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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
(Mark One)
 
  [X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934.
 
                  For the fiscal year ended December 31, 1997
 
                                      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 1-14348
 
                               ----------------
 
                             METROMAIL CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              13-3015410
       (STATE OF INCORPORATION)         (I.R.S. EMPLOYER IDENTIFICATION NO.)
 
                 360 EAST 22ND STREET, LOMBARD, IL 60148-4989
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 620-3300
 
                               ----------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
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<CAPTION>
                                                        NAME OF EACH EXCHANGE
               TITLE OF EACH CLASS                       ON WHICH REGISTERED
      --------------------------------------           -----------------------
      <S>                                              <C>
      Common Stock, $.01 par value per share           New York Stock Exchange
      Preferred Stock Purchase Rights                  New York Stock Exchange
</TABLE>
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
  Indicate by check mark whether Metromail Corporation (1) has filed all
reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that Metromail
Corporation was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.  YES [X]   NO [_]
 
  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]
 
  The aggregate market value of the voting stock held by non-affiliates of
Metromail Corporation as of January 30, 1998 was approximately $227,606,644
(based on closing sale price of $16 7/16 as reported for the New York Stock
Exchange-Composite Transactions).
 
  The number of shares of Metromail Corporation's common stock, $.01 par value
per share, outstanding as of January 30, 1998, was 22,516,996.
 
                               ----------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  PORTIONS OF THE PROXY STATEMENT FOR METROMAIL CORPORATION'S 1998 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III.
 
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                             CROSS REFERENCE SHEET
                                      AND
                               TABLE OF CONTENTS
 
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                                                                    PAGE NO. OR
                                                                     REFERENCE
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 <C>      <S>                                                       <C>
 PART I
 ITEM 1.  BUSINESS................................................        1
 ITEM 2.  PROPERTIES..............................................        9
 ITEM 3.  LEGAL PROCEEDINGS.......................................        9
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS...       10
 ITEM 4A. EXECUTIVE OFFICERS OF METROMAIL CORPORATION.............       11
 PART II
 ITEM 5.  MARKET FOR METROMAIL CORPORATION'S COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS.............................       13
 ITEM 6.  SELECTED FINANCIAL DATA.................................       14
 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS.....................       15
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
          RISK....................................................       19
 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............       20
 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE.....................       40
 PART III
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF METROMAIL
          CORPORATION.............................................       40
 ITEM 11. EXECUTIVE COMPENSATION..................................       40
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT..............................................       40
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........       40
 PART IV
 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
          FORM 8-K................................................       40
</TABLE>
<PAGE>
 
                                    PART I
 
ITEM 1: BUSINESS.
 
  Metromail Corporation ("Metromail" or the "Company") is a leading provider
of direct marketing, database marketing and reference products and services in
the United States and the United Kingdom. Metromail helps its customers
identify and reach targeted audiences utilizing its comprehensive, proprietary
consumer database encompassing more than 95% of the households in the United
States, as well as providing database marketing software and related services.
The Company provides its information, information services and software
services to a wide variety of organizations engaged in direct mail, telephone
and target marketing, as well as to clients who desire specific reference and
information services. The Company's clients include Fortune 500 companies, as
well as numerous mid-size and small businesses.
 
  Metromail was incorporated under the laws of the State of Delaware in 1979.
It is a successor to several predecessor businesses, including a list
development business that was started in 1946. The Company became a public
company in 1984 and remained so until mid-1987 when it was acquired by R. R.
Donnelley & Sons Company ("R. R. Donnelley"). The Company has made several
acquisitions, including the acquisition in 1994 of the assets of Customer
Insight Company, a company that develops marketing oriented database solutions
("CIC"). Data by Design, a database marketing consulting service in the United
Kingdom ("DBD"), and International Communication & Data Plc, a compiler of
lists in the United Kingdom primarily through the use of surveys ("ICD"), were
acquired by R. R. Donnelley in 1994 and 1995, respectively. The Company
managed the United Kingdom operations since their acquisition by R. R.
Donnelley, with ownership being transferred to the Company in early 1996. On
June 19, 1996, Metromail completed an initial public offering of 13,800,000
shares of its common stock (the "IPO"), resulting in the reduction of R. R.
Donnelley's ownership in the Company to approximately 38.4%. In 1997,
Metromail acquired Atlantes Corporation, a company that obtains, processes and
manages information from product registration questionnaires ("Atlantes"),
Marketing Information Technologies, Inc., a database marketing and strategic
marketing services consulting firm ("MIT"), and Saxe, Inc., a provider of
object-oriented, open-architecture software solutions and databases for
database marketing purposes ("Saxe").
 
  The Company's main phone number is (630) 620-3300 and its Internet address
is http://www. metromail.com.
 
RECENT DEVELOPMENTS
 
  On February 10, 1998, the Company announced that its Board of Directors had
retained Lehman Brothers Inc. to advise the Company in its efforts to explore
strategic alternatives to maximize shareholder value. On March 13, 1998 the
Company announced that it and The Great Universal Stores P.L.C. ("GUS") have
signed a definitive merger agreement (the "Merger Agreement") pursuant to
which GUS has agreed to acquire all of the outstanding common stock of the
Company at a price of $31.50 per share in cash. Pursuant to a Schedule 14D-9
Solicitation/Recommendation Statement dated March 16, 1998, the Company
announced that its Board of Directors has unanimously (i) determined that such
merger agreement and the transactions contemplated thereby are fair to the
stockholders of the Company and that the tender offer and the merger
contemplated by the merger agreement are otherwise in the best interests of
the Company and its stockholders and (ii) approved and adopted such merger
agreement and the transactions contemplated thereby and that its Board of
Directors recommends that all stockholders of the Company accept such offer
and tender their shares and approve and adopt such merger agreement and the
merger contemplated thereby. Subsequently, the Company announced that a suit
has been filed in the Delaware Chancery Court by American Business
Information, Inc. ("ABI") to preliminarily and permanently enjoin the
consummation of the transactions contemplated by the Merger Agreement. The
hearing on ABI's motion for a preliminary injunction will be held on March 27,
1998. Three class action suits have been filed in the Delaware Chancery Court
also seeking to enjoin such transactions.
 
<PAGE>
 
  In addition, the Company announced that it has received from ABI an offer to
purchase all of the outstanding common stock of the Company for $33 per share
in cash, subject to potential modest upward adjustments if ABI succeeds in
invalidating the termination fee in the Merger Agreement and certain stock
options. While the ABI offer is not subject to a financing contingency, the
financing commitments ABI has provided to the Company are subject to a number
of conditions, including the completion of due diligence with respect to both
the Company and ABI. The Company's Board of Directors has authorized the
Company and its advisors to begin discussions with ABI and its advisors to
better understand the ABI offer, including the financing.
 
  Further material developments with respect to the foregoing will be
described in amendments to the Company's Schedule 14D-9
Solicitation/Recommendation Statement.
 
PRODUCTS AND SERVICES
 
  Metromail provides three general categories of products and services to its
clients: direct marketing services (including list development services and
personalization printing and lettershop services), database marketing services
(including database marketing software and services and list enhancement
services) and reference services (including on-line services and directory
publishing). Direct marketing services accounted for 56.4%, 53.0% and 51.6% of
the Company's total net sales in 1997, 1996 and 1995, respectively, database
marketing services accounted for 24.0%, 27.7% and 28.4% of the Company's total
net sales in 1997, 1996 and 1995, respectively, and reference services
accounted for 19.6%, 19.3% and 20.0% of total net sales in 1997, 1996 and
1995, respectively.
 
 Direct Marketing Services
 
  List Development Services. The Company assists clients in implementing cost-
effective direct marketing strategies by creating lists of those individuals
and households in the client's trade area having the characteristics that fit
the marketing strategy and are most likely to respond favorably to the
client's marketing efforts. Metromail provides customized list development
services to two primary groups of clients: sales promotion and mail order
organizations. Sales promotion clients generally have determined the
characteristics of their target customers and provide the Company with a trade
area definition and a customer profile. The Company then uses its computer
software and database to identify the individuals and households in the
customer's trade area who have the characteristics that the client has
specified and compiles a list of those individuals and households.
 
  Mail order clients use the Company's marketing and analytical services to
identify the geographic, demographic and other marketing characteristics in
the Company's database that singly and in combination describe the best
prospects for the client's direct marketing campaign. In many cases, the
Company reviews the client's customer files and direct marketing experience,
as well as syndicated research, publicly available marketing data, relevant
historical information and marketing research in the Company's database. In
addition, the Company may design, conduct and analyze market surveys or test
mailings. From this research and testing the Company defines relevant market
segments and their respective sizes and ranks these segments according to
their relative potential value to the client.
 
  The Company provides lists to approximately 15,000 clients annually. The
Company generates most of its list sales from sales to consumer goods
manufacturers, financial institutions, magazine publishers, mail order houses
and not-for-profit organizations. These lists are used for targeted mailings,
telephone marketing campaigns and statistical samplings. Except for test
mailings, these list orders range in size from 500 to 20 million households
and prices generally range from $7 to $250 per thousand names, although
requests for certain information may be as high as $1,000 per thousand names.
Lists generally are delivered in the form of computer tape or mailing labels.
The Company provides its list development services from its facilities in
Lincoln, Nebraska.
 
 
                                       2
<PAGE>
 
  Personalization Printing and Lettershop Services. Metromail's personalization
printing and lettershop services frequently are used in conjunction with list
development and enhancement services provided by the Company. In 1997, 14 of
the Company's top 25 clients used these services in addition to the Company's
other services. The Company provides processing and mailing services to direct
mail advertisers from facilities located in Mt. Pleasant, Iowa; Rutland,
Vermont; Seward, Nebraska; and Lincoln, Nebraska.
 
  Personalization printing involves applying addresses and variable text to
direct mail pieces. Lettershop services consist of forms trimming, folding,
affixing special items (such as coins, medallions or cards), inserting
materials into envelopes, polywrapping, applying address labels and mailing. In
connection with these services, the Company uses both addresses generated from
its own database and addresses provided by its clients. Lettershop services are
typically contracted for on an individual mailing basis. Contracts range in
size from relatively small test mailings and statistical samplings to major
promotions of up to 35 million pieces.
 
  The Company believes it is one of the largest providers of commercial
lettershop services in the United States. At its three lettershop facilities,
the Company has the capacity to insert material in more than 6.5 million
envelopes per day, package 10 million product samples per month and polywrap 26
million packages per month. The Company has installed and improved special
equipment in its production facilities that permits production of a high volume
of polywrapped advertising materials. The Company has also established an
integrated computerized system of scheduling, production and inventory control.
 
  The Company's lettershop services processed over 1.4 billion pieces of mail
in 1997. To expedite mailing of materials, United States Postal Service
personnel have been permanently assigned to each of the lettershop facilities.
 
 Database Marketing Services
 
  Database Marketing Software and Services. Metromail provides database
marketing products and services to clients that possess a large amount of
internal and external data and need a way to assemble and analyze the data to
determine their appropriate marketing initiatives. As a result of internal
technology developments and recent acquisitions (Saxe and MIT), the Company
offers database software products across various technology platforms,
including personal computers, client/server, UNIX and mainframe service
bureaus, utilizing open architecture and proprietary database structures with
ODBC connectivity. Building on the Company's Convergent Marketing methodology,
the Company couples these technology products with professional services to
offer clients a complete database marketing solution.
 
  The Company targets a variety of industries for these software products and
services, focusing on the financial services, telecommunications, utilities,
retail, catalog, publishing, cable television, entertainment, computer-based
technologies and travel-related services industries. The Company currently
supports over 1,900 installations of these products at over 270 client sites.
 
  The Company's software products provided by CIC are licensed to clients,
generally for a three-year period. In connection with some installations, the
Company, as a service, also purchases and re-sells to the client certain
computer equipment, including storage devices and other peripherals.
 
  The Company's Professional Services organization combines the services of its
consulting, education and implementation teams to help clients better identify
and understand customer needs, segment customers based upon value criteria and
assist in aligning their marketing efforts appropriately. With a staff of
experienced consultants well versed in strategic marketing practices and
leading-edge marketing technologies, the Professional Services organization has
the experience to deliver marketing solutions to meet a wide range of industry
needs.
 
  List Enhancement Services. The Company improves the quality of lists or
databases provided by its clients by eliminating duplicate names, correcting
addresses and ZIP codes and appending additional information, such as telephone
numbers or other marketing-related characteristics, to the lists or databases.
 
                                       3
<PAGE>
 
  Metromail's list enhancement services enable a client to process information
utilized in direct mail campaigns. These processes help the Company's clients
identify persons on lists supplied by the client likely to respond favorably to
the client's mailing, improve the delivery of the items mailed and reduce the
postage costs of a direct mail campaign. Typically, a client sends to the
Company hundreds of lists, aggregating millions of names that have been rented
from list brokers or other sources and the client's current customer list.
Using its computer resources and proprietary software, the Company consolidates
these lists, corrects addresses and ZIP codes and eliminates duplicate names
(the merge/purge process). A client can enhance this consolidated list by
incorporating certain of the characteristics contained in the Company's
database and/or INSOURCE, an enhancement database that combines Metromail's
National Consumer Data Base and other proprietary databases with the consumer
databases of Experian Information Solutions Inc. (formerly TRW Target Marketing
Services) ("Experian"), to provide in-depth information on approximately 95
percent of all U.S. households. INSOURCE, introduced in late 1996, is able to
append more than 300 data variables to customer records, including hobbies,
interests, product preferences and investment, educational and occupational
information. Metromail believes INSOURCE is the most complete enhancement
database currently available in the market.
 
  The Company also uses its database to enhance a client's proprietary customer
list and to make that list more deliverable. The Company has non-exclusive
licenses from the United States Postal Service for certain services, such as
National Change of Address, Delivery Sequence File and Locatable Address
Conversion System, to facilitate these processes. These enhancements usually
include adding information from the Company's database, eliminating
undeliverable addresses and verifying households at a particular address. ZIP
codes and addresses on a proprietary list can be corrected and telephone
numbers can be added. In addition, the Company saves its clients money on the
mailing of these enhanced lists by carrier route coding, ZIP code presorting
and overlaying 9-digit ZIP codes.
 
  The Company provides list enhancement services to approximately 400 clients
annually, most of whom are involved in continuity marketing (e.g., record
clubs), financial services, insurance, magazine and book publishing, mail order
and catalog merchandising or retail. The Company provides these services
primarily from its facilities in Lombard, Illinois.
 
 Reference Services
 
  On-Line Services. Metromail offers a number of services that involve the need
for immediate electronic access to information contained in the Company's
database. The most important of these services are the Company's MetroNet and
National Directory Assistance ("NDA") services.
 
  The Company's MetroNet service provides users with on-line or electronic
access to the Company's MetroNet Master file (a subset of the Company's
database), change of address files, business listings and regional Bell
operating companies' electronic directory assistance databases. These services
are marketed primarily to collection agencies, consumer finance companies and
credit card issuers.
 
  The Company's NDA services provide on-line access to a database consisting of
more than 108 million residential, business and government listings, as well as
on-line access to the electronic directory assistance databases maintained by
the regional Bell operating companies. The Company markets these services,
which were commenced in 1995, to telephone companies, operator service
providers and other organizations with high-volume directory assistance needs.
As of December 31, 1997, the Company had entered into contracts to provide
these services to approximately 40 clients.
 
  Directory Publishing Services. Metromail publishes the Cole directories,
local "reverse look-up" directories covering approximately 155 urban and
suburban areas in the United States and Canada, including New York, Boston,
Philadelphia, Dallas and Houston. These directories, which contain
approximately 32 million residential and business listings, are available
either in printed form or on CD-ROM. The directories are derived from the
Company's database and contain listings arranged by street address and
telephone number. Many of the directories also include census demographic data
on a neighborhood basis and historical data, such as duration of residence.
 
                                       4
<PAGE>
 
  The Company has approximately 48,000 clients annually for the printed Cole
directories and approximately 3,500 clients for its Cole and MetroSearch CD-ROM
products. The clients for these products are principally collection agencies,
financial institutions, government agencies, insurance brokers and agents,
local merchants such as home improvement businesses, and real estate brokers.
The Cole directories are primarily used by clients to market products or
services to prospects or to identify individuals at specific addresses or
telephone numbers within a specific geographic area. The Cole directories are
generally supplied on an annual subscription basis for prices ranging from $90
to over $1,000, depending on the size of the market. In 1997 approximately 77%
of leases for Cole directories were renewed.
 
  The Company publishes, prints and binds the Cole directories at its Lincoln,
Nebraska facility. In addition, the Company provides certain printing and
binding services for other publishers of short-run directories.
 
  BehaviorBank(R), Cole(R), MetroBase(R), Metromail(R), Metromail's National
Consumer Data Base(R), MetroNet(R), MetroSearch(R) and NDA(R) are registered
trademarks of Metromail; AnalytiX(R) is a registered trademark of Customer
Insight Company; Explore and Convergent Marketing are trademarks of Customer
Insight Company; and INSOURCE is a service mark of Metromail and Experian.
 
INTERNATIONAL OPERATIONS
 
  Metromail's international operations consist primarily of its operations in
the United Kingdom of ICD, one of Britain's leading consumer lifestyle and
financial list developers and providers, and DBD, a provider of database
marketing consulting services. ICD acquires consumer lifestyle data primarily
through mailed surveys. During 1997, ICD received lifestyle data for 4.4
million individuals, bringing the number of individuals included in its
lifestyle file to 9.8 million. Another ICD product, the British Investor
Database, is compiled from share registers and contains 7.7 million share
transactions. More than 2,000 companies either sponsor survey questions or rent
data from ICD. Through DBD, ICD also offers a range of high value analytical
and consultancy services.
 
  In September 1997, Metromail and PMP Communications Ltd., a leading
communications and new media company in Australia, entered into a joint venture
to develop a consumer lifestyle database primarily through mailed surveys
within Australia.
 
METROMAIL'S DATABASE
 
  Metromail maintains and continually updates a large proprietary database that
contains geographic, demographic, individual and other marketing information on
over 95% of the households in the United States. The Company believes that its
database is one of the most complete, highest quality and up-to-date direct
marketing databases in the United States and is a principal reason that clients
use the Company's list development and enhancement services. This database
contains numerous characteristics relating to the individuals and households
reflected in the database in addition to name, address and telephone number.
Examples of these characteristics include age, length of residence at a
particular address, dwelling unit type, gender of the head of household,
presence of other family members, estimated household income and home
ownership.
 
  The Company has been accumulating data for over 50 years, and management
believes that its processes of gathering data from numerous sources and
modifying and updating its database represent a significant competitive
advantage for the Company.
 
  Metromail derives the data included in its database from a wide variety of
public records and other public sources and from proprietary, third-party
sources. With the exception of self-reported data which the Company obtains
primarily through the use of consumer surveys and questionnaires, the Company
does not collect data directly from consumers. Among the public sources used by
the Company are the "white pages" (the Company's primary source of names,
addresses and telephone numbers), public records of driver's license
registrations, real estate transactions and U.S. census data. The Company has
arrangements with numerous third parties that provide proprietary data to the
Company. These providers include certain of the Company's clients that provide
the Company with data relating to their recent direct marketing experiences.
 
                                       5
<PAGE>
 
  In 1993, the Company began collecting data directly from consumers in
response to surveys. The Company distributes to consumers, primarily through
co-op mailings, package inserts and magazine inserts, survey questionnaires in
various forms. These questionnaires solicit information from the recipients
such as standard demographic information, product preferences, purchasing
habits, activities, hobbies and interests, brand awareness and medical
ailments. Questionnaires can be tailored to address specific marketing concerns
of the Company's clients by developing specific survey questions which seek the
desired information. Survey respondents complete and return questionnaires to
the Company because they become eligible to receive offers of coupons, samples
and information from manufacturers, pharmaceutical companies, financial
institutions and other service providers. Incentives such as sweepstakes
offers, prizes and extensions to subscribed services are also provided when
appropriate to increase response rates. In 1997, Metromail acquired Atlantes,
which gathers information from product registration questionnaires, warranty
questionnaires and other questionnaires related to the purchase of consumer
products, and manages the process of computerizing these questionnaires for its
clients in return for receiving ownership of certain information from the
questionnaires, including the consumer's name, address, demographics and
behavioral information. Although Metromail had access to the Atlantes database
prior to the acquisition of Atlantes through a sublicense agreement with
Experian, which has an exclusive contract with Atlantes to market Atlantes'
database (through December 31, 1999), Metromail believes its acquisition of
Atlantes will increase the size and content of its self-reported consumer
lifestyle database by focusing the form and content of Atlantes' questionnaires
to complement Metromail's existing database and by providing greater capital
investment in the business. In addition, in 1997 Metromail launched its
Internet-based lead generation system through its DV2U.com web site. People
visit this site to receive offers and coupons from companies that may be of
interest to them, and to be entered into sweepstakes. The Company is able to
collect demographic and other information concerning the people who register at
this web site through questionnaires posted on the site.
 
  The Company provides disclosure to potential survey, product registration and
DV2U questionnaire respondents regarding the intended use of the data thereby
reducing privacy concerns because respondents are voluntarily completing the
surveys or the questionnaires acknowledging that they understand how the
information may be used. The Company does not use the information collected
through surveys and questionnaires for its reference services and has stated
that it will not do so unless disclosure is provided regarding the use of such
information for reference services. The Company expects to continue to expand
its use of surveys and questionnaires as a data collection method. As indicated
above under "International Operations," the Company is using the survey method
as a means to develop its database in the United Kingdom and Australia.
 
  The Company is dedicated to being a leader in ethical management of consumer
data. It has developed information management practices applicable to its
direct marketing services and its reference services. The Company believes that
responsible data management includes collecting, using and disseminating
information by fair, ethical and lawful means and respecting the requests of
individuals for information the Company possesses about them and any requests
that their names be suppressed in the Company's database so that they do not
receive unwanted marketing solicitations.
 
COMPETITION
 
  The markets in which Metromail competes are highly competitive and
fragmented. While a number of large companies and many smaller competitors
provide certain of the direct marketing, database marketing and reference
services provided by the Company, the Company believes that it provides the
broadest range of these types of services of any company in the direct
marketing services, database marketing services and reference services
industries.
 
  In list development and list enhancement services, Metromail competes on the
basis of the quality, accuracy and completeness of its database, its market
analysis and segmentation capabilities and the other list enhancement services
it offers. The Company competes in marketing database services on the basis of
the quality of its software products. The Company competes in lettershop
services on the basis of the capabilities and efficiencies
 
                                       6
<PAGE>
 
of its equipment and employees, which enable it to handle large and complicated
orders in a timely manner. Price is also a competitive factor for all the
database marketing services and direct marketing services the Company provides.
In reference services, Metromail competes on the basis of the quality, accuracy
and scope of the information contained in its database, the quality of its
customer service and price. With respect to its on-line services, two critical
competitive factors are the ability to be contacted by the user and the
response time.
 
REGULATION
 
  Although the manner in which Metromail collects, uses and transfers certain
types of data is regulated in certain respects at the federal level and by
certain states, as described below, Metromail's business is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, including regulations concerning the
environment.
 
  In response to concerns about individual privacy and the collection,
distribution and use of information about individuals, the Direct Marketing
Association (the "DMA"), which is the leading trade association of direct
marketers, has established certain guidelines for fair information practices
which it recommends be followed by participants in the direct marketing
industry. The Company was actively involved in the formulation of the DMA's
guidelines, and many of the Company's significant direct marketing clients have
adopted and implemented such guidelines. In addition, the Company has adopted
and implemented information management practices, principles and procedures
which supplement those of the DMA. One of the guidelines suggested by the DMA
is that direct marketers refrain from soliciting by mail or telephone those
individuals who have contacted the DMA and have asked that they not be the
subject of unrequested solicitations. To make compliance with this guideline
possible, the DMA maintains the Mail Preference Service and the Telephone
Preference Service, consisting of lists of those individuals who have notified
the DMA that they wish to "opt out" of receiving mail or telephone
solicitations. The DMA makes these lists available to participants in the
direct marketing industry who subscribe to these services. The Company is a
subscriber and receives updated lists from the DMA monthly and promptly
suppresses in its database all information concerning the individuals who
appear on the DMA lists.
 
  Additionally, the Company was an active participant with the Individual
Reference Services Group (the "IRSG"), an ad hoc association of companies that
joined together to develop information practices guidelines for reference
products and services. The IRSG presented draft guidelines at the Federal Trade
Commission ("FTC") workshops conducted in June 1997. In December 1997, these
guidelines were finalized. These guidelines, which the Company has pledged to
follow, commit the Company to acquire data used for its reference products and
services only from reputable sources, to restrict distribution of non-public
information in its reference products and services through safeguards
appropriately calibrated to the type of use made of the information and to
educate the public concerning these guidelines. These guidelines are supported
through three separate mechanisms: (i) the Company may be responsible under
existing law if it fails to follow these guidelines; (ii) the principal
suppliers of non-public information will contractually require the Company to
abide by these guidelines as a requirement of receiving the data; and (iii) the
Company will be subject to an annual audit by its independent public
accountants to monitor its compliance with these guidelines.
 
  Privacy concerns have also led to increased federal and state regulation of
the collection, use and transfer of information about individuals and of direct
marketers and their activities. Examples of laws regulating the use of
information include laws adopted by a number of states precluding the use of
information derived from voter registration records, real estate files and
driver's licenses and the federal Driver's Privacy Protection Act of 1994,
which became effective in September 1997. Under this act, each state is
prohibited from disclosing personal information contained in motor vehicle
department records for bulk use in surveys, marketing or solicitations, unless
the state has implemented a procedure whereby each driver has the opportunity
to prohibit such use of information about such driver. Examples of laws
regulating direct marketers and their activities include state laws requiring
telemarketers to be bonded or registered, an FTC regulation prohibiting
telemarketers from making a call to a person who previously has stated that he
or she does not wish to receive a call made by or on behalf of the seller whose
goods or services are being offered, and federal and state restrictions on the
use by telemarketers of automatic dialing and artificial voices or prerecorded
messages.
 
                                       7
<PAGE>
 
  In March 1997, a bill seeking to restrict the sale of data was re-introduced
in the United States Congress. The Children's Privacy Protection and Parental
Empowerment Act of 1997 seeks to prohibit list brokers (including the Company)
from knowingly selling or purchasing personal information (defined to include
name, address and telephone number) about a child (defined to be a person under
16 years old) without the written consent of a parent of that child. A previous
version of this bill failed to become enacted into law in 1996. The Company
believes that the 1997 bill will not be enacted into law in its current form.
 
  In 1996, Congress asked the Federal Reserve Board (the "FRB") to examine the
availability to the general public of sensitive consumer identification
information, including social security numbers, mother's maiden names, prior
addresses and dates of birth. The FRB invited companies to respond to questions
relating to the collection, maintenance and use of sensitive data. With the
exception of month and year of birth, the Company does not distribute data that
was the subject of the FRB's inquiry. The FRB indicated that it found no
evidence to conclude that the availability of this data presents an increased
risk of consumer identity fraud or an increased risk to financial institutions.
 
  The FTC continues to conduct workshops and studies on the protection and use
of personal information. These workshops and studies examine the collection and
availability of personal information on the Internet and on "look-up" services
and the collection and availability of children's information. The Company has
been actively working with the FTC on these and other issues. The
Administration, members of Congress and FTC Commissioners have stated publicly
that they prefer industry self-regulation over government regulations.
 
  Because of the possibility of increased regulation brought on by privacy
concerns, the Company collects certain data directly from individuals, who
agree that their information may be used for certain specified purposes,
including direct marketing purposes. Although the Company intends to continue
to pursue actively the collection of self-reported data, the percentage of data
in the Company's current database that constitutes self-reported data is small.
 
  Certain of the reference services provided by the Company to certain credit
card issuer associations and their member banks are subject to the Fair Credit
Reporting Act ("FCRA"). Amendments to the FCRA, that became effective on
September 30, 1997, provide consumers with easier access to their credit
reports, facilitate the correction of errors in reports and address the issue
of "prescreening," a procedure used by creditors in some direct marketing
programs.
 
CUSTOMERS AND SEASONALITY
 
  The Company's business is based on long-standing client relationships.
Although sales are not guaranteed under long-term contracts, a substantial
portion of the Company's net sales is derived from clients that the Company has
served for many years. Net sales to the top 25 clients (almost all of which
have been clients for five or more years) amounted to $117.3 million in 1997,
$75.4 million in 1996 and $68.6 million in 1995. Net sales to the top 25
clients accounted for 37.5%, 26.8% and 28.9% of total net sales in 1997, 1996
and 1995, respectively. No single client accounted for more than 10% of total
net sales in any of these years. The Company's business is somewhat seasonal.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Outlook".
 
COMPUTER OPERATIONS
 
  In 1997, the Company consolidated its two data centers into one center
located in Lombard, Illinois. The Company's data center runs on computer
systems designed to provide advanced processing capabilities, provide
flexibility to meet the Company's and its clients' changing needs and contain
costs. The Company's mainframe computer system consists of two IBM ES9000
computers. The IBM ES9000 computers have approximately 500 MIPS (millions of
instructions per second) of total processing power. The ES9000 platform allows
for expansion of processing capacity to approximately 3,000 MIPS, without
significant infrastructure changes. Other data center components include
robotic tape subsystems, DASD and high-speed laser, LED and compact printers.
The Company also supports alternate platforms from IBM, Hewlett Packard and
Sequent, which have approximately three terabytes of DASD attached to them.
 
                                       8
<PAGE>
 
  In 1996, the Company completed a major redesign of the file structure of its
database. This redesign, which commenced in 1994, takes advantage of new
relational software and parallel processing hardware technology. The new
database structure is expected to reduce the costs and time of adding newly
acquired data to the database, permit concurrent processing of a number of
separate jobs and reduce processing times.
 
EMPLOYEES
 
  As of December 31, 1997, the Company had approximately 3,220 employees, of
whom approximately 3,090 were located in the United States and approximately
130 were located in the United Kingdom. The domestic employees included
approximately 230 officers and managerial employees, approximately 270
employees engaged in sales or sales support and approximately 300 programmers,
system engineers and systems analysts. The domestic employees also include
approximately 1,395 hourly employees, most of whom are engaged in providing
lettershop services. The Company employs part-time workers as needed, primarily
in lettershop services.
 
  None of the Company's employees is covered by a collective bargaining
agreement. The Company believes that its relations with its employees are good.
 
ITEM 2: PROPERTIES.
 
  The Company's principal executive offices and the Company's data center are
located at 360 East 22nd Street, Lombard, Illinois 60148, where the Company
leases a 115,000 square foot facility pursuant to a lease expiring in 2012 and
a 38,000 square foot facility pursuant to a lease expiring in 2000. The Company
plans to expand into a third location in this area in mid-1998 pursuant to a
lease of a 68,000 square foot facility expiring in 2012. The Company also owns
a 233,000 square foot facility in Lincoln, Nebraska and lettershop facilities
in Mt. Pleasant, Iowa (211,000 square feet); Seward, Nebraska (161,000 square
feet); and Rutland, Vermont (113,000 square feet). The Company has over 30
regional sales offices which it leases generally for terms between one and
three years. The Company's marketing database software and consulting services
operate from a 54,000 square foot leased facility in the Denver, Colorado area.
Atlantes leases an 8,000 square foot facility in Denver, Colorado pursuant to a
lease expiring in 1998 and MIT leases a 12,000 square foot facility in Rye, New
York pursuant to a lease expiring in 2003. The Company also leases a 40,000
square foot lettershop facility in Lincoln, Nebraska.
 
ITEM 3: LEGAL PROCEEDINGS.
 
  In 1993, the Company purchased the assets of Computerized Marketing
Technologies, Inc. and affiliated companies ("CMT") relating to a database
created through the use of questionnaires distributed to consumers. Following
this purchase, the Company continued CMT's practice of contracting with
Computerized Image & Data Systems, Inc. ("CIDS") for CIDS to provide data input
services with respect to completed surveys. At the time, CIDS was negotiating
to subcontract a portion of these services to a correctional facility
maintained by the State of Texas. This facility was a major supplier of data
input services to the State of Texas, including services with respect to voter
registration and drivers' license records, and according to CIDS, was selected
as a subcontractor, in part, because of the procedures followed by the facility
to safeguard the information made available to the prisoners. In June 1994, the
Company became aware of a report that a woman in Ohio, who apparently had
completed a Company survey, had received a letter purporting to contain
sexually explicit language from a convicted rapist held in the facility that
provided data input services. Immediately after becoming aware of this report,
the Company requested that CIDS terminate its subcontract with the facility. On
April 18, 1996, a complaint was filed in the District Court of Travis County,
Texas (Beverly J. Dennis v. Metromail Corporation et al., Cause No. 96-04451)
against the Company, R. R. Donnelley, CIDS, the Texas Department of Criminal
Justice, the executive director of the Texas Department of Criminal Justice and
the chairman of the Texas Board of Criminal Justice by the woman who allegedly
had received the letter. The complaint, as amended, now alleges the following
causes of action against the Company and R. R. Donnelley and certain of the
other defendants: (1) defendants negligently misrepresented the purpose for
which the survey
 
                                       9
<PAGE>
 
data would be used; (2) the conduct of the Company, R. R. Donnelley and CIDS in
inducing plaintiffs to provide information without disclosing to plaintiffs
that such information would be provided to convicted felons constituted fraud;
(3) defendants have been unjustly enriched by their actions; (4) defendants'
conduct resulted in the invasion of plaintiffs' privacy; (5) defendants'
conduct resulted in the infliction of severe emotional distress upon
plaintiffs; (6) defendants were negligent and grossly negligent in entrusting
plaintiffs' information to convicted felons; and (7) defendants breached an
implied contract. In addition, the complaint alleged two causes of action
solely against the Texas Department of Criminal Justice and the two state
officials. In April 1997, the state defendants were severed from the lawsuit
after winning summary judgment based on sovereign immunity. The complaint seeks
restitution, actual and exemplary damages in an unspecified amount and
injunctive relief on behalf of the named plaintiff and a purported class
consisting of all persons who completed Company surveys and whose completed
surveys were processed by inmates in the Texas prison system from January 1,
1993 to the present time. A third, fourth and fifth amended complaint have been
filed naming seven additional plaintiffs, none of whom alleged that he or she
received any offensive letter from a prisoner who key punched data. The Company
is not yet able to determine the number of persons comprising the purported
class but believes the number of persons who completed surveys in this period
and whose surveys were processed by such inmates could exceed 1.3 million. The
Company intends to defend vigorously this suit. The Company had removed the
case to the United States District Court for the Western District of Texas but
the case was subsequently remanded to state court. The Company intends to
challenge certification of the class, and the Company believes that if such
challenge is successful, this litigation would not have a material adverse
effect on the Company. However, because this litigation is in its early stages,
it is not possible to make a meaningful determination of the ultimate outcome
or to make an estimate of the loss, if any, should the outcome be unfavorable.
The Company has made a preliminary estimate that its costs of litigating the
case will be $1.5 million. The Company's insurer has agreed to assume the
defense of this case subject to a reservation of rights to deny coverage. In
the event the Company's insurer were to successfully deny coverage, R. R.
Donnelley has agreed to pay the legal fees and expenses incurred by the Company
in defending this case, but the Company would be responsible for any other
amounts payable by it as a result of this case. Because of such agreements to
pay such fees and expenses, such legal fees and expenses will not affect the
Company's cash flows; however, if R. R. Donnelley were to pay such fees and
expenses, applicable accounting principles would require the Company to
recognize such fees and expenses as incurred and apply all payments by R. R.
Donnelley in respect of such fees and expenses to additional paid-in capital.
 
  The Company is subject to various claims and legal actions other than the
Dennis litigation that arise in the ordinary course of business. The Company
believes such claims and legal actions, individually and in the aggregate, will
not have a material adverse effect on the business or financial condition of
the Company.
 
  The statements contained in this "Legal Proceedings" section that are not
historical information are forward-looking statements that are based on the
Company's estimates, assumptions, projections and current expectations.
Reference is hereby made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Cautionary Statements Regarding Future-
Looking Statements" for a discussion of certain factors that could cause the
matters discussed in this section to differ materially from the forward-looking
statements contained herein.
 
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
 
  None
 
                                       10
<PAGE>
 
ITEM 4A: EXECUTIVE OFFICERS OF METROMAIL CORPORATION.
 
  Information with respect to those individuals who served as executive
officers of the Company as of December 31, 1997 is set forth below.
 
<TABLE>
<CAPTION>
             NAME         AGE   POSITION
             ----         ---   --------
      <C>                 <S>   <C>
      Barton L. Faber      50   Chairman, President, Chief Executive Officer and Director (1)
      Susan L. Henricks    47   Former President and Chief Executive Officer and Director (1)
      Philip H. Bonello    46   Senior Vice President, Information (2)
      James R. Drake       36   President, Mail Production Services
      Ronald G. Eidell     53   Senior Vice President and Chief Financial Officer
      Kenneth A. Glowacki  45   Vice President, Finance
      Tery R. Larrew       43   President, Database Marketing Services and President, Customer
                                Insight Company
      Thomas J. Quarles    48   Senior Vice President, General Counsel, Chief Administrative Officer
                                and Secretary
      Mac E. Rodgers       38   President, Information Services
</TABLE>
--------
(1) Effective January 2, 1998, Ms. Henricks resigned as President and Chief
    Executive Officer and a director of the Company. Effective with Ms.
    Henricks' resignation, Mr. Faber was elected to the additional positions
    of President and Chief Executive Officer of the Company.
(2) Effective January 1, 1998, Mr. Bonello became Senior Vice President,
    Information of the Company. Prior to that time, Mr. Bonello was Senior
    Vice President and General Manger, On-Line Services of the Company.
 
  Barton L. Faber has been Chairman of the Company since January 1996,
President and Chief Executive Officer since January 1998 and a director of the
Company since July 1995. He served as President, Information Resources of R.
R. Donnelley from January 1995 to June 1996. From September 1989 until January
1995, he was President, Information Services of R. R. Donnelley. Prior to that
time, he was Vice President and Director, Information Services of R. R.
Donnelley in 1989, Vice President, Corporate Development of R. R. Donnelley
from April 1985 until 1989, and Group Manager, Business Development and
Analysis of R. R. Donnelley from the time he joined R. R. Donnelley in January
1985 until April 1985. Prior to joining R. R. Donnelley, he held various
positions with Mobil Oil Corporation and Ramada Europe. Mr. Faber is also a
member of the board of directors of Document Sciences Corporation and Xeikon
N.V.
 
  Susan L. Henricks resigned from the Company effective January 2, 1998. Prior
to that time, Ms. Henricks had been a director of the Company since January
1996 and President and Chief Executive Officer of the Company since July 1995.
She was President of the Company from May 1995 until July 1995. Ms. Henricks
joined the Company in 1986 and served as Reference and Information Services
Division President from 1990 to May 1995, Senior Vice President, Information
Services, in 1989, Vice President, Data Processing in 1988 and Vice President
of Production from 1986 to 1988. Prior to joining the Company, she held
various positions with CNA Insurance Company, Centerre Bank, N.A. and The
Signature Group.
 
  Philip H. Bonello has served as Senior Vice President, Information of the
Company since January 1998. Since joining the Company in 1986, he was Senior
Vice President and General Manager, On-Line Services of the Company from July
1995 to January 1998, Vice President, Electronic Services and Vice President,
Marketing Research from 1993 to 1995, Director of Marketing from 1992 to 1993
and Director of Corporate Planning from 1986 to 1992. Prior to joining the
Company, he held various positions with Coopers & Lybrand from 1984 to 1986
and DePaul University from 1980 to 1994.
 
 
                                      11
<PAGE>
 
  James R. Drake has served as President, Mail Production Services since
January 1997. Since joining the Company in 1984, he served as Senior Vice
President and General Manager, Mail Production Services from 1995 to 1996,
Vice President, Plant Manager from 1989 to 1995, and has held various other
managerial and financial positions. For the six-month period between September
1995 and March 1996, Mr. Drake left the Company and served as President of
INSYNQ Services, a mailing, sorting and distribution venture.
 
  Ronald G. Eidell has been Senior Vice President and Chief Financial Officer
of the Company since February 1996. He served as Senior Vice President,
Finance of R. R. Donnelley from January 1996 to June 1996. From 1991 until
January 1996, he was Senior Vice President and Treasurer of R. R. Donnelley.
Prior to that time, he was Vice President and Treasurer of R. R. Donnelley
from 1988 to 1991, Treasurer of R. R. Donnelley in 1988 and Controller of R.
R. Donnelley from 1982 to 1986. From February 1987 until rejoining R. R.
Donnelley in 1988, he was Vice President-Chief Financial Officer and Treasurer
of Advanced Systems, Inc.
 
  Kenneth A. Glowacki has been Vice President, Finance of the Company since
September 1988. From December 1986 to September 1988, he served as Director of
Internal Audit of R. R. Donnelley. Prior to that time, Mr. Glowacki was an
Audit Manager at Arthur Andersen & Co.
 
  Tery R. Larrew has served as President, Database Marketing Services of the
Company since December 1996 and President, Customer Insight Company since
1990. Prior to that time, he was a Principal at Pinnacle Management
Corporation and held various executive positions at First Financial Management
Corporation.
 
  Thomas J. Quarles has been Senior Vice President, General Counsel and Chief
Administrative Officer of the Company since February 1996 and Secretary of the
Company since April 1996. He served as Senior Vice President and General
Counsel of R. R. Donnelley from February 1995 to June 1996. From January 1991
until February 1995, he was Vice President and Associate General Counsel of
Ameritech Corporation. From April 1985 until December 1990 he was Vice
President and General Counsel of Ameritech Publishing, Inc. and from 1979
until March 1985, he was general attorney for Michigan Bell Telephone Company.
 
  Mac E. Rodgers has served as President, Information Services of the Company
since November 1997. Mr. Rodgers joined the Company in 1984 and served as
Senior Vice President and General Manager, Information Services from December
1996 to November 1997, Vice President and General Manager, List and Cole
Services from July 1995 to December 1996, Vice President and General Manager,
Cole Services from January 1995 to July 1995, Vice President, Sales from 1993
to January 1995 and Vice President and Plant Manager from 1990 to 1993, along
with various production and managerial positions.
 
                                      12
<PAGE>
 
                                    PART II
 
ITEM 5: MARKET FOR METROMAIL CORPORATION'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
 
  The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "ML". As of January 30, 1998, there were 208 holders of
record of the Common Stock.
 
  Trading of the Common Stock commenced on the NYSE on June 14, 1996 in
connection with the IPO. Prior to the IPO, the Common Stock was not listed or
quoted on any organized market system. The following table sets forth the high
and low sales prices of the Common Stock during the periods indicated as
reported on the New York Stock Exchange Composite Transactions Tape during
such periods.
 
<TABLE>
<CAPTION>
                                                               HIGH     LOW
      1996                                                     ----     ----
      <S>                                                      <C>      <C>
      Second Quarter (June 14 through June 30)................ $22 3/4  $19 3/4
      Third Quarter........................................... $22 1/2  $ 16
      Fourth Quarter.......................................... $23 3/8  $ 16
<CAPTION>
                                                               HIGH     LOW
      1997                                                     ----     ----
      <S>                                                      <C>      <C>
      First Quarter........................................... $22 1/4  $15 1/2
      Second Quarter.......................................... $24 7/8  $16 7/8
      Third Quarter........................................... $24 3/4  $18 1/8
      Fourth Quarter.......................................... $23 1/16 $17 7/8
</TABLE>
 
  The Company currently intends to retain earnings to finance the growth of
its business and therefore does not intend to pay any cash dividends for the
foreseeable future. Payment of any cash dividends in the future will depend on
the Company's results of operations, financial condition, cash requirements
and other factors deemed relevant by the Board of Directors of the Company.
 
                                      13
<PAGE>
 
ITEM 6: SELECTED FINANCIAL DATA.
 
  The following table sets forth selected historical consolidated and combined
financial data of the Company. Statement of operations data for each of the
three years in the period ended December 31, 1997 and balance sheet data as of
December 31, 1997 and 1996 have been derived from the audited consolidated and
combined financial statements of the Company contained herein. Statement of
operations data for the years ended December 31, 1994 and 1993 and balance
sheet data as of December 31, 1995 and 1994 are derived from audited
consolidated and combined financial statements of the Company not contained
herein. Balance sheet data as of December 31, 1993 is derived from unaudited
information. The unaudited financial data includes all adjustments that the
Company considers necessary for a fair presentation of the consolidated and
combined financial position and consolidated and combined results of
operations for the period reflected therein.
 
  The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements and Supplementary Data" included
elsewhere in this Annual Report on Form 10-K.
 
<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                                ----------------------------------------------
                                1997(1)     1996    1995(1)   1994(1)   1993
                                --------  --------  --------  -------- -------
                                              (IN THOUSANDS)
<S>                             <C>       <C>       <C>       <C>      <C>
STATEMENT OF OPERATIONS DATA:
  Direct marketing sales....... $185,106  $149,056  $122,303  $100,060 $84,904
  Database marketing sales.....   78,996    77,967    67,410    56,746  42,779
  Reference sales..............   64,285    54,422    47,474    38,665  36,032
                                --------  --------  --------  -------- -------
    Total net sales............  328,387   281,445   237,187   195,471 163,715
  Database and production
   costs.......................  202,166   155,708   134,361   108,806  95,016
  Write-off of in process
   research and development
   costs.......................   23,000       --        --        --      --
  Amortization of goodwill.....    8,142     7,572     7,446     6,608   6,054
  Selling expenses.............   60,230    53,240    45,913    37,107  29,625
  General and administrative
   expenses....................   31,298    25,524    16,645    14,408  12,372
  Provisions for doubtful
   accounts....................    4,965     2,143     2,180     1,848   1,959
                                --------  --------  --------  -------- -------
    Earnings (loss) from
     operations................   (1,414)   37,258    30,642    26,694  18,689
  Interest expense--related
   party.......................      --     10,178    21,329    18,999  22,112
  Interest expense.............    2,761       776        80       --      --
  Other expense (income)--net..   (1,226)     (207)      (87)       24    (138)
                                --------  --------  --------  -------- -------
    Earnings (loss) before
     income taxes..............   (2,949)   26,511     9,320     7,671  (3,285)
  Income taxes.................    1,084    12,649     6,585     5,684   1,181
                                --------  --------  --------  -------- -------
    Net income (loss) from
     operations before
     cumulative effect of
     accounting changes........   (4,033)   13,862     2,735     1,987  (4,466)
  Cumulative after-tax effect
   of changes in accounting
   principles, net of income
   taxes(2)....................    4,488       --        --        --    4,388
                                --------  --------  --------  -------- -------
    Net income (loss).......... $ (8,521) $ 13,862  $  2,735  $  1,987 $(8,854)
                                ========  ========  ========  ======== =======
</TABLE>
 
<TABLE>
<S>                              <C>       <C>      <C>      <C>      <C>
    Net income (loss) per
     share--basic and assuming
     dilution (3):
    Earnings (loss) before
     cumulative effect of
     changes in accounting
     principles................. $   (.18) $    .62 $    .12      .09     (.20)
    Cumulative effect of changes
     in accounting principles,
     net of
     taxes......................      .20       --       --       --       .20
                                 --------  -------- -------- -------- --------
    Net income (loss) per share. $   (.38) $    .62 $    .12      .09     (.40)
                                 ========  ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF
 PERIODS):
  Total assets.................. $481,169  $443,406 $378,721 $328,768 $293,691
  Total debt....................   61,222    21,468  250,376  219,737  202,503
  Total shareholders' equity....  359,287   360,548   85,392   78,939   75,872
</TABLE>
--------
(1) In 1994, the Company purchased CIC. In 1995, an affiliate of R. R.
    Donnelley acquired ICD. In 1997, the Company purchased Atlantes, Saxe and
    MIT. See Notes 1 and 13 of Notes to Consolidated and Combined Financial
    Statements of Metromail.
(2) In 1993, the cumulative after-tax effect of the change in accounting
    principle relates to the adoption of SFAS No. 106 accounting for post-
    retirement benefits other than pensions. In 1997, the change in accounting
    principle relates to the adoption of EITF 97-13, accounting for costs
    incurred in connection with business process reengineering and information
    technology transformation. See Note 2 of Notes to Consolidated and
    Combined Financial Statements of Metromail.
(3) See Note 2 of Notes to Consolidated and Combined Financial Statements of
    Metromail.
 
                                      14
<PAGE>
 
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
 
RESULTS OF OPERATIONS
 
 Year ended December 31, 1997 compared to the year ended December 31, 1996
 
  Total net sales increased 16.8% to $328.4 million for 1997 from $281.4
million for 1996. This $47.0 million increase was comprised of a $36.1
million, or 24.2%, increase in direct marketing sales, a $1.0 million, or
1.3%, increase in database marketing sales (previously included in direct
marketing sales) and a $9.9 million, or 18.1%, increase in reference sales.
Within direct marketing services, list services sales in the U.S. grew 36.9%
to $92.5 million, including the initial fees related to a new multi-year
contract for data usage. Lettershop sales grew 18.6% to $66.4 million and U.K.
survey sales decreased 6.3% because 1997 included $10.4 million of revenue
from one survey while 1996 included $17.2 million of revenue from two surveys.
Decreased revenue in the U.K. from surveys was partially offset by increased
data information sales. Database marketing sales increased due to a 3.6%, or
$1.9 million, increase for sales of list enhancement services and revenue from
the acquisition of MIT in August 1997. Sales of the Company's AnalytiX(R) and
Explore(TM) software products were flat in 1997 compared to 1996. The growth
in reference sales was primarily due to a 39.0% increase in on-line services,
including National Directory Assistance ("NDA(R)") which doubled in revenue
compared to 1996, and a 2.1% increase in the directory business.
 
  Database and production costs increased for 1997 to $202.2 million, or 61.6%
as a percentage of total net sales, from $155.7 million for 1996, or 55.3% as
a percentage of total net sales. Higher costs included the following: (i)
$10.6 million of costs associated with increased volume at the lettershops,
including a $1.5 million one-time non-cash write down of assets; (ii) $10.3
million of increased costs in list services, including several one-time, non-
cash reserves and write-offs of certain assets totaling $6.5 million and
increased data and computer costs; (iii) $8.9 million of increased costs to
support the growth of the Company's on-line services business; (iv) $5.8
million of increased costs, including facility and staff costs, to support
planned growth in the Company's database marketing software business; and (v)
costs related to the acquired companies and the consolidation of the Company's
two data centers. The increase as a percentage of total net sales was
primarily due to the one-time, non-cash reserves and write-offs of certain
assets in list services, increased costs associated with the higher volume at
the lettershops, which have higher production costs as a percentage of total
net sales compared to the other operations of the Company, costs of the
acquired companies and the increased costs associated with the database
marketing software business with no corresponding sales growth.
 
  The write-off of in process research and development costs (the "In Process
R & D Write-Off") of $23 million represents the portion of the purchase price
for the acquisition of Saxe allocated to in process research and development
and then written off in the third quarter of 1997.
 
  Selling expenses of $60.2 million increased from the prior year, but
decreased as a percentage of total net sales to 18.3% from 18.9% in the prior
year period. The increased expense from the prior year was due to increased
selling expense for commissions related to the increase in sales across the
Company and increased marketing expense. The improvement in selling expense as
a percentage of total net sales was due to increased efficiencies across the
sales organizations.
 
  General and administrative expenses increased $5.8 million, or 22.6%, from
1996 primarily due to increased costs associated with being a stand alone
public company. None of the stand alone costs were incurred in the first half
of 1996.
 
  The loss from operations of $1.4 million for the year ended December 31,
1997 represents a decrease of $38.7 million compared to earnings of $37.3
million for the year ended December 31, 1996 due to the foregoing factors.
 
  Interest expense-related party, primarily paid to a subsidiary of R. R.
Donnelley, of $10.2 million for 1996, was zero for 1997 due to the elimination
of the related party debt subsequent to completion of the IPO.
 
  Interest expense of $2.8 million for 1997 was $2.0 million higher than 1996
due to increased borrowings to fund 1997 acquisitions.
 
                                      15
<PAGE>
 
  The Company's tax expense decreased $11.6 million from $12.6 million for
1996 due to the decrease in earnings before income taxes and cumulative effect
of change in accounting principle. The effective tax rate exceeds the U.S.
federal statutory rate primarily due to the effect of non-deductible goodwill
amortization.
 
  The cumulative effect of change in accounting principle, net of income tax,
reflects the new accounting requirement (referred to as EITF 97-13) which
requires the Company to expense certain previously capitalized costs relating
to business process reengineering and information technology. The cumulative
effect of the accounting change was a one-time non-cash charge of $7.4 million
pre-tax, $4.5 million after tax.
 
  The net loss of $8.5 million represented a decrease of $22.4 million
compared to earnings of $13.9 million for 1996 as a result of the foregoing
factors.
 
 Year ended December 31, 1996 compared to the year ended December 31, 1995
 
  Total net sales increased 18.7% to $281.4 million for 1996 from $237.2
million for 1995. This $44.2 million increase resulted from a $26.7 million,
or 21.9%, increase in direct marketing sales, a $10.6 million, or 15.7%,
increase in database marketing sales and a $6.9 million, or 14.6%, increase in
reference sales. Direct marketing sales growth was due to $17.7 million of
additional sales of U.K. business due to growth, completion by ICD of two
surveys in 1996 compared to one in 1995 and the inclusion of a full twelve
months of sales of ICD (acquired in May 1995). Additional direct marketing
sales growth was due to increased lettershop volume of $3.7 million and more
modest increases across the traditional direct marketing services of list and
U.S. survey. Database marketing sales growth was due to strong demand for the
AnalytiX(R) and Explore(TM) database products. Reference services sales growth
was primarily due to a 28.7% increase in the Company's Metronet and NDA on-
line services plus a 5.8% increase in directory publishing services.
 
  Database and production costs increased from $134.4 million for 1995, or
56.7% as a percentage of total net sales, to $155.7 million, or 55.3% as a
percentage of total net sales, for 1996. This growth was due to increased
expenses of $4.9 million related to the second U.K. survey, start-up costs of
the NDA on-line services of $5.7 million, increased production costs to
support the higher sales volume for the lettershops, increased costs to
support the growth in marketing database services, increased U.S. survey
expenses, expenses related to the upgrade of computer capacity and increased
directory publishing costs. The decrease in the database and production costs
as a percentage of total net sales was due to improved efficiencies at ICD
(primarily the second survey, which has production costs as a percentage of
total net sales less than the Company's other operations) and increased sales
in the traditional direct marketing areas, which improved the coverage of
fixed costs. The decrease in database and production costs as a percentage of
total net sales was partially offset by increased costs related to the start
up of the NDA on-line services.
 
  Selling expenses increased $7.3 million, or 16.0%, from 1995 and decreased
as a percentage of total net sales from 19.4% for 1995 to 18.9% for 1996. The
increase in the amount is due to the increase in sales and related selling
expenses across all operations and from ICD, where selling expenses as a
percentage of total net sales are higher than the Company's other operations.
 
  General and administrative expenses grew $8.9 million, or 53.3%, from 1995
and as a percentage of total net sales from 7.0% to 9.1% for 1996. The
increase resulted primarily from the acquisition and growth of ICD, and
increased staff costs associated with being a stand alone public company.
 
  Earnings from operations of $37.3 million for 1996 increased $6.7 million
from $30.6 million for 1995 due to the foregoing factors.
 
  Interest expense-related party decreased $11.1 million due to the use of the
IPO net proceeds to repay the amount owed to a subsidiary of R. R. Donnelley.
 
                                      16
<PAGE>
 
  Interest expense of $0.8 million resulted from borrowings under a credit
agreement with a syndicate of banks (See "Changes in Financial Condition")
required to pay related party debt for ICD and provide operating funds in the
U.K.
 
  The Company's tax expense in 1996 increased $6.1 million compared to 1995
due to the increase in earnings before income taxes. The effective tax rate
exceeds the U.S. federal statutory rate primarily due to the effect of non-
deductible goodwill amortization.
 
  Net income increased $11.2 million to $13.9 million for 1996 as a result of
the foregoing factors.
 
CHANGES IN FINANCIAL CONDITION
 
  For 1997, net cash provided by operating activities of $43.6 million
increased $19.9 million over the prior year period. The Company believes that
cash flows from operations will be sufficient to fund its ongoing operations
on a long-term basis, as well as continued growth and investment. The Company
expects the credit agreement described below to be available for seasonal cash
needs and acquisitions.
 
  Capital expenditures and investments for 1997 totaled $82.2 million, an
increase of $44.6 million over 1996, primarily due to the acquisition of Saxe
and MIT and the acquisition of 516,400 shares of stock under the Company's
stock repurchase program, which shares substantially offset shares issued in
the acquisition of Atlantes. In February, 1997, the Board of Directors of the
Company terminated the stock repurchase program.
 
  In the acquisition of Atlantes, the Company issued 698,431 shares of common
stock and paid $2.9 million in cash to Atlantes holders. Up to an additional
$12.5 million in the form of common stock could be paid to Atlantes
shareholders in the 1999-2002 time period based upon achievement of specified
performance targets. The Company paid cash in the acquisition of MIT and the
acquisition of Saxe, and the Company may be required to make additional cash
payments during the 1998-2000 time period in connection with the acquisition
of MIT depending on achievement of specified performance targets.
 
  The Company amended its existing credit agreement on August 18, 1997. Under
the amended credit agreement (the "Amended Credit Agreement"), the Company is
entitled to borrow up to $100 million on a revolving credit basis. Borrowings
under the Amended Credit Agreement mature in 2002 and bear interest (i) at the
prime rate announced by the bank acting as agent for the syndicate, (ii) at
the LIBOR rate plus, depending on the Company's leverage ratio and fixed
charge coverage ratio, up to 42.5 basis points per annum, or (iii) at a rate
determined by competitive bidding. At December 31, 1997 there was $61.2
million outstanding under the Amended Credit Agreement resulting primarily
from the acquisitions of Saxe and MIT and the purchase of treasury stock.
 
OUTLOOK
 
  Historically, the Company's net sales build quarterly through the year, with
the majority of net sales being achieved in the second half of a given year.
In 1997, 1996 and 1995, total net sales of the Company during the second half
of the year constituted 57.5%, 56.0% and 55.3%, respectively, of total net
sales for the year.
 
  Many of the Company's expenses are incurred ratably throughout the year and,
when combined with the quarterly revenue pattern discussed above, result
historically in fluctuations in earnings from operations. Earnings from
operations are strongest in the second half of the year. Earnings from
operations in the second half of 1997, 1996 and 1995 constituted 59.6%, 72.0%
and 55.6%, respectively, of total earnings from operations for the year
(excluding the impact of the In Process R&D Write-Off). Had the deferral of
approximately $2.0 million of expenses from the second quarter of 1995 to the
third and fourth quarters of 1995 (resulting in a $2.0 million negative impact
on earnings from operations for the second half of 1995) not taken place, the
Company estimates that the percentage of earnings from operations for the
second half of 1995 would have been approximately 62.1% of the full year's
earnings from operations.
 
                                      17
<PAGE>
 
  Management expects the historical patterns of larger second half portions of
the year's sales and operating earnings (excluding the impact of the In
Process R&D Write-Off) to occur again in 1998. In 1997, the U.K. operations
distributed only one survey (primarily in the third quarter 1997) with revenue
of $9.5 million compared to two in 1996 (second quarter and fourth quarter
1996) reflecting the nine month production cycle for this portion of the U.K.
operation's business. The 1996 surveys produced $7.4 million and $9.8 million
of revenue in the second and fourth quarters of 1996, respectively. The second
and fourth quarters of 1997 did not included any U.K. survey revenue, but
included additional revenue from the sale of information from the U.K.
database. Revenues in 1998 are expected to include two surveys (second quarter
and fourth quarter) for the Company's U.K. operations.
 
  During 1997, the Company assessed the impact of the conversion of internal
processes and systems to be Year 2000 compliant. The Company has begun
replacing or renovating the systems and applications where necessary using
both internal staff and external experts. The cost of the projects is
estimated to be between $2.5 million and $4 million. These costs are based on
managements' best estimates, which are derived utilizing numerous assumptions
of future events. However, there can be no guarantee that these estimates will
be achieved and the actual results could differ materially from those plans.
The Company expects the project to be completed not later than the end of the
first quarter of 1999.
 
CAUTIONARY STATEMENTS REGARDING FUTURE-LOOKING STATEMENTS
 
  This Form 10-K, including the "Outlook" section above, are among certain
communications by the Company that contain forward-looking statements,
including statements regarding the Company's financial position, results of
operations, market position, product development and regulatory matters. These
forward-looking statements are based on the Company's estimates, assumptions,
projections and current expectations. The Company hereby notes several
important factors that could cause the Company's actual results and other
matters to differ materially from the results, projections and expectations
expressed in the forward-looking statements.
 
  Regulation. Adoption of additional guidelines by the DMA or additional
guidelines applicable to the Company's reference services and enactment of
federal or state laws or regulations affecting the Company's direct marketing,
database marketing or reference services could have the effect of materially
increasing the cost to the Company of collecting certain kinds of information,
precluding or restricting the use by direct marketers or users of the
Company's reference products of information that the Company could lawfully
collect or otherwise materially adversely affecting the Company's business,
operating results or financial condition.
 
  Absence of Long-Term Contracts; Lack of Predictability of Sales;
Fluctuations in Operating Results. The Company's sales, particularly with
respect to its direct marketing services and database marketing products, are
generally not derived from long-term contracts. Therefore, the Company must
continually engage in sales efforts and must be prepared to adjust its pricing
terms to meet competition. The Company's net sales are affected by a number of
seasonal characteristics and other factors, including, with respect to the
Company's direct marketing and database marketing services, the timing and
extent of the direct marketing activities of the Company's clients. These
activities are influenced by general factors, such as postal rates, paper
prices and overall economic conditions, and by factors specific to a client,
such as the client's advertising budget and choice of advertising media. The
Company's net sales can also be affected by the availability of new or updated
data. Thus, if the Company does not update its database as quickly as do its
competitors, the Company's net sales could be adversely affected. The
potential unpredictability of the Company's net sales can lead to fluctuations
in quarterly and annual operating results, especially because many expenses
are incurred by the Company ratably throughout the year. In addition, the
expenses associated with acquiring data, and the timing of acquisitions and
the costs and expenses associated therewith, might also affect operating
results.
 
  Competition. The markets in which Metromail competes are highly competitive
and fragmented. Some of the Company's competitors have, and potential
competitors may have, materially greater financial, technical and
 
                                      18
<PAGE>
 
marketing resources than the Company that may allow them to compete
effectively with the Company in respect of some or all of its direct
marketing, database marketing and reference services.
 
  Technological Changes and Software Development. The Company's future success
is dependent on its ability to keep pace with technological improvements,
including as they affect the Company's ability to input collected information
into its database and produce the information desired by its clients and the
costs of doing so. In addition, the Company's future success in respect of its
marketing database software will depend upon its ability to enhance its
current products and to develop and introduce new products and services on a
timely basis that keep pace with technological developments and address the
increasingly sophisticated needs of its clients. If the Company is unable to
keep pace with technological improvements or is unable, for technological or
other reasons, to develop and introduce new products or enhancements of
existing products in a timely and cost-effective manner in response to
changing market conditions or customer requirements, the Company's business,
operating results or financial condition could be materially adversely
affected.
 
  Litigation. The Company cannot predict the effects, if any, that the Dennis
litigation discussed under "Legal Proceedings" may have on its business,
operating results or financial condition, although such litigation could have
an adverse effect on the Company (including through adverse publicity) if the
Company were not to be successful in its defense or if the Company's insurer
were to deny coverage.
 
  Risk of Loss of Data Center or Interruption of Telecommunications Services.
The Company's operations are dependent on its ability to protect its data
center in Lombard, Illinois against damage from fire, power loss,
telecommunications failure or similar event. In addition, the on-line services
provided by the Company are dependent on telecommunications links to the
regional Bell operating companies. The Company has taken precautions to
protect its data center and telecommunications links from events that could
interrupt its operations. Any damage to the Company's data center or any
failure of the Company's telecommunication links that causes interruptions in
the Company's operations could have a material adverse effect on the Company's
business, operating results or financial condition.
 
  Growth Through Acquisitions and New Products. The Company's business
strategy includes growth through acquisitions of proprietary information and
of distribution channels and businesses complementary to the Company's
business. The Company has made a number of acquisitions in the past and
believes that it has been successful in integrating the acquired assets and
businesses into the Company's operations. There can be no assurance, however,
that future acquisitions will be consummated on acceptable terms or that any
acquired assets or business will be successfully integrated into the Company's
operations. The Company's business strategy also includes growth through the
introduction of new products or services that leverage the information
contained in the Company's database. There can be no assurance that new
products or services introduced by the Company will achieve acceptance.
 
  Reference is also made to the Company's Registration Statement (No. 333-
2042) under "Risk Factors" for a more detailed discussion of the foregoing and
other factors that may affect the Company.
 
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
  Not applicable.
 
                                      19
<PAGE>
 
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Shareholders of Metromail
 Corporation and Affiliates:
 
  We have audited the accompanying consolidated and combined balance sheets of
Metromail Corporation and Affiliates as of December 31, 1997 and 1996, and the
related consolidated and combined statements of operations, changes in
shareholders' equity and cash flows for each of the three years ended December
31, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metromail Corporation and
Affiliates as of December 31, 1997 and 1996 and the results of its operations
and cash flows for each of the three years ended December 31, 1997, in
conformity with generally accepted accounting principles.
 
  As discussed in Note 2 to the financial statements, in the fourth quarter of
1997 Metromail Corporation and Affiliates changed their method of accounting
for certain costs incurred in connection with information technology
transformation projects.
 
                                          /s/ Arthur Andersen LLP
 
                                          Arthur Andersen LLP
 
Chicago, Illinois
January 31, 1998
 
(Except with respect to matters discussed in Note 18, as to which the date is
March 23, 1998)
 
                                      20
<PAGE>
 
                      METROMAIL CORPORATION AND AFFILIATES
 
                    CONSOLIDATED AND COMBINED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                          ASSETS
                          ------
<S>                                                          <C>       <C>
Cash and equivalents.......................................  $  8,158  $ 18,530
Receivables, less sales allowances and allowances for
 doubtful accounts of $6,298 in 1997 and $4,461 in 1996....   101,965    99,219
Inventories................................................     5,603     6,722
Prepaid expenses...........................................     8,116     8,552
Current deferred income taxes..............................       476       793
                                                             --------  --------
    Total current assets...................................   124,318   133,816
Net property, plant and equipment, at cost, less
 accumulated depreciation of $61,276 in 1997 and $50,701 in
 1996......................................................    54,374    45,313
Goodwill and other intangibles, net of accumulated
 amortization of $99,442 in 1997 and $86,372 in 1996.......   273,909   255,799
Deferred income taxes......................................     9,941       --
Other assets...............................................    26,627     8,478
                                                             --------  --------
    Total assets...........................................  $489,169  $443,406
                                                             ========  ========
<CAPTION>
           LIABILITIES AND SHAREHOLDERS' EQUITY
           ------------------------------------
<S>                                                          <C>       <C>
Accounts payable...........................................  $  7,073  $  6,608
Accrued compensation.......................................    11,923     8,540
Deferred revenue...........................................    12,484     9,050
Other accrued liabilities..................................    25,285    28,560
                                                             --------  --------
    Total current liabilities..............................    56,765    52,758
Long-term debt.............................................    61,222    21,468
Deferred income taxes......................................       --      1,591
Other noncurrent liabilities...............................    11,895     7,041
                                                             --------  --------
    Total noncurrent liabilities...........................    73,117    30,100
Shareholders' equity:
Common stock, $.01 par value, 75,000,000 shares authorized,
 23,136,431 shares issued, 22,529,746 shares outstanding in
 1997; and 22,437,000 shares issued, 22,311,900 shares
 outstanding in 1996. Preferred stock, $.01 par value,
 20,000,000 shares authorized, no shares issued in 1997 and
 1996......................................................       231       224
Additional paid-in capital.................................   392,083   374,832
Accumulated deficit (includes cumulative adjustment for
 currency translation of $155 in 1997 and $3 in 1996)......   (20,731)  (12,362)
Unearned compensation--restricted stock....................      (584)      --
Treasury stock, at cost, 606,685 shares in 1997; 125,100
 shares in 1996............................................   (11,712)   (2,146)
                                                             --------  --------
    Total shareholders' equity.............................   359,287   360,548
                                                             --------  --------
    Total liabilities and shareholders' equity.............  $489,169  $443,406
                                                             ========  ========
</TABLE>
 
 
   See accompanying Notes to Consolidated and Combined Financial Statements.
 
                                       21
<PAGE>
 
                      METROMAIL CORPORATION AND AFFILIATES
 
               CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1997      1996      1995
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Direct marketing sales........................... $185,106  $149,056  $122,303
Database marketing sales.........................   78,996    77,967    67,410
Reference sales..................................   64,285    54,422    47,474
                                                  --------  --------  --------
  Total net sales................................  328,387   281,445   237,187
Database and production costs....................  202,166   155,708   134,361
Write-off of in process research and development
 costs...........................................   23,000       --        --
Amortization of goodwill.........................    8,142     7,572     7,446
Selling expenses.................................   60,230    53,240    45,913
General and administrative expenses..............   31,298    25,524    16,645
Provisions for doubtful accounts.................    4,965     2,143     2,180
                                                  --------  --------  --------
  Earnings (loss) from operations................   (1,414)   37,258    30,642
Interest expense--related party..................      --     10,178    21,329
Interest expense.................................    2,761       776        80
Other (income)--net..............................   (1,226)     (207)      (87)
                                                  --------  --------  --------
  Earnings (loss) before cumulative effect of
   change in accounting principle and income
   taxes.........................................   (2,949)   26,511     9,320
Income taxes.....................................    1,084    12,649     6,585
                                                  --------  --------  --------
    Earnings (loss) before cumulative effect of
     change in accounting principle..............   (4,033)   13,862     2,735
    Cumulative effect of change in accounting
     principle (EITF 97-13), net of income taxes.    4,488       --        --
                                                  --------  --------  --------
    Net income (loss)............................ $ (8,521) $ 13,862  $  2,735
                                                  ========  ========  ========
    Net income (loss) per share--basic and
     assuming dilution
     (Note 2):
    Earnings (loss) before cumulative effect of
     change in accounting principle.............. $   (.18) $    .62  $    .12
    Cumulative effect of change in accounting
     principle, net of taxes.....................      .20       --        --
                                                  --------  --------  --------
    Net income (loss) per share.................. $   (.38) $    .62  $    .12
                                                  ========  ========  ========
    Weighted average number of shares of common
     stock and common stock equivalents
     outstanding.................................   22,412    22,427    22,427
                                                  ========  ========  ========
</TABLE>
 
 
   See accompanying Notes to Consolidated and Combined Financial Statements.
 
                                       22
<PAGE>
 
                      METROMAIL CORPORATION AND AFFILIATES
 
    CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                     ADDITIONAL                 TOTAL
                         RESTRICTED COMMON TREASURY   PAID-IN   ACCUMULATED SHAREHOLDERS'
                           STOCK    STOCK   STOCK     CAPITAL     DEFICIT      EQUITY
                         ---------- ------ --------  ---------- ----------- -------------
<S>                      <C>        <C>    <C>       <C>        <C>         <C>
Balance at December 31,
 1994...................   $ --      $ 86  $    --    $107,844   $(28,971)    $ 78,959
  Current year earnings
   .....................     --       --        --         --       2,735        2,735
  Currency translation
   .....................     --       --        --         --        (237)        (237)
  ICD stock acquired ...     --       --        --       3,935        --         3,935
                           -----     ----  --------   --------   --------     --------
Balance at December 31,
 1995...................     --        86       --     111,779    (26,473)      85,392
  Current year earnings
   .....................     --       --        --         --      13,862       13,862
  Currency translation
   .....................     --       --        --         --         249          249
  Common stock issued in
   IPO .................     --       138       --     263,053        --       263,191
  Treasury stock
   acquired ............     --       --     (2,146)       --         --        (2,146)
                           -----     ----  --------   --------   --------     --------
Balance at December 31,
 1996 ..................     --       224    (2,146)   374,832    (12,362)     360,548
  Current year loss.....                                           (8,521)      (8,521)
  Currency translation..                                              152          152
  Treasury stock
   acquired.............     --       --     (9,566)       --         --        (9,566)
  Restricted stock
   earned (unearned)....    (584)     --        --         758        --           174
  Atlantes acquisition..     --         7       --      16,493        --        16,500
                           -----     ----  --------   --------   --------     --------
Balance at December 31,
 1997...................   $(584)    $231  $(11,712)  $392,083   $(20,731)    $359,287
                           =====     ====  ========   ========   ========     ========
</TABLE>
 
 
 
   See accompanying Notes to Consolidated and Combined Financial Statements.
 
                                       23
<PAGE>
 
                      METROMAIL CORPORATION AND AFFILIATES
               CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                               ------------------------------
                                                 1997      1996       1995
                                               --------  ---------  ---------
<S>                                            <C>       <C>        <C>
Cash flows provided by (used in) operating
 activities:
  Net income (loss) from operations........... $ (8,521) $  13,862  $   2,735
  Write-off of in process research and
   development costs..........................   23,000        --         --
  Cumulative effect of change in accounting
   principle--EITF 97-13 writedown............    7,357        --         --
  Depreciation, amortization and writeoffs of
   intangibles................................   29,775     20,810     13,405
  Amortization of goodwill....................    8,142      7,572      7,446
  Other--net..................................      666        249       (236)
  Net change in assets and liabilities........  (16,802)   (18,511)   (13,651)
                                               --------  ---------  ---------
    Net cash provided by operating activities.   43,617     23,982      9,699
                                               --------  ---------  ---------
Cash flows used for investing activities:
  Capital expenditures........................  (35,061)   (37,589)   (28,459)
  Other investments including acquisitions,
   net of cash................................  (47,095)       --     (15,330)
                                               --------  ---------  ---------
    Net cash used for investing activities....  (82,156)   (37,589)   (43,789)
                                               --------  ---------  ---------
Cash flows provided by (used for) financing
 activities:
  Borrowings and advances from related
   parties....................................      --     131,592    325,381
  Repayments of borrowings and advances from
   related party..............................      --    (380,084)  (296,526)
  Reduction of capital lease obligation.......   (2,173)       --         --
  Increase in borrowings......................   39,754     19,584      1,300
  Change in capital stock.....................      --         138        --
  Proceeds from initial public offering.......      --     263,053        --
  Proceeds from exercise of stock options.....      196        --         --
  Stock issuance pursuant to employee stock
   purchase plan..............................      403        --         --
  Purchase of treasury stock..................  (10,165)    (2,146)       --
  Capital contribution from R. R. Donnelley...      --         --       3,935
                                               --------  ---------  ---------
    Net cash provided by financing activities.   28,015     32,137     34,090
                                               --------  ---------  ---------
Effect of exchange rate changes on cash and
 cash equivalents.............................      152        --         --
                                               --------  ---------  ---------
Net increase (decrease) in cash and
 equivalents..................................  (10,372)    18,530        --
  Cash and equivalents at beginning of year...   18,530        --         --
                                               --------  ---------  ---------
  Cash and equivalents at end of year......... $  8,158  $  18,530  $     --
                                               ========  =========  =========
The changes in assets and liabilities, net of
 balances assumed through acquisitions, were
 as follows:
Decrease (increase) in assets:
  Receivables--net............................ $   (310) $ (30,781) $  (8,470)
  Inventories--net............................    1,119     (1,064)    (1,244)
  Prepaid expenses............................      596     (1,103)    (4,545)
  Current deferred income taxes...............      317       (168)       560
  Deferred income taxes.......................   (9,941)       149       (149)
  Other assets................................   (7,704)    (2,147)    (3,106)
Increase (decrease) in liabilities:
  Accounts payable............................     (389)       866     (1,954)
  Accrued compensation........................    2,776      2,467        151
  Deferred revenue............................    3,434      2,329      1,157
  Other accrued liabilities...................   (8,028)     8,859      4,873
  Deferred income taxes.......................   (1,591)       252     (1,121)
  Other noncurrent liabilities................    2,919      1,830        197
                                               --------  ---------  ---------
    Net change in assets and liabilities...... $(16,802) $ (18,511) $ (13,651)
                                               ========  =========  =========
</TABLE>
 
   See accompanying Notes to Consolidated and Combined Financial Statements.
 
                                       24
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
            NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND NATURE OF OPERATIONS
 
  Metromail Corporation ("Metromail" or the "Company") is a leading provider
of direct marketing, database marketing and reference products and services in
the United States and the United Kingdom.
 
  Metromail was a wholly owned subsidiary of R. R. Donnelley & Sons Company
("R. R. Donnelley") until June 19, 1996 when the Company completed an initial
public offering of 13.8 million shares of its common stock (the "IPO"),
reducing R. R. Donnelley's ownership in the Company to 38.4%. Metromail had
been acquired by R. R. Donnelley in 1987 in a business combination accounted
for as a purchase. On the date of acquisition, the financial position of
Metromail was adjusted to the fair value of the assets acquired and
liabilities assumed by R. R. Donnelley. All adjustments to Metromail's
financial position by R. R. Donnelley at the date of acquisition have been
pushed down to Metromail's financial statements.
 
  The accompanying consolidated and combined financial statements include the
accounts of Metromail and subsidiaries, as well as International Communication
& Data Plc ("ICD") and Data by Design ("DBD"), which were affiliates of
Metromail in 1995. ICD was an affiliate of Metromail and an indirect wholly
owned subsidiary of R. R. Donnelley located in the United Kingdom. DBD was a
division of a wholly owned subsidiary of R. R. Donnelley located in the United
Kingdom, which was acquired by R. R. Donnelley in August 1994. ICD was
contributed to Metromail by R. R. Donnelley in February 1996. Subsequent to
this contribution, ICD purchased all of the assets of DBD. The accompanying
financial statements have been restated to reflect the combination of entities
under common control by R. R. Donnelley at December 31, 1995. ICD and DBD are
included in the results of operations of the accompanying consolidated and
combined financial statements from the date of original acquisition by R. R.
Donnelley in May 1995 and August 1994, respectively. The consolidated
financial statements also include Atlantes Corporation ("Atlantes"), Marketing
Information Technologies ("MIT") and Saxe, Inc. ("Saxe"), three wholly owned
subsidiaries that were acquired during the third quarter of 1997. Atlantes is
a company that obtains, processes and manages information from product
registration questionnaires. MIT is a database marketing and strategic
marketing services and consulting firm. Saxe is a provider of object-oriented,
open-architecture software solutions and databases for database marketing
purposes. Metromail and its wholly owned subsidiaries are collectively
referred to hereinafter as the "Company".
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Consolidation and Combination
 
  The consolidated and combined financial statements include all accounts of
the Company. All material intercompany balances and transactions are
eliminated in consolidation and combination.
 
 Revenue Recognition and Deferred Revenues
 
  The Company recognizes revenues for direct marketing services at the time
the services are provided. For sales of data under guaranteed multi-year
agreements related to a file installation of selected data from the National
Consumer Data Base, the Company defers the recognition of a portion of the
revenue related to the future costs and margin of the information or services
to be provided in such future years. Current year revenues include the balance
of the guaranteed revenue under the respective agreements, discounted by an
appropriate interest rate factor if the collection period exceeds one year.
The portion of such receivable to be collected in future years is recorded in
"Other Assets" in the accompanying financial statements. Revenues for
reference services are recognized at the time the service is provided or the
product is delivered. The Company's proprietary database software is generally
licensed for an initial term of three years. The license provides for (a) an
initial license fee, (b) subsequent annual license and maintenance fees and
(c) customer support service fees. Initial license fee revenues are recognized
when delivery of the software has occurred, collectibility is probable and the
 
                                      25
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
Company retains no significant obligations under the licensing agreements.
Annual license and maintenance fees are recognized over the balance of the
contract in accordance with specific contract terms. Revenues from customer
support services are recognized in the period in which the support services
are performed by the Company.
 
  The Company provides sales allowances for sales credits issued to clients in
the normal course of business. The allowances are recorded as reductions of
sales and are included in net sales in the accompanying statement of
operations. The reductions included in net sales were $4.9 million, $5.0
million and $5.1 million for the years ended 1997, 1996 and 1995,
respectively.
 
 Per Share Information
 
  In accordance with SFAS No. 128, net income per share for the years ended
December 31, 1997, 1996 and 1995 has been computed on a basic and dilutive
basis. For the year ended December 31, 1997 there are no reconciling items
between basic and dilutive net income per share. Options to purchase 1,771,969
shares of common stock were outstanding during 1997 but are not included in
the computation of diluted net income per share because their effect is
antidilutive. For the year ended December 31, 1996 there are 1,220 potential
shares of common stock added to the number of shares outstanding in
reconciling between basic and dilutive net income per share, and there is no
effect on income available to common stockholders. Additionally in 1996, there
were options outstanding to purchase 1,290,250 shares of common stock, but
these are not included in the computation because their effect is
antidilutive. For the year ended December 31, 1995 the weighted average number
of common stock outstanding, for both basic and dilutive, reflects the shares
issued by the Company upon completion of the IPO as if they were outstanding
the entire year.
 
 Inventories
 
  Inventories include materials, labor and production overhead and are carried
at weighted average cost.
 
 Foreign Currency Translation
 
  The financial statements of ICD are translated into U.S. dollars using
exchange rates in effect at the end of the period for assets and liabilities
and average exchange rates for results of operations during the period of
inclusion in the Company's financial statements. Gains and losses arising from
translation are included in shareholders' equity and are not included in
results of operations.
 
 Property, Plant and Equipment--Capitalization and Depreciation
 
  Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method based on useful lives of up to 30 years for
buildings and 3 to 10 years for machinery, equipment and computer hardware.
Maintenance and repair costs are charged to expense as incurred. When
properties are retired or disposed, the costs and related depreciation
reserves are eliminated and the resulting profit or loss is recognized in
income.
 
 Intangible Assets--Capitalization and Amortization
 
  Intangible assets primarily consist of the cost of databases and data,
internal software, software development and goodwill.
 
  Goodwill primarily consists of the excess of purchase price over the fair
market value of net assets acquired by R. R. Donnelley as a result of its
acquisition of Metromail in 1987. Goodwill also includes the excess of
purchase price over the fair market value of net assets for businesses the
Company has acquired and accounted for as a purchase. These costs are
amortized over their estimated useful lives of primarily 40 years.
 
                                      26
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Costs incurred for routine maintenance and updating of databases are
expensed as incurred. However, the Company does capitalize the costs incurred
to acquire databases, significantly enhance existing databases, acquire lists
and acquire data through Company-generated surveys. Such databases and data
enhancements are stated at cost and are amortized over their estimated useful
life of three years.
 
  Internal software represents costs incurred to purchase externally developed
software, external consulting costs and direct internal costs incurred in the
development of various production and administrative applications. Intangible
assets as of December 31, 1997 included $5.7 million related to a major
redesign of the file structure of the Company's database. This new database
structure supports the delivery of the Company's information service
offerings. The costs related to this redesign are being amortized over its
expected period of benefit of five years. All other internal software is
amortized over three years.
 
  Software development costs represent costs incurred to develop database
software which is licensed to clients. The Company capitalizes software
development costs when the technological feasibility of the product has been
assured, through the time at which the product is available for licensing to
its clients, in accordance with Statement of Financial Accounting Standards
No. 86. These costs are amortized over their estimated useful life of three
years. All development costs incurred prior to achieving technological
feasibility are expensed as incurred.
 
 Impairment of Long-lived Assets
 
  The Company periodically assesses whether events or circumstances have
occurred that may indicate the carrying value of its long-lived assets may not
be recoverable. When such events or circumstances indicate the carrying value
of an asset may be impaired, the Company uses an estimate of the future
undiscounted cash flows to be derived from the asset over the remaining useful
life of the asset to assess whether or not the asset is recoverable. If the
future undiscounted cash flows to be derived over the life of the asset do not
exceed the asset's net book value, the Company recognizes an impairment loss
for the amount by which the net book value of the asset exceeds its estimated
fair market value. The Company has recognized no material impairment losses
for the years ended December 31, 1997, 1996 and 1995. Management does not
believe any material impairment of long-lived assets exists as of December 31,
1997.
 
 Income Taxes
 
  Metromail and its wholly owned subsidiaries were included in the
consolidated federal income tax return of R. R. Donnelley through June 19,
1996 (the date of completion of the IPO). DBD and ICD had historically been
included in the consolidated tax return of R. R. Donnelley's wholly owned
United Kingdom subsidiaries. The consolidated and combined tax provision is
presented as if the Company filed separate tax returns. Deferred taxes are
provided when tax laws and financial accounting standards differ with respect
to the amount of income calculated in a given year and the bases of assets and
liabilities, in accordance with Statement of Financial Accounting Standards
No. 109. Prior to completion of the IPO, income taxes were paid by R. R.
Donnelley on behalf of Metromail.
 
 Use of Estimates and Assumptions
 
  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, liabilities, the
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.
 
                                      27
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Change in Accounting Principles
 
  As required by the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") Issue 97-13, "Accounting for Costs Incurred In Connection
with a Consulting Contract That Combines Business Process Reengineering and
Information Technology Transformation", Metromail recorded an after-tax charge
of $4.5 million of previously capitalized costs ($.20 per common share on both
the basic and diluted bases) in the fourth quarter of 1997. These costs relate
to business process reengineering and information technology transformation,
which are no longer allowed to be capitalized under EITF 97-13, issued in the
fourth quarter. This charge was reported as a cumulative effect of change in
accounting principle.
 
 Fair value of financial instruments
 
  The carrying amount reported in the consolidated balance sheets for cash,
accounts receivable, prepaid expenses and other current assets, accounts
payable and accrued expenses approximates fair value because of the immediate
or short-term maturity of these financial instruments. The recorded value of
long-term debt is estimated to approximate fair value due to the interest
rates incurred by the Company on such debt.
 
 New accounting pronouncements
 
  SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997, will
require the Company to disclose, in financial statement format, all non-owner
changes in equity. Such changes include, for example, cumulative foreign
currency translation adjustments, certain minimum pension liabilities and
unrealized gains and losses on available-for-sale securities. This Statement
is effective for fiscal years beginning after December 15, 1997 and requires
presentation of prior period financial statements for comparability purposes.
The Company expects to adopt this Statement beginning with its financial
statements for the year ending December 31, 1998. Adoption of this statement
is not expected to have a material impact on the Company's financial
statements.
 
  SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major clients.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company
expects to adopt this Statement in its financial statements for the year
ending December 31, 1998.
 
3. TRANSACTIONS WITH R. R. DONNELLEY & SONS COMPANY
 
  Related party transactions with R. R. Donnelley not disclosed elsewhere in
the financial statements are as follows:
 
 Employee Benefit Programs
 
  Prior to completion of the IPO, the Company participated in various employee
benefit programs which were sponsored by R. R. Donnelley. These programs
included medical, dental and life insurance and workers' compensation. The
Company reimbursed R. R. Donnelley for its proportionate cost of these
programs based on historical experience and relative headcount. The costs
reimbursed to R. R. Donnelley included costs for reported claims as well as
incurred but not reported claims. The Company recorded expense related to the
reimbursement of these costs of approximately $5.5 million in the period from
January 1, 1996 through the completion of the
 
                                      28
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
IPO. These costs were charged to database and production costs, selling
expense and general and administrative expense based on the number of
employees in each of these categories.
 
  At the completion of the IPO, the Company and R. R. Donnelley entered into a
Benefit Administration Services Agreement. This agreement, among other things,
permitted the Company to continue to participate in the welfare plans of R. R.
Donnelley until the Company established its own welfare plans, which it did on
July 1, 1996. The Benefit Administration Services Agreement also required the
Company to reimburse R. R. Donnelley for (1) the actual cost of benefits
provided under R. R. Donnelley's employee benefit plans for Company employees
during the period in which the Company continued to participate in such plans
following completion of the IPO and (2) the Company's pro rata share of
administration and plan asset management expenses incurred in the operation of
these plans during such period. This Agreement expired on December 31, 1996.
The costs incurred by the Company under this agreement in respect of the
Company's participation in R. R. Donnelley's employee benefit plans for the
period from completion of the IPO through December 31, 1996 were $1.3 million.
 
 Post-Retirement Medical and Life Insurance Benefits
 
  Prior to completion of the IPO, the Company also participated in a post-
retirement benefit program sponsored by R. R. Donnelley, which provides
certain post-retirement medical and life insurance benefits. Prior to
completion of the IPO, the Company reimbursed R. R. Donnelley for its
proportionate cost of these programs based on an actuarial estimation of the
proportionate costs attributable to all of the Company's employees. The
Company recorded expense related to the reimbursement of these costs of
approximately $1.2 million for the year ended December 31, 1996. Under the
Benefit Administration Services Agreement, the Company assumed the liability
to provide retiree medical and life insurance benefits with respect to active
employees who had not yet satisfied the age and service eligibility
requirements to receive such benefits as of the completion of the IPO, and R.
R. Donnelley retained the liability to provide retiree benefits to all active
and terminated employees who had met the age and service requirements for
eligibility as of the completion of the IPO. The liability related to the
portion of post-retirement benefits which will be paid by the Company has been
reflected in other noncurrent liabilities in the accompanying financial
statements in the amount of $7.0 million as of December 31, 1997 and $6.0
million as of December 31, 1996. The liability related to the portion of post-
retirement liability retained by R. R. Donnelley, net of associated deferred
taxes receivable from R. R. Donnelley, has been reflected in other noncurrent
liabilities in the accompanying financial statements.
 
 Corporate Services
 
  Prior to completion of the IPO, R. R. Donnelley provided certain support
services to the Company, including legal, tax, treasury, benefits
administration, real estate, audit and corporate development services. These
charges were allocated by R. R. Donnelley to the Company based on various
formulas which reasonably approximate the actual costs incurred. The expense
recorded by the Company for these allocations was approximately $1.3 million
for the period from January 1, 1996 through the completion of the IPO and are
included in general and administrative expenses in the accompanying income
statements. The amounts allocated by R. R. Donnelley are not necessarily
indicative of the actual costs which may have been incurred had the Company
operated as an entity unaffiliated with R. R. Donnelley during the periods
prior to completion of the IPO. However, the Company believes that such
allocation was reasonable and in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 55.
 
                                      29
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  At the completion of the IPO, the Company and R. R. Donnelley entered into a
Transition Services Agreement, pursuant to which R. R. Donnelley or its
affiliates agreed to perform certain legal, environmental, real estate, risk
management and tax services for the Company, and the Company agreed to furnish
R. R. Donnelley certain financial information. The costs incurred by the
Company under this agreement for 1997 were $0.02 million and for the period
from completion of the IPO through December 31, 1996 were $0.2 million.
 
 Metromail Computer Processing Services
 
  Prior to completion of the IPO, the Company provided computer processing
services to R. R. Donnelley for most of the corporate software applications
used by R. R. Donnelley. The Company charged R. R. Donnelley the estimated
cost of providing these services. These costs include hardware, software and
labor costs associated with running the various application programs used by
R. R. Donnelley. The costs reimbursed by R. R. Donnelley were approximately
$1.8 million for the period from January 1, 1996 through the completion of the
IPO. This amount has been recorded as a reduction of database and production
costs in the accompanying income statement. The Company believes these
reimbursed costs reasonably approximate the actual costs incurred by the
Company.
 
  At the completion of the IPO, the Company entered into a Data Center
Services Agreement with R. R. Donnelley. Under the Data Center Services
Agreement, the Company provides to R. R. Donnelley general computer and data
processing services, including mainframe processing and technical software
systems support and data processing for R. R. Donnelley's internal business
purposes. The Data Center Services Agreement will be in effect for the period
commencing on the closing of the IPO and ending on December 31, 1998. After
December 31, 1998, the Data Center Services Agreement will automatically renew
unless terminated by either party upon six months notice. R. R. Donnelley paid
the Company a fee of $4.4 million and $4.3 million for the Company's services
under the agreement during the periods ending on December 31, 1997 and 1996,
respectively. The yearly fee will be adjusted according to changes in R. R.
Donnelley's service needs and increased by an amount equal to the average
published consumer price index increase for the preceding 12 months, measured
at September 30 of each year, provided that such increases shall not exceed
six percent per year.
 
 Sales through R. R. Donnelley
 
  The Company sold products and services to clients who were also clients of
R. R. Donnelley. For some of these sales, the Company's clients were billed by
R. R. Donnelley. R. R. Donnelley then allocated to the Company that portion of
the revenue attributable to the Company's performed services, as agreed upon
by the Company and its client. These sales approximated $21.9 million, $21.8
million and $22.7 million for the years ended December 31, 1997, 1996 and
1995, respectively. The receivables from the Company's clients related to
sales prior to the completion of the IPO are excluded from the Company's
balance sheets as R. R. Donnelley retained risk of loss with collection.
 
  At the completion of the IPO, the Company and R. R. Donnelley entered into a
Sales Agreement. Pursuant to the Sales Agreement, if R. R. Donnelley
successfully sells the services of the Company to a customer, R. R. Donnelley
will, following performance of the services, invoice and seek to collect the
amounts owed from such customer for the services provided by the Company. Upon
collection of such amounts from the customer, R. R. Donnelley will pay the
collected amount less two percent. Under this agreement, revenue attributable
to the Company's performed services are recognized at the completion of the
Company's services. The Company retains the risk of loss related to these
sales and $5.0 million and $4.9 million of these sales are included in
receivables at December 31, 1997 and 1996, respectively.
 
                                      30
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Tax Allocation and Indemnification Agreement
 
  Pursuant to a Tax Allocation and Indemnification Agreement entered into by
the Company and R. R. Donnelley at the completion of the IPO, the Company
remained obligated to pay to R. R. Donnelley any income taxes shown on R. R.
Donnelley's consolidated and combined tax returns, generally to the extent
attributable to the Company, for the tax period (the "Interim Period")
beginning on January 1, 1996 and ending on the date of the consummation of the
IPO (to the extent that it has not previously paid such amounts to R. R.
Donnelley). In addition, if the income tax liability shown on any such
consolidated or combined tax return for the Interim Period and attributable to
the Company is adjusted as a result of an action of a taxing authority or a
court, then the Company will pay to R. R. Donnelley the full amount of any
increase in such tax liability (together with any applicable interest and
penalties). Under federal regulations, the Company will be subject to several
liability for the consolidated federal income taxes for any tax year
(including the Interim Period) in which it was a member of the R. R. Donnelley
federal consolidated group (whether or not such taxes are attributable to the
Company). R. R. Donnelley has agreed to indemnify the Company against such
liability and any similar liability under state and local law. R. R. Donnelley
has also agreed to indemnify the Company against any increase in the Company's
income taxes (whether or not related to taxes paid on a consolidated or
combined basis) for periods prior to January 1, 1996 that result from an
action of a taxing authority or a court (except to the extent such increase
provides tax benefits to the Company for periods beginning on or after January
1, 1996, in which case the sum of such tax benefits will be retained by R. R.
Donnelley or paid by the Company to R. R. Donnelley).
 
4. INVENTORIES
 
  The components of the Company's inventories were as follows:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                   -------------
                                                                    1997   1996
                                                                   ------ ------
                                                                        (IN
                                                                    THOUSANDS)
      <S>                                                          <C>    <C>
      Raw materials............................................... $1,675 $2,662
      Work in process.............................................  3,928  4,060
                                                                   ------ ------
        Total..................................................... $5,603 $6,722
                                                                   ====== ======
</TABLE>
 
  Raw material inventories consist mainly of paper and other materials used in
the manufacturing of directories. Work in process inventories consist of costs
associated with jobs not completed for list, list enhancement, lettershop and
directories in process.
 
5. PROPERTY AND EQUIPMENT
 
  Property and equipment consisted of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
      <S>                                                    <C>       <C>
      Land.................................................. $  1,439  $  1,439
      Buildings and improvements............................   30,791    30,328
      Machinery, equipment and computer hardware............   83,420    64,247
                                                             --------  --------
        Total property and equipment........................  115,650    96,014
      Accumulated depreciation..............................  (61,276)  (50,701)
                                                             --------  --------
        Net property and equipment.......................... $ 54,374  $ 45,313
                                                             ========  ========
</TABLE>
 
  Depreciation expense included in the Consolidated and Combined Statements of
Operations was $9.7 million, $8.6 million and $6.5 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
 
                                      31
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. INTANGIBLE ASSETS
 
  Intangible assets consisted of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
      <S>                                                    <C>       <C>
      Databases and software development costs.............. $ 70,308  $ 65,410
      Goodwill..............................................  303,043   276,761
                                                             --------  --------
        Total intangibles...................................  373,351   342,171
      Accumulated amortization..............................  (99,442)  (86,372)
                                                             --------  --------
        Total intangibles, net.............................. $273,909  $255,799
                                                             ========  ========
</TABLE>
 
  Amortization expense included in the Consolidated and Combined Statements of
Operations was $28.2 million, $19.8 million and $14.4 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
 
7. OTHER ASSETS
 
  Other assets include investment tax credits recorded in connection with an
investment and employment agreement between the Company and the state of
Nebraska. The credits recorded in other assets are approximately $3.9 million
and $4.9 million as of December 31, 1997 and 1996, respectively. Under the
terms of the agreement, the Company must maintain certain investments in plant
and equipment and the number of personnel in the state over a defined period
of time.
 
  The Company records the income derived from this agreement in the period in
which the required wage and capital expenditures are made. The investment
credits will be realized through reductions of sales, use and other state
taxes in future periods. Approximately $1.6 million of these tax credits
expire in the year 2002 and $2.3 million expire in the year 2009. The benefits
associated with these credits are recorded in earnings from operations in the
amount of approximately $1.0 million for each of the years ended December 31,
1997, 1996 and 1995. The credits are classified in database and production
costs, selling expense and general and administrative expense based on a
proration of the amount of wage and capital expenditures applicable to each of
the respective areas.
 
  Included in other assets is $11.0 million related to the non current portion
of receivables associated with multi-year contracts.
 
  Additionally, other assets include minority investments in common stock
totalling $7.5 million, of which $2.7 million are accounted for using the
equity method of accounting and $4.8 million are accounted for using the cost
method of accounting.
 
8. PENSION PLAN AND POST-RETIREMENT BENEFITS
 
  The Company's pension plan (the "Plan") is a defined benefit pension plan
sponsored by the Company for its employees. All contributions to the Plan are
made by the Company. Employees are considered eligible when they reach 21
years of age. The Plan provides a normal retirement benefit equal to the sum
of the following:
 
  . The benefit accrued as of December 31, 1990;
 
  . 1.5% of covered earnings for each year of benefit services earned after
    December 31, 1990, up to a maximum of 38 total years of benefit service
    (including years of benefit service earned prior to 1991);
 
                                      32
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  . 0.5% of covered earnings in excess of covered compensation for each year
    of benefit services earned after December 31, 1990, up to a maximum of 38
    total years of benefit service (including years of benefit service earned
    prior to 1991); and
 
  . 2.0% of covered earnings for each year of benefit service in excess of 38
    years.
 
  Participants are 100 percent vested upon the completion of five years of
vesting service; provided, however, that a participant who was employed by the
Company prior to 1995 will be vested upon attainment of age 55 regardless of
such participant's years of service. Plan participants are eligible for normal
benefits at age 65 but may elect early retirement after age 55. The
participants may also elect to continue working beyond age 65 and defer
retirement.
 
  Net pension expenses (credits) included in operating results for the Plan
for the years ended December 31 were:
 
<TABLE>
<CAPTION>
                                                      1997     1996     1995
                                                     -------  -------  -------
                                                         (IN THOUSANDS)
      <S>                                            <C>      <C>      <C>
      Service cost.................................. $ 2,449  $ 2,178  $ 1,386
      Interest cost on the projected benefit
       obligation...................................   2,618    2,391    2,027
      Actual (return) loss on plan assets...........  (9,666)  (5,410)  (6,506)
      Amortization of unrecognized prior service
       costs and of net obligation at adoption of
       SFAS No. 87 and deferrals....................   6,312    2,549    4,542
                                                     -------  -------  -------
        Total expense............................... $ 1,713  $ 1,708  $ 1,449
                                                     =======  =======  =======
</TABLE>
 
  The actuarial computations that derived the above amounts assumed a discount
rate on the projected benefit obligations of 7.00% at December 31, 1997, 7.50%
at December 31, 1996 and 7.25% at December 31, 1995, an expected long-term
rate of return on Plan assets of 9.5% and annual salary increases of 5.0%.
 
  In June of 1992 certain accrued benefits and assets relating thereto were
transferred to the Plan from the Oregon Printing Industry Pension Plan (the
"OPI Benefits"). In connection with the IPO, in July of 1996, the OPI Benefits
(approximately $1.9 million) were transferred from the Plan to the R. R.
Donnelley Norwest Pension Plan. Had these assets been excluded from plan
assets, pension expense would not have been materially impacted for the years
ended December 31, 1996 and 1995, respectively.
 
  Plan assets are mainly invested in marketable securities valued at the last
quoted market price during the fiscal year. The funded status and prepaid
pension cost as of December 31 are as follows:
 
<TABLE>
<CAPTION>
                                                                1997     1996
                                                               -------  -------
                                                               (IN THOUSANDS)
      <S>                                                      <C>      <C>
      Fair value of Plan assets..............................  $48,214  $38,432
                                                               -------  -------
      Actuarial present value of benefit obligations:
        Vested...............................................   29,916   24,482
        Non-vested...........................................    2,496    1,527
                                                               -------  -------
      Total accumulated benefit obligations..................   32,412   26,009
      Additional amounts related to projected wage increases.   10,830    9,175
                                                               -------  -------
      Projected benefit obligations for services rendered to
       date..................................................   43,242   35,184
                                                               -------  -------
      Plan assets over projected benefit obligations.........    4,972    3,248
      Unrecognized prior service cost........................    1,097    1,213
      Unrecognized net (gain) from experience................   (4,379)  (2,385)
      Unrecognized portion of net transition obligation......      580      751
                                                               -------  -------
        Prepaid pension costs................................  $ 2,270  $ 2,827
                                                               =======  =======
</TABLE>
 
                                      33
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In the event of Plan termination, the Plan provides that no funds can revert
to the Company and any excess assets over Plan liabilities must be used to
fund retirement benefits.
 
  Benefits under the Plan are limited to the extent required by provisions of
the Internal Revenue Code and the Employee Retirement Income Security Act of
1974. If payment of retirement benefits is limited by such provisions, an
amount equal to any reduction in retirement benefits will be paid as
supplemental benefit under the Unfunded Supplemental Benefit Plan effective
January 1, 1996. In 1997, $0.3 million was charged to expense. The accumulated
benefit obligation of $0.6 million was recorded in other accrued liabilities
at December 31, 1997. At December 31, 1997 the related projected benefit
obligation was $1.45 million.
 
  As a subsidiary of R. R. Donnelley, the Company also provided certain health
care and life insurance benefits for retired employees as part of a post-
retirement benefit program sponsored by R. R. Donnelley. Subsequent to the
IPO, the Company continues to provide certain health care and life insurance
benefits for retired employees similar to those sponsored under the R. R.
Donnelley program. Substantially all of the Company's domestic full-time
employees become eligible for those benefits upon reaching age 55 while
working for the Company and having 10 years of continuous service with the
Company or R. R. Donnelley at retirement. The Company does not fund the
liability and thus no plan assets have been considered in the determination of
post-retirement benefit expense below.
 
  The accrual basis expense for all employees of the Company recorded in the
accompanying statements of operations for post-retirement benefit programs
sponsored by R. R. Donnelley or the Company during 1997, 1996 and 1995 is as
follows:
 
<TABLE>
<CAPTION>
                                                          1997    1996    1995
                                                         ------  ------  ------
                                                            (IN THOUSANDS)
      <S>                                                <C>     <C>     <C>
      Service cost...................................... $  905  $  913  $1,088
      Interest cost.....................................    721     646     742
      Amortization of prior service cost................   (311)   (378)    --
                                                         ------  ------  ------
        Total expense................................... $1,315  $1,181  $1,830
                                                         ======  ======  ======
</TABLE>
 
  The total 1997 post-retirement benefit expense includes $0.3 million related
to the Company's employees covered by R.R. Donnelley's Post-Retirement Plan.
This is not included within the Company's total net post-retirement liability
listed below. The Company is liable for post-retirement medical and life
insurance benefits for active employees under 55 years of age who were not yet
eligible to receive benefits as of the date of completion of the IPO. R. R.
Donnelley is liable for payments of post-retirement medical and life insurance
benefits for all other employees of the Company as of the date of the IPO. The
Company's liability is as follows:
 
<TABLE>
<CAPTION>
                                                                    1997   1996
                                                                   ------ ------
                                                                        (IN
                                                                    THOUSANDS)
      <S>                                                          <C>    <C>
      Accumulated post-retirement benefit obligation:
       Retirees and their dependents.............................. $   37 $  --
       Active employees fully eligible to retire and receive
        benefits..................................................  1,309    --
       Active employees not yet fully eligible....................  4,251  4,766
                                                                   ------ ------
          Total Accumulated post-retirement benefit obligation.... $5,597 $4,766
        Unrecognized prior service cost...........................    531    863
        Unrecognized net gain.....................................    878    345
                                                                   ------ ------
        Net post-retirement liability............................. $7,006 $5,974
                                                                   ====== ======
</TABLE>
 
  This liability, net of associated deferred taxes receivable from R. R.
Donnelley, has been reflected in other noncurrent liabilities.
 
                                      34
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The actuarial computations assume a discount rate of 7.0% (7.25% at December
31, 1996) and a health care cost trend rate of 8.0%, declining gradually to
5.0% in the year 2009 and thereafter to determine the accumulated post-
retirement benefit obligation. A one percentage point increase in the health
care cost trend rate would increase the 1997 post-retirement benefit expense
by less than $0.1 million and the accumulated post-retirement benefit
obligation as of December 31, 1997 by approximately $0.25 million.
 
9. LEASE OBLIGATIONS
 
  The Company leases office space and various equipment. The leases are mainly
accounted for as operating leases. Rental costs under the operating lease
agreements approximated $10.8 million, $10.0 million and $9.4 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
 
  Minimum future lease obligations in effect at December 31, 1997 are:
 
<TABLE>
<CAPTION>
                                                                    OBLIGATION
                                                                  --------------
                                                                  (IN THOUSANDS)
      <S>                                                         <C>
      Period ending December 31,
        1998.....................................................    $12,711
        1999.....................................................     10,928
        2000.....................................................      8,433
        2001.....................................................      5,293
        2002 and thereafter......................................     34,383
                                                                     -------
          Total..................................................    $71,748
                                                                     =======
</TABLE>
 
  The Company accounts for leases of computer equipment as capital leases.
These leases were initiated during 1996 and 1997 and are for terms ranging
from one to five years. The gross asset value recorded under these leases is
$12.9 million. Accumulated amortization at December 31, 1997 was approximately
$2.4 million and was included in depreciation expense for the year.
 
  Minimum future lease obligations and imputed interest in effect at December
31, 1997 are:
 
<TABLE>
<CAPTION>
                                                              OBLIGATION
                                                      --------------------------
                                                      PRINCIPAL INTEREST  TOTAL
                                                      --------- -------- -------
                                                            (IN THOUSANDS)
      <S>                                             <C>       <C>      <C>
      Period ending December 31,
        1998.........................................  $5,063     $552   $ 5,615
        1999.........................................   2,642      251     2,893
        2000.........................................   1,051      118     1,169
        2001.........................................     847       29       876
                                                       ------     ----   -------
          Total......................................  $9,603     $950   $10,553
                                                       ======     ====   =======
</TABLE>
 
10. COMMITMENTS AND CONTINGENCIES
 
  On April 18, 1996, the Company was named in a lawsuit by Beverly J. Dennis
against the Company, R. R. Donnelley, and four other parties. The Company
believes that this litigation would not have a material adverse effect on the
financial position of the Company. However, because this litigation is in its
early stages, it is not possible to make a meaningful determination of the
ultimate outcome or to make an estimate of the loss, if any, should the
outcome be unfavorable. The Company has made a preliminary estimate that its
costs of litigating the case will be $1.5 million. The Company's insurer has
agreed to assume the defense of this case subject to a reservation of rights
to deny coverage. In the event the Company's insurer were to successfully deny
coverage, R. R. Donnelley has agreed to pay the legal fees and expenses
incurred by the Company in defending this case,
 
                                      35
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
but the Company would be responsible for any other amounts payable by it as a
result of this case. Because of such agreements to pay such fees and expenses,
such legal fees and expenses will not affect the Company's cash flows;
however, if R. R. Donnelley were to pay such fees and expenses, applicable
accounting principles would require the Company to recognize such fees and
expenses as incurred and apply all payments by R. R. Donnelley in respect of
such fees and expenses to additional paid-in capital.
 
  The Company is subject to various claims and legal actions other than the
Dennis litigation that arise in the ordinary course of business. The Company
believes such claims and legal actions, individually and in the aggregate,
will not have a material adverse effect on the business or financial condition
of the Company.
 
11. DEBT
 
  The Company amended its $45.0 million revolving credit agreement on August
18, 1997. Under the amended credit agreement (the "Amended Credit Agreement"),
the Company is entitled to borrow up to $100.0 million on a revolving credit
basis. Borrowings under the Amended Credit Agreement mature in 2002 and bear
interest (i) at the prime rate announced by the bank acting as agent for the
syndicate, (ii) at the LIBOR rate plus, depending on the Company's leverage
ratio and fixed charge coverage ratio, up to 42.5 basis points per annum or
(iii) at a rate determined by competitive bidding. At December 31, 1997 there
was $61.2 million outstanding under the Amended Credit Agreement resulting
primarily from the acquisitions of Saxe and MIT and the purchase of treasury
stock. Interest paid, net of capitalized interest, was $1.7 million in 1997.
Interest paid, net of capitalized interest and related party interest, was
$0.6 million in 1996. The Company's revolving credit agreement contains
warranties and covenants which, among other things, require the maintenance of
ratios related to leverage and cash flow. As of December 31, 1997 the Company
was in compliance with all covenants.
 
12. INCOME TAXES
 
  The components of the provision for taxes for the years ended December 31
are as follows:
 
<TABLE>
<CAPTION>
                                                           1997    1996    1995
                                                          ------  ------- ------
                                                             (IN THOUSANDS)
      <S>                                                 <C>     <C>     <C>
      Federal............................................ $  503  $ 9,118 $5,435
      State..............................................    (95)   1,989    832
      Foreign............................................    676    1,542    318
                                                          ------  ------- ------
        Total tax provision.............................. $1,084  $12,649 $6,585
                                                          ======  ======= ======
</TABLE>
 
  The current and deferred portions of the income tax provision are as
follows:
 
<TABLE>
<CAPTION>
                                                         1997     1996    1995
                                                        -------  ------- ------
                                                            (IN THOUSANDS)
      <S>                                               <C>      <C>     <C>
      Current.......................................... $10,286  $12,357 $7,295
      Deferred.........................................  (9,202)     292   (710)
                                                        -------  ------- ------
        Total provision................................ $ 1,084  $12,649 $6,585
                                                        =======  ======= ======
</TABLE>
 
  A reconciliation of the effective tax rate from statutory U.S. federal
income tax rate of 35% for the years ended December 31 is as follows:
 
<TABLE>
<CAPTION>
                                                             1997    1996  1995
                                                             -----   ----  ----
      <S>                                                    <C>     <C>   <C>
      Federal rate..........................................  35.0%  35.0% 35.0%
      State taxes...........................................   3.2    6.0   8.9
      Foreign taxes.........................................   2.1    --    2.4
      Goodwill amortization................................. (82.3)   8.9  23.0
      Other.................................................   5.2     .8   1.4
                                                             -----   ----  ----
        Effective tax rate.................................. (36.8)% 50.7% 70.7%
                                                             =====   ====  ====
</TABLE>
 
                                      36
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As of December 31, 1997 and 1996 total current deferred tax assets and total
noncurrent deferred tax (liability) asset are as follows:
 
<TABLE>
<CAPTION>
                                                                1997     1996
                                                               -------  -------
                                                               (IN THOUSANDS)
      <S>                                                      <C>      <C>
      Allowance for doubtful accounts......................... $   711  $   690
      Inventory...............................................  (2,041)  (1,086)
      Vacation liability......................................   1,628      756
      Miscellaneous, other....................................     178      433
                                                               -------  -------
        Total net current deferred tax asset..................     476      793
                                                               -------  -------
      Accumulated depreciation................................  (3,203)  (3,906)
      Goodwill and intangibles................................   1,647    1,172
      Other intangibles.......................................  10,036   (1,014)
      Pension accrual.........................................  (1,934)    (267)
      Post retirement liabilities.............................   2,641    2,424
      Miscellaneous, other....................................     754      --
                                                               -------  -------
        Total net noncurrent deferred tax (liability) asset...   9,941   (1,591)
                                                               -------  -------
        Total................................................. $10,417  $  (798)
                                                               =======  =======
</TABLE>
 
  The Company has not provided a valuation allowance for deferred tax assets
because, although realization is not assured, the Company believes it is more
likely than not that such tax assets will be recognized through reversals of
taxable timing differences and taxable income in future periods.
 
  Taxes payable at December 31, 1997 are included in other accrued
liabilities. Cash payments for income taxes were $14.0 million for the period
ended December 31, 1997 and $7.2 million for the period from June 19, 1996
through December 31, 1996.
 
13. ACQUISITIONS
 
  The Company acquired ICD, through a wholly owned subsidiary of R. R.
Donnelley, in May 1995. In February 1996, a wholly owned subsidiary of R. R.
Donnelley contributed ICD to Metromail. Subsequent to the contribution, ICD
purchased all of the net assets of DBD. This contribution and purchase between
entities under R. R. Donnelley's common control resulted in the historical
costs bases of ICD and DBD (prior to their contribution and purchase) being
carried over to Metromail with no gain or loss recognized as a result of these
transactions.
 
  The Company completed three acquisitions during 1997: (i) the acquisition of
Atlantes, which closed on July 1, 1997; (ii) the acquisition of MIT, which
closed on August 21, 1997; and (iii) the acquisition of Saxe, which closed on
September 26, 1997. A substantial portion of the Saxe purchase price was
allocated to in-process research and development and written off in the third
quarter (approximately $23 million pre-tax--$13.8 million after tax). In the
acquisition of Atlantes, the Company issued 698,431 shares of common stock and
paid $2.9 million in cash to Atlantes holders. Up to an additional $12.5
million in the form of common stock could be paid to Atlantes shareholders in
the 1999-2002 time period based upon achievement of specified performance
targets. The Company paid cash in the acquisition of MIT and the acquisition
of Saxe, and the Company may be required to make additional cash payments
during the 1998-2000 time period in connection with the acquisition of MIT
depending on achievement of specified performance targets. The impact of these
acquisitions if they had been recorded as of January 1, 1997 is not material.
 
                                      37
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
14. STOCK INCENTIVE PLANS
 
  The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for stock
options been determined consistent with FASB Statement No. 123, the Company's
net income for 1997 and 1996 would have been reduced by $.3 million and $1.6
million, respectively. Net income per share for 1997 and 1996 would have been
reduced by $0.01 and $0.07, respectively. These plans were not effective for
1995, accordingly 1995 and prior years were not affected by this accounting.
 
  The fair value in 1997 of each option is estimated on the date of grant
using the Black Scholes option pricing model with the following assumptions:
weighted average risk-free interest of 6.23%; no expected dividend yield;
expected life of five years; weighted average volatility of 36%. The fair
value in 1996 of each option is estimated on the date of grant using the Black
Scholes option pricing model with the following assumptions: weighted average
risk-free interest of 7.1%; no expected dividend yield; expected life of ten
years; weighted average volatility of 36%.
 
15. EMPLOYEE STOCK PURCHASE PLAN
 
  The Company has an Employee Stock Purchase Plan which permits employees to
purchase shares of Common Stock at below-market prices. The Plan is intended
to qualify as an employee stock purchase plan under section 423 of the
Internal Revenue Code of 1986, as amended. The plan is not subject to the
provisions of the Employee Retirement Income Security Act of 1974, and is not
intended to be and does not qualify as a pension, profit sharing or other
"qualified" plan under Section 401(a) of the Code. The Plan became effective
on July 1, 1997. Payroll deductions are credited to a purchase account on the
books of the Company on the behalf of each participant. Purchases of stock are
made at the end of each quarter.
 
16. OTHER ACCRUED LIABILITIES
 
  The balance in other accrued liabilities consists of the following:
 
  CURRENT PORTION
 
<TABLE>
<CAPTION>
                                                                 1997    1996
                                                                ------- -------
                                                                (IN THOUSANDS)
      <S>                                                       <C>     <C>
      Taxes.................................................... $ 3,220 $ 7,755
      Capital lease (see Note 9)...............................   5,063   4,581
      Royalties................................................     714   3,363
      Amount due to related party..............................     --    4,600
      Customer deposits........................................   4,485     422
      Accrued survey costs.....................................   2,326     --
      Accrued insurance........................................   1,216     --
      Accrued interest expense.................................     754     --
      Other....................................................   7,507   7,839
                                                                ------- -------
        Total.................................................. $25,285 $28,560
                                                                ======= =======
  NON-CURRENT PORTION
 
      Post retirement benefits................................. $ 7,355 $ 7,041
      Capital lease (see Note 9)...............................   4,540     --
                                                                ------- -------
        Total.................................................. $11,895 $ 7,041
                                                                ======= =======
</TABLE>
 
                                      38
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
     NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
 
 
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                               1ST      2ND     3RD      4TH
                                             QUARTER  QUARTER QUARTER  QUARTER
                                             -------  ------- -------  -------
                                             (IN THOUSANDS, EXCEPT PER SHARE
                                                          DATA)
      <S>                                    <C>      <C>     <C>      <C>
      1997:
      Direct marketing sales................ $35,149  $41,664 $55,419  $52,874
      Database marketing sales..............  16,539   17,809  19,063   25,585
      Reference sales.......................  14,112   14,336  17,097   18,740
                                             -------  ------- -------  -------
        Total net sales.....................  65,800   73,809  91,579   97,199
      Earnings (loss) from operations.......   3,387    5,324 (10,520)     395
      Net income (loss).....................   1,263    2,603  (7,079)  (5,308)
      Earnings (loss) per share.............    0.06     0.12   (0.31)   (0.24)
      Earnings (loss) per share--assuming
       dilution.............................    0.06     0.12   (0.31)   (0.24)
<CAPTION>
                                               1ST      2ND     3RD      4TH
                                             QUARTER  QUARTER QUARTER  QUARTER
                                             -------  ------- -------  -------
                                             (IN THOUSANDS, EXCEPT PER SHARE
                                                          DATA)
      <S>                                    <C>      <C>     <C>      <C>
      1996:
      Direct marketing sales................ $26,984  $37,121 $34,028  $50,923
      Database marketing sales..............  14,910   18,838  20,792   23,427
      Reference sales.......................  12,475   13,387  13,410   15,150
                                             -------  ------- -------  -------
        Total net sales.....................  54,369   69,346  68,230   89,500
      Earnings from operations..............   1,725    8,713  10,893   15,927
      Net income (loss).....................  (2,887)   1,484   5,947    9,318
      Earnings (loss) per share.............   (0.13)    0.07    0.27     0.42
      Earnings (loss) per share--assuming
       dilution.............................   (0.13)    0.07    0.27     0.42
</TABLE>
 
  The Company has determined that the non-cash write-offs and provisions have
been appropriately recorded in the fourth quarter of 1997 and do not require
restatements of the previous 1997 quarters or previous year(s) financial
statements.
 
18. SUBSEQUENT EVENTS
 
  On February 10, 1998, the Company announced that its Board of Directors had
retained Lehman Brothers Inc. to assist the Company in its efforts to explore
strategic alternatives to maximize shareholder value. On March 13, 1998 the
Company announced that it and The Great Universal Stores P.L.C. ("GUS") have
signed a definitive merger agreement pursuant to which GUS has agreed to
acquire all of the outstanding common stock of the Company at a price of
$31.50 per share in cash. Pursuant to a Schedule 14D-9 Solicitation/
Recommendation Statement dated March 16, 1998, the Company announced that its
Board of Directors has unanimously (i) determined that such merger agreement
and the transactions contemplated thereby are fair to the stockholders of the
Company and that the tender offer and the merger contemplated by the merger
agreement are otherwise in the best interests of the Company and its
stockholders and (ii) approved and adopted such merger agreement and the
transactions contemplated thereby and that its Board of Directors recommends
that all of the Company accept and adopt such merger agreement and the merger
contemplated thereby. Subsequently, the Company announced that a suit has been
filed in the Delaware Chancery Court by American Business Information, Inc.
("ABI") to preliminarily and permanently enjoin the consummation of the
transactions contemplated by the Merger Agreement. The hearing on ABI's motion
for a preliminary injunction will be held on March 27, 1998. Three class
action suits have been filed in the Delaware Chancery Court also seeking to
enjoin such transactions.
 
  In addition, the Company announced that it has received from ABI an offer to
purchase all of the outstanding common stock of the Company for $33 per share
in cash, subject to potential modest upward
 
                                      39
<PAGE>
 
adjustments if ABI succeeds in invalidating the termination fee in the Merger
Agreement and certain stock options. While the ABI offer is not subject to a
financing contingency, the financing commitments ABI has provided to the
Company are subject to a number of conditions, including the completion of due
diligence with respect to both the Company and ABI. The Company's Board of
Directors has authorized the Company and its advisors to begin discussions
with ABI and its advisors to better understand the ABI offer, including the
financing.
 
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
  None
 
                                   PART III
 
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF METROMAIL CORPORATION.
 
  Information required by this item regarding directors is contained in the
section entitled "Election of Director" in the Company's Proxy Statement for
its 1998 Annual Meeting of Stockholders, which section is incorporated herein
by reference. Information regarding officers is included at the end of Part I
of this Annual Report on Form 10-K. Other information required by this item
regarding both directors and officers is contained in the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for its 1998 Annual Meeting of Stockholders, which section is
incorporated herein by reference.
 
ITEM 11: EXECUTIVE COMPENSATION.
 
  Information required by this item is contained in the section entitled
"Compensation of Directors and Executive Officers" in the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders, which section is
incorporated herein by reference.
 
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
  Information required by this item is contained in the section entitled
"Beneficial Ownership of Common Stock" in the Company's Proxy Statement for
its 1998 Annual Meeting of Stockholders, which section is incorporated herein
by reference.
 
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
  Information required by this item is contained in the section entitled
"Certain Transactions" in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders, which section is incorporated herein by reference.
 
                                    PART IV
 
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
  (a)1. FINANCIAL STATEMENTS
 
      See Part II, Item 8 of this Annual Report on Form 10-K.
 
    2. FINANCIAL STATEMENT SCHEDULES
 
      See "Schedule II--Valuation and Qualifying Accounts" set forth
      below.
 
    3. EXHIBITS
 
      Exhibits required to be attached pursuant to Item 601 of Regulation
      S-K are listed in the Exhibit Index attached hereto, which Exhibit
      Index is incorporated herein by reference.
 
  (b)REPORTS ON FORM 8-K
 
      No Current Report on Form 8-K was filed by the Company during the
      fourth quarter of 1997.
 
  (c)EXHIBITS
 
      See Item 14(a)(3) above.
 
                                      40
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          Metromail Corporation
 
                                                 /s/ Barton L. Faber
                                          By: _________________________________
                                            Name: Barton L. Faber
                                            Title: Chairman, President and
                                            Chief Executive Officer
 
March 23, 1998
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF METROMAIL
CORPORATION AND IN THE CAPACITIES AND ON THE DATE INDICATED.
 
<TABLE>
<CAPTION>
             SIGNATURE                         TITLE(S)                   DATE
             ---------                         --------                   ----
 
 
<S>                                  <C>                           <C>
      /s/ Barton L. Faber            Director and Chairman,          March 23, 1998
____________________________________  President and Chief
          Barton L. Faber             Executive Officer
                                      (principal executive
                                      officer)
 
      /s/ Ronald G. Eidell           Senior Vice President and       March 23, 1998
____________________________________  Chief Financial Officer
          Ronald G. Eidell            (principal financial
                                      officer)
 
    /s/ Kenneth A. Glowacki          Vice President, Finance         March 23, 1998
____________________________________  (principal accounting
        Kenneth A. Glowacki           officer)
 
      /s/ Donald N. Boyce            Director                        March 23, 1998
____________________________________
          Donald N. Boyce
 
    /s/ Robert C. McCormack          Director                        March 23, 1998
____________________________________
        Robert C. McCormack
 
      /s/ Peter F. Murphy            Director                        March 23, 1998
____________________________________
          Peter F. Murphy
 
                                     Director                        March 23, 1998
____________________________________
          Jonathan P. Ward
 
</TABLE>
 
                                      41
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
  We have audited in accordance with generally accepted auditing standards,
the consolidated and combined financial statements of Metromail Corporation
and Affiliates included in this Form 10-K and have issued our report thereon
dated January 31, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements as a whole. The schedule immediately
following this report is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
 
                                          /s/ Arthur Andersen LLP
 
                                          Arthur Andersen LLP
 
Chicago, Illinois
January 31, 1998
 
                                      42
<PAGE>
 
                     METROMAIL CORPORATION AND AFFILIATES
 
                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                            DEDUCTIONS--
                                            ADDITIONS        WRITE-OFFS
                              BALANCE  --------------------   OF TRADE   BALANCE
   SALES ALLOWANCES AND       AT THE   CHARGES    CHARGES   RECEIVABLES, AT END
  ALLOWANCES FOR DOUBTFUL    BEGINNING    TO        TO         NET OF      OF
         ACCOUNTS            OF PERIOD SALES(1) EXPENSES(2)  RECOVERIES  PERIOD
  -----------------------    --------- -------- ----------- ------------ -------
<S>                          <C>       <C>      <C>         <C>          <C>
For the Year Ended December
 31, 1996..................    3,965    4,979      2,143       (6,626)    4,461
For the Year Ended December
 31, 1997..................    4,461    4,888      4,965       (8,016)    6,298
</TABLE>
--------
(1) These amounts represent provisions for sales allowances that are included
    in net sales.
(2) These amounts represent provisions for doubtful accounts that are included
    in general and administrative expenses.
 
                                      43
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT NO.                             DESCRIPTION
 -----------                             -----------
 <C>         <S>
  2.1        Agreement and Plan of Merger, dated as of March 12, 1998, by and
             among The Great Universal Stores P.L.C., Great Universal
             Acquisition Corp. and Metromail Corporation. (7)
  2.2        Stock Purchase Agreement, dated as of March 12, 1998, between The
             Great Universal Stores P.L.C. and Metromail Corporation (7)
  2.3        Stock Purchase Agreement, dated as of March 12, 1998, between R.
             R. Donnelley and The Great Universal Stores P.L.C. (8)
  2.4        Form of Stock Purchase Agreement, dated as of March 12, 1998,
             between The Great Universal Stores P.L.C. and each of Barton L.
             Faber, Ronald G. Eidell and Thomas J. Quarles. (8)
  3(i)       Third Restated Certificate of Incorporation of Metromail
             Corporation, as amended. (4)
  3(ii)      By-laws of Metromail Corporation. (1)
  4.1        Rights Agreement, dated as of February 24, 1997, between Metromail
             Corporation and
             American Stock Transfer and Trust Company, as Rights Agent. (2)
  4.2        First Amendment to Rights Agreement, dated as of March 12, 1998.
             (8)
 10.1        Form of Transition Services Agreement between Metromail
             Corporation and
             R. R. Donnelley. (1)
 10.2        Form of Sales Agreement between Metromail Corporation and R. R.
             Donnelley. (1)
 10.3        Amendment dated March 12, 1998 to Sales Agreement between
             Metromail Corporation and R. R. Donnelley. (8)
 10.4        Form of Benefit Administration Services Agreement between
             Metromail Corporation and
             R. R. Donnelley. (1)
 10.5        Form of Data Center Services Agreement between Metromail
             Corporation and
             R. R. Donnelley. (1)
 10.6        Amendment dated March 12, 1998 to Data Center Services Agreement
             between Metromail Corporation and R. R. Donnelley. (8)
 10.7        Form of Tax Allocation and Indemnification Agreement between
             Metromail Corporation
             and R. R. Donnelley. (1)
 10.8*       Employment Agreement between Metromail Corporation and Barton L.
             Faber. (1)
 10.9*       Employment Agreement between Metromail Corporation and Susan L.
             Henricks. (1)
 10.10*      Employment Agreement between Metromail Corporation and Ronald G.
             Eidell. (4)
 10.11*      Employment Agreement between Metromail Corporation and Thomas J.
             Quarles. (4)
 10.12*      Employment Agreement dated June 16, 1994 between Customer Insight
             Company and
             Tery R. Larrew. (1)
 10.13*      Amendment to Employment Agreement between Customer Insight Company
             and Tery R. Larrew. (8)
 10.14*      Management Agreement between Metromail Corporation and Barton L.
             Faber. (4)
 10.15*      Amendment to Management Agreement between Metromail Corporation
             and Barton L. Faber. (8)
 10.16*      Management Agreement between Metromail Corporation and Susan L.
             Henricks. (4)
 10.17*      Management Agreement between Metromail Corporation and Ronald G.
             Eidell. (4)
 10.18*      Amendment to Management Agreement between Metromail Corporation
             and Ronald G. Eidell. (8)
 10.19*      Management Agreement between Metromail Corporation and Thomas J.
             Quarles. (4)
 10.20*      Amendment to Management Agreement between Metromail Corporation
             and Thomas J. Quarles. (8)
 10.21*      Management Agreement between Metromail Corporation and Tery R.
             Larrew. (4)
 10.22*      Amendment to Management Agreement between Metromail Corporation
             and Tery R. Larrew. (8)
 10.23*      Amended and Restated Metromail Corporation 1996 Stock Incentive
             Plan. (5)
 10.24*      Metromail Corporation 1996 Broad-Based Employee Stock Plan. (1)
 10.25*      Metromail Corporation 1997 Employee Stock Purchase Plan (6)
 10.26*      Metromail Corporation Directors' Deferred Retainer Plan (4)
 10.27       Form of Credit Agreement among Metromail Corporation and certain
             Subsidiaries, as Borrower, the Banks named therein and the First
             National Bank of Chicago, as Administrative Agent. (1)
</TABLE>