation basis) of
DG Liquidation,  Inc. as of July 31, 2001 and 2000 and the related statements of
changes in net  assets  (liquidation  basis) for each of the three  years in the
period ended July 31, 2001. These financial statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

As described in Note A to the  financial  statements,  the  stockholders  of the
Company approved a plan of liquidation on June 27, 1997 and on July 3, 1997, the
Company  sold  substantially  all  its  net  assets  and  commenced  liquidation
proceedings.  As a result,  the Company has changed its basis of accounting  for
periods  subsequent  to  June  30,  1997  from  the  going  concern  basis  to a
liquidation basis.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the net assets in liquidation of DG Liquidation,  Inc. as
of July 31, 2001 and 2000 and the changes in its net assets in  liquidation  for
each of the three years in the period ended July 31, 2001,  in  conformity  with
accounting principles generally accepted in the United States of America applied
on the liquidation basis as described in the preceding paragraph.

Eisner LLP

New York, New York
December  27, 2001,  except for Notes E[3],  A[2] and E[1] as to which the dates
are August 12, 2002, October 9, 2002 and May 16, 2003, respectively

                                                                             F-1

<PAGE>

DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)


Statements of Net Assets
(liquidation basis)
(in thousands, except share and per share amounts)


                                                               July 31,
                                                        ---------------------
                                                           2001        2000
                                                        ---------   ---------
ASSETS
Cash                                                    $   3,277   $   9,753
Deferred tax asset                                          1,847       1,974
Other assets                                                   70          60
                                                        ---------   ---------

                                                            5,194      11,787
                                                        ---------   ---------

LIABILITIES
Estimated liquidation expenses                                428         746
Income taxes payable                                                    1,457
Accrued expenses                                               52         129
Liquidating distributions payable                             424         277
Deferred gain related to proceeds from letter of credit     4,188       4,188
                                                        ---------   ---------

                                                            5,092       6,797

Commitments and contingencies (Note E)
                                                        ---------   ---------
Net assets in liquidation                               $     102   $   4,990
                                                        =========   =========



Net assets in liquidation per common share
   (based on 9,275,000 common shares
    outstanding in 2001 and 2000)                       $    0.01   $    0.54
                                                        =========   =========


                                                                             F-2
See notes to financial statements

<PAGE>

DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Statements of Changes in Net Assets
(liquidation basis)
(in thousands except per share amounts)

                                                         Year Ended July 31,
                                                 ------------------------------
                                                  2001        2000        1999
                                                 -------    --------   --------

Net assets in liquidation - beginning of year    $ 4,990    $  9,275   $ 13,258
                                                 -------    --------   --------
Interest and other income                            302         486        663
Decrease (increase) in estimated costs to be
  incurred during period of liquidation                6          26        (11)
Loss on write-off of note receivable                            (880)
Recovery of receivables previously written off        80         323        966
Other adjustments to net assets
                                                     (43)        (54)      (133)
                                                 -------   ---------   --------
Increase (decrease) in net assets before
  income taxes and items shown below                 345         (99)     1,485

(Provision) benefit for income taxes related
   to change in net assets, including a deferred
    tax (provision) benefit of $(127) in 2001,
     $1,483 in 2000 and $(148) in 1999              (132)         22       (476)
                                                 -------   ---------   --------
Increase (decrease) in net assets
  before items shown below                           213         (77)     1,009

Common stock acquired in settlement of
  receivables                                                    (34)      (338)

Liquidating distributions to common
 stockholders ($0.55 per share in 2001,
 $0.45 per share in 2000 and $0.50
  per share in 1999)                              (5,101)     (4,174)    (4,654)
                                                 -------   ---------   --------
 (Decrease) in net assets                         (4,888)     (4,285)    (3,983)
                                                 -------   ---------   --------
Net assets in liquidation - end of year          $   102   $   4,990   $  9,275
                                                 =======   =========   ========




See notes to financial Statements                                            F-3

<PAGE>


DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

NOTES TO FINANCIAL STATEMENTS

NOTE A - PLAN OF LIQUIDATION, SALE OF ASSETS AND BASIS OF PRESENTATION

[1]  Plan of liquidation:

     DG  Liquidation,  Inc.  (the  "Company"),  formerly  known  as  Drug  Guild
     Distributors,  Inc.,  was a  wholesale  distributor  of a wide  variety  of
     products to drug stores and health and beauty aid stores located  primarily
     in the State of New Jersey, the greater New York City metropolitan area and
     Connecticut.

     A Plan of Complete  Liquidation (the "Plan") was approved by the holders of
     a majority of the Company's  outstanding shares of common stock on June 27,
     1997.  The  Plan  provided  for:  (1) the sale of the  Company's  operating
     assets, (2) the payment of or provision for all of the Company's  remaining
     liabilities and  obligations,  (3) payment of $100 per share to the holders
     of  preferred  stock  prior  to  any  amounts  distributed  to  the  common
     stockholders and (4) the dissolution of the Company.

[2]  Sale of assets:

     On July 3,  1997,  the  Company  sold  substantially  all of its  operating
     assets,  subject to  substantially  all of the  Company's  liabilities,  to
     Neuman Health Services,  Inc. and Neuman Distributors,  Inc.  (collectively
     "Neuman"),  wholesale distributors of pharmaceuticals and health and beauty
     products,  for $4,000,000 in cash paid on closing, an unsecured  $1,000,000
     noninterest bearing promissory note due in August 2001 and the remainder in
     an adjustable value promissory  note,  recorded at $10,646,000,  payable in
     quarterly  installments  over four  years and  collateralized  by a standby
     letter of  credit.  The  $1,000,000  promissory  note was  recorded  at its
     present value ($880,000 at July 31, 1999) using an imputed interest rate of
     6.69%.  The adjustable value note provided for interest at a rate (6.97% at
     July 31,  2000)  determined  quarterly  equal to the  higher of 1% plus the
     180-day  London  Interbank  Offered  Rate or the  rate  specified  for U.S.
     Treasury  Notes with maturity  equal to the remaining term of the note, but
     no lower than the Federal  rate as  disseminated  by the  Internal  Revenue
     Service from time to time. During the year ended July 31, 1998, pursuant to
     the terms of the note,  interest was paid quarterly  based on the principal
     payments received by the Company.  Subsequent thereto, interest was payable
     quarterly  based on the unpaid  principal  balance of the note.  During the
     period August 1, 1999 to May 22, 2000 and the year ended July 31, 1999, the
     Company  received  from  Neuman  quarterly  principal  payments on the note
     aggregating $2,400,000 and $3,452,000, respectively, plus interest payments
     of $173,000 and $1,060,000, respectively.

     In connection  with the sale,  the Company also received an option in favor
     of the Company's stockholders to purchase under certain conditions,  at 85%
     of the per share offering price, an aggregate of 10% of Neuman shares to be
     made  available  in  a  public   offering  in  the  event  Neuman  filed  a
     registration statement with the Securities and Exchange Commission prior to
     July 3, 2001 in connection  with an initial public  offering.  No value had
     been  ascribed  to the option due to its  contingent  nature.  Such  option
     expired unexercised.

                                                                             F-4

<PAGE>

DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Notes to Financial Statements

     The asset  purchase  agreement  provided  that the purchase  price would be
     subject  to  adjustment  based  upon a final  valuation  of the  assets and
     liabilities  sold. In addition,  the terms of sale provided that Neuman had
     one year from the date of purchase  to return to the  Company any  accounts
     receivable balances which had not then been collected and reduce the amount
     of the adjustable note by such  uncollected  balances (see Note E[2]).  The
     gain recognized on the sale was $3,683,000.

     On April 6, 2000, Neuman filed a petition for reorganization  under Chapter
     11 of the Bankruptcy Code. As a result thereof,  during the year ended July
     31,  2000,  the  Company  wrote  off the  $880,000  carrying  value  of the
     unsecured promissory note due from Neuman. In addition, on May 22, 2000 the
     Company made a drawing on the standby  letter of credit and on May 25, 2000
     received  $7,084,000 of which $2,794,000  represented the carrying value of
     the adjustable value note,  $102,000  represented  accrued interest thereon
     through such date and $4,188,000 represented additional proceeds.

                                                                             F-5


<PAGE>

DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Notes to Financial Statements


NOTE A -  PLAN  OF  LIQUIDATION,  SALE  OF  ASSETS  AND  BASIS  OF  PRESENTATION
(CONTINUED)


[2]  Sale of assets: (continued)

     Within  the  ninety-day  period  prior to the filing of the  petition,  the
     Company  received  $885,000 from Neuman in connection  with the  adjustable
     value  note.  Subsequent  to the  filing,  the  Chapter 11 Trustee  filed a
     complaint  against  the  Company in the  Bankruptcy  Court to recover  such
     alleged  preference  payment.  The Company  maintained that it had defenses
     against the Trustee's  claims and filed a motion for summary  judgment.  In
     addition,  on October 20, 2000, the Company filed a general unsecured claim
     against the bankruptcy  estate which reflected that $7,657,000 was due from
     Neuman on the adjustable value note at March 31, 2000,  including  $576,000
     of  additional  accrued  interest  through such date based on the increased
     amount of the note, prior to the receipt of the $7,084,000 letter of credit
     proceeds,  leaving a balance of $573,000 due the Company. In addition,  the
     Company filed a claim for $1,000,000 in connection with the unsecured note.

     On September  24, 2002, a settlement  agreement,  which was approved by the
     Bankruptcy Court on October 9, 2002, was entered into pursuant to which the
     Company  and the  Trustee  released  each  other from all  pre-petition  or
     post-petition  claims,  except  that the  Company  is  entitled  to receive
     distribution from the bankruptcy estate as to its unsecured claims referred
     to above which were allowed in full.

     In connection with the settlement,  in fiscal 2003, the Company will record
     an additional  gain on sale of $2,513,000 net of income taxes of $1,675,000
     ($0.27 per common share).

[3]  Basis of presentation:

     Subsequent to June 30, 1997, the Company adopted the  liquidation  basis of
     accounting. Accordingly, the net assets of the Company at July 31, 2001 and
     2000 are stated at  liquidation  value  whereby  assets are stated at their
     estimated net realizable  values and liabilities,  which include  estimated
     liquidation  expenses to be incurred through the date of final  dissolution
     of the Company, are stated at their anticipated settlement amounts.

     The valuation of assets and liabilities  necessarily requires estimates and
     assumptions.  Net  assets  and  future  liquidating  distributions  will be
     subject to  uncertainties  including  the  ultimate  amount of  liquidation
     expense and the amount,  if any,  ultimately  collected on unsecured claims
     against the bankruptcy estate.


                                                                             F-6
<PAGE>


DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Notes to Financial Statements


NOTE B - ESTIMATED LIQUIDATION EXPENSES

Estimated liquidation expenses, consisting of legal and other professional fees,
consulting fees and insurance expense,  to be incurred through the date of final
dissolution  of the  Company  have been  accrued in the  accompanying  financial
statements.  Analysis of  transactions  reflected in the liability for estimated
liquidation expenses during fiscal 1999, 2000 and 2001 follows:



 Balance at July 31, 1998                                            $   1,806
 Liquidation expenses paid during the year ended July 31, 1999            (554)
 Increase in estimated liquidation expenses to be incurred                  11
                                                                     ---------

 Balance at July 31, 1999                                                1,263
 Liquidation expenses paid during the year ended July 31, 2000            (491)
 Decrease in estimated liquidation expenses to be incurred                 (26)
                                                                     ---------

 Balance at July 31, 2000                                                  746
 Liquidation expenses paid during the year ended July 31, 2001            (312)
 Decrease in estimated liquidation expenses to be incurred                  (6)
                                                                     ---------

 Balance at July 31, 2001                                            $     428
                                                                     =========


                                                                             F-7

<PAGE>


DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Notes to Financial Statements

NOTE C - INCOME TAXES

The Company accounts for income taxes utilizing the asset and liability approach
requiring  the  recognition  of  deferred  tax  assets and  liabilities  for the
expected future tax consequences of temporary  differences  between the basis of
assets and liabilities for financial reporting purposes and tax purposes.


The deferred tax asset at July 31, 2001 and 2000 relates to the following:


<TABLE>
<CAPTION>
                                                                  2001            2000
                                                            -------------   -------------
<S>                                                         <C>             <C>
 Estimated liquidation expenses                             $     172,000   $     299,000
 Deferred gain related to proceeds from letter of credit        1,675,000       1,675,000
                                                            -------------   -------------

                                                            $   1,847,000   $   1,974,000
                                                            =============   =============
</TABLE>


NOTE D - OFFICER'S LIFE INSURANCE

At July 31, 2001 the Company was the owner and beneficiary of insurance policies
of $1,600,000,  on the life of its former president.  At July 31, 2001 and 2000,
the  cash  surrender   value  of  these  policies  was  $197,000  and  $194,000,
respectively.  At such  dates,  the Company had  outstanding  loans  aggregating
$152,000  against the cash surrender value at a weighted average annual interest
rate of 7.57%. The cash surrender value, net of borrowings, is included in other
assets.

In October 2001, the former president died and on December 14, 2001, the Company
received approximately  $1,599,000,  net of outstanding loans of $157,000,  from
the insurance  company in  settlement  of the  policies,  resulting in a gain of
$1,511,000 to be recognized during the year ending July 31, 2002.


NOTE E - COMMITMENT AND CONTINGENCIES

[1]  On March 3, 1998,  the Company  filed a complaint  in Supreme  Court of the
     State of New York, in New York County, against its former auditors, Anchin,
     Block & Anchin,  LLP (the  "Anchin  Firm")  seeking to recover  damages for
     professional  malpractice,  breach of fiduciary duty and breach of contract
     exceeding  $16,000,000  in connection  with an inventory  defalcation.  The
     Anchin Firm had previously  acted in the capacities of financial  advisors,
     auditors and accountants for the Company for a continuous  period beginning
     in 1977 and ending on July 2, 1996.


                                                                             F-8

<PAGE>

DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Notes to Financial Statements

     The damages  sought from the Anchin Firm relate to the loss of inventory by
     reason of the defalcations taking place during the period from October 1992
     through May 1996,  a reduction in the  consideration  received in the asset
     sale transaction  with Neuman and restitution of approximately  $900,000 of
     fees paid to the Anchin Firm and various other fees and expenses.

     On April 30,  1998,  the Anchin Firm filed an answer  denying the  material
     allegations,  and commenced a third-party  lawsuit  against  members of the
     Company's Executive Committee during the period of January 1990 through May
     31, 1996,  and the  Company's  corporate  attorneys,  alleging  that if the
     Company is  successful  in its claims  against the Anchin Firm,  then these
     third-party  defendants,  by reason of their alleged  failure to reasonably
     perform their respective  fiduciary  duties,  should be held liable for the
     losses  to the  Company  for  which  the  Anchin  Firm is sought to be held
     responsible.  On October 27,  1998,  the court  dismissed  the  third-party
     claims  against  the  Company's  corporate  attorneys  and the Anchin  Firm
     withdrew its claims against the former members of the Executive  Committee,
     thereby discontinuing the third-party lawsuit.

     The  Company's  claims  against the Anchin Firm were tried before a jury in
     Supreme  Court,  New York  County,  in October  and  November  2002,  which
     resulted  in a verdict in favor of the  Company.  Judgment  in favor of the
     Company and against the Anchin Firm was entered in Supreme Court,  New York
     County, on February 4, 2003 in the aggregate sum of approximately $290,000.
     The judgment was paid in full on May 16, 2003 in the total sum of $297,000,
     including interest of $7,000. Net assets will be increased by the amount of
     the judgment  reduced by related legal and other  professional  fees during
     the year ended July 31, 2003.

[2]  On or about  July 1,  1998,  the  buyer of the  Company's  assets  (Neuman)
     proposed to reassign to the Company uncollected accounts receivable of four
     customers  which  accounted  for   approximately   $1,486,000  of  accounts
     receivable  purchased  from the Company in July 1997 (see Note  A[2]).  The
     Company had assigned  those  accounts  receivable  to Neuman  together with
     related security agreements. After the closing of the asset purchase Neuman
     made  additional  sales to those four  customers  and  extended  additional
     credit to them.  Neuman also incurred legal fees and interest in seeking to
     collect both the pre-closing and post-closing  accounts receivable with the
     result that Neuman  asserted that it has made a  post-closing  extension of
     credit to the four customers totaling approximately $2,336,000.  Neuman has
     told  the  Company  that it  should  accept  reassignment  of the  accounts
     receivable  of the four  customers  in an  aggregate  total  of  $1,486,000
     without  reassignment  of the  security  agreements,  with a  corresponding
     reduction in the adjustable value note receivable.

     The Company has taken the position that the security agreements must follow
     the  accounts  receivable  which they secure and that it is  therefore  not
     obligated to accept reassignment of the accounts receivable,  and therefore
     a reduction  in the face amount of the note,  unless it also  receives  the
     security agreements  applicable to those accounts  receivable.  The Company
     has told Neuman that pursuant to the asset purchase  agreement,  the oldest
     accounts  receivable  must  be  paid  in full  before  the  newer  accounts
     receivable are paid and that it is therefore  entitled,  under the security
     agreements which must be reassigned together with the accounts  receivable,
     to receive the full amount of the pre-acquisition balance due of $1,486,000
     out of a pending payment by a major  pharmaceutical  retail chain to Neuman
     of approximately $2,500,000.

     As  described  in Note A[2],  a  settlement  agreement  was approved by the
     Bankruptcy  Court on  October  9, 2002,  pursuant  to which the  Trustee in
     Neuman's   bankruptcy  and  the  Company   released  each  other  from  all
     pre-petition or post-petition claims and, accordingly, none of the accounts
     receivable were reassigned to the Company.


                                                                             F-9

<PAGE>

DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Notes to Financial Statements

[3]  A customer  of the  Company  initiated  a lawsuit in  February  1997 in the
     United States District Court for the District of New Jersey,  alleging that
     the Company has conspired with  co-defendant  wholesalers to deny credit to
     the plaintiff  that is allegedly due to it,  amounting to an alleged "group
     boycott"  in  violation  of the  federal  Sherman  Anti-trust  Act  and New
     Jersey's Anti-trust Act, as well as a breach of an implied covenant of good
     faith and fair  dealing  and  tortuous  interference  with the  plaintiff's
     contracts.

     The plaintiff asked for preliminary and permanent  injunctions as well as a
     money  judgment  against each  defendant  for what are described as actual,
     compensatory,  punitive and trebled damages,  attorney's fees and costs and
     such  other  relief as the court  may deem  appropriate.  The court did not
     enter any preliminary  injunction against any defendant.  The Company filed
     an answer denying all of the material allegations of the complaint, setting
     forth various  affirmative  defenses,  alleging a counterclaim  against the
     plaintiff  for the money it owes the Company,  approximately  $48,000,  and
     asking for a dismissal of the complaint.

     The  defendants,  including  the  Company,  have made  motions  for summary
     judgment  seeking  dismissal of all of the  plaintiff's  claims,  which are
     pending before the court.  The Company has also asked for summary  judgment
     on its counterclaim. On August 12, 2002, these claims were dismissed by the
     court.

                                                                            F-10

<PAGE>

DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)

Notes to Financial Statements

NOTE E - COMMITMENT AND CONTINGENCIES  (CONTINUED)

[4]  The Company  entered  into  consulting  agreements  with its  President,  a
     Director  and its  former  Vice  President  - Finance  for the  purpose  of
     implementing  the plan of  liquidation.  The  agreement  with the Company's
     President provides for his part-time  employment on a month-to-month  basis
     for a fee of $5,000 per month plus  expenses.  The  consulting  fee for the
     Director was $1,000 per month and ended in April 2002.  The agreement  with
     the former Vice President - Finance  commenced on June 4, 1998 and provided
     for a monthly  consulting  fee of $11,400  (beginning in January 1999) plus
     expenses,  and a severance payment of $34,000. This agreement terminated in
     August 1999 and he was engaged  thereafter on a month-to-month  basis for a
     fee of $2,750 through April 2002.

[5]  In connection  with the sale of the Company's  assets on July 3, 1997,  the
     purchaser  assumed the Company's  obligation  under existing leases and the
     landlord released the Company from liability for future lease payments. The
     Company,  subsequent to the sale, occupies office space on a month-to-month
     basis  in the  offices  of  its  President,  at an  annual  cost  including
     telephone service, photocopies and postage of $1,200.


[6]  The  Company  has been a party to  several  other  pending  legal  actions,
     principally motor vehicle accidents involving vehicles owned or operated by
     the Company, and other claims including one for product liability for which
     the Company is covered by its insurance.  The Company  believes the results
     of these  various  lawsuits  and  claims  will not  materially  affect  the
     financial position of the Company.


NOTE F - REDEEMABLE PREFERRED STOCK

Preferred  stockholders were entitled to an 8% cumulative  dividend based on par
value,  payable in preferred stock. Upon liquidation of the Company,  holders of
the  preferred  stock were  entitled  to a payment of $100 per share  before any
amounts  are paid to  holders  of  common  stock.  The  preferred  stock was not
entitled to vote and did not have any  preemptive or conversion  rights.  During
the year ended July 31, 1998, 20,690 shares of preferred stock were redeemed for
$2,069,000 and subsequent thereto through December 28, 1998, the remaining 1,930
outstanding shares of preferred stock were redeemed for $193,000.


NOTE G - RECOVERY OF RECEIVABLES

The stockholders  constituted a substantial  portion of the Company's  customers
and all  stockholders  had assigned  their  shares to the Company as  additional
collateral for their respective  accounts receivable  balances.  The transfer of
shares is restricted by agreement,  and any  stockholder  who wishes to sell his
shares must first  offer them to the  Company at cost (as  defined) or par value
with respect to shares  issued as a stock  dividend.  During the year ended July
31, 2000,  stockholders returned 34,000 shares of common stock to the Company in
settlement of previously written off receivable  balances.  The common stock was
valued at  approximately  $34,000  based on the per share value of net assets in
liquidation.


                                                                            F-11