UNITED STATES
                    SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C.  20549

                                 FORM 10-Q

(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996

                               or

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

     Commission file number 33-31706-01

                          SULLIVAN COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                  62-1395968
-----------------------------------      ---------------------------------------
  (State or other jurisdiction of        (I.R.S. employer identification number)
   incorporation or organization)

                               225 High Ridge Road
                           Stamford, Connecticut 06905
                                 (203) 977-8101

       (Address, including zip code, and telephone number, including area
               code, of registrant's principal executive offices)

                             SULLIVAN GRAPHICS, INC.
             (Exact name of registrant as specified in its charter)

              New York                                  16-1003976
-----------------------------------      ---------------------------------------
  (State or other jurisdiction of        (I.R.S. employer identification number)
   incorporation or organization)

                               100 Winners Circle
                           Brentwood, Tennessee 37027
                                 (615) 377-0377

       (Address, including zip code, and telephone number, including area
               code, of registrant's principal executive offices)

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 during
the  preceding 12 months (or for such shorter  periods that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes [X]    No [ ]

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practical date.

Sullivan  Communications,  Inc.  has 123,889  shares  outstanding  of its Common
Stock,  $.01 Par Value, as of January 31, 1997 (all of which are privately owned
and not traded on a public market).

                   Exhibit Index on page 26 of 27 total pages
<PAGE>


                                      INDEX


Part I.   Financial Information                                         Page No.
-------   ---------------------                                         --------


Item 1.   Condensed Consolidated Financial Statements

          Condensed Consolidated Balance Sheets as of December 31, 1996
          and March 31, 1996                                               3

          Condensed Consolidated Statements of Operations for the
          three months ended December 31, 1996 and 1995                    5

          Condensed Consolidated Statements of Operations for the
          nine months ended December 31, 1996 and 1995                     6

          Condensed Consolidated Statements of Cash Flows
          for the nine months ended December 31, 1996 and 1995             7

          Notes to Condensed Consolidated Financial Statements             8

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                       14


Part II.  Other Information

Item 1.   Legal Proceedings                                               24

Item 6.   Exhibits and Reports on Form 8-K                                24


          Signatures                                                      25

          Exhibit Index                                                   26




                                       2
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                      Condensed Consolidated Balance Sheets
                    (Dollars in thousands, except par values)


                                               December 31, 1996  March 31, 1996
                                               -----------------  --------------
                                                 (Unaudited)

Assets

Current assets:
  Cash and cash equivalents                            --              --
  Receivables:

    Trade accounts, less allowance for
     doubtful accounts of $6,279 and $4,830 at
     December 31, 1996 and March 31, 1996
     respectively                                 $  58,252           64,465
  Other                                               2,385            3,588
                                                  ---------          -------
          Total receivables                          60,637           68,053

  Inventories                                        10,388           13,181
  Prepaid expenses and other current assets           4,074            4,285
                                                  ---------          -------
          Total current assets                       75,099           85,519
 
Property, plant and equipment                       235,870          207,264 
Less accumulated depreciation                       (66,327)         (51,103)
                                                  ---------          -------
          Net property, plant and equipment         169,543          156,161 

Excess of cost over net assets acquired, less
  accumulated amortization of $31,433 and
  $25,269 at December 31, 1996 and
  March 31, 1996, respectively                       84,054           89,324

Other assets                                         15,845           20,177
                                                  ---------          -------

           Total assets                           $ 344,541          351,181
                                                  =========          =======

See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                      Condensed Consolidated Balance Sheets
                    (Dollars in thousands, except par values)


                                               December 31, 1996  March 31, 1996
                                               -----------------  --------------
                                                 (Unaudited)


Liabilities and Stockholders' Deficit

Current liabilities:
  Current installments of long-term debt and
    capitalized leases                            $  16,794            11,490
  Trade accounts payable                             30,794            35,931
  Accrued expenses                                   33,507            27,271
  Income taxes                                        1,829             1,215
                                                  ---------          --------
     Total current liabilities                       82,924            75,907

Long-term debt and capitalized leases, excluding
  current installments                              288,065           286,127
Deferred income taxes                                 8,202             7,801
Other liabilities                                    29,286            25,742
                                                  ---------          --------
     Total liabilities                              408,477           395,577

Stockholders' deficit:

Common stock, voting, $.01 par value, 5,852,223
  shares authorized, 123,889 shares issued and
  outstanding                                             1                 1
Series A convertible preferred stock,
  $.01 par value, 4,000 shares authorized,
  issued and outstanding, $40,000,000
  liquidation preference                               --                --
Series B convertible preferred stock,
  $.01 par value, 1,750 shares authorized,                 
  issued and outstanding, $17,500,000                      
  liquidation preference                               --                --
Additional paid-in capital                           57,499            57,499
Accumulated deficit                                (120,016)         (100,525)
Cumulative translation adjustment                    (1,420)           (1,371)
                                                  ---------          --------

     Total stockholders' deficit                    (63,936)          (44,396)
                                                  ---------          --------

Commitments and contingencies

     Total liabilities and stockholders' 
       deficit                                    $ 344,541           351,181
                                                  =========          ========

See accompanying notes to condensed consolidated financial statements.




                                       4
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                 Condensed Consolidated Statements of Operations
                                 (In thousands)
                                   (Unaudited)



                                                          Three Months Ended
                                                              December 31,
                                                        ----------------------
                                                          1996          1995
                                                        ---------     --------

Sales                                                   $ 136,472      153,308
Cost of sales                                             116,753      133,602
                                                        ---------      -------

     Gross profit                                          19,719       19,706


Selling, general and administrative expenses (note 8)      10,882        9,737
Amortization of goodwill                                    2,065        2,158
Restructuring costs and other special charges               1,171          104
                                                        ---------      -------

     Operating income                                       5,601        7,707

Other expense (income):
  Interest expense                                          9,139        8,648
  Interest income                                             (40)         (49)
  Other, net                                                  130          235
                                                        ---------      -------

  Total other expense                                       9,229        8,834
                                                        ---------      -------

     Loss from continuing operations before income
       taxes                                               (3,628)      (1,127)

Income tax expense                                           (711)        (188)
                                                        ---------      -------

     Loss from continuing operations                       (4,339)      (1,315)

Discontinued operations, net of tax                          --          1,388

                                                        ---------      -------
          Net (loss) income                             $  (4,339)          73
                                                        =========      =======


See accompanying notes to condensed consolidated financial statements.



                                       5
<PAGE>
                          SULLIVAN COMMUNICATIONS, INC.
                 Condensed Consolidated Statements of Operations
                                 (In thousands)
                                   (Unaudited)

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

Sales                                                   $ 414,671      408,451
Cost of sales                                             362,069      354,795
                                                        ---------      -------

  Gross profit                                             52,602       53,656

Selling, general and administrative expenses (note 8)      34,781       28,089
Amortization of goodwill                                    6,164        6,473
Restructuring costs and other special charges               1,659        2,828
                                                        ---------      -------

     Operating income                                       9,998       16,266

Other expense (income):
  Interest expense                                         27,233       23,867
  Interest income                                            (131)        (229)
  Nonrecurring charge related to terminated                                   
  merger                                                      --         1,534
  Other, net                                                   85        1,257
                                                        ---------      -------

Total other expense                                        27,187       26,429
                                                        ---------      -------

     Loss from continuing operations before
     income taxes and extraordinary item                  (17,189)     (10,163)

Income tax expense                                         (2,302)      (3,375)
                                                        ---------      -------

   Loss from continuing operations before
   extraordinary item                                     (19,491)     (13,538)

Discontinued operations, net of tax                          --          1,388
Loss on early extinguishment of debt, net of tax             --         (4,526)
                                                        ---------      -------

          Net loss                                      $ (19,491)     (16,676)
                                                        =========      =======


See accompanying notes to condensed consolidated financial statements.




                                       6
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                Condensed Consolidated Statements of Cash Flows
                                 (In thousands)
                                  (Unaudited)

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

Cash flows provided (used) by operating activities:
  Net loss                                              $ (19,491)     (16,676)

Adjustments to reconcile net loss to cash provided 
(used) by operating activities:
  Depreciation                                             18,477       15,709
  Amortization of goodwill and other assets                 7,279        7,652
  Amortization of deferred financing costs and
   bond premium                                             1,327          971

Other special charges - non-cash                            1,019         --

Extraordinary non-cash credit from early
 retirement of debt, net                                     --         (1,803)

Decrease (increase) in working capital and other           17,573      (15,384)
                                                        ---------     --------
     Net cash provided (used) by operating activities      26,184       (9,531)

Cash flows provided (used) by investing activities:
  Cash purchases of property, plant and equipment          (7,123)     (14,159)
  Proceeds from sales of property, plant and equipment         21           15
  Other                                                      (192)         (78)
                                                        ---------     --------
     Net cash used by investing activities                 (7,294)     (14,222)

Cash flows provided (used) by financing activities:
  Proceeds from long-term borrowings                         --        245,000
  Repayment of long-term debt, including current
   maturities                                              (7,522)    (218,682)
  Net (decrease) increase in revolver borrowings           (8,559)       5,901
  Payments under capital lease obligations                 (2,169)        (286)
  Payment of deferred financing costs                        (644)     (11,846)
  Other, net                                                    4          110
                                                        ---------     --------
     Net cash (used) provided by financing activities     (18,890)      20,197

Effect of exchange rates on cash and cash equivalents        --            (15)
                                                        ---------     --------
Decrease in cash and cash equivalents                        --         (3,571)

Cash and cash equivalents:
  Beginning of period                                        --          4,635
                                                        ---------     --------
  End of period                                         $    --          1,064
                                                        =========     ========
Noncash investing activity:
  Equipment purchases under capital leases              $  25,330        7,746
                                                        =========     ========

See accompanying notes to condensed consolidated financial statements.




                                       7
<PAGE>

                      SULLIVAN COMMUNICATIONS, INC.
           Notes to Condensed Consolidated Financial Statements
                               (Unaudited)
Description of the Company

Sullivan Communications, Inc. ("Communications"),  and, together with its wholly
owned subsidiary,  Sullivan  Graphics,  Inc.  ("Graphics"),  collectively,  (the
"Company") was formed in April 1989 under the name GBP Holdings,  Inc. to effect
the  purchase  of all  the  capital  stock  of GBP  Industries,  Inc.  from  its
stockholders in a leveraged buyout  transaction.  In October 1989, GBP Holdings,
Inc.  changed its name to  Sullivan  Holdings,  Inc.  and GBP  Industries,  Inc.
changed  its name to  Sullivan  Graphics,  Inc.  Effective  June 1993,  Sullivan
Holdings, Inc. changed its name to Sullivan Communications, Inc.

On April 8, 1993 (the "Acquisition Date"),  pursuant to an Agreement and Plan of
Merger dated as of March 12, 1993, as amended (the "Merger Agreement"),  between
Communications  and SGI Acquisition  Corp.  ("Acquisition  Corp."),  Acquisition
Corp. was merged with and into Communications (the  "Acquisition").  Acquisition
Corp. was formed by The Morgan Stanley  Leveraged Equity Fund II, L.P.,  certain
institutional investors and certain members of management (the "Purchasers") for
the purpose of  acquiring a majority  interest  in  Communications.  Acquisition
Corp. acquired a substantial and controlling majority interest in Communications
in  exchange  for  $40  million  in  cash.  In the  Acquisition,  Communications
continued as the surviving  corporation and the separate corporate  existence of
Acquisition Corp. was terminated.

On August 15, 1995, the Company  completed a merger  transaction  (the "Shakopee
Merger") with Shakopee Valley Printing Inc. ("Shakopee"). Shakopee was formed to
effect the purchase of certain assets and  assumption of certain  liabilities of
Shakopee Valley Printing, a division of Guy Gannett Communications.  On December
22,  1994,  pursuant to an  Agreement  for the  Purchase  of Assets  between Guy
Gannett  Communications  (the "Seller") and Shakopee (the  "Buyer"),  the Seller
agreed to sell (effective at the close of business on December 22, 1994) certain
assets and transfer certain liabilities of Shakopee Valley Printing to the Buyer
for a total purchase price of approximately  $42.6 million,  primarily  financed
through the issuance of 35,000 shares of Common Stock and bank  borrowings.  The
35,000 shares were  purchased by Morgan  Stanley  Capital  Partners  III,  L.P.,
Morgan  Stanley  Capital  Investors,  L.P.  and  MSCP  III 892  Investors,  L.P.
(collectively,  the "MSCP III Entities"),  together with First Plaza Group Trust
and  Leeway & Co. The  general  partner  of each of the MSCP III  Entities  is a
wholly owned  subsidiary of Morgan Stanley Group Inc., the parent company of the
general partner of the Company's majority  stockholder.  In addition,  the other
stockholders of Shakopee were also stockholders of the Company.

Communications has no operations or significant assets other than its investment
in Graphics.  Communications  is dependent upon  distributions  from Graphics to
fund its  obligations.  Under the terms of its debt  agreements  at December 31,
1996,  Graphics'  ability to pay dividends or lend to  Communications  is either
restricted or  prohibited,  except that  Graphics may pay  specified  amounts to
Communications  (i) to pay  the  repurchase  price  payable  to any  officer  or
employee  (or  their  estates)  of  Communications,  Graphics  or any  of  their
respective  subsidiaries  in respect of their stock or options to purchase stock
in  Communications  upon the death,  disability or  termination of employment of
such  officers and  employees  (so long as no default,  or event of default,  as
defined,  has  occurred  under the terms of the New Bank  Credit  Agreement,  as
defined below,  and provided the aggregate  amount of all such  repurchases does
not exceed $2,000,000) and (ii) to fund the payment of Communications' operating
expenses incurred in the ordinary course of business,  other corporate  overhead
costs and expenses (so long as the  aggregate  amount of such  payments does not
exceed $250,000 in any fiscal year) and Communications'  obligations pursuant to
a tax sharing agreement with Graphics.  Substantially all of Graphics' long-term
obligations have been fully and unconditionally guaranteed by Communications.




                                       8
<PAGE>

                        SULLIVAN COMMUNICATIONS, INC.
             Notes to Condensed Consolidated Financial Statements
                                 (Unaudited)

The two  business  sectors  of the  commercial  printing  industry  in which the
Company operates are printing and digital imaging/prepress services conducted by
its American Color division ("American Color").

1.  Summary of Significant Accounting Policies

a.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and are in accordance with  instructions to Form 10-Q and
Article  10 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal  recurring  adjustments)  considered  necessary for a fair
presentation  have been included.  The operating  results for the three and nine
month  periods  ended  December 31, 1996 are not  necessarily  indicative of the
results  that may be expected  for the fiscal year ended March 31,  1997.  These
unaudited  condensed   consolidated  financial  statements  should  be  read  in
conjunction with the  consolidated  financial  statements and footnotes  thereto
included in the Company's Form 10-K for the fiscal year ended March 31, 1996 and
the Company's Post-Effective Amendment No. 2 to Registration Statement No.
33-97090 on Form S-1.

Certain  prior  period  amounts have been  reclassified  to conform with current
period presentation.

2. The Shakopee Merger

On August 15, 1995, the Shakopee  Merger was  consummated  and each  outstanding
share of the Common Stock of Shakopee was converted into one share of the Common
Stock of the Company  and 1/20 of one share of Series B  Preferred  Stock of the
Company.   Also  on  August  15,  1995,  concurrent  with  the  Shakopee  Merger
transaction,  the Company  refinanced a significant  portion of its  outstanding
indebtedness,  including  indebtedness  assumed  in  the  Shakopee  Merger  (the
"Refinancing"). See note 3 for a description of the Refinancing.

The Shakopee  Merger has been  accounted for as a combination  of entities under
common  control  (similar  to  a  pooling-of-interests),  and  accordingly,  the
unaudited condensed consolidated financial statements give retroactive effect to
the Shakopee Merger and include the combined  operations of  Communications  and
Shakopee subsequent to December 22, 1994.




                                       9
<PAGE>

                        SULLIVAN COMMUNICATIONS, INC.
             Notes to Condensed Consolidated Financial Statements
                                 (Unaudited)

3. The Refinancing

On August 15, 1995, the Company sold $185 million of 12 3/4% Senior Subordinated
Notes Due 2005 (the "New Notes").  In connection with the sale of the New Notes,
the Company entered into a series of transactions  (the Refinancing and together
with the Shakopee Merger, the "Transactions"),  including the following: (i) the
Company entered into a Credit Agreement with BT Commercial  Corporation ("BTCC")
and other financial  institutions (the "New Bank Credit  Agreement"),  providing
Graphics with a $75 million revolving credit facility maturing in 2000 (the "New
Revolving Credit Facility") and a $60 million  amortizing term loan with a final
maturity in 2000 (the "New Term Loan"); (ii) the repayment of all $126.5 million
of indebtedness outstanding under Graphics' old bank credit agreement (plus $2.3
million of accrued  interest to the date of repayment);  (iii) the redemption of
all  outstanding  15%  Senior  Subordinated  Notes  Due 2000 of  Graphics  at an
aggregate  redemption  price of $105.6  million  (plus  $1.8  million of accrued
interest to the  redemption  date);  (iv) the  repayment of all $24.6 million of
indebtedness  assumed  in the  Shakopee  Merger  (plus  $0.1  million of accrued
interest to the date of repayment) and (v) the incurrence of approximately $11.8
million of fees and  expenses  related to the  Transactions.  As a result of the
Transactions,  the  Company  recorded  an  extraordinary  loss  related to early
extinguishment of debt of $4.5 million, net of $0 taxes. This extraordinary loss
primarily   consisted  of  the  early  redemption  premium  on  the  15%  Senior
Subordinated  Notes and the  write-off of deferred  financing  costs  related to
refinanced  indebtedness  partially  offset by the  write-off  of a bond premium
associated with the 15% Senior Subordinated Notes.

Borrowings  under the New Revolving  Credit  Facility are subject to a borrowing
base which  consists of (i) 85% of Eligible  Accounts  Receivable  plus (ii) the
lesser  of (x)  $15.0  million  or (y)  60% of  Eligible  Inventory  plus  (iii)
Equipment  Acquisition Loans in an amount not to exceed $7.5 million outstanding
at any time,  each of which must be repaid  within  six months  from the date of
borrowing, minus (iv) the aggregate amount of reserves against Eligible Accounts
Receivable and Eligible Inventory established by BTCC.

At December 31, 1996,  the  remaining  New Term Loan  amortizes in the following
annual amounts: (i) $2.3 million through the remainder of Fiscal Year 1997, (ii)
$10.6 million in Fiscal Year 1998, (iii) $13.3 million in Fiscal Year 1999, (iv)
$15.2 million in Fiscal Year 2000 and (v) $8.0 million in Fiscal Year 2001.

Communications has guaranteed  Graphics'  indebtedness under the New Bank Credit
Agreement, as amended (the "Bank Credit Agreement"),  which guarantee is secured
by a  pledge  of  all  Graphics'  and  its  subsidiaries'  stock.  In  addition,
borrowings under the Bank Credit  Agreement are secured by substantially  all of
the assets of Graphics.  Communications is restricted under its guarantee of the
Bank  Credit  Agreement  from,  among  other  things,   entering  into  mergers,
acquisitions,  incurring  additional debt and paying  dividends.  The Company is
currently  in  compliance  with all  financial  covenants  set forth in the Bank
Credit Agreement.

Interest under the Bank Credit Agreement is floating based on prevailing  market
rates and is computed  using  various rate options over periods of 30, 60, 90 or
180 days as selected by the Company.


                                       10
<PAGE>

                        SULLIVAN COMMUNICATIONS, INC.
             Notes to Condensed Consolidated Financial Statements
                                 (Unaudited)

4. The Gowe Acquisition

On March 12, 1996,  Graphics  acquired the assets of Gowe, Inc., a Medina,  Ohio
based regional printer of newspapers,  T.V. books and retail advertising inserts
and catalogs ("Gowe"),  for approximately $6.7 million in cash and assumption of
certain  liabilities of Gowe,  Inc.,  pursuant to an Asset  Purchase  Agreement,
among Graphics,  Gowe, Inc. and ComCorp,  Inc., the parent company of Gowe, Inc.
(the "Gowe  Acquisition").  The Gowe  Acquisition  was  accounted  for under the
purchase method of accounting  applying the provisions of Accounting  Principles
Board  Opinion No. 16 ("APB 16").  Pursuant to the  requirements  of APB 16, the
purchase price was allocated to the tangible assets and identifiable  intangible
assets and  liabilities  assumed based upon their  respective  fair values.  The
allocation  of the  purchase  price is  preliminary  and may  change  during the
allocation period.

The Company's  pro forma  unaudited  results of  operations  for the nine months
ended December 31, 1995, assuming that the Gowe Acquisition occurred as of April
1, 1995, were $434.7 million in sales and a $17.4 million net loss.

5. Disposal of 51% Interest in National Inserting Systems, Inc.

On March 11,  1996,  the Company  sold its 51%  interest  in National  Inserting
Systems,  Inc.  ("NIS") for  approximately  $2.5  million in cash and a note for
approximately  $0.2  million  under  the terms of a Stock  Redemption  Agreement
between NIS and Graphics. This transaction resulted in a net gain on disposal of
approximately  $1.3  million,   which  was  classified  as  other,  net  in  the
consolidated  statement of operations  for the fiscal year ended March 31, 1996.
The proceeds from the sale were used to repay  indebtedness under Graphics' Bank
Credit Agreement (as defined herein).

6. Inventories

The components of inventories are as follows (in thousands):


                                       December 31, 1996      March 31, 1996
                                       -----------------      --------------

Paper                                       $ 8,314                11,277

Ink                                             315                   272

Equipment held for sale                         176                   349

Supplies and other                            1,583                 1,283
                                            -------                ------
      Total                                 $10,388                13,181
                                            =======                ======


7.   Non-recurring Charge Related to Terminated Merger

The Company  recognized $1.5 million of expenses related to a terminated  merger
in the nine month period ended December 31, 1995.

8.  Non-recurring Charge Related to Resignation of Chief Executive Officer

A  non-recurring  charge of $1.9  million  relating  to the  resignation  of the
Company's  Chief  Executive  Officer was recorded in the quarter ended September
30, 1996 and is classified as a selling,  general and administrative  expense in
the nine months ended December 31, 1996.  Payments  under the related  agreement
continue through 2001, subject to certain requirements.



                                       11
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

9.   Restructuring Costs and Other Special Charges

In April 1995, the Company approved a plan for its American Color division which
is   designed   to  improve   productivity,   increase   customer   service  and
responsiveness,  and provide increased growth in this business. The cost of this
plan is being  accounted  for in  accordance  with  the  guidance  set  forth in
Emerging  Issues  Task  Force  Issue 94-3  "Liability  Recognition  for  Certain
Employee  Termination  Benefits  and other Costs to Exit an Activity  (including
Certain  Costs  Incurred  in  a  Restructuring)".  The  estimated  pretax  costs
associated  with  this  plan of $5.0  million  represent  employee  termination,
goodwill  write-down  and other  related costs that will be incurred as a direct
result of the plan. In the quarter ended June 30, 1995,  the Company  recognized
$2.1  million of such  charges,  primarily  for  severance  and other  personnel
related costs. In the quarter ended  September 30, 1995, the Company  recognized
$0.6 million of restructuring  costs primarily  related to hiring and relocating
certain  management  personnel.  In the quarter  ended  December 31,  1995,  the
Company  recognized an additional  $0.1 million of  restructuring  costs. In the
quarter  ended  March  31,  1996,  the  Company   recognized   $1.3  million  of
restructuring costs, which included $0.9 million of goodwill write-down and $0.4
million  primarily  related  to certain  relocation  costs  associated  with the
restructuring.  The goodwill  write-down related to certain facilities that were
either  shut  down  or  relocated  as part of the  restructuring.  In  addition,
approximately $0.4 million, $0.1 million and $0.1 million of restructuring costs
primarily related to relocation costs were recognized in the quarters ended June
30, 1996, September 30, 1996 and December 31, 1996, respectively.  The remaining
costs  of  approximately  $0.3  million,   principally   related  to  additional
relocation and other transition expenses, will be recorded as incurred.

During the quarter ended December 31, 1996, the Company recorded special charges
totalling  $1.0  million to adjust the  carrying  values of idle,  disposed  and
under-performing assets of the Company's American Color sector to estimated fair
values. The provision was based on a review of Company wide long-lived assets in
accordance  with  Financial   Accounting  Standards  Board  Statement  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("FASB 121"). Fair value was based on the Company's  estimate of
held and used and idle assets based on current market  conditions using the best
information available.  Such special charges are classified within restructuring
costs and other special charges in the consolidated statement of operations.







                                       12
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

10. Commitments and Contingencies

The Company has  employment  agreements  with one of its principal  officers and
four other employees. Such agreements provide for minimum compensation levels as
well as for incentive  bonuses which are payable if specified  management  goals
are attained.  The aggregate  commitment for future compensation at December 31,
1996, excluding bonuses, was approximately $2.3 million.

Graphics,  together with over 300 other persons, has been designated by the U.S.
Environmental  Protection  Agency as a potentially  responsible  party (a "PRP")
under the Comprehensive  Environmental  Response  Compensation and Liability Act
("CERCLA," also known as "Superfund") at one Superfund site.  Although liability
under  CERCLA  may be  imposed on a joint and  several  basis and the  Company's
ultimate  liability  is not  precisely  determinable,  the PRPs have agreed that
Graphics' share of removal costs is 0.46% and therefore  Graphics  believes that
its share of the anticipated remediation costs at such site will not be material
to its  business or  financial  condition.  Based upon an analysis of  Graphics'
volumetric  share of waste  contributed to the site and the agreement  among the
PRPs,  the  Company  has  recorded a reserve of  approximately  $0.1  million in
connection with this liability on its consolidated balance sheet at December 31,
1996. The Company believes this amount is adequate to cover such liability.

On  December  21,  1989,  Graphics  sold its ink  manufacturing  operations  and
facilities ("CPS").  Graphics remains  contingently liable under $3.7 million of
industrial  revenue  bonds  assumed  by the  purchaser  ("CPS  Buyer")  in  this
transaction.  The CPS  Buyer  which  assumed  these  liabilities  has  agreed to
indemnify  Graphics  for any  resulting  obligation  and has  also  provided  an
irrevocable letter of credit in favor of the holders of such bonds. Accordingly,
management  believes that any obligation of Graphics  under this  contingency is
unlikely.

The Company has been named as a defendant in several other legal actions arising
from its normal business activities. In the opinion of management, any liability
that may arise from such actions will not have a material  adverse effect on the
consolidated financial statements of the Company.






                                       13
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Results of Operations

General

On August 15, 1995, Shakopee Valley Printing,  Inc. ("Shakopee") was merged with
and into Sullivan  Graphics,  Inc.  ("Graphics")  (the "Shakopee  Merger").  The
merger has been  accounted for as a combination of entities under common control
(similar to a pooling-of-interests), and accordingly, the condensed consolidated
financial  statements give retroactive effect to the Shakopee Merger and include
the combined operations of Sullivan Communications,  Inc. ("Communications") and
Shakopee  subsequent  to December  22, 1994 (the date on which  Shakopee  became
under common control with Graphics and Communications (the "Company")).

On March 11, 1996,  Graphics sold its 51% interest in National Inserting Systems
("NIS") for approximately $2.5 million in cash and a note for approximately $0.2
million  under  the  terms  of a  Stock  Redemption  Agreement  between  NIS and
Graphics.  The proceeds from the sale were used to repay  indebtedness under the
Bank Credit Agreement (as defined herein).

On March 12, 1996,  Graphics  acquired the assets of Gowe, Inc., a Medina,  Ohio
based regional printer of newspapers,  T.V. books and retail advertising inserts
and catalogs ("Gowe"),  for approximately $6.7 million in cash and assumption of
certain  liabilities of Gowe, Inc., pursuant to an Asset Purchase Agreement (the
"Gowe  Acquisition").  The Gowe Acquisition was accounted for under the purchase
method of accounting  applying the  provisions of  Accounting  Principles  Board
Opinion No. 16 ("APB 16").  Pursuant to the requirements of APB 16, the purchase
price was allocated to the tangible assets and  identifiable  intangible  assets
and liabilities  assumed based upon their respective fair values. The allocation
of the  purchase  price is  preliminary  and may change  during  the  allocation
period.  Gowe's  results of operations  for the three months ended  December 31,
1996 (the "1996 Three Month Period") and the nine months ended December 31, 1996
(the "1996 Nine Month Period") are included in the Company's Unaudited Condensed
Consolidated Financial Statements.

During March 1996, the Company  completed the construction and start-up of a new
plant in Hanover,  Pennsylvania ("Flexi-Tech").  Flexi-Tech will be dedicated to
the production of commercial flexi books (a form of advertising inserts) serving
various  segments of the retail  advertising  market and the  production of T.V.
listing guides serving the newspaper market.

In the 1996 Nine Month Period,  the Company began to present certain fixed costs
of its American Color production  facilities within cost of sales rather than as
selling,   general  and  administrative   expenses.  This  new  presentation  is
consistent with the Company's  presentation of the printing  sector's  financial
information,  and the Company  believes that this is a more accurate  measure of
the gross margin of the business. The financial information for the three months
ended  December  31, 1995 (the "1995 Three  Month  Period")  and the nine months
ended  December 31, 1995 (the "1995 Nine Month  Period") for the American  Color
sector has been reclassified to conform with this presentation.





                                       14
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations



The following table summarizes the Company's  results of operations for the 1996
Three Month Period,  the 1995 Three Month Period, the 1996 Nine Month Period and
the 1995 Nine Month Period.


                             Three Months Ended           Nine Months Ended
                                 December 31,                December 31,
                             -------------------         -------------------
                             1996           1995         1996           1995
                             ----           ----         ----           ----
                                        (dollars in thousands)

Sales:
     Printing             $ 115,290      $ 131,954    $ 353,218      $ 347,585
     American Color          20,029         18,864       55,992         54,854
     Other (a)                1,153          2,490        5,461          6,012
                          ---------      ---------    ---------      ---------
          Total           $ 136,472      $ 153,308    $ 414,671      $ 408,451

Gross Profit:
     Printing             $  14,924      $  15,225    $  38,801      $  40,924
     American Color           4,639          3,518       11,779         10,422
     Other (a)                  156            963        2,022          2,310
                          ---------      ---------    ---------      ---------
          Total           $  19,719      $  19,706    $  52,602      $  53,656

Gross Margin:
     Printing                 12.9%          11.5%        11.0%          11.8%
     American Color           23.2%          18.6%        21.0%          19.0%
          Total               14.4%          12.9%        12.7%          13.1%



Operating Income
(Loss):
     Printing             $   9,731      $  10,688    $  22,737      $  26,929
     American Color (b)        (364)(d)        292         (833)(d)       (896)
     Other (a) (c)           (3,766)(e)     (3,273)     (11,906)(e)     (9,767)
                          ---------      ---------    ---------      ---------
          Total           $   5,601      $   7,707    $   9,998      $  16,266


(a) Other operations consist primarily of revenues and expenses  associated with
    the Company's 51% owned  subsidiary,  NIS (sold on March 11, 1996),  and its
    wholly-owned subsidiary, Sullivan Media Corporation ("SMC").
(b) Includes the impact of restructuring costs of $0.1 million in the 1996 Three
    Month  Period and in the 1995 Three Month  Period,  $0.6 million in the 1996
    Nine Month Period and $2.8 million in the 1995 Nine Month Period.
(c) Also reflects corporate selling,  general and administrative  expenses,  and
    amortization expense.
(d) Includes  the impact of $1.0  million of other  special  charges  related to
    non-cash fixed asset write-offs and write-downs (see note 9 to the Unaudited
    Condensed Consolidated Financial Statements).
(e) Also reflects non-recurring employee termination expenses of $2.5 million in
    the  1996  Nine  Month  Period   (including  $1.9  million  related  to  the
    resignation  of the Company's  Chief  Executive  Officer - see note 8 to the
    Unaudited Condensed Consolidated Financial Statements) and $0.6 million in
    the 1996 Three Month Period.




                                       15
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Printing

Sales.  Printing sales increased $5.6 million to $353.2 million in the 1996 Nine
Month Period from $347.6  million in the 1995 Nine Month  Period.  This increase
includes  $36.9 million of sales by Gowe and  Flexi-Tech  and an  approximate 3%
increase in production volume  (excluding Gowe and Flexi-Tech).  These increases
were  partially  offset  by a  decrease  in paper  prices  and the  effect of an
increase in customer supplied paper.

Printing sales decreased $16.7 million to $115.3 million in the 1996 Three Month
Period  from  $132.0  million  in the 1995 Three  Month  Period.  This  decrease
includes a decrease  in paper  prices and the effect of an  increase in customer
supplied paper.  These decreases were partially offset by $14.1 million of sales
by Gowe and Flexi-Tech  and a slight  increase in production  volume  (excluding
Gowe and Flexi-Tech).

Gross Profit.  Printing gross profit  decreased $2.1 million to $38.8 million in
the 1996 Nine Month  Period  from $40.9  million in the 1995 Nine Month  Period.
Printing  gross  margin  decreased  to 11.0% in the 1996 Nine Month  Period from
11.8% in the 1995 Nine Month  Period.  The  decrease  in gross  profit and gross
margin includes an increase in depreciation expense, a reduction in the price of
scrap  paper,  incremental  costs  related to the  start-up  of  Flexi-Tech  and
continued  competitive pricing pressures.  These decreases were partially offset
by reduced  variable  production  and certain other  manufacturing  costs due to
continued cost containment programs at the printing plants, the impact of higher
volume and incremental gross margin from Gowe.

Printing gross profit  decreased $0.3 million to $14.9 million in the 1996 Three
Month Period from $15.2 million in the 1995 Three Month Period.  Printing  gross
margin  increased to 12.9% in the 1996 Three Month Period from 11.5% in the 1995
Three  Month  Period.  The  decrease  in gross  profit  includes  an increase in
depreciation expense, a reduction in the price of scrap paper, incremental costs
related  to  the  start-up  of  Flexi-Tech  and  continued  competitive  pricing
pressures.  These decreases were partially offset by reduced variable production
and certain other manufacturing costs due to continued cost containment programs
at the printing plants and  incremental  gross margin from Gowe. The increase in
gross margin as a percentage of sales is primarily attributable to the impact of
lower paper prices included in sales during the 1996 Three Month Period.

Selling,  General and  Administrative  Expenses.  Printing selling,  general and
administrative  expenses increased to $16.1 million or 4.6% of printing sales in
the 1996 Nine Month Period from $14.0  million or 4.0% of printing  sales in the
1995  Nine  Month  Period.   This  increase   includes   selling,   general  and
administrative  expenses  of  Gowe  and  Flexi-Tech,  and  increased  sales  and
marketing expenses.

Printing selling,  general and administrative expenses increased to $5.2 million
or 4.5% of printing  sales in the 1996 Three Month  Period from $4.5  million or
3.4% of printing  sales in the 1995 Three Month Period.  This increase  includes
selling,  general  and  administrative  expenses  of Gowe  and  Flexi-Tech,  and
increases in certain employee related expenses.

Operating  Income.  As a result of the above factors,  operating income from the
printing business  decreased to $22.7 million in the 1996 Nine Month Period from
$26.9 million in the 1995 Nine Month Period and decreased to $9.7 million in the
1996 Three Month Period from $10.7 million in the 1995 Three Month Period.




                                       16
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

American Color

Sales.  American  Color's sales  increased  $1.1 million to $56.0 million in the
1996 Nine Month Period from $54.9  million in the 1995 Nine Month  Period.  This
increase is primarily  the result of increases  in digital  visual  effects work
partially offset by lower equipment sales.

American Color's sales increased $1.1 million to $20.0 million in the 1996 Three
Month Period from $18.9 million in the 1995 Three Month Period. This increase is
primarily  the result of  increases  in prepress  production  volume and digital
visual effects work partially offset by lower equipment sales.

Gross  Profit.  American  Color's gross profit  increased  $1.4 million to $11.8
million in the 1996 Nine Month Period from $10.4  million in the 1995 Nine Month
Period.  American Color's gross margin increased to 21.0% in the 1996 Nine Month
Period from 19.0% in the 1995 Nine Month Period.  These  increases are primarily
the result of cost savings in material and other production costs offset in part
by facilities management start-up costs.

American Color's gross profit increased $1.1 million to $4.6 million in the 1996
Three Month  Period from $3.5 million in the 1995 Three Month  Period.  American
Color's  gross  margin  increased  to 23.2% in the 1996 Three Month  Period from
18.6% in the 1995 Three Month Period.  These  increases are primarily the result
of increased volume and cost savings in material and other production costs.

Selling, General and Administrative Expenses.  American Color's selling, general
and  administrative  expenses  increased  to $11.0  million or 19.6% of American
Color's  sales in the 1996  Nine  Month  Period  from $8.5  million  or 15.5% of
American  Color's  sales in the 1995 Nine  Month  Period.  These  increases  are
primarily a result of increased sales and marketing expenses and the addition of
operations  and  administrative  personnel and related  expenses,  including its
digital visual effects group.

American Color's selling,  general and administrative expenses increased to $3.8
million or 19.1% of American  Color's  sales in the 1996 Three Month Period from
$3.1 million or 16.5% of American  Color's sales in the 1995 Three Month Period.
These increases are primarily a result of increased sales and marketing expenses
and  the  addition  of  operations  and  administrative  personnel  and  related
expenses, including its digital visual effects group.

Operating  Income (Loss).  Operating  losses at American Color were reduced to a
loss of $0.8  million in the 1996 Nine Month  Period from a loss of $0.9 million
in the 1995 Nine Month Period.  This decrease includes the above factors and the
incurrence of other special  charges of $1.0 million  related to non-cash  fixed
asset write-offs and write-downs in the 1996 Nine Month Period and restructuring
costs associated with the American Color  restructuring  plan of $0.6 million in
the 1996 Nine Month Period and $2.8 million in the 1995 Nine Month Period.

Operating income (loss) at American Color decreased to a loss of $0.4 million in
the 1996 Three Month  Period from income of $0.3 million in the 1995 Three Month
Period.  This decrease  includes the above  factors and the  incurrence of other
special charges of $1.0 million  related to non-cash fixed asset  write-offs and
write-downs in the 1996 Three Month Period.

See note 9 to the Unaudited  Condensed  Consolidated  Financial  Statements  and
discussion below for information regarding the American Color restructuring plan
and other special  charges  related to the non-cash  write-off and write-down of
fixed assets.






                                       17
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Other Operations

Other operations consist primarily of revenues and expenses  associated with the
Company's 51% owned subsidiary,  NIS (sold March 11, 1996), and its wholly-owned
subsidiary,  SMC. In  addition,  other  operations  include  corporate  selling,
general  and  administrative  and  other  expenses  and  amortization   expense.
Amortization   expense   related  to  other   operations,   including   goodwill
amortization (see below), was $6.5 million,  $7.2 million, $2.1 million and $2.4
million,  in the 1996 Nine Month Period,  the 1995 Nine Month  Period,  the 1996
Three Month Period and the 1995 Three Month Period, respectively.

Operating losses from other operations increased $2.1 million to a loss of $11.9
million in the 1996 Nine Month  Period  from a loss of $9.8  million in the 1995
Nine Month  Period.  This increase  primarily  reflects  non-recurring  employee
termination  expenses of $2.5 million  (including  $1.9  million  related to the
resignation  of  the  Company's  Chief  Executive  Officer  - see  note 8 to the
Unaudited Condensed Consolidated Financial Statements).

Operating losses from other operations  increased $0.5 million to a loss of $3.8
million in the 1996 Three Month  Period from a loss of $3.3  million in the 1995
Three Month Period.  This  increase  includes the  non-recurring  charge of $0.6
million related to other employee termination expenses.

Goodwill Amortization

Amortization  expense  associated with goodwill was $6.2 million,  $6.5 million,
$2.1  million  and $2.2  million for the 1996 Nine Month  Period,  the 1995 Nine
Month  Period,  the 1996 Three  Month  Period and the 1995 Three  Month  Period,
respectively.

Restructuring Costs and Other Special Charges

In April 1995, the Company approved a plan for its American Color division which
is   designed   to  improve   productivity,   increase   customer   service  and
responsiveness,  and provide increased growth in this business. The cost of this
plan is being  accounted  for in  accordance  with  the  guidance  set  forth in
Emerging  Issues  Task  Force  Issue 94-3  "Liability  Recognition  for  Certain
Employee  Termination  Benefits  and other Costs to Exit an Activity  (including
Certain  Costs  Incurred  in  a  Restructuring)".  The  estimated  pretax  costs
associated  with  this  plan of $5.0  million  represent  employee  termination,
goodwill  write-down  and other  related costs that will be incurred as a direct
result of the plan. In the quarter ended June 30, 1995,  the Company  recognized
$2.1  million of such  charges,  primarily  for  severance  and other  personnel
related costs. In the quarter ended  September 30, 1995, the Company  recognized
$0.6 million of restructuring costs,  primarily related to hiring and relocating
certain  management  personnel.  In the quarter  ended  December 31,  1995,  the
Company  recognized an additional  $0.1 million of  restructuring  costs. In the
quarter  ended  March  31,  1996,  the  Company   recognized   $1.3  million  of
restructuring costs, which included $0.9 million of goodwill write-down and $0.4
million  primarily  related  to certain  relocation  costs  associated  with the
restructuring.  The goodwill  write-down related to certain facilities that were
either  shut  down  or  relocated  as part of the  restructuring.  In  addition,
approximately  $0.4  million,  $0.1  million and $0.1  million of  restructuring
charges  primarily  related to relocation  costs were recognized in the quarters
ended June 30, 1996, September 30, 1996 and December 31, 1996, respectively. The
remaining costs of approximately $0.3 million, principally related to additional
relocation and other transition expenses, will be recorded as incurred.

During the quarter ended December 31, 1996, the Company recorded special charges
totalling  $1.0  million to adjust the  carrying  values of idle,  disposed  and
under-performing assets of the Company's American Color sector



                                       18
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                    Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

to estimated  fair values.  The provision was based on a review of  Company-wide
long-lived  assets in  accordance  with  Financial  Accounting  Standards  Board
Statement No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets to be Disposed Of" ("FASB 121").  Fair value was based on the
Company's  estimate  of held and used and idle  assets  based on current  market
conditions  using the best  information  available.  Such  special  charges  are
classified  within   restructuring  costs  and  other  special  charges  in  the
consolidated statement of operations.

Interest Expense

Interest expense  increased 14.1% to $27.2 million in the 1996 Nine Month Period
from $23.9 million in the 1995 Nine Month Period. This increase is primarily the
result of increased average  indebtedness levels including  indebtedness related
to  the  Transactions  (see  note  3 to  the  Unaudited  Condensed  Consolidated
Financial Statements) and obligations under capital leases.

Interest  expense  increased 5.7% to $9.1 million in the 1996 Three Month Period
from $8.6 million in the 1995 Three Month Period. This increase is primarily the
result of increased obligations under capital leases.

Non-recurring Charges Related to Terminated Merger

The Company  recognized $1.5 million of expenses related to a terminated  merger
in the 1995 Nine Month Period.

Other Expense, Net

Other  expense,  net decreased to expense of $0.1 million in the 1996 Nine Month
Period from expense of $1.3 million in the 1995 Nine Month Period. This decrease
includes  the impact of reduced  expenses  associated  with an employee  benefit
program.

Other expense,  net decreased to expense of $0.1 million in the 1996 Three Month
Period from expense of $0.2 million in the 1995 Three Month Period.

Income Tax Expense

Income tax expense  decreased to $2.3 million in the 1996 Nine Month Period from
$3.4 million in the 1995 Nine Month Period and  increased to $0.7 million in the
1996 Three Month  Period from $0.2 million in the 1995 Three Month  Period.  The
decrease for the 1996 Nine Month Period is primarily due to the Shakopee Merger,
smaller amounts of taxable income in foreign  jurisdictions and the sale of NIS,
partially  offset by an increase in the deferred tax  valuation  allowance.  The
increase  for the 1996  Three  Month  Period is related  to an  increase  in the
deferred tax valuation  allowance,  which is partially offset by the elimination
of NIS taxes.

Net Loss

As a result of the factors  discussed above, the Company's net loss increased to
a loss of $19.5  million  in the 1996  Nine  Month  Period  from a loss of $16.7
million in the 1995 Nine Month  Period,  and decreased to a loss of $4.3 million
in the 1996 Three Month Period from net income of $0.1 million in the 1995 Three
Month Period.





                                       19
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Liquidity and Capital Resources

In  August  1995,  the  Company  refinanced  substantially  all of its  existing
indebtedness  (the  "Refinancing")  (see  note  3  to  the  Unaudited  Condensed
Consolidated  Financial  Statements).  The primary objectives of the Refinancing
were to gain greater  financial and  operating  flexibility,  to facilitate  the
merger with Shakopee,  to refinance  near-term debt service  requirements and to
provide further opportunity for internal growth and growth through acquisitions.

As part of the Refinancing,  the Company received gross proceeds of $185 million
from the sale of 12 3/4% Senior  Subordinated  Notes Due 2005 (the "New Notes").
The gross proceeds of the offering of the New Notes, together with $85.6 million
in borrowings under the amended credit agreement with BT Commercial  Corporation
and other financial  institutions  (the "Bank Credit  Agreement"),  and existing
cash balances were used (i) to redeem all $100 million  principal  amount of the
15% Senior Subordinated Notes at a redemption price of $105.6 million (plus $1.8
million of accrued interest to September 15, 1995, the redemption date), (ii) to
repay all $126.5 million of  indebtedness  outstanding  under Graphics' old bank
credit  agreement (plus $2.3 million of accrued interest at the repayment date),
(iii) to repay all $24.6 million of indebtedness  assumed in the Shakopee Merger
(plus $0.1 million of accrued  interest at the repayment  date) and (iv) to fund
approximately $11.8 million of fees and expenses incurred in connection with the
Transactions.

The Bank Credit Agreement  includes a revolving credit facility which matures on
September  30,  2000 (the "New  Revolving  Credit  Facility"),  providing  for a
maximum of $75 million of borrowing  availability,  subject to a borrowing  base
requirement  (see  note  3 to the  Unaudited  Condensed  Consolidated  Financial
Statements).  As of February  13,  1997,  the Company  had  borrowings  of $30.9
million  outstanding under the New Revolving Credit Facility and $6.6 million of
additional borrowing availability. The Company expects that it will from time to
time during the  remainder  of fiscal year ending March 31, 1997  ("Fiscal  Year
1997") use a substantial portion of its availability in the normal course of its
operations.

The Bank Credit  Agreement also provides for a $60 million  amortizing term loan
with a final maturity on September 30, 2000 (the "New Term Loan"). The remaining
Fiscal Year 1997 scheduled payment due under the New Term Loan is $2.3 million.

Cash from operations and net borrowings  under the New Revolving Credit Facility
(see the Unaudited Condensed Consolidated Statements of Cash Flows) were used to
repay $7.5 million in scheduled  principal  payments on indebtedness  during the
1996 Nine Month Period.  Additionally,  these cash sources were used to fund the
Company's  cash capital  expenditures  during the 1996 Nine Month Period of $7.1
million and the repayment of capital  lease  obligations  of $2.2  million.  The
Company  plans to continue  its program of  upgrading  its printing and prepress
equipment and expanding production capacity and currently  anticipates that full
year Fiscal Year 1997 cash capital expenditures will approximate $12 million and
repayment  of capital  lease  obligations  will  approximate  $3.5  million.  In
addition,  the  Company  plans to  acquire  equipment  under  capital  leases of
approximately  $27 million  during  full year Fiscal Year 1997.  The Company had
zero cash and cash equivalents on hand at December 31, 1996 due to a requirement
under the Bank Credit  Agreement that  substantially  all of the Company's daily
available  funds be used to reduce  borrowings  under the New  Revolving  Credit
Facility.  The Company expects that its ongoing  liquidity  requirements  during
Fiscal Year 1997 will be met from cash from  operations  and  amounts  available
under the Bank Credit Agreement. The Company is currently in compliance with all
financial covenants set forth in the Bank Credit Agreement.


                                       20
<PAGE>

                        SULLIVAN COMMUNICATIONS, INC.
                   Management's Discussion and Analysis of
                Financial Condition and Results of Operations

At December 31, 1996, the Company had total debt  outstanding of $304.9 million,
including capital lease  obligations.  Of the total debt outstanding at December
31, 1996,  $80.4 million was  outstanding  under the Bank Credit  Agreement at a
weighted  average  interest  rate of 8.32%.  Indebtedness  under the Bank Credit
Agreement bears interest at floating rates,  causing the Company to be sensitive
to prevailing interest rates. At December 31, 1996, the Company had indebtedness
other  than  obligations  under the Bank  Credit  Agreement  of  $224.5  million
(including $185 million of New Notes).









                                       21
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


EBITDA

                             Three Months Ended           Nine Months Ended
                                 December 31,                December 31,
                             -------------------          ------------------
                             1996           1995          1996          1995
                             ----           ----          ----          ----
                                        (dollars in thousands)


EBITDA:
     Printing              $ 14,826       $ 14,783      $ 37,641      $ 38,995
     American Color (a)       2,236          1,773         4,549         3,018
     Other (b) (c)           (1,671)(d)       (828)       (5,417)(d)    (2,386)
                           --------       --------      --------      --------
          Total            $ 15,391       $ 15,728      $ 36,773      $ 39,627
                                                                      
EBITDA Margin:
     Printing                 12.9%          11.2%         10.7%         11.2%
     American Color (a)       11.2%           9.4%          8.1%          5.5%
          Total               11.3%          10.3%          8.9%          9.7%


(a) Includes the impact of restructuring costs of $0.1 million in the 1996 Three
    Month  Period and in the 1995 Three Month  Period,  $0.6 million in the 1996
    Nine Month Period and $2.8 million in the 1995 Nine Month Period.
(b) Other operations consist primarily of revenues and expenses  associated with
    the Company's 51% owned  subsidiary,  NIS (sold on March 11, 1996),  and its
    wholly-owned subsidiary SMC.
(c) Also reflects corporate selling, general and administrative expenses.
(d) Also reflects non-recurring employee termination expenses of $2.5 million in
    the  1996  Nine  Month  Period   (including  $1.9  million  related  to  the
    resignation  of the Company's  Chief  Executive  Officer - see note 8 to the
    Unaudited Condensed Consolidated Financial Statements) and $0.6 million in
    the 1996 Three Month Period.


"EBITDA"  is  defined  as  earnings  before  net  interest  expense,  income tax
(expense) benefit, depreciation,  amortization, other special charges related to
asset  write-offs  and  write-downs,   other  income   (expense),   discontinued
operations and  extraordinary  items.  "EBITDA Margin" is defined as EBITDA as a
percentage of net sales.  EBITDA is presented and discussed  because  management
believes that investors regard EBITDA as a key measure of a leveraged  company's
performance and ability to meet its future debt service requirements.  EBITDA is
not a measure of  financial  performance  under  generally  accepted  accounting
principles  and should not be  considered an  alternative  to net income (or any
other measure of performance under generally accepted accounting  principles) as
a measure of performance or to cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of  liquidity.  Certain
covenants  in the New Notes and the Bank Credit  Agreement  are based on EBITDA,
subject to certain adjustments.



                                       22
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Printing.  As a result of the  reasons  previously  described  under "-Printing"
(excluding the increase in depreciation  expense),  Printing EBITDA decreased to
$37.6  million in the 1996 Nine Month Period from $39.0 million in the 1995 Nine
Month Period,  representing a decrease of $1.4 million,  and the Printing EBITDA
Margin  decreased  to 10.7% in the 1996 Nine Month Period from 11.2% in the 1995
Nine Month  Period.  Printing  EBITDA  was $14.8  million in both the 1996 Three
Month  Period  and the 1995 Three  Month  Period.  The  Printing  EBITDA  Margin
increased  to 12.9% in the 1996 Three Month  Period from 11.2% in the 1995 Three
Month Period.

American Color. As a result of the reasons previously described under "-American
Color," American Color's EBITDA increased to $4.5 million in the 1996 Nine Month
Period from $3.0 million in the 1995 Nine Month Period, representing an increase
of $1.5 million,  and the American Color EBITDA Margin  increased to 8.1% in the
1996 Nine Month  Period from 5.5% in the 1995 Nine Month  Period.  These  EBITDA
increases  included  restructuring  costs of $0.6 million in the 1996 Nine Month
Period as compared  with $2.8  million in the 1995 Nine Month  Period.  American
Color's  EBITDA  increased  to $2.2  million in the 1996 Three Month Period from
$1.8 million in the 1995 Three Month  Period,  representing  an increase of $0.4
million,  and the American  Color EBITDA  Margin  increased to 11.2% in the 1996
Three  Month  Period  from 9.4% in the 1995 Three  Month  Period.  These  EBITDA
increases  included  Restructuring  costs of $0.1 million in both the 1996 Three
Month Period and the 1995 Three Month Period.

Other. As a result of the reasons previously described under "-Other Operations"
(excluding changes in amortization  expense),  other operations' negative EBITDA
increased to negative  EBITDA of $5.4 million in the 1996 Nine Month Period from
negative EBITDA of $2.4 million in the 1995 Nine Month Period.  Other operations
negative  EBITDA  increased to negative EBITDA of $1.7 million in the 1996 Three
Month  Period  from  negative  EBITDA of $0.8  million in the 1995  Three  Month
Period.  EBITDA for the 1996 Nine  Month  Period  includes  the impact of a $1.9
million  non-recurring  charge related to the resignation of the Company's Chief
Executive Officer (see note 8 to the Unaudited Condensed  Consolidated Financial
Statements)  and a $0.6 million  non-recurring  charge related to other employee
termination expenses. EBITDA for the 1996 Three Month Period includes the impact
of a $0.6 million  non-recurring  charge related to other  employee  termination
expenses.





                                       23
<PAGE>

                          SULLIVAN COMMUNICATIONS, INC.
                            Part II Other Information

Item 1.   (a)   Legal Proceedings

          Reference  is made to Item 3  (Legal  Proceedings)  disclosure  in the
          Company's Form 10-K filed for the fiscal year ended March 31, 1996.


Item 6.   Exhibits and Reports on Form 8-K

     (a)  Exhibits

          Exhibit No.    Description
          -----------    -----------
            27.0         Financial Data Schedule


     (b)  Reports on Form 8-K

          Form 8-K filed with the Securities and Exchange  Commission on October
          21, 1996 under Item 5 announcing the EBITDA for the three months ended
          September 30, 1996.


                                       24
<PAGE>

                                   SIGNATURES




Pursuant  to  the   requirements  of  the  Securities   Exchange  Act  of  1934,
Communications  and Graphics  have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.




                                   Sullivan Communications, Inc.
                                   Sullivan Graphics, Inc.



Date  February 14, 1997            By  /s/ Joseph M. Milano
                                     ----------------------------
                                     Joseph M. Milano
                                     Senior Vice President and
                                     Chief Financial Officer
                                     (Authorized Officer and
                                     Principal Financial Officer)




Date  February 14, 1997            By  /s/ Patrick W. Kellick
                                     ----------------------------
                                     Patrick W. Kellick
                                     Vice President - Corporate Controller
                                     (Chief Accounting Officer)


                                       25
<PAGE>

                                EXHIBIT INDEX


 Exhibit No.    Description                                      Page
 -----------    -----------                                      ----
    27.0        Financial Data Schedule                           27









                                       26