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, 1999

[ ]   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.  The
products were comprised of four groups:  (1) legend drugs  (approximately 80% of
sales), which are dispensed to the public only on a doctor's prescription in the
form of pills, tablets,  capsules or bulk ingredients;  (2) patent or non-legend
drugs  (approximately  13% of sales),  which do not require a  prescription  and
include such items as cough medicines and aspirin;  (3) sundries  (approximately
5% of sales), which include such items as clocks, soaps, deodorants, hair driers
and most other non-pharmaceutical  products commonly sold in drugstores; and (4)
certain items which were sold under the Company's private labels  (approximately
2% of sales), including vitamins, shampoos and cough syrups.

      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.


                                       3
<PAGE>

      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.  During the fiscal year ended
July 31, 1999,  pursuant to the terms of the note,  interest  (6.97% at July 31,
1999)  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 year ended July 31, 1999, the Company
received quarterly principal payments on the note aggregating  $3,452,000,  plus
interest of $1,060,000.

      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.


                                       4
<PAGE>

      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.

      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.


                                       5
<PAGE>

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.

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.


                                       6
<PAGE>

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.

      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, 1999 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.


                                       7
<PAGE>

      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.

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.
During the fiscal year ended July 31, 1999, the Company collected  $4,512,000 of
payments made on the adjustable  rate promissory  note, of which  $3,452,000 was
applied to notes  receivable  and the  remaining  $1,060,000  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.

      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.


                                       8
<PAGE>

      Statement of Changes in Net Assets in Liquidation

      As of July  31,  1999,  the  Company  had net  assets  in  liquidation  of
$9,275,000.  This  represented  an decrease in  estimated  liquidation  value of
assets over liabilities of $3,983,000 from the net assets at July 31, 1998. This
change was mainly  attributed to and initial  distribution  to  stockholders  of
$4,654,000   (including   $142,000  withheld  towards  recovery  of  receivables
previously  written off), offset by the increase in net assets for the year. The
increase  in net assets  included  interest  and other  income of  $663,000  and
collection of $966,000 of accounts  receivable  previously written off. This was
offset by an increase in  non-legal  costs of  $107,000 in  connection  with the
lawsuit against Anchin.  The provision for income taxes related to the change in
net assets was $476,000 due to increased  income.  The increase was also reduced
by the  acceptance  by the  Company of common  stock as payment  for  previously
written off  receivables  in the amount of $338,000.  This amount is included in
the $966,000 listed above.

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.


                                       9
<PAGE>

      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

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, 1999:

Name                  Age     Position
----                  ---     --------

Harold Blumenkrantz    66     President, Chief Executive Officer and Director
Alfred Hertel          75     Chairman of the Board and Director
Michael Katz           65     Vice President and Director
Howard Sternheim       70     Vice President and Director (deceased April 2002)
Gerald Koblin          67     Secretary, Treasurer, Chief Accounting and
                               Financial Officer and Director
Paul Emanuel           78     Director
Ernest Wyre            80     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.


                                       10
<PAGE>

      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.

      Paul  Emmanuel  had been the  owner of Town and  Country  Pharmacy,  Inc.,
Ridgewood,  New Jersey, for more than the past five years, and 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, 1999,
1998 and 1997,  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.


                                       11
<PAGE>

                                            ANNUAL COMPENSATION

                                                        Other
Name                                                    Annual      All Other
and Principal                                           Compen-     Compen-
Position                   Year       Salary    Bonus   sation      sation
--------------------       -----      ------    -----   ------      -------
Harold Blumenkrantz        1999       $60,000     --      --           --
President and              1998       $65,000
CEO(1)

Alan Glenn                 1997       $46,333     --      --           --
Senior Vice
President,
CEO, COO(2)

Jay Reba                   1997      $109,170     --      --           --
Vice President
Finance(3)

Mark Englander             1997      $103,552     --      --           --
Vice President(3)

Norman Genzer              1997      $112,521     --      --           --
Vice President(3)

All 1999 Executive
 Officers as a
 Group (5 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.

(2)   Appointed President of the Company in March 1996. Retired from the Company
      effective August 31, 1996.

(3)   Resigned from the Company in July 1997 in  connection  with the asset sale
      to Neuman.

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

      The Company's  non-contributory  defined benefit pension plan for eligible
non-union  employees  was  terminated  in  August  1997.  See Note E of Notes to
Financial Statements.

      The  Company  also had a  profit-sharing  plan,  including  a 401(k),  for
non-union employees, including its officer-employees, which required no fixed or
minimum contribution.  There has been no contribution to the profit-sharing plan
since the fiscal year ended July 31, 1994. Under the plan,  contributions by the
Company  were  allocated  among  the  accounts  of  participating  employees  in
proportion to their respective compensations, as defined. Upon retirement, death
or  disability,  participating  employees  are  entitled  to the  value of their
accounts as  provided  in the plan.  An  employee's  interest  in the  Company's
contribution  became  vested in  increments  over the first  five years of their
membership.


                                       12
<PAGE>

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:

                                       Shares Beneficially      Percentage of
Name and Address of Beneficial Owner         Owned(1)       Stock Outstanding(1)
------------------------------------   -------------------  --------------------

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 Group        469,415                 5.06%
(6 persons)


                                       13
<PAGE>

--------------------------
(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 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.


                                       14
<PAGE>

      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, 1999, there were no shares issued and outstanding.

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
the interim financial statements were approximately  $54,000 and $54,000 for the
fiscal years ended July 31, 1999 and 1998, respectively.


                                       15
<PAGE>

      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. for the fiscal years ended July 31, 1999 and 1998 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, 1999 and July 31,
1998,  other than audit  services,  was  approximately  $5,000 each year for tax
return preparation.

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,  1999 and
            1998.
      (iii) Statement of Changes in Net Assets (liquidation basis) for the years
            ended July 31,  1999 and 1998,  and for the period from July 1, 1997
            to July 31, 1997.
      (iv)  Statements of Operations  (going  concern basis) for the period from
            August 1, 1996 to June 30, 1997.
      (v)   Statements of  Stockholders'  Equity (going  concern  basis) for the
            period from August 1, 1996 to June 30, 1997.
      (vi)  Statements of Cash Flows (going  concern  basis) for the period from
            August 1, 1996 to June 30, 1997.
      (vii) Notes to the Financial Statements.
      (a)(2) Financial Statement Schedules:

             None

      (a)(3) Exhibits.

      The following exhibits are filed as part of this report:


                                       16
<PAGE>

       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 1999.


                                       17
<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
                                           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


                                       18
<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.  (formerly Drug Guild  Distributors,  Inc.) as of July 31,
1999 and 1998 and the related  statements of changes in net assets  (liquidation
basis) for the years then ended and for the period from July 1, 1997 to July 31,
1997. In addition,  we have audited the  accompanying  statements of operations,
stockholders'  equity and cash flows for the period  from August 1, 1996 to June
30, 1997.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance  with 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, 1999 and 1998, the changes in its net assets in liquidation  for the
years then ended and for the period from July 1, 1997 to July 31, 1997,  and the
results of its  operations  and cash flows for the period from August 1, 1996 to
June 30, 1997, in conformity with accounting  principles  generally  accepted in
the United  States of America  applied on the basis  described in the  preceding
paragraph.

Eisner LLP

New York, New York
October 27, 2000, except for Notes G, H[5], A[2] and H[2] as to
which the dates are December 14, 2001, 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)

<TABLE>
<CAPTION>

                                                                                                             JULY 31,
                                                                                                     -------------------------
                                                                                                         1999         1998
                                                                                                     -----------   -----------
ASSETS
<S>                                                                                                  <C>           <C>
Cash                                                                                                 $     4,329   $     3,170
United States Treasury bills, at cost which approximates market value                                                    2,016
Notes receivable, including accrued interest of $32 in 1999 and $645 in 1998                               6,105        10,114
Other assets                                                                                                 134           102
Deferred tax asset                                                                                           361           509
                                                                                                     -----------   -----------

                                                                                                          10,929        15,911


LIABILITIES
Estimated liquidation expenses                                                                             1,263         1,806
Accrued expenses and taxes                                                                                    71           654
Liquidating distributions payable                                                                            320
                                                                                                     -----------   -----------

                                                                                                           1,654         2,460
Redeemable preferred stock; authorized 250,000 shares, $100 par value;
   issued and outstanding 1,930 shares at redemption value in 1998                                                         193
                                                                                                     -----------   -----------

                                                                                                           1,654         2,653
Commitments and contingencies (Note H)

NET ASSETS IN LIQUIDATION                                                                            $     9,275   $    13,258
                                                                                                     ===========   ===========

NET ASSETS IN LIQUIDATION PER COMMON SHARE (BASED ON 9,309,000 AND
         9,552,000 COMMON SHARES OUTSTANDING, RESPECTIVELY)                                                $1.00         $1.39


</TABLE>

See notes to financial statements

                                      F-2
<PAGE>

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


<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
(liquidation basis)
(in thousands, except per share amount)

                                                                                                      PERIOD FROM
                                                                                                      JULY 1, 1997
                                                                             YEAR ENDED JULY 31,       TO JULY 31,
                                                                              1999          1998          1997
                                                                          -----------   -----------   ------------

<S>                                                                      <C>           <C>            <C>
Net assets in liquidation - beginning of period                          $    13,258   $     12,659   $     11,892
                                                                          -----------   -----------   ------------

Gain on sale of net assets                                                                                   3,683
Interest and other income                                                         663         1,319            114
Estimated costs to be incurred during period of liquidation                       (11)         (293)        (2,017)
Insurance claim recovery                                                                                     1,000
Loss on termination of pension plan                                                                           (305)
Dividend on preferred stock                                                                                    (13)
Recovery of receivables previously written-off                                    966
Other adjustments to net assets                                                  (133)          (32)            94
                                                                          -----------   -----------   ------------

Increase in net assets before income taxes and items shown below                1,485           994          2,556

Provision for income taxes related to change in net assets,
 including a deferred tax (provision) benefit
 of ($148) in 1999, $382 in 1998 and ($1,681) in 1997                            (476)         (395)        (1,789)
                                                                          -----------   -----------   ------------

Increase in net assets before items shown below                                 1,009           599            767
Common stock acquired in settlement of receivables                               (338)
Liquidating distributions to common stockholders ($0.50 per share)             (4,654)
                                                                          -----------   -----------   ------------
(Decrease) increase in net assets                                              (3,983)          599            767
                                                                          -----------   -----------   ------------
NET ASSETS IN LIQUIDATION - END OF PERIOD                                 $     9,275   $    13,258   $     12,659
                                                                          ===========   ===========   ============
</TABLE>

See notes to financial statements

                                      F-3
<PAGE>

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

STATEMENT OF OPERATIONS
(going concern basis)
(in thousands, except per share data)

                                                      PERIOD FROM
                                                     AUGUST 1, 1996
                                                       TO JUNE 30,
                                                          1997
                                                       ---------

Net sales                                              $ 454,572
Cost of sales                                            426,833
                                                       ---------

Gross profit                                              27,739
                                                       ---------

Expenses:
   Warehouse                                               8,197
   Shipping and delivery                                   5,310
   Selling, general and administrative                    11,478
   Interest expense                                        4,805
   Interest income                                          (500)
   Gain on settlement of claim                              (596)
                                                       ---------

      Net operating expenses                              28,694
                                                       ---------

Loss before income taxes                                    (955)
                                                       ---------

Benefit for income taxes:
   Current                                                   (68)
   Deferred                                                 (382)
                                                       ---------

                                                            (450)

NET LOSS                                                    (505)
Stock dividend on preferred stock                            145
                                                       ---------

Net loss attributable to common stockholders           $    (650)
                                                       =========

LOSS PER COMMON SHARE                                  $   (0.07)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING       9,957
                                                       =========

See notes to financial statements


                                      F-4
<PAGE>

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

<TABLE>
<CAPTION>

STATEMENT OF STOCKHOLDERS' EQUITY
(going concern basis)
(all amounts in thousands)
                                                        COMMON STOCK $1 PAR VALUE

                                                                                                      TOTAL         LESS     TOTAL
                                                  ISSUED AND    SUBSCRIBED AND ADDITIONAL   ACCUM-    BEFORE      SUBSCRIP-  STOCK-
                                                  OUTSTANDING      UNISSUED    PAID-IN      ULATED  SUBSCRIPTIONS  TIONS    HOLDERS'
                                                 SHARES  AMOUNT  SHARES AMOUNT CAPITAL      DEFICIT  RECEIVABLE  RECEIVABLE EQUITY
                                                 ------  ------  ------ -----  --------     -------  ----------  ---------- -------

<S>                                            <C>     <C>         <C>     <C>    <C>         <C>       <C>         <C>   <C>
BALANCE - JULY 31, 1996                         10,023  $ 10,023    412     $412   $  3,628  $ (805)   $13,258     $639  $ 12,619
Transactions for the period from August 1,
   1996 to June 30, 1997:
      Net loss                                                                                 (505)      (505)              (505)
      Common stock redeemed or cancellations       (56) $    (56)  (601)   $(601)        33               (624)   $(601)      (23)
      Common stock to offset accounts receivable  (100)     (100)                        76                (24)               (24)
      Collections on subscriptions                  25        25    (38)     (38)        13                  0      (38)       38
      Stock dividend on preferred stock                                                        (145)      (145)              (145)
      Stock forfeited in settlement of claim      (340)     (340)                       272                (68)               (68)
      Common stock subscription adjustments                         227      227       (227)                 0                  0
                                              --------  --------  -----   ------    ------- --------   -------  -------     ------

      BALANCE - JUNE 30, 1997                    9,552  $  9,552      0       $0    $ 3,795 $(1,455)   $11,892       $0   $11,892
                                              ========  ========  =====   ======    ======= =======    =======  =======   =======

</TABLE>

See notes to financial statements


                                      F-5
<PAGE>

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

STATEMENT OF CASH FLOWS
(going concern basis)
(in thousands)

<TABLE>
<CAPTION>
                                                                                    PERIOD FROM
                                                                                   AUGUST 1, 1996
                                                                                   TO JUNE 30, 1997
                                                                                   ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                  <C>
   Net loss                                                                          $  (505)
   Adjustments to reconcile net loss to net cash provided by operating activities:
      Depreciation and amortization                                                      998
      Noncash gain on settlement of claim                                               (596)
      Deferred compensation payable                                                      (42)
      Deferred income taxes                                                             (382)
      Changes in:
        Trade receivables, net                                                         2,031
        Merchandise inventory                                                         (4,252)
        Tax refund receivable                                                          1,036
        Prepaid expenses and other current assets                                        175
        Accounts payable                                                               5,189
        Deferred rent payable                                                             99
        Accrued expenses and taxes                                                        78
                                                                                     -------
           Net cash provided by operating activities                                   3,829
                                                                                     -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property and equipment                                                  (767)
   Decrease in other assets                                                              170
                                                                                     -------
           Net cash used in investing activities                                        (597)
                                                                                     -------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of notes payable                                                           (396)
   Net decrease in short-term bank debt                                               (2,166)
   Collections on common stock                                                            38
   Common stock redeemed                                                                 (23)
   Preferred stock redeemed                                                             (485)
                                                                                     -------
           Net cash used in financing activities                                      (3,032)
                                                                                     -------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                200
Cash and cash equivalents - beginning of period                                          200
                                                                                     -------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                            $   400
                                                                                     =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest paid                                                                     $ 4,805
   Income taxes - refunded                                                           $ 1,036
   Summary of noncash transactions:
      Reduction of accrued  expenses in exchange  for issuance of notes  payable
      Cancellation of common shares and liability for deferred compensation
        in connection with settlement of claim                                       $   596
      Accounts receivable reduced for redemptions of common stock                    $    24
      Stock dividends on preferred stock                                             $   145

</TABLE>

See notes to financial statements

                                       F-6

<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  amount  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 has been recorded at its
      present  value   ($880,000  and  $823,000  at  July  31,  1999  and  1998,
      respectively)  using an imputed  interest  rate of 6.69%.  The  adjustable
      value note  provides  for  interest at a rate (6.97% and 6.36% at July 31,
      1999 and 1998,  respectively)  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 is payable quarterly based on the unpaid principal balance of the
      note.  During the years ended July 31, 1999 and 1998, the Company received
      quarterly  principal  payments  on the  note  aggregating  $3,452,000  and
      $2,000,000, respectively plus interest payments of $1,060,000 and $82,000,
      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  files a
      registration  statement with the Securities and Exchange  Commission prior
      to July 3, 2001 in connection  with an initial public  offering.  No value
      has been ascribed to the option due to its contingent nature.


<PAGE>

      The asset purchase  agreement  provided that the purchase price is 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 H[3]).  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,  in fiscal  2000,  the
      Company  wrote  off the then  $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.

<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.  After giving effect to the write-off of the unsecured note of
      $880,000  during  fiscal 2000 and the related  $352,000 tax  benefit,  net
      assets in  liquidation  increased by  $1,985,000  ($0.21 per common share)
      resulting  from  adjustments  in  connection  with the sale of  assets  to
      Neuman.

[3]   BASIS OF PRESENTATION:

      Through June 30, 1997,  the financial  statements  have been prepared on a
      going concern basis.  Subsequent to June 30, 1997, the Company has adopted
      the liquidation  basis of accounting.  Accordingly,  the net assets of the
      Company at July 31, 1999 and 1998 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
      expenses and the amount,  if any,  ultimately to be collected on unsecured
      claims against the bankruptcy estate.

<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1]   USE OF ESTIMATES:

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

[2]   MERCHANDISE INVENTORY:

      Inventory,  which consisted  entirely of finished goods, was stated at the
      lower of cost (last-in, first-out) or market.


                                      F-8
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[3]   PROPERTY AND EQUIPMENT:

      Depreciation  was computed on straight-line  and accelerated  methods over
      the estimated useful lives as follows:

          Leasehold improvements                            10 - 18 years
          Warehouse equipment                                     5 years
          Data processing equipment                           5 - 7 years
          Trucks and delivery equipment                           5 years

[4]   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.

[5]   LOSS PER COMMON SHARE:

      For the eleven month period ended June 30, 1997, loss per common share was
      computed  by  dividing  net  loss  as  increased  by  preferred   dividend
      requirements,  by the weighted average number of common shares outstanding
      during the period.

NOTE C - 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 follows:


                                       F-9
<PAGE>

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

        Estimated liquidation expenses accrued
           during the period July 1, 1997 to July 31, 1997       $   2,017

        Liquidation expense paid during the period                     (93)
                                                                 ---------

        Balance at July 31, 1997                                     1,924

        Liquidation expenses paid during the year ended
           July 31, 1998                                              (411)

        Increase in estimated liquidation expenses to be
           incurred                                                    293
                                                                 ---------

        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
                                                                 =========


                                      F-10
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE D - SETTLEMENT OF CLAIM

During the year ended July 31, 1996, an independent  investigatory firm retained
by the Company  uncovered  certain payments which may have been unauthorized and
may have benefited the Company's former  president and chief executive  officer.
The Company  asserted  various claims against this individual who has denied the
allegations.  In June 1997,  the parties  entered  into a  settlement  agreement
whereby 339,851 shares of the Company's common stock owned by the former officer
and his wife were  forfeited.  In addition,  he surrendered his right to receive
unpaid deferred  compensation  consisting of monthly  payments of $8,333 through
February  2004.  The Company had  previously  provided for the present  value of
these  payments.  The Company  recorded a gain of $596,000 on  settlement of the
claim during the period ended June 30, 1997.

NOTE E - RETIREMENT PLANS

The Company  maintained a  noncontributory  defined benefit pension plan for its
eligible  nonunion  employees  which  was  frozen  June 28,  1996.  Accordingly,
employee service subsequent to such date is excluded from benefit accruals under
the plan. The benefits under this plan were based on the participants' length of
service and  compensation.  The funding  policy for this plan was to  contribute
amounts actuarially determined as necessary to provide sufficient assets to meet
the benefit requirements of the plan retirees. The plan was terminated in August
1997. In connection therewith,  a loss of $305,000 on termination of the pension
plan has been reflected as a decrease in net assets in July 1997.

Net pension cost included the following components:

                                                             PERIOD FROM
                                                            AUGUST 1, 1996
                                                             TO JUNE 30,
                                                                1997
                                                             -----------

        Interest cost on projected benefit obligation            $82,000
        Actual return on plan assets                             (48,000)
        Net amortization and deferral                              8,000
                                                             -----------

        Net periodic cost                                        $42,000
                                                             ===========

The  Company  made   contributions   along  with  other  employers  to  a  union
multi-employer  plan,  Local 815,  International  Brotherhood of Teamsters.  The
expense for such plan was  $337,000  for the eleven  month period ended June 30,
1997. The Employee  Retirement  Income Securities Act of 1974, as amended by the
Multi-Employers  Pension Plan Amendment Act of 1980, imposes certain liabilities
upon employers who are contributors to multi-employer plans in the event of such
employers'  withdrawal from such a plan or upon a termination of such a plan. In
connection  with the sale of the  Company's  assets the  purchaser  assumed  the
Company's obligation under the multi-employer plan.

The  Company  also  had a  profit-sharing  plan and a  401(k)  savings  plan for
eligible  nonunion  employees.  The 401(k)  plan was solely  funded by  employee
contributions.   The   profit-sharing   plan   required   no  fixed  or  minimum
contribution.  There was no profit-sharing expense for the period from August 1,
1996 through June 30, 1997.


                                      F-11
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE F - INCOME TAXES

A reconciliation of the income tax benefit with the amounts computed by applying
the maximum Federal income tax rate to the pre-tax loss follows:

                                                               PERIOD FROM
                                                              AUGUST 1, 1996
                                                                TO JUNE 30,
                                                                   1997
                                                         --------------------

 Computed tax benefit at maximum rate                    $(325,000)     (34.0)%
 State tax benefit, net of Federal income tax effect       (57,000)      (6.0)
 Other adjustments                                         (68,000)      (7.1)
                                                         ---------      -----

                                                         $(450,000)     (47.1)%
                                                         =========      =====

Deferred  taxes relate to tax loss  carryforwards  and  differences  between the
financial  reporting  and tax  bases of  assets  and  liabilities.  The tax gain
($624,000)  on sale of the net  assets  to  Neuman  is being  recognized  on the
installment basis for tax purposes; accordingly, the tax basis of the adjustable
value note is reduced by the unrecognized  gain and a deferred tax liability has
been  recorded  for the  difference  between  the  amount  at which  the note is
reflected in the accompanying balance sheet and its tax basis.

The net deferred tax asset at July 31, 1999 and 1998 relates to the following:



                                                     1999           1998
                                                ------------    ------------

 Estimated liquidation expenses                 $    429,000    $    614,000
 Difference between financial
  reporting and tax basis of note receivable         (68,000)       (105,000)
                                                ------------    ------------

                                                $    361,000    $    509,000
                                                ============    ============

In  connection  with the sale of the  Company's  net assets to Neuman on July 3,
1997, the balance in the deferred tax asset account at such date was written off
as a reduction of net assets.


                                      F-12
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE G - OFFICER'S LIFE INSURANCE

At July 31, 1999 the Company was the owner and beneficiary of insurance policies
of $1,600,000,  on the life of its former president.  At July 31, 1999 and 1998,
the  cash  surrender   value  of  these  policies  was  $201,000  and  $199,000,
respectively.  At such  dates,  the Company had  outstanding  loans  aggregating
$152,000  against the cash surrender  value at an annual interest rate of 7.57%.
The cash  surrender  value,  net of borrowings  is included in other assets.  In
October 2001, the Company's  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 in fiscal 2002.


                                      F-13
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE H - COMMITMENT AND CONTINGENCIES

[1]   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.

      Total rent expense,  including  real estate taxes,  was $1,109,000 for the
      eleven-month period ended June 30, 1997.

      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.

[2]   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
      (see Note K). 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.

      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.

[3]   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   totalling
      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.


                                      F-14
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE H - COMMITMENT AND CONTINGENCIES  (CONTINUED)

[3]   (CONTINUED)

      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.

[4]   In October  1996,  the Company  received a letter  from an attorney  for a
      former director and stockholder of the Company  alleging  mismanagement of
      the Company  and  requesting  additional  information.  In June 1997,  the
      attorney,  acting on behalf of the former director and other  stockholders
      who appear to be related to the former  director,  asked for copies of the
      Company's  financial  statements  over the past  three  years,  which  the
      Company supplied. No other action has been taken with regard to the claims
      in the October 1996 letter by either the former director or his attorney.

[5]   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 tortious 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.

[6]   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. The agreement was terminated
      in August 1999. He was thereafter  engaged on a  month-to-month  basis for
      $2,750 per month through April 2002.


                                      F-15
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

NOTE H - COMMITMENT AND CONTINGENCIES  (CONTINUED)

[7]   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 I - REDEEMABLE PREFERRED STOCK

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.  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 J - STOCKHOLDERS' EQUITY

The stockholders were 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,  1999,
stockholders  returned  243,000  shares  of  common  stock  to  the  Company  in
settlement of previously written off receivable  balances.  The common stock was
valued at  approximately  $338,000 based on the per share value of net assets in
liquidation.

NOTE K - INVENTORY DEFALCATION

During 1996, an inventory defalcation was discovered.  On February 17, 1998, the
Company received  $1,000,000 from insurance coverage related to the defalcation.
Such amount has been reflected in the  accompanying  statement of changes in net
assets for the period from July 1, 1997 to July 31, 1997.


                                      F-16