-------------------------------------------------------------------------------
                       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, 1996
                               or
[ ]    Transition  report  pursuant  to  Section  13 or  15(d) of the
       Securities Exchange Act of 1934 For the transition period from 
       _____ to _____

  Commission file number 0-22696

                               DISC GRAPHICS, INC.
             (Exact Name of Registrant as specified in its charter)

           Delaware                                 13-3678012
  (State or other jurisdiction of          (IRS Employer Identification No.)
   incorporation or organization)

  10 Gilpin Avenue, Hauppauge, New York               11788
  (Address of Principal Executive Offices)          (Zip Code)

  Registrant's telephone number, including area code:  (516) 234-1400

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

  Title of Class                Name of each exchange on which registered
  --------------                ------------------------------------------
   None                         None

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

       Common Stock, $.01 par value
       Class A  Redeemable Common Stock Purchase Warrants

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

  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]

  At March 24,  1997,  the  aggregate  market  value of the voting stock held by
non-affiliates of Registrant was  approximately  $8,337,000 based on the closing
price of the Common Stock on the Nasdaq Stock Market on that date.

  At March 24, 1997, the Registrant had outstanding  5,369,658  shares of Common
Stock, $.01 par value per share.

Documents Incorporated by Reference: Part III - Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Exchange Act.
 ------------------------------------------------------------------------------

<PAGE>

                                     PART I


ITEM 1.  Description of Business


Background

  RCL  Capital  Corp.  ("RCL")  was  incorporated  in August  1992 to serve as a
vehicle to effect a business combination with an operating business. On November
18,  1993,  RCL  completed  a public  offering  of units  ("Units"),  each  Unit
consisting of one share of the RCL's Common Stock and two  redeemable  warrants.
Net  proceeds of the public  offering  after the  payment of certain  additional
expenses yielded approximately $6,400,000, which was put into escrow pending the
acquisition of an operating business.

  On October 30, 1995, Disc Graphics, Inc., a New York corporation ("Old Disc"),
merged with and into RCL.  Following  the  merger,  RCL changed its name to Disc
Graphics,  Inc. ("DGI" or the  "Company").  Net Proceeds of the merger after the
payment for the  redemption of  approximately  185,000 shares of Common Stock at
$5.15 per share,  in  accordance  with the terms of the original  RCL  offering,
yielded proceeds to the Company of approximately $5,000,000. These proceeds were
used  primarily to reduce  certain  indebtedness  of the Company and for working
capital purposes.

  The merger has been treated for accounting and financial reporting purposes as
a reverse  merger of RCL into Old Disc.  Accordingly,  the Company's  results of
operations  prior to October 30,  1995 are those of Old Disc.  In  addition,  in
connection with the merger, DGI adopted a December 31 fiscal year.

General

  DGI, located in Hauppauge, New York, is a diversified manufacturer and printer
of  specialty  packaging  focused  on the  home  video,  pharmaceutical,  music,
entertainment  software,  publishing and cosmetics  markets.  Products  include:
pre-recorded  video,  CD-ROM and audio cassette  packaging;  folding cartons for
pharmaceuticals and cosmetics;  book jackets, posters, pressure sensitive labels
and general commercial  printing.  Customers include software,  CD-ROM and video
distributors;  vitamin, cosmetic and fragrance companies; major book publishers;
and Fortune 500 companies.

  DGI's primary business  strategies are: (1) to increase the Company's share of
print and packaging  sales within its primary  markets,  including  music,  home
video, pharmaceutical,  cosmetic,  publishing and general consumer products; (2)
to  acquire  other   strategically-located   specialty  packaging  and  printing
companies that serve geographic markets and industries near existing  customers,
as well as serve  markets  that  will  permit  DGI to offer a  service  and cost
advantage over its competitors;  and (3) to develop innovative packaging designs
and techniques for new and existing markets.

  DGI is actively involved in investigating additional printing and packaging
related business opportunities,  including potential acquisitions similar to the
acquisition of Pointille,  Inc., a packaging printer in May 1996. However,  DGI
has not entered into any  definitive  agreement  with  respect to any  potential
acquisition. In addition, there can be no assurance that DGI will consummate any
such acquisition,  or if completed, that any such acquisition will be profitable
for DGI.
<PAGE>

  Historically,  DGI has  grown  primarily  through  the  development  of new
customers  through its superior service and response  capabilities and increases
in orders from existing  customers.  In 1992,  DGI acquired Four Seasons  Litho,
Inc., a commercial  printer with revenues of  approximately $3 million per year,
and  in  1996,  DGI  acquired  substantially  all  of  the  assets  and  certain
liabilities of Pointille and has since integrated their manufacturing facilities
and sales/marketing programs into DGI's. DGI intends to continue and enhance its
historic growth by acquiring  strategically-located  folding carton and printing
companies,  opening new facilities to serve regional U.S. markets,  expand DGI's
product line and continue ongoing internal expansion.

   DGI's principal executive offices and principal manufacturing  operations are
located at 10 Gilpin Avenue,  Hauppauge, New York 11788. Its telephone number is
(516) 234-1400.

Packaging/Printing Industry

   Approximately 70% of DGI's revenue in 1996 was derived from the manufacture
and sale of  paperboard  folding  cartons.  An industry  trade  publication  has
estimated  that in 1996 there were 300 companies  operating  495 folding  carton
manufacturing  plants in the United States and that total revenues from the sale
of folding cartons was  approximately  $5.4 billion,  reflecting a 2.6% increase
over 1995.

  Folding carton manufacturers are divided into three main segments:  integrated
manufacturers   (those  owned  by  or  affiliated   with  a  paperboard   mill),
non-integrated   or  independent   manufacturers   and,  in-plant  or  "captive"
manufacturers  which are owned directly by the end user. DGI generally  competes
with  independent  manufacturers.  DGI  focuses  on those  markets  that use the
folding carton as part of a product's marketing. The promotional function of the
carton  may employ  multiple  colors,  coatings,  several  printing  techniques,
stamping  and other  graphic  design  considerations.  DGI has  concentrated  in
markets, such as the home video, software,  cosmetics,  music and pharmaceutical
packaging markets,  which utilize those techniques to a significant  extent. DGI
has devoted  substantial  resources toward developing the specialized  processes
required in such markets.

  DGI's business includes  commercial  printing,  book component printing and
labels.  Industry  trade  sources have  estimated  that the total United  States
commercial  printing market in 1996 was approximately $74 billion.  The industry
is fragmented with many small printing  companies serving regional markets.  For
example,  within the New York City  Metropolitan  area,  there are nearly  3,500
printing establishments with 76% having fewer than ten employees.  DGI is listed
in the top 200 printers in the United States,  based on revenues.  Based on 1995
revenues,  DGI was ranked 183 in the top 500  printing  companies  in the United
States by an industry trade publication.

Products

  Video/Entertainment Software Packaging

  DGI  manufactures  video  packaging,  including  bottom  load  video  sleeves,
multi-packs  and  specialty  items.  DGI has  historically  concentrated  on the
catalogue and special interest video/software markets. DGI's catalogue customers
typically  have  licensed or  purchased  products  from major  movie  production
studios. Special interest continues to be a growing segment of the video market.
Packaging for these videos is often sold to independent  distributors  and video
tape  duplicators.  Through these  distributors and duplicators DGI has produced
packaging  for many Fortune 500  companies.  In  addition,  the  acquisition  of
Pointille has provided DGI with a facility in close  proximity to major film and
video studios.  Through this facility,  DGI produces video packaging for studios
such as The Walt Disney Company and Time Warner, Inc.

<PAGE>

  Software packaging has been a growing market for DGI, with CD-ROM packaging as
the  principal  product.  Many of DGI's  existing  video,  publishing  and music
customers are marketing  software through their existing  distribution  channels
and are purchasing software packaging from DGI.

  Music/Audio Packaging

  DGI manufactures pre-recorded cassette packaging, such as insert or "J" cards,
cassingles  (cassettes  with only one or a few songs),  compact disc  packaging,
including  tray cards and  booklets,  as well as audio book  packaging and other
printed materials for the music/audio industry.

  The music industry customers often require that packaging be produced quickly,
often within days of placing an order.  As an  established  and  accepted  music
industry printer,  DGI has assembled a combination of skilled workers,  advanced
equipment, and production systems to meet these requirements.

  DGI has long  standing  customer  relationships  with many of the major record
companies  in the  United  States  and also  manufactures  packaging  for  major
duplicators in the United States.  Additionally,  DGI manufactures packaging for
special  interests  and  secondary  markets.  The  acquisition  of Pointille has
bolstered  DGI's presence in the West Coast market and management  believes this
will greatly enhance future growth.

  The other major  segment of this  market is audio  publishing  packaging.  DGI
believes  that it has a  significant  share  of  this  market.  DGI's  principal
customers  include  two of the  largest  publishers  in this  market.  DGI  also
manufactures packaging for self-help and specialty cassettes which are a growing
portion of this market.

  Pharmaceutical/Vitamin Packaging

  Pharmaceuticals  fall into two main categories:  over-the-counter  ("OTC") and
prescription.  Each category places specific  requirements upon the graphics for
the folding  cartons and labels  used.  DGI has  emphasized  the OTC side of the
market,  which  requires  the use of  multi-color  graphics  to  convey  product
identity and brand  recognition.  A large part of DGI's  revenues for  OTC-style
cartons is for "private label"  products,  such as for large food and drug store
chains which have their own house brands and other private label  pharmaceutical
manufacturers.

  Vitamin and  nutritional  supplements  packaging is the other major portion of
DGI's OTC carton  business.  Color  graphics  are also  emphasized  for  vitamin
packaging as the product  lines have  distinct  vibrant  colors.  Sales of these
cartons are made directly to several major vitamin manufacturers.

  Consumer Product Packaging

  DGI manufactures cartons and packaging for fragrances,  skin lotions, pet 
products,  food  and  other  specialty  packaging  for this  market.  Those
packagings  may  be the  actual  product  carton  or  special  point-of-purchase

<PAGE>

promotions  for  the  major  cosmetic  companies  or  educational  packages  for
pharmaceutical  companies. DGI sells packaging for this market both directly and
through brokers representing national brands and private label companies.

  Commercial Printing

  In the area of commercial printing, DGI prints brochures, posters, sell sheets
and other promotional  material.  DGI prints book jackets and covers, as well as
children's books and "cut labels" for vitamin and food packaging.

  Labels

  DGI prints labels on pressure sensitive stock that are die cut to a customer's
specifications.  The primary markets for labels are  pharmaceuticals,  vitamins,
video packages (face and spine labels), pet products and specialty items. Labels
are sold primarily to existing  customers for packaging.  Many video and folding
carton orders include an order for the corresponding labels.

Marketing and Sales

  DGI's  revenues are derived from several  markets.  The largest  market,  as a
percentage  of total  1996 net sales,  was  video/entertainment  software  which
accounted for approximately 29%; followed by consumer product  packaging,  which
accounted  for  approximately  27%;  next  was  music/audio  packaging  ,  which
accounted for 18%; then  pharmaceutical/vitamin  packaging,  which accounted for
approximately 10%; then commercial  printing,  which accounted for approximately
9%; and labels which accounted for approximately 7%.

  DGI's sales are primarily the result of direct  solicitation  by its executive
officers and full-time  sales people.  DGI's package  engineering  staff assists
customers with new package design and development. Because DGI has a short cycle
time, it has a small order backlog,  with most orders processed and delivered in
one to four weeks. For additional information concerning the Company's customers
and its lines of business,  see the  Consolidated  Financial  Statements and the
Notes thereto located elsewhere in this Annual Report.

Seasonality

  Historically,  DGI's revenues have been seasonal.  In the last two quarters of
1996 and 1995,  DGI's revenues were  approximately  56% and 53% of annual sales,
respectively.  This seasonality is primarily the result of certain markets which
DGI  services,  such  as  music/audio  packaging,  video/entertainment  software
packaging  and  consumer  product  packaging,  which  require  that  products be
produced and shipped  between  August and October for sale during the  Christmas
holiday season.  As these three categories  account for  approximately  70.8% of
DGI's sales in 1996, business, the revenues of DGI are typically greater in the 
last six months of the calendar year versus the first six months.

Competition

  DGI competes  with a small number of printed  paperboard  packaging  companies
within each of its markets. In the music, video and software industries, DGI has
five major competitors, the largest of which is Shorewood Packaging Corporation.
These  industries  require high quality  packaging with rapid turnaround time at
competitive pricing. Those competitive factors are also evident in the Company's
other  markets.  DGI  believes  that its  ability to perform  all aspects of the
manufacturing  process  in-house  is an  important  factor  in  maintaining  and
improving its competitive position.

<PAGE>

  While DGI believes its present competitive position is strong, there can be no
assurance that this will not change. Several of DGI's competitors have financial
resources  that are  greater  than DGI's.  In  addition,  because  DGI  supplies
packaging to consumer  industries,  it is also subject to the competitive forces
affecting its customers.

Employees

  As of March 15, 1997, DGI had  approximately  372  employees.  274 of these
employees are located in the Company's  Hauppauge,  New York facility,  with 227
serving in manufacturing capacities and 47 serving in selling and administrative
capacites.  75  employees  are  located  in the  Company's  Burbank,  California
facility,  with 69 serving in manufacturing  capacities and 6 serving in selling
and  administrative  capacites.  23  employees  are  located  in  the  Company's
Rockaway, New Jersey facility, with 21 serving in manufacturing capacities and 2
serving in selling and administrative capacites. A majority of the manufacturing
employees located in the Burbank, California facility are represented by a labor
union. DGI considers its relationship with its employees to be satisfactory.

Materials

  DGI  uses a  variety  of raw  materials.  The  most  significant  types of raw
material  utilized are paperboard,  paper,  label paper, ink coating,  films and
plates.  These  materials are purchased from a variety of suppliers with several
alternate sources for each. Although the supply of paper and paperboard over the
past several  years has been limited,  resulting in industry wide  shortages and
price  increases,  DGI has been  successful in obtaining  adequate  materials to
satisfy all sales orders,  and does not anticipate any significant  difficulties
in obtaining supplies of such materials in the future.  There are no assurances,
however,  that DGI will not encounter  difficulty in obtaining  supplies of such
material to fulfill its requirements.

Equipment

  DGI owns or leases various manufacturing, computer and other equipment used in
the manufacture of its products and for its administrative support.

Regulation

  DGI's  activities  are subject to various  environmental,  health and employee
safety laws.  DGI has expended  resources,  both  financial and  managerial,  to
comply  with  applicable  environmental,  health and worker  safety  laws in its
operations and at its facilities and anticipates  that it will continue to do so
in the future.  Compliance with  environmental  laws has not  historically had a
material effect on DGI's capital expenditures, earnings or competitive position,
and DGI does not anticipate  that such compliance will have a material effect on
DGI in the future. Although DGI believes that it is generally in compliance with
all  applicable  environmental,  health and worker safety laws,  there can be no
assurance  that  additional  costs for  compliance  will not be  incurred in the
future or that such costs will not be material.

<PAGE>



Current Directors and Executive Officers of the Company

  Donald Sinkin is Chairman of the Board, Chief Executive Officer and President 
of  the Company.

  Stephen Frey is a Director and Vice President of Operations of the Company.

  John Rebecchi is a Director and Vice President of Sales & Marketing of the 
Company.

  Daniel Levinson is a Director of the Company and is a member of Holding 
Capital Group.  Mr.Levinson is a director of several private companies.

  Seymour W. Zises is a Director of the Company and is President and Chief 
Executive Officer of Family Management Corporation and President and Chief 
Executive Officer of Forest Hill Capital Corporation.  Mr. Zises is also a 
director of several companies.

  Mark L.  Friedman  is a Director  of the  Company,  counsel to the law firm of
Baer, Marks & Upham, and is Vice Chairman of the Board of Directors of Universal
Gym Equipment, Inc., a fitness equipment company.

  Margaret Krumholz is Chief Financial Officer of the Company.


ITEM 2.     Properties

  DGI's  executive  offices, primary  manufacturing  facility and its warehouse 
are located in Hauppauge, New York. The executive offices and manufacturing
plant are part of a leased  55,000  square  foot  facility.  The  monthly  lease
payment for such  executive  office and  manufacturing  space is $29,000 and the
lease  terminates  on  December  31,  2007.  The  facility  is owned by  certain
principals of DGI through a limited  partnership and DGI believes that the lease
terms were and are at least as  favorable  to DGI as the lease terms which could
have  been  obtained  from  unaffiliated   third  parties  for  similar  office,
manufacturing  and  warehouse  space.  DGI's  warehouse  facility  is a building
adjacent to its  executive  offices of which  40,000  square feet is occupied by
DGI.  The  monthly  lease  payment  for the  warehouse  is $11,267 and the lease
terminates on August 31, 1997.  DGI also maintains an 8,400 square foot printing
facility in Rockaway,  New Jersey.  The monthly lease payment for the New Jersey
facility  is $3,325  and the lease  terminates  on June 13,  1998.  DGI leases a
30,000 square foot manufacturing  facility in Burbank,  California.  The monthly
lease payment for the California facility is $17,400 and the lease terminates on
May 18, 1998.  Management  of DGI believes that the  facilities  are adequate to
meet current operational needs.

ITEM 3.     Legal Proceedings

  From  time to  time,  DGI is a party to  certain  lawsuits  that  arise in the
conduct of its  business.  While the outcome of these  lawsuits and  proceedings
cannot be predicted  with  certainty,  management  believes  that,  if adversely
determined, the lawsuits and proceedings, either singularly or in the aggregate,
would not have a material  adverse effect on the financial  condition or results
of operations of DGI.

<PAGE>


ITEM 4.     Submission of Matters to a Vote of Security Holders

  During the fourth quarter of the year ended  December 31, 1996,  there
were no matters  submitted  to a vote of the DGI  security  holders  through the
solicitation of proxies or otherwise.

                            PART II

ITEM 5.     Market for the Registrant's Common Equity and Related Stockholder 
            Matters

  (a)  Price Range of Common Stock

  Since May 28, 1996, the Company's  Common Stock, par value $.01 per share (the
"Common Stock"),  has been authorized for trading on the National Association of
Securities Dealers, Inc. SmallCap Market under the symbol DSGR. From October 31,
1995 to May 28,  1996,  DGI's  Common  Stock was  listed on the  American  Stock
Exchange  under the symbol DGI.  Prior to October 31, 1995, the Common Stock was
quoted on the OTC  Bulletin  Board  under the symbol  RCLC.  The table set forth
below  contains the range of the high and low closing bid prices on the National
Association of Securities  Dealers,  Inc. SmallCap Market for the quarters ended
September  30, 1996 and  December 31,  1996.  The prices for the quarters  ended
March 31, 1996 and June 30, 1996 are the high and low  closing  sales  prices on
the American  Stock  Exchange.The  prices for the quarters ended March 31, 1995,
June 30, 1995, September 30, 1995 and December 31, 1995 are the high and low bid
quotations  on the  OTC  Bulletin  Board.  The  OTC  Bulletin  Board  quotations
represent prices between dealers and do not include retail mark up, mark down or
commission. They do not necessarily represent actual transactions.

   The Company's  Class A Warrants are currently  authorized  for trading on the
National  Association  of Securities  Dealers,  Inc.  SmallCap  Market under the
symbol  DSGRW.  From October 31, 1995 to May 28, 1996 the Class A Warrants  were
quoted and traded on the OTC  Bulletin  Board under the symbol  DSGRW.  Prior to
October  31,  1995,  the Class A  Warrants  were  quoted  and  traded on the OTC
Bulletin  Board under the symbol RCLCW.  The table set forth below  contains the
range of the high and low  closing  bid prices on the  National  Association  of
Securities  Dealers,  Inc.  SmallCap Market for the quarters ended September 30,
1996 and December 31,  1996.  The prices for the quarters  ended March 31, 1995,
June 30, 1995,  September 30, 1995,  December 31, 1995,  March 31, 1996 and June
30, 1996 are the high and low bid quotations on the OTC Bulletin Board . The OTC
Bulletin Board  quotations  represent  prices between dealers and do not include
retail  mark up,  mark down or  commission.  They do not  necessarily  represent
actual transactions.

<TABLE>
<CAPTION> 
                             Common Stock     Class A Warrants          Units
                             High     Low      High       Low        High      Low
                             ----     ---      ----       ---        ----      ---
<S>                        <C>       <C>       <C>        <C>       <C>        <C>
Quarter Ended
 March 31, 1995            $4.625     $3.75     $0.50     $0.125    $5.875     $4.50
 June 30, 1995             4.9375      4.50      0.75      0.375      5.75      5.00
 September 30, 1995          4.88      4.50    0.8125     0.4375      6.00     5.375
 December 31, 1995        5.15625     2.875    0.8125     0.4375      6.00      3.00
 March 31, 1996              4.25    3.3125    0.8125     0.4375       *         *
 June 30, 1996             3.9375     2.625      0.75      0.375       *         *
 September 30, 1996        2.9375    1.6875     0.375      0.125       *         *
 December 31, 1996           2.75     2.125      0.25      0.125       *         *

</TABLE>
<PAGE>

     On March 24,  1997,  the  closing  bid prices for the Common  Stock and the
Class A Warrants were $2.75 and $0.3125, respectively.

     * On October 31, 1995, the Units were eliminated upon the merger of RCL and
Old Disc.

     (b)  Holders of Common Stock.

     As of March 24,  1997,  there were 55 holders of record of the Common Stock
and 27 holders of record of Class A Warrants.

     (c)  Dividends

     The Company has not paid any cash  dividends  on its Common Stock since its
inception.  The payment of dividends in the future will be contingent upon DGI's
revenues and earnings,  capital requirements and general financial condition and
any other factors deemed  relevant by the DGI Board of Directors.  DGI presently
intends to retain  all  earnings  for use in DGI's  business  operations  and to
further the growth of DGI's  business.  Accordingly,  the DGI Board of Directors
does not anticipate declaring any dividends in the foreseeable future.


<PAGE>


ITEM 6.   Selected Financial Data

     The  following  table sets forth  selected  data  regarding  the  Company's
operating results and financial position. The data should be read in conjunction
with Management's  Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated  Financial  Statements and Notes thereto, all of
which are contained in this Annual Report on Form 10-K.  Cash dividends were not
paid on the Company's Common Stock in any of the periods indicated below.

            (In thousands, except per share amounts)
<TABLE>
<CAPTION>

                                          Years Ended December 31,
                                 1996     1995      1994      1993      1992
                                 ----     ----      ----      ----      ----
<S>                             <C>      <C>        <C>      <C>       <C> 
Income Statement Data:
 Sales                         $42,575   $36,149   $30,550   $26,651   $21,233
 Gross profit                   10,911     7,481     6,797     5,819     4,641
 Operating expenses              7,612     5,733     5,020     4,559     3,883
 Income from operations          3,299     1,748     1,777     1,260       758
 Interest expense                  764       838       837       697       548
 Net income                      1,454       501       502       215       103
 Net income per common share      0.29      0.18      0.22      0.10        --
 Cash dividends per share           --        --        --        --        --
 Weighted average number of
  shares outstanding             5,094     2,714     2,247     2,247        --


                                            As at December 31,
                                 1996     1995      1994      1993      1992
                                 ----     ----      ----      ----      ----

Balance Sheet Data:
 Total assets                  $22,046   $18,604   $14,048   $12,831   $11,229
 Current liabilities             7,483     3,934     4,835     4,257     7,325
 Total liabilities               5,598     7,243     6,933     6,796     2,378
 Stockholders' equity            8,964     7,427     2,280     1,778     1,526
</TABLE>

<PAGE>


ITEM 7.   Management's Discussion and Analysis of Financial Condition 
          and Results of Operations

General

     The following is a discussion of the consolidated  financial  condition and
results of  operations  of the Company for the three year period ended  December
31,  1996.  The  discussion  should be read in  conjunction  with the  Company's
consolidated  financial statements and the notes thereto included in this Annual
Report.

Introduction

     Disc  Graphics,  Inc.  was  incorporated  in August 1992 under the name RCL
Capital  Corp.  ("RCL") to serve as a vehicle  to effect a business  combination
with an  operating  business.  On November 18, 1993,  RCL  completed  the public
offering of Units,  each Unit  consisting of one share of RCL's Common Stock and
two redeemable  warrants.  Net proceeds of the public offering after the payment
of certain additional expenses yielded approximately  $6,400,000,  which was put
into escrow pending the acquisition of an operating business.

Merger

     On October 30, 1995, RCL consummated the merger (the "Merger")  pursuant to
the  Agreement  and  Plan  of  Merger  dated  as of May  8,  1995  (the  "Merger
Agreement")  between RCL and Old Disc.  The merger was  subject to,  among other
things, approval by RCL's stockholders, which approval was obtained at a special
meeting  of  stockholders  held on  October  27,  1995.  Pursuant  to the Merger
Agreement  (i) Old Disc merged with and into RCL, (ii) RCL's name was changed to
Disc Graphics,  Inc. and (iii) all of the  outstanding  shares of Class A Common
Stock,  no par value,  and the Class B Common Stock,  no par value,  of Old Disc
were converted into (a) an aggregate of 3,100,000  shares of Common Stock of RCL
and (b) and an  aggregate  of  1,000,000  warrants to purchase an  aggregate  of
1,000,000 shares of Common Stock of RCL, one-quarter of which are exercisable at
a price of each of $7.00, $8.00, $9.00 and $10.00.

Potential Future Issuance's of Shares of Common Stock by the Company

     Pursuant to the Merger  Agreement as modified by a certain  Agreement as of
October  30,  1995  by  and  among  certain   stockholders   of  RCL  (the  "RCL
Stockholders")  and  the  former   shareholders  of  Old  Disc  (the  "Old  Disc
Shareholders") and RCL, if the Old Disc Shareholders subsequently determine from
time to time until up to five  years  after  October  30,  1995 (the  "Effective
Time")  that,  as of the  Effective  Time,  either  (i) RCL did not have cash or
marketable  securities  with a fair market value as of the Effective Time of not
less than $6,000,000  (the actual amount of cash and marketable  securities held
by RCL as of the  Effective  Time,  the  "First  Amount")  or (ii)  the cash and
marketable  securities of RCL did not exceed all the  liabilities  of RCL of any
kind or nature (whether fixed or contingent,  matured or unmatured)  (including,
without limitation,  all liabilities based upon, relating to or arising from any
actions  taken by or on behalf of RCL or the  failure of RCL to take any actions
prior to the Effective Time or any facts or circumstances  existing prior to the
Effective Time, which in any such case result in any liabilities, obligations or
claims  against  the Company  after the  Effective  Time) (all such  liabilities
collectively,  the "RCL  Liabilities")  by not less than  $6,000,000 (the actual
amount of cash and  marketable  securities  held by RCL as of the Effective Time
less such liabilities,  the "Second Amount"),  then promptly upon notice of such
determination  by the Old Disc  Shareholders  to the Company,  the Company shall
issue to such Old Disc Shareholders,  on a pro rata basis based on the number of
shares of Old Disc Common Stock held by such  shareholders  immediately prior to
the Effective Time, the number of shares of the Company's Common Stock (the "RCL
Designated Shares") sufficient (without  duplication) to increase the percentage
of ownership of the Company by all of such  shareholders  that such shareholders
have had  immediately  after the  Effective  Time  (excluding  any RCL Indemnity
Shares (as defined  below)  issued  after the  Effective  Time) from 60.23% to a
percentage determined by a formula defined in the Merger Agreement. Although the
formula in the Merger Agreement allows for the Old Disc  Shareholders to receive
as much as  three  times  the  number  of RCL  Designated  Shares,  the Old Disc
Shareholders  agreed to limit  the  calculation  to two times the  number of RCL
Designated Shares.
<PAGE>

     Notwithstanding  the  provision  of the Merger  Agreement  described in the
immediately  preceding  paragraph,   the  RCL  Stockholders  and  the  Old  Disc
Shareholders  have  entered  into  an  agreement   pursuant  to  which  the  RCL
Stockholders  will  transfer to the Old Disc  Shareholders  shares of DGI Common
Stock  owned by the RCL  Stockholders  instead of the  Company  issuing  certain
shares of DGI Common Stock to the Old Disc Shareholders,  but only if and to the
extent that Net Assets are between $4,900,000 and $5,304,750. "Net Assets" means
RCL's  cash  and  marketable  securities  at the  Effective  Time  less  the RCL
Liabilities.

     Pursuant to the Merger  Agreement,  the Old Disc  Shareholders  were issued
342,256 shares of Company Common Stock on December 3, 1996. The RCL Stockholders
also transferred 60,000 shares of Common Stock to the Old Disc Shareholders.

Proceeds of the Merger

     Net  proceeds  of the  merger  after  the  payment  for the  redemption  of
approximately  185,000 shares of Common Stock at $5.15 per share,  in accordance
with the terms of the original RCL offering,  yielded proceeds to the Company of
approximately  $5,000,000.  These proceeds were used primarily to reduce certain
indebtedness of the Company and for working capital purposes.

     The Merger has been treated for accounting and financial reporting purposes
as a reverse merger of RCL into Old Disc. Accordingly,  the Company's results of
operations  prior to October 30,  1995 are those of Old Disc.  In  addition,  in
connection with the merger, DGI adopted a December 31 fiscal year.

Pointille Acquisition

     On May 18,  1996,  the Company,  acquired  ("the  California  Acquisition")
substantially  all of the assets and certain  liabilities of Pointille,  Inc., a
California  corporation  ("Pointille")  pursuant to an asset purchase  agreement
dated as of May 17,  1996,  by and among  the  Company,  Pointille  and the sole
shareholder of Pointille (the "Asset  Purchase  Agreement").  The purchase price
consisted of $662,545 in cash,  74,074 shares of the Company's  Common Stock,  a
promissory  note  in  the  amount  of  $330,000,  payable  in 36  equal  monthly
installments  of  principal  and  interest  beginning  on  June  16,  1996,  and
transaction  costs.  The California  Acquisition was recorded using the purchase
method of accounting and accordingly,  the results of Pointille's operations are
included in the Company's  results of operation  from May 18, 1996. The goodwill
related to Pointille was approximately $1,069,363 million at December 31, 1996.


<PAGE>


Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     Net Sales

     Net sales for the year ended December 31, 1996 were $42,575,000 compared to
$36,149,000  for the same  period the prior  year,  representing  an increase of
$6,426,000  or  18%.   This  increase  was  primarily  due  to  the   California
Acquisition,  which  accounted for net sales of  approximately  $4,542,000.  The
categories  of  the  business   which   experienced   significant   growth  were
video/software  packaging,  which  increased  $2,947,000  or 32%,  and  consumer
product packaging,  which increased $2,089,000 or 22%. Approximately half of the
growth  in  video/software  packaging  was a result  of an  increase  in  CD-ROM
packaging sales.  Management believes that the California  Acquisition positions
DGI to compete more aggressively in the west coast markets and that this should 
be most beneficial as it relates to the entertainment segment (i.e. video/
software and music/audio packaging) and CD-ROM packaging segment of DGI's 
business.

     Sales  of  music/audio  packaging,  commercial  printing  and  labels  also
increased by 10%, 24% and 6%,  respectively over sales for the prior period. The
negative effect on the Company from the recent downturn in the music  industry's
cassette  segment was greatly offset by the strong cassette segment sales in 
the newly  acquired  California  facility.  Pharmaceutical/vitamin  packaging  
sales experienced a slight  decrease of $219,000 or 5%,  compared with the  
comparable period of the prior year.  This is a result of a change in the  
Company's  focus to growing earnings, thereby concentrating on more profitable
segments within this business category.

     Gross Profit

     Gross profit for the year ended December 31, 1996 was  $10,911,000
(a 26% profit margin) compared to $7,481,000 (a 21% profit margin) for the prior
year, representing an increase of $3,431,000.  The increase was due primarily to
the reduction in costs of goods sold as a percentage of revenue, increased sales
volume and the California Acquisition. The California Acquisition resulted in an
increase in gross profit of  $640,000.  The decrease in cost of goods sold was a
result of  manufacturing  efficiencies  attributable  to improved  processes and
equipment.  The investment  and focus on more  efficient  equipment and improved
processes  resulted in a five percentage point decrease in cost of goods sold as
a percentage of sales for the twelve months.  The Company  continues to focus on
opportunities within manufacturing to reduce costs.

     Selling, General and Administrative Expenses

     Selling, general and administrative ("SG&A") expenses for the twelve months
ended  December  31,  1996  were  $7,612,000  (17.9%  of  revenue)  compared  to
$5,733,000 (15.9% of revenue) for the prior year, an increase of $1,879,000,  or
33%.  This  increase was due  primarily  to revenue  related  expenses  (such as
freight to customers and commissions),  professional fees, the cost of insurance
related to the Company's  public status and costs  associated  with operation of
the newly acquired California facility.

     In the fourth quarter of 1996,  the Company  instituted a program to reduce
SG&A  expenses by  integrating  the  California  Acquisition  and  renegotiating
professional  fees.  The  continuing  focus will be to  leverage  the  Company's
current fixed cost base with future growth in the business.

<PAGE>

     Interest Expense

     Interest  expense  for the year  ended  December  31,  1996  was  $764,000,
compared to $838,000 for the prior year.  Interest expense includes  interest on
notes payable to the  Company's  former bank lender in addition to capital lease
obligations  on  equipment.  The decline in  interest  expense is related to the
decrease in indebtedness from the utilization of the Merger proceeds.

     Income Taxes

     The  provision  for  income  taxes for the year  ended  December  31,  1996
increased  primarily due to the increase in pretax  income of  $1,666,000  and a
slight  increase  in the  effective tax rate from  42.4% in 1995 to 42.6% in
1996.

     Net Income

     Net income for the twelve  months ended  December 31, 1996 was  $1,454,000,
compared to $501,000 for the prior year, an increase of $953,000,  or 190%. This
increase  was a result of an  increase in net sales of  approximately  18% along
with the  management  of  manufacturing  costs  resulting  in cost of goods sold
declining  as a  percentage  of net sales  from  79.3% in 1995 to 74.4% in 1996.
Although the California  Acquisition  resulted in a positive impact in net sales
there was only a break-even effect on net income.  Management  believes that the
Company's  strategy of  focusing  on cost  reductions,  margin  improvement  and
earnings  along with the  historical  growth in revenue  resulted in significant
improvement in the income in 1996 compared to 1995.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

     Net Sales

     Net sales for the twelve  months ended  December 31, 1995 were  $36,149,000
compared  to  $30,550,000  for the  prior  year,  representing  an  increase  of
$5,599,000,  or 18%. Unit volume for the twelve months ended  December 31, 1995,
compared to the same period of the prior year  increased  7%. The  categories of
the business which experienced significant growth were video/software packaging,
which  increased  $2,886,000,  or 46%, and  consumer  product  packaging,  which
increased  $2,139,000,  or 29%.  Approximately  half of the  growth  in sales of
video/software packaging was a result of an increase in CD-ROM packaging.  Sales
of music/audio packaging and labels also increased by 11% and 24%, respectively.
The increase in music/audio  packaging  sales was  substantially  greater in the
first  six  months  of 1995  than in the last  six  months,  due to the  general
downturn in the music industry.

     There  was a  slight  downturn  in  sales  of  both  pharmaceutical/vitamin
packaging and  commercial  printing of 8% and 7%,  respectively.  Pharmaceutical
packaging  sales has been adversely  impacted as it related to reorders,  due to
the consolidation of several pharmaceutical manufacturers.  The Company believes
that it is well positioned with the surviving  manufacturers to continue to grow
pharmaceutical  sales in the future.  Commercial  sales were  impacted by a soft
economy and a competitive  market place.  Within this segment,  sales of package
paper labels grew 40%, or $113,000, however, this gain was offset by declines in
book components and other general commercial categories.

<PAGE>



     Gross Profit

     Gross profit for the twelve months ended  December 31, 1995 was  $7,481,000
(a 21% profit margin), compared to $6,797,000 (a 22% profit margin) for the same
period of the prior year,  representing  an increase of  $684,000,  or 10%.  The
increase  was due  primarily  to the  increase  in  sales  partially  offset  by
increases in paper and paperboard  costs. In addition,  the Company  experienced
both manufacturing  inefficiencies and additional costs related to the increased
need to outsource work during the  installation of a new press.  Upon completion
of the press installation in September of 1995, costs for outsourcing  declined.
This press has  enhanced  production  capacity  and  efficiency  resulting  in a
reduction  of  costs.  The  Company  also  started  a  new  facility  for  label
manufacturing in New Jersey,  incurring one-time costs related to indirect labor
at the facility.

     Selling, General and Administrative Expenses

     SG&A  expenses  for  the  twelve  months  ended   December  31,  1995  were
$5,734,000,  compared  to  $5,020,000  for the same  period of the  prior  year,
representing an increase of $714,000, or 14%. This increase was due primarily to
increases in wages, benefits, overhead and revenue related increases in expenses
such as freight for shipments to customers and  commissions/bonuses.  Subsequent
to the merger,  the Company has incurred  additional  legal and accounting  fees
relating to  reporting  and  compliance  requirements  which have to do with the
public status of the Company.  Despite these added costs, the Company's focus on
managing fixed costs in relation to growth in revenues has resulted in a decline
in SG&A as a percentage of revenue.

     SG&A as a percent of net sales for the twelve  months  ended  December  31,
1995 was 15.9%, versus 16.5% for the same period of the prior year.

     Interest Expense

     Interest  expense  for the  twelve  months  ended  December  31,  1995  was
$838,000,  compared  to  $837,000  for  the  same  period  of  the  prior  year,
representing an increase of $1,000.  Interest expense included interest on notes
payable to the  Company's  former bank lender and capital lease  obligations  on
equipment.  The increase in interest  expense was partially due to debt incurred
related to capital  expenditures and was partially offset by the use of proceeds
resulting from the merger with RCL which were utilized to reduce debt.

     Income Taxes

     The  provision  for income taxes for the twelve  months ended  December 31,
1995 was $368,000, compared to $439,000 for the same period of the prior year, a
decline of $71,000,  or 16%.  This decline is due in part to the decline in both
the  pretax  income  and the  effective  tax rate from 46.7% in 1994 to 42.4% in
1995.  The effective  tax rate changed due to the  settlement in a prior year of
IRS audit.

     Net Income

     Net income for the twelve  months  ended  December  31, 1995 was  $501,000,
compared to $502,000  for the same  period of the prior year.  Although  revenue
increased by 18%, there was substantially no change in net income.  This was due
to the Company's investments in equipment and production in the New Jersey label
facility which, in management's  opinion,  strategically  positioned the Company
for growth, and legal and accounting fees related to the Company's public status
which were incurred post-merger.

<PAGE>

Liquidity and Capital Resources

     The primary  sources of cash for DGI's business  activities  have been cash
provided from  operations,  borrowings  under the financing  agreement  with its
former bank lender (the "Financing  Agreement")  and in 1995,  proceeds from the
merger  between  RCL and Old Disc.  As of  December  31,  1996,  DGI had working
capital of  $5,002,000 compared to  $7,537,000 as of December 31,  1995.  This
decline  was due  primarily  to cash paid for the  California  Acquisition,  the
increase in accounts  payable,  accrued expenses and income taxes payable offset
by the increase in accounts receivable.

     Net cash provided by operating  activities  for the year ended December 31,
1996 was $5,309,000, an increase of $5,207,000 from the prior year. The Company
continues  to have a strong  focus on cash  management.  Cash used in  investing
activities included the California  Acquisition and capital  expenditures.  Cash
used for the California Acquisition was $663,000.

     Capital expenditures have been primarily for the purchase of a new computer
system,  manufacturing  equipment,  effecting  building  improvements,  and  the
purchase of furniture and fixtures.  Capital expenditures in 1996 were $782,000,
as compared to $3,485,000 in 1995. In 1995, the Company  invested  approximately
$2,000,000 in a new six color printing press which is  technologically  advanced
and has the ability to do waterless printing.

     On February  26, 1997,  the Company  entered  into a new  revolving  credit
agreement (the "Credit Agreement") with a different bank lender which allows for
borrowings  equal  to 85% of  eligible  accounts  receivable  plus  up to 70% of
eligible inventory,  not to exceed $10,000,000.  The credit agreement is secured
by substantially  all of the unencumbered  assets of the Company.  The borrowing
rate under  this  agreement  is either  (i) LIBOR  plus 125 to 175 basis  points
depending on the Debt  Coverage  Ratio or (ii) the Bank's Base Rate.  The Credit
Agreement also provides for a borrowing  sublimit for  acquisitions in an amount
equal to the lesser of $3,000,000  or 25% of the  Company's  tangible net worth.
The utilization of this sublimit must be in compliance with the Credit Agreement
as a whole.

     DGI's prior  Financing  Agreement  allowed for borrowing an amount equal to
85% of  eligible  accounts  receivable  plus 70% of the  value of  rolled  paper
inventory,  not to exceed  $8,500,000.  Amounts  outstanding under the Financing
Agreement  accrued interest at 1% over the bank's prime rate (9.25% per annum at
December 31, 1996). The Financing  Agreement  contained  certain covenants which
restricted  certain  activities  by DGI  and  required  DGI to  satisfy  certain
performance criteria,  including the maintenance of minimum net worth levels and
debt service  ratios.  At December 31, 1996, DGI was not in compliance  with one
covenant,  which  had  limited  the  amount of annual  capital  expenditures  to
$650,000.  DGI had spent  $782,374 in 1996.  As of December  31,  1996,  DGI had
approximately  $5,500,000 available for borrowing under the Financing Agreement.
DGI has used the  proceeds  from the merger with RCL (net cash of  approximately
$5,000,000),  less  expenses  of DGI  incurred  in  connection  with the merger,
primarily  to pay down  certain  existing  indebtedness  of DGI and for  working
capital purposes.

<PAGE>

     Inflation and Seasonality

     The Company has  experienced  increases in variable  and fixed  costs.  The
Company has managed to reduce the impact of these cost  increases  by  obtaining
certain  volume  discounts  through  the  purchase of larger  quantities  of raw
material  and   investment  in  equipment  to  cut  rolled  paper  into  sheets,
eliminating the need to purchase more costly sheeted paperboard.

     In addition,  despite  inflationary  increases in direct labor, the Company
has managed  through more  efficient  equipment to reduce the cost of labor as a
percentage  of  revenues  by  5  percentage  points.   The  Company,   like  its
competitors, has whenever possible passed on increased costs by way of increased
pricing in various markets.

     Historically,   a  portion  of  DGI's  business  has  been  seasonal.   The
requirements  of the home video,  music and cosmetic  markets for products to be
delivered for the Christmas holiday season generally causes an increase in sales
from August through October.

New Accounting Standard

       The Company  adopted the provisions of Statement of Financial  Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for  Long-Lived  Assets to Be Disposed Of, on January 1, 1996.  Adoption of this
Statement did not have a material  impact on the Company's  financial  position,
results of operation, or liquidity.

      Prior to January 1, 1996, the Company  accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No.25,  Accounting for Stock Issued to Employees,  and related  interpretations.
Alternatively,  SFAS No.  123 also  allows  entities  to  continue  to apply the
provisions  of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based  method defined in SFAS No. 123 had been
applied.  The Company has elected to apply the  provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.

ITEM 8.     Financial Statements and Supplementary Data

                                                                       Page
                                                                       ----
Consolidated Financial Statements - Disc Graphics and Subsidiaries
Independent Auditor's Report . . . . . . . . . . . . . . . . .           19
Consolidated Balance Sheets as of December 31, 1996 and 1995 .           20
Consolidated Statements of Income for the years ended December 31,
 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . .           21
Consolidated Statements of Changes in Stockholders' Equity for
 the years ended December 31, 1996, 1995 and 1994. . . . . . .           22
Consolidated Statements of Cash Flows for the years ended
 December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . .           23
Notes to Consolidated Financial Statements . . . . . . . . . .           24
<PAGE>

                              DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                       Consolidated Financial Statements
                           December 31, 1996 and 1995
                  (with Independent Auditors' Report Thereon)


<PAGE>
                          Independent Auditors' Report


The Board of Directors
  and Stockholders
Disc Graphics, Inc.:

We have audited the accompanying  consolidated  balance sheets of Disc Graphics,
Inc.  and  subsidiaries  as of  December  31,  1996 and  1995,  and the  related
statements of income,  stockholders' equity and cash flows for each of the years
in the three-year  period ended December 31, 1996. In connection with our audits
of the  consolidated  financial  statements,  we have also audited the financial
statement  schedule  as listed in the  accompanying  index.  These  consolidated
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated  financial statements and financial statement schedule based on our
audits.

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

In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position  of Disc
Graphics,  Inc.  and  subsidiaries  as of December  31,  1996 and 1995,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally  accepted
accounting  principles.  Also in our opinion,  the related  financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.


                                   /s/ KPMG Peat Marwick LLP


February 27, 1997

<PAGE>
                              DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                          Consolidated Balance Sheets

                           December 31, 1996 and 1995

<TABLE>
<CAPTION>

               Assets                                          1996            1995
               ------                                          ----            ----      
<S>                                                      <C>                <C> 
Current assets:
 Cash and cash equivalents                                $     30,859       1,309,677
 Accounts receivable, net of allowance for 
    doubtful accounts of $844,000 and 
    $494,000, respectively                                   9,055,995       7,200,428
 Inventories                                                 2,013,333       1,812,137
 Prepaid expenses and other current assets                     599,927         571,394
 Current maturities of notes receivable                         85,014          82,777
 Deferred income taxes                                         700,000         493,594
                                                           -----------     -----------    
    Total current assets                                    12,485,128      11,470,007

Plant and equipment, net                                     8,254,920       6,776,378
Notes receivable, less current maturities                            -          59,937
Goodwill, net of amortization of $46,493                     1,069,363               - 
Security deposits and other assets                             236,271         297,191
                                                           -----------     -----------    
    Total assets                                          $ 22,045,682      18,603,513
                                                           ===========     ===========    
     Liabilities and Stockholders' Equity

Current liabilities:
 Current maturities of equipment notes payable                 456,651         386,787
 Current portion, long-term debt                                97,167               -
Current maturities of capitalized lease obligations payable    692,852         584,635
 Accounts payable                                            2,088,473       1,740,544
 Accrued liabilities                                         3,194,098       1,116,511
 Income taxes payable                                          954,088         105,084
                                                           -----------     -----------    
     Total current liabilities                               7,483,329       3,933,561

Long-term debt                                                 515,234       3,000,000
Equipment notes payable, less current maturities             1,902,838       2,418,881
Capitalized lease obligations payable, less 
     current maturities                                      2,192,235         963,950
Deferred income taxes                                          988,000         860,000
                                                           -----------     -----------    
     Total liabilities                                      13,081,636      11,176,392

Commitments and contingencies

Stockholders' equity:
 Preferred stock:
     $.01 par value; authorized 5,000 shares; 
     no shares issued and outstanding
     Common stock:
     $.01 par value; authorized 20,000,000 shares; 
     issued 5,378,518 in 1996 and 4,962,188 in 1995             53,786          49,622
 Additional paid-in capital                                  5,051,555       4,948,119
 Retained earnings                                           3,883,366       2,429,380
                                                           -----------     -----------    
                                                             8,988,707       7,427,121
Less:
 Treasury stock, 8,710 shares at cost                          (24,661)              -
                                                           -----------     -----------    
    Total stockholders' equity                               8,964,046       7,427,121
                                                           -----------     -----------
    Total liabilities and stockholders' equity             $22,045,682      18,603,513
                                                           ===========     ===========

See accompanying notes to consolidated financial statements.
</TABLE>


<PAGE>





                              DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                       Consolidated Statements of Income

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                        1996            1995            1994
                                        ----            ----            ---
<S>                                  <C>             <C>            <C>  

Sales                                $42,575,120     36,149,096     30,550,359
Cost of sales                         31,663,934     28,668,506     23,753,057
                                     -----------    -----------    -----------
     Gross profit                     10,911,186      7,480,590      6,797,302

Operating expenses:
  Selling and shipping expenses        3,682,886      2,775,768      2,484,775
  General and administrative expenses  3,929,521      2,957,253      2,535,571
                                     -----------    -----------    -----------
     Operating income                  3,298,779      1,747,569      1,776,956

Interest expense, net                    763,793        838,263        836,610
(Loss) gain on disposal of equipment           -        (40,777)           450
                                     -----------    -----------    -----------

Income before provision for 
     income taxes                      2,534,986        868,529        940,796

Provision for income taxes             1,081,000        368,000        439,000
                                     -----------    -----------    -----------

     Net income                      $ 1,453,986        500,529        501,796
                                     ===========    ===========    ===========
     Net income per share            $       .29            .18            .22
                                     ===========    ===========    ===========                                     
  Weighted average number of shares
      outstanding                      5,093,732      2,714,229      2,247,120
                                     ===========    ===========    ===========  

See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>
                              DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
                                                                  Additional
                              Preferred stock     Common stock      paid in   Retained   Treasury
                              Shares    Amount   Shares    Amount   capital   earnings    stock    Total
                              -------   -------  -------   ------- ---------- --------   --------  -----  
<S>                           <C>      <C>      <C>        <C>       <C>      <C>        <C>       <C>                 

Balance, December 31, 1993        -    $    -   2,247,120  $22,471   328,304  1,432,055       -    1,782,830

Loss on treasury stock            -         -         -        -        -        (5,000)      -       (5,000) 

Net income                        -         -         -        -        -       501,796       -      501,796
                             -------   -------  --------- --------  --------   ---------  --------  ---------   
Balance, December 31, 1994        -         -   2,247,120   22,471   328,304   1,928,851      -     2,279,626

Shares issued in connection with
   Disc/RCL Merger                -         -   2,715,068   27,151  4,619,815        -        -     4,646,966

Net income                        -         -         -        -         -       500,529      -       500,529
                             -------   -------  --------- --------  ---------  ---------  --------  ---------   
Balance, December 31, 1995        -         -   4,962,188   49,622  4,948,119  2,429,380      -     7,427,121

Additional expenses in connection
   with Disc/RCL Merger           -         -        -         -     (35,000)        -        -       (35,000)

Shares issued in connection with
   an acquisition                 -         -      74,074      741   174,259         -        -       175,000

Purchase of treasury stock        -         -        -         -        -            -    (24,661)    (24,661)

Purchase of warrants              -         -        -         -     (32,400)        -        -       (32,400)

Additional common shares 
   issued in connection
   with Disc/RCL Merger           -         -     342,256    3,423    (3,423)        -        -          -
  
Net income                        -         -        -         -        -     1,453,986       -     1,453,986
                             -------   -------  --------- --------  ---------  ---------  --------  ---------   
Balance, December 31, 1996        -   $     -   5,378,518  $53,786 5,051,555   3,883,366  (24,661)  8,964,046
                             -------   -------  --------- -------- ---------   ---------  --------  ---------   

See accompanying notes to consolidated financial statements.
</TABLE>


<PAGE>

                              DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                    1996            1995            1994
                                                    ----            ----            ---- 
<S>                                              <C>            <C>              <C>                

Cash flows from operating activities:
 Net income                                      $1,453,986        500,529        501,796
 Adjustments to reconcile net income to 
   net cash used in operating activities:
     Depreciation and amortization                1,529,246      1,062,873        952,563
     Deferred income taxes                           78,406        168,000         72,000
     Allowance for doubtful accounts                496,662        197,624        145,000
     Loss on disposition of assets                        -         40,777              -
     Change in assets and liabilities, 
      net of acquisition of business:
           Increase in accounts receivable         (637,390)      (231,563)    (1,423,374)
           Decrease (increase) in inventories        42,407       (196,656)      (660,130)
           Decrease (increase) in prepaid expenses
               and other current assets            (156,577)      (353,523)        46,478
           Increase (decrease) in accounts payable
               and accrued liabilities            1,765,149       (970,315)       498,792
           Increase (decrease) in income taxes 
               payable                              691,862        (76,547)        42,402
           Decrease (increase) in security 
               deposits and other assets             45,135        (38,892)        18,930
                                                 ----------     ----------     ---------- 
                  Net cash provided by operating
                  activities                      5,308,886        102,307        194,457
                                                 ----------     ----------     ---------- 
Cash flows from investing activities:
 Capital expenditures                              (782,374)    (3,485,023)      (426,797)

 Purchase of Pointille                             (662,545)             -              -
                                                 ----------     ----------     ---------- 
                 Net cash used in investing
                 activities                      (1,444,919)    (3,485,023)      (426,797)
                                                 ----------     ----------     ---------- 

Cash flows from financing activities:
 Net short-term borrowings, net of repayments    (3,820,459)    (2,035,268)       838,113
 Payments of notes receivable                        57,700        247,774        121,497
 Borrowings under long-term debt                     79,688      2,700,292              -
 Payments of long-term debt                      (1,367,653)      (872,193)      (735,204)
 Net proceeds from issuance of common stock               -      4,646,966              -
 Expenses in connection with merger                 (35,000)             -              -
 Purchase of warrants                               (32,400)             -              -   
 Purchase of treasury stock                         (24,661)             -              -
                                                 ----------     ----------     ---------- 
                Net cash (used in) provided by
                financing activities             (5,142,785)     4,687,571        224,406

Net increase (decrease) in cash                  (1,278,818)     1,304,855         (7,934)

Cash, beginning of year                           1,309,677          4,822         12,756
                                                 ----------     ----------     ---------- 
Cash, end of year                                $   30,859      1,309,677          4,822
                                                 ==========     ==========     ========== 

See accompanying notes to consolidated financial statements.
</TABLE>


<PAGE>




                              DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1996 and 1995


(1)  Summary of Significant Accounting Policies

(a)  Description of Business

Disc  Graphics,  Inc.  and  subsidiaries  (the  Company) are engaged in the
printing  and  manufacturing  of  paperboard  packaging  for music,  home video,
pharmaceutical  and general consumer  products.  The Company's business has been
seasonal.  This  seasonality is primarily the result of the music and home video
products which are sold between August and October for the holiday season.

On October 30, 1995,  Disc  Graphics,  Inc., a New York  corporation  (Old Disc)
merged with and into RCL Capital  Corp.  (RCL).  All of the  outstanding  common
stock of Old Disc was  converted  into the  right to  receive  common  stock and
warrants to purchase common stock of RCL. RCL simultaneously changed its name to
Disc  Graphics,  Inc. and adopted Disc's year end of December 31. For accounting
purposes,  the acquisition has been treated as a  recapitalization  of Disc with
Disc as the acquiror (reverse acquisition).  The historical financial statements
prior to October 30,  1995 are those of Disc.  Historical  stockholders'  equity
prior to the  merger  has been  adjusted  for the  equivalent  number  of shares
received in the merger after  giving  effect to the new par value with an offset
to  additional  paid in capital.  Earnings  per share for  periods  prior to the
merger reflect the number of equivalent shares received by Disc.

Prior to October 30, 1995,  RCL was a publicly  held,  development  stage entity
with  assets  consisting  primarily  of cash (a public  shell).  The Company has
recorded the merger in a manner similar to the issuance of stock for cash. Terms
of the merger required the issuance of approximately  3,100,000 shares of common
stock and warrants to purchase an additional 1,000,000 shares of common stock to
the Old Disc shareholders in exchange for their interest. In connection with the
merger,  certain RCL  stockholders  were  required to  contribute to RCL, for no
separate  consideration,  200,000  shares  of RCL  common  stock.  In  addition,
electing RCL stockholders  redeemed 184,935 shares of common stock  concurrently
with the merger. As a result, net proceeds to the Company aggregated  $4,646,966
for the issuance of 2,715,068 shares of common stock.

Pursuant  to the Merger  Agreement,  as modified  by a certain  Agreement  dated
October 30, 1995,  and based upon RCL not meeting  certain  prescribed  cash and
marketable  securities  amounts as of October 30,  1995,  the  Company  would be
required  to issue  to the Old  Disc  shareholders,  upon  proper  notification,
additional  common  shares of the Company for no additional  consideration.  The
number of  additional  shares that would be issued to the Old Disc  shareholders
was  based on a  formula  in the  Merger  Agreement,  as  modified  by a certain
Agreement.  In the fourth quarter of 1996, 342,256 additional shares were issued
to the Old Disc shareholders.

(b)  Principles of Consolidation

The consolidated  financial  statements include the financial  statements of the
Company and its two  wholly-owned  subsidiaries.  All  significant  intercompany
balances and transactions have been eliminated in consolidation.

(c)  Cash Equivalents

For purposes of the statements of cash flows,  the Company  considers all highly
liquid debt instruments  purchased with an original  maturity of three months or
less to be cash equivalents.  In 1995, cash equivalents  consisted of Eurobonds.
There were no cash equivalents in 1996.

 (Continued)
<PAGE>


(d)  Inventories

Inventories are stated at the lower of cost or market.  Cost is determined using
the first-in, first-out (FIFO) method.

(e)  Revenue Recognition

Revenues are recognized when merchandise is shipped.

(f)  Plant and Equipment

Plant and  equipment  are recorded at cost.  Depreciation and amortization are
charged  to  operations  using  the  straight-line  method  over  the  following
estimated useful lives:

Machinery and equipment                  3 to 11 years
Furniture and fixtures                   5 to 7 years
Automobiles and trucks                   3 to 5 years
Leasehold improvements                   2 to 10 years


Capitalized  values of assets under leases are amortized over the lesser of term
of the lease or the estimated  life of the asset,  depending upon the provisions
of the lease.

(g)  Covenant Not to Compete

The covenant not to compete was fully amortized in fiscal 1996. The covenant had
an original life of four years and was amortized using the straight-line method.

(h)  Net Income Per Share

For all years  presented,  net income per share is computed  under the  treasury
stock method which assumes the exercise of all outstanding  options and warrants
which are dilutive.  The computation of weighted average shares  outstanding for
1994, 1995 and 1996 does not include  incremental shares relating to outstanding
warrants since the exercise price of the warrants  exceeds the market price. The
computation  of weighted  average shares  outstanding  for 1995 does not include
incremental shares relating to outstanding  options as the exercise price of the
options exceeds the market price.

Net income per share was based on 5,093,732,  2,714,229  and 2,247,120  weighted
average shares outstanding for 1996, 1995 and 1994, respectively.

(i)  Income Taxes

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and  liabilities  and their  respective tax bases and operating
loss tax credit carryforwards.  Deferred tax assets and liabilities are measured
using  enacted  tax rates  expected  to apply to taxable  income in the years in
which those temporary  differences are expected to be recovered or settled.  The
effect  on  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized in income in the period that includes the enactment date.

 (Continued)

<PAGE>


(j)  Goodwill

Goodwill,  which  represents the excess of purchase price over fair value of net
assets  acquired,  is  amortized  on a  straight-line  basis over a period of 15
years.  The Company  assesses the  recoverability  of this  intangible  asset by
determining  whether the amortization of the goodwill balance over its remaining
life can be recovered  through  undiscounted  future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
upon  projected  discounted  future  operating  cash flows using a discount rate
reflecting  the  Company's   average  cost  of  funds.  The  assessment  of  the
recoverability  of goodwill will be impacted if estimated  future operating cash
flows are not achieved.

(k)  Use of Estimates

Management  of the  Company  has  made a number  of  estimates  and  assumptions
relating  to the  reporting  of assets and  liabilities  and 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 to
prepare  these  financial  statements  in  conformity  with  generally  accepted
accounting principles. Actual results could differ from those estimates.

(l)  Stock Option Plan

Prior to January 1, 1996,  the Company  accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees,  and related  interpretations.
As such,  compensation  expense generally would be recorded on the date of grant
only if the current market price of the  underlying  stock exceeded the exercise
price. On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize  as expense over the vesting  period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the  provisions  of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share  disclosures  for employee
stock  option  grants made in 1995 and future  years as if the  fair-value-based
method  defined in SFAS No. 123 had been  applied.  The  Company  has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma  disclosure
provisions of SFAS No. 123.

(m)  Impairment of Long Lived Assets and Long Lived Assets to Be Disposed Of

The Company  adopted the  provisions  of SFAS No. 121,  Accounting  for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996.  This  Statement  requires that  long-lived  assets and certain
identifiable  intangibles be reviewed for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceed the fair value of the assets.  Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.

 (Continued)

<PAGE>


(n)  Reclassifications

Reclassifications  are made whenever necessary to conform with the current 
year's presentation.

(2)  Acquisition

On May 17,  1996,  the  Company  acquired  substantially  all of the  assets and
certain  liabilities of Pointille,  Inc., a California  based  printing  company
("Pointille"),  for  $662,545  in cash,  the  issuance  of 74,074  shares of the
Company's  common stock,  and the issuance of a promissory note in the amount of
$330,000 (principal and interest),  payable in 36 equal monthly  installments of
principal  and  interest  beginning  on June 17, 1996 (the  "Acquisition").  The
Company  recorded the value of the 74,074 shares of the  Company's  common stock
issued  at the  estimated  fair  value  at the  date  of  the  Acquisition.  The
Acquisition  was  accounted  for using the  purchase  method  of  accounting  in
accordance with generally accepted  accounting  principles.  The Company has not
yet determined the final purchase price of Pointille,  therefore, an estimate of
the amount owed from the former  owner is included in prepaid and other  current
assets.

The allocation of the purchase price of Pointille was as follows:

<TABLE>
<S>                                                <C>

Purchase price:
            Cash                                   $   662,545
            Promissory note (present value)            299,708
            Receivable from former owner             (175,633)
            Common stock                               175,000
            Transaction costs                          154,236
                                                   -----------
            Pointille's net asset value              1,115,856
                                                             -
                                                   -----------

            Goodwill                               $ 1,115,856
                                                   ===========
</TABLE>

The   following   unaudited  pro  forma  results  have  been  prepared  for
comparative purposes only and include certain adjustments such as (i) additional
amortization  expense due to goodwill resulting from the acquisition and (ii) an
increased  interest  expense due to cash borrowed under the Company's  financing
agreement  with  Fleet  Bank  for the  payment  of the  purchase  price  and the
repayment  of  Pointille's  bank line of credit  and notes  payable  (which  was
partially  offset by the  payment of  Pointille's  bank line of credit and notes
payable).  These  unaudited pro forma results do not purport to be indicative of
the results of operations  which  actually  would have resulted had the purchase
been  effected on January 1, 1995,  nor of future  results of  operations of the
consolidated  entities.  For  purposes of pro forma and interim  reporting,  the
financial information of Pointille,  which was on a February 28 fiscal year, was
adjusted to conform with the Company's reporting periods.

The following unaudited pro forma information presents a summary of consolidated
results of  operations of the Company and  Pointille as if the  Acquisition  had
occurred January 1, 1995.

<PAGE>


<TABLE>
<CAPTION>

                                         1996               1995
                                         ----               ----
                                           (thousands except per
                                             share amounts)
<S>                                     <C>                <C> 

          Net sales                     $45,401            44,203
          Net income                      1,487               575
          Earnings per common share         .29               .21

</TABLE>

(3)  Supplemental Cash Flow Information

The following is supplemental information relating to the consolidated statement
of cash flows:

<TABLE>
<CAPTION>

                                   1996          1995           1994
                                   ----          ----           ---- 
<S>                              <C>            <C>           <C>

Cash paid during the year for:
     Interest                    $812,747       816,763        886,610
     Income taxes                 460,071       274,606        174,818
</TABLE>

Other non-cash  transactions  include common stock issued in connection with the
acquisition  valued at  $175,000  (see note 2) and assets  under  capital  lease
assumed $2,077,388 (see note 13).

(4)  Covenant Not to Compete

In 1992, the Company entered into a non-competition agreement in connection with
the acquisition of a company. Under the non-competition  agreement,  the Company
was obligated to pay $185,000 over four years in equal bi-monthly  installments.
The present  value of the  liability,  discounted  at 7.5%,  was recorded in the
accompanying  financial  statements.  As of December 31,  1996,  the covenant is
fully  amortized.  Amortization  of the  intangible  asset  amounted to $11,544,
$34,632,  and $34,632  for the years ended  December  31,  1996,  1995 and 1994,
respectively.

(5)  Inventories

Inventories consist of the following:
<TABLE>
<CAPTION>

                                            1996            1995 
                                            ----            ----
<S>                                      <C>             <C> 

Raw materials                            $1,425,230       1,327,496
Work-in-process                             248,210         265,873
Finished goods                              339,893         218,768
                                         ----------       ---------        
                                         $2,013,333       1,812,137
                                         ==========       =========
</TABLE>
   

     (Continued)

<PAGE>


(6)  Plant and Equipment

Plant and equipment consists of the following:
<TABLE>
<CAPTION>

                                            1996            1995 
                                            ----            ----
<S>                                      <C>             <C> 

Machinery and equipment                  $11,664,480      9,042,833
Furniture and fixtures                       973,251        901,774
Leasehold improvements                     1,052,678        896,218
Automobiles and trucks                       149,546         84,359
                                         -----------    -----------
                                          13,839,955     10,925,184
Less accumulated depreciation
       and amortization                    5,585,035      4,148,806
                                         -----------    ----------- 
                                         $ 8,254,920      6,776,378
                                         ===========    ===========
</TABLE>


Depreciation  and  amortization  expense  of plant  and  equipment  amounted  to
$1,446,633,  $1,022,601 and $912,291 for the years ended December 31, 1996, 1995
and 1994, respectively.

(7)  Accrued Liabilities

Accrued liabilities at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>

                                                 1996            1995 
                                                 ----            ----
<S>                                            <C>             <C> 

Accrued payroll and other employee benefits    $2,723,754        835,937
Accrued commissions                               253,751        172,217
Accrued other                                     216,593        108,357
                                               ----------     ----------  
                                               $3,194,098      1,116,511
                                               ==========     ========== 
</TABLE>

(8)  Long-Term Debt

(a) On February 26, 1997,  the Company  entered into a new  financing  agreement
with a lending institution. The seven year Revolving Credit - Term Loan facility
provides the Company the option to convert the  outstanding  balance at February
26, 2000 to a fixed term loan to be repaid over four years. The revolving credit
portion  of the  loan  provides  financing  of up to 85%  of  eligible  accounts
receivable and 70% of eligible inventory, as defined, not to exceed $10,000,000.
The financing agreement bears interest at the lower of LIBOR plus 1.25% to 1.75%
based  on the debt  coverage  ratio  or the  bank's  base  rate.  The  financing
agreement  is secured by the  Company's  accounts  receivable,  inventory  and a
portion of property,  plant, and equipment. In addition, the financing agreement
contains various covenants including the maintenance of certain financial ratios
including consolidated net worth, working capital and debt service, the 
maintenance of net income and  limitations to future  borrowings to be used for 
acquisitions.

(b) The Company's  previous  financing  agreement was with a bank which provided
for loans in amounts of up to 85% of eligible accounts receivable and inventory,
as defined,  with the maximum  borrowings not to exceed  $8,500,000.  Such loans
bear interest, payable monthly, at 1% over the

     (Continued)

<PAGE>


bank's  prime  rate  (9.25%  and  9.50% at  December  31,  1996  and  1995,
respectively).  The  previous  financing  agreement  provided  the lender with a
security interest in the Company's accounts  receivable,  as defined,  inventory
and personal property.  In addition,  the agreement  contained various covenants
including the  maintenance of a specified  level of indebtedness to tangible net
worth, as defined.  At December 31, 1995, the Company was not in compliance with
certain of these covenants.  All such instances of noncompliance  were waived or
amended  by the bank.  The  Company  was not in  compliance  with the  financing
agreement at December  31, 1996.  This debt was repaid on February 26, 1997 with
the proceeds from the new financing  agreement.  The Company's president and two
vice presidents personally guaranteed the amounts borrowed under this agreement.
At December 31, 1996 and 1995, the Company's  outstanding  borrowings under this
financing  agreement  aggregated  $366,591  and  $3,000,000,  respectively.  The
weighted average interest rate during the years ended December 31, 1996 and 1995
was 9.3% and 9.1%, respectively.

(c) In connection with the Acquisition described in note 2, the Company issued a
promissory note in the amount of $330,000 (principal and interest) payable in 36
equal  monthly  installments  of principal and interest that began in June 1996.
The outstanding  balance of the promissory note at December 31, 1996 is $245,810
of which $97,167 is currently payable on such date.

(9)  Equipment Notes Payable

Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>

                                                 1996            1995 
                                                 ----            ----
<S>                                           <C>             <C> 

Various secured  equipment  financing  notes, 
     payable  in monthly  installments
     aggregating  $51,111 including  interest 
     at 8.2% maturing from October 1999
     through June 2003 secured by equipment 
     with a net book value of $2,236,856 
     at December 31, 1996                      $2,271,241      2,640,996

Secured equipment financing note payable to 
     a bank payable in monthly installments 
     of $2,416 with interest at 7.9% 
     through October 1997                          49,295        73,302
Other                                              38,953        91,370
                                               ----------    ----------     
                                                2,359,489     2,805,668
Less current maturities                           456,651       386,787
                                               ----------    ----------      
                                               $1,902,838     2,418,881
                                               ==========    ==========
</TABLE>

Notes payable aggregating $77,866 at December 31, 1996 are personally guaranteed
by the president and two vice presidents.

The aggregate  maturities  of equipment  notes payable for each of the five
years  subsequent  to December 31, 1996 are as follows:  1997:  $456,651;  1998:
$454,980; 1999: $406,299; 2000: $335,678 and 2001: $282,352.

     (Continued)

<PAGE>


(10) Leases

The Company is obligated under various capital leases for furniture and fixtures
and certain machinery and equipment that expire at various dates during the next
five  years.  At  December  31,  1996 and 1995,  the  gross  amount of plant and
equipment and related  accumulated  amortization  recorded  under capital leases
were as follows:

<TABLE>
<CAPTION>

                                            1996            1995 
                                            ----            ----
<S>                                      <C>             <C> 

Machinery and equipment                  $4,917,515      3,728,535
Furniture and fixtures                            -         40,615
                                         ----------     ----------   
                                          4,917,515      3,769,150
Less accumulated amortization             1,850,842      2,220,566
                                         ----------     ----------
                                         $3,066,673      1,548,584
                                         ==========     ==========
</TABLE>

The Company  occupies  its  premises  pursuant  to a lease with a related  party
expiring  December 31, 2007,  with a five year renewal option (see note 14). The
lease  provides for annual  rentals,  as defined,  payable  monthly,  as well as
payments  for a share of  maintenance,  insurance,  and real estate  taxes.  The
Company is also obligated under various noncancelable equipment leases.

Rent expense for the years ended December 31, 1996,  1995 and 1994 was $673,188,
$451,729 and $429,250, respectively.

Future minimum lease payments under noncancelable operating leases (with initial
remaining  lease  terms in excess of one year) and the  present  value of future
minimum capital lease payments as of December 31, 1996 are:

<TABLE>
<CAPTION>

                                          Capital        Operating
                                           Leases         Leases
                                          -------        ---------     
<S>                                      <C>            <C> 

 Year ending December 31:
          1997                           $ 922,605        886,297
          1998                             785,514        660,907
          1999                             759,482        514,440
          2000                             517,605        483,606
          2001                             220,460        443,949
          2002 and thereafter              280,759      2,195,442
                                         ---------      --------- 
Total minimum lease payments             3,486,425     $5,184,641
                                                       ========== 
Less amount representing interest (at
   rates ranging from 8.1% to 20.9%)       601,338
                                         ---------

Net principal portion                    2,885,087
Less portion due within one year           692,852
                                         ---------

Long-term portion                      $ 2,192,235
                                       ===========
</TABLE>
 
     (Continued)

<PAGE>


Liabilities  under  certain  capital  leases are  personally  guaranteed  by the
president and two vice-presidents.

(11) Stockholders' Equity

(a)  Stock Option

Concurrent  with the merger with RCL, the  Company's  stockholders  approved the
adoption of the 1995 Incentive  Stock Option Plan (the "Plan").  An aggregate of
500,000 shares of the Company's  common stock are reserved for issuance upon the
exercise of options pursuant to the Plan. Officers, key employees, directors and
certain  consultants  and advisors to the Company are eligible to participate in
the Plan.  The Plan may issue  incentive  stock options and  nonqualified  stock
options. Options are granted at the market price on the date of grant and expire
in ten years.  After six months from the grant date,  options  become vested and
fully  exercisable.  At December 31, 1996, there were 376,500  additional shares
available for grant under the Plan.

Changes in options outstanding are as follows:
<TABLE>
<CAPTION>

                                1996                          1995
                      ------------------------       -------------------------
                      Weighted                       Weighted
                      average        Shares          average         Shares
                      exercise       subject         exercise        subject
                      price          to option       price           to option
                      ---------      ---------       ---------       ---------       
<S>                    <C>           <C>             <C>             <C>

Beginning of year      $4.125         62,500          $     -         62,500
Options granted          2.89         61,000            4.125         75,000
End of year              3.51        123,500            4.125         62,500
Exercisable at year end     -         88,500                -              -

</TABLE>

The options  outstanding  as of December  31, 1996 are  summarized  in ranges as
follows:

<TABLE>
<CAPTION>

                  Range of       Weighted        Number of       Weighted
                  exercise       average          options         average
                  price       exercise price    outstanding    remaining life
                  ----------  ---------------   ------------   ---------------
<S>                <C>           <C>               <C>           <C>    
                   $  2.00         2.00             35,000        9-3/4 years
                   $  3.25         3.25              1,000        9 years
                   $ 4.125        4.125             87,500        8-3/4 years
                                                   -------
                                                   123,500
                                                   =======                      
</TABLE>

The per share weighted  average fair value of stock options  granted during 1996
and 1995 was $1.43 and $1.90,  respectively,  on the date of the grant using the
Black  Scholes   option-pricing   model  with  the  following  weighted  average
assumptions:  1995 and 1996 - expected  dividend yield of 0%, risk free interest
rate of 6.5%,  expected stock  volatility of 26%-35% and an expected option life
of 7.5 years.

     (Continued)

<PAGE>


The  Company  applies  APB  Opinion  No.  25 in  accounting  for its  Plan  and,
accordingly,  no compensation  cost has been recognized for its stock options in
the financial statements.  Had the Company determined compensation cost based on
the fair value at the grant date for its stock  options  under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts  indicated
below:

<TABLE>
<CAPTION>

                                     1996          1995
                                     ----          ----
<S>                               <C>             <C> 

Net earnings:
     As reported                  $1,453,986      500,529
     Pro forma                     1,368,329      478,350

Net earnings per share:
     As reported:                       $.29          .18
     Pro forma                           .27          .18
</TABLE>


Pro forma net earnings reflect only options granted in 1996 and 1995. Therefore,
the full impact of  calculating  compensation  cost for stock options under SFAS
No.123 is not reflected in the pro forma net earnings  amounts  presented  above
because compensation cost is reflected over the options' vesting period.

(b)  Warrants

The Company has  2,700,000  Class A warrants  outstanding  that were  originally
issued in connection with RCL's initial public offering (IPO).  The warrants are
separable  and  tradable  and each  warrant  entitles the holder to purchase one
share of the  Company's  common  stock at $5.50 per share  prior to  November 9,
1999. The warrants may be redeemed,  at the Company's option, at a price of $.05
per warrant provided the closing bid price equals or exceeds $9.50 per share for
the 20 trading days within a period of 30 consecutive  trading days prior to the
notice of redemption.

In connection with the merger with RCL, warrants to purchase 1,000,000 shares of
common stock were issued at exercise  prices  ranging from $7.00 to $10.00.  The
warrants expire on November 9, 2002.

In connection with RCL's IPO,  warrants to purchase 135,000 units were issued to
the  underwriter   (Underwriters'  Warrants).  The  Underwriters'  Warrants  are
exercisable  at a price  of  $9.00  per  unit  consisting  of one  share  of the
Company's  common stock and two Class A warrants  (Units) and expire on November
9, 1998.  The exercise  price of the Class A warrants  contained in the Units is
$5.50 per share.

During 1996, 168,000 warrants were repurchased for $32,400.

(12) Notes Receivable-Stockholders

In December 1991, the president and two vice presidents  were advanced  $536,360
in exchange for notes  receivable.  These notes were  unsecured and provided for
interest  at 9%. The  balance  of the notes at  December  31,  1996 and 1995 was
$49,676 and $99,352. The above amounts are included with notes receivable in the
accompanying balance sheets.



     (Continued)

<PAGE>


(13) Income Taxes

The provision  (benefit) for income taxes for the years ended December 31, 1996,
1995 and 1994 consists of the following:

<TABLE>
<CAPTION>
                                      1996            1995            1994
                                      ----            ----            ----
<S>                               <C>               <C>             <C> 
                                                                            
Current
    Federal                        $931,400         150,000          278,000
    State                           228,000          50,000           89,000
                                  ---------       ---------         --------  

                                  1,159,400         200,000          367,000
                                  ---------       ---------         --------  

Deferred:
    Federal                         (66,640)        126,000           54,400
    State                           (11,760)         42,000           17,600
                                  ---------       ---------         --------  
                                    (78,400)        168,000           72,000
                                  ---------       ---------         --------  

                                 $1,081,000         368,000          439,000
                                  =========       =========         ========  
</TABLE>

A reconciliation  between the Company's effective tax rate and the statutory tax
rate is as follows, at December 31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
                                      1996            1995            1994
                                      ----            ----            ----
<S>                                   <C>             <C>             <C>

Statutory tax rate                    34.0%           34.0%           34.0%
State income taxes, net of
     federal benefit                   8.5             7.0             7.6
Other                                   .1             1.4             5.1
                                      -----           -----           -----   
                                      42.6%           42.4%           46.7%
                                      =====           =====           =====     
</TABLE>

The tax effects of temporary  differences that give rise to significant  portion
of the net deferred tax liability at December 31, 1996 and 1995 is as follows:

<PAGE>

<TABLE>
<CAPTION>

                                                      1996            1995
                                                      ----            ----
<S>                                                 <C>            <C> 

Deferred tax assets:
      Inventory valuation                           $  66,000          29,000
      Allowance for doubtful accounts                 333,000         229,000
      Uniform cost capitalization for inventory        25,000          29,000
      Accrued vacation                                143,000         169,000
      Accrued salaries and commissions                 57,000          37,594
      Sales return allowance                           66,000               -  
      State net operating loss carryforward            32,000          31,000
      Investment tax credit carryforwards             681,000         681,000
                                                   ----------       ---------    
        Total deferred tax assets                   1,403,000       1,205,594
                                                   ----------       ---------
    Less valuation allowance                         (703,000)       (712,000)
                                                   ----------       ---------
        Net deferred tax assets                       700,000         493,594
                                                   ----------       ---------

Deferred tax liability:
      Accelerated depreciation for tax purposes       988,000         860,000
                                                   ----------       ---------  
                                                      988,000         860,000
                                                   ----------       ---------

        Net deferred tax liability                 $  288,000         366,406
                                                   ==========       =========   

</TABLE>

The  valuation  allowance for deferred tax assets as of January 1, 1995 and 1996
was $712,000 and $703,000,  respectively.  The net change in the total valuation
allowance  for the years ended  December  31, 1996 was a decrease of $9,000.  In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some  portion or all of the  deferred tax assets
will not be  realized.  The  ultimate  realization  of  deferred  tax  assets is
dependent  upon the  generation of future  taxable  income during the periods in
which those temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning  strategies in making this assessment.  Based upon the level of
historical  taxable  income and  projections  for future taxable income over the
periods which the deferred tax assets are deductible,  management  believes that
it is more  likely  than not the  Company  will  realize  the  benefits of these
deductible differences, net of the existing valuation allowances at December 31,
1996. The amount of the deferred tax asset considered realizable, however, could
be reduced in the near term if estimates  of future  taxable  income  during the
carryforward period are reduced.

At December 31, 1996,  the Company has available New York State  investment
tax credit  carryforwards  aggregating  approximately  $681,000 expiring through
2006.  The  Company  has New  York  and New  Jersey  state  net  operating  loss
carryforwards of $320,000 expiring through 2011.

(14) Related Party Transactions

The Company leases one of its operating facilities from an entity which is owned
by several officers, directors and stockholders of the Company. The lease is for
a fifteen year term expiring in 2007 and requires minimum annual rental payments
of $348,000. Rentals paid to the entity were $348,000 in each of the years ended
December 31, 1996, 1995 and 1994, and a security deposit of $115,000 paid on the
lease is included in security deposits and other assets at December 31, 1996 and
1995, respectively.

     (Continued)

<PAGE>


On  January  1,  1996,  the  Company   assumed  three  leases  with  a  net
capitalizable value of $2,077,388 from the officer-owned entity. The leases were
assumed without material modification as to the terms. The lease obligations and
related  assets  were  recorded at the net  present  value of the minimum  lease
payments in accordance with SFAS No.  13.  The  underlying  assets  are being
depreciated over the bases' remaining lives.

(15) Commitments and Contingencies

In 1991, the Company entered into a consulting contract with its former Chairman
which  expired on August 31,  1996.  Consulting  fees of  $53,600,  $80,400  and
$80,400 were paid pursuant to the contract in 1996, 1995 and 1994, respectively.

In 1992,  the  Company  entered  into  consulting  agreements  with three of its
shareholders.  Each agreement was originally for a seven-year term, and provided
for a minimum  fee of $25,000  per year.  Each of these  agreements  was revised
effective  March 1, 1995, to provide for an  expiration  date of August 31, 2001
and to increase the minimum annual fee to $37,333.  The aggregate  expense under
these  agreements  was $132,412,  $117,500 and $87,500 for 1996,  1995 and 1994,
respectively.

In 1992,  the Company  entered into an  employment,  commission  and  consulting
agreement  with the former owner of a  commercial  printing  entity  acquired in
1992.  The  agreement  provided  for the  payment of an annual  base salary plus
commissions  through April 1994.  The agreement also provided for the payment of
deferred  commissions  through April 1995 and of  consulting  fees through April
1996.  Expenses  related to the agreement  approximated  $196,000,  $160,000 and
$258,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

The  Company is  involved  in various  claims and legal  actions  arising in the
ordinary  course  of  business.  In the  opinion  of  management,  the  ultimate
disposition  of these  matters will not have a material  effect on the Company's
financial position, results of operations or liquidity.

(16) Benefit Plans

The Company  maintains an Employee  401(k)  Savings Plan.  The plan is a defined
contribution  plan which is  administered  by the  Company.  All  employees  are
eligible for voluntary participation upon completing three consecutive months of
service.  The plan  provides  for growth in savings  through  contributions  and
income  from  investments.  It is  subject  to the  provisions  of the  Employee
Retirement  Income Security Act of 1974 (ERISA),  as amended.  Plan participants
are allowed to  contribute  a specified  percentage  of their base  salary.  The
Company  matches  the  participants'  contributions  up  to a  maximum  of 2% of
compensation.  The costs  related to the plan  approximated  $117,700, $116,500
and $73,300  for the years ended  December  31,  1996,  1995 and 1994,
respectively.

(17) Fair Value of Financial Instruments

FASB Statement No.107,  "Disclosures about Fair Value of Financial Instruments",
defines  the fair  value of a  financial  instrument  as the amount at which the
instrument could be exchanged in a current transaction between willing parties.

The carrying value of all financial instruments classified as a current asset or
current  liability  are deemed to  approximate  fair value  because of the short
maturity of these investments.  In the opinion of management, the fair values of
equipment  notes  payable,  long-term debt and capital leases are not materially
different from the carrying value.

     (Continued)

<PAGE>


(18) Business and Credit Concentrations

Most of the  Company's  customers  are located in the  northeastern  United
States.  Three  customers  individually  accounted  for 21%,  23% and 27% of the
Company's sales for 1996, 1995 and 1994, respectively.  Accounts receivable from
two and three customers  comprised  approximately  15% and 21% of total accounts
receivable at December 31, 1996 and 1995, respectively.

The Company  generally grants credit based upon  analysis of the  customer's
financial position and previously established buying and selling patterns.

(19) Unaudited Quarterly Financial Information

The  following is a summary of quarterly  operating  results for fiscal 1996 and
1995 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                     1996
                                                     ----   
                                      First     Second    Third     Fourth
                                      quarter   quarter   quarter   quarter
                                      -------   -------   -------   -------     
<S>                                   <C>       <C>        <C>       <C> 

Net sales                             $8,304    10,152     12,773    11,346
Gross profit                           1,732     2,407      3,538     3,234
Net income                                17       231        671       535
Net income per share                     .00       .05        .13       .10
                                      ======    ======     ======    ======
</TABLE>

<TABLE>
<CAPTION>

                                                     1995
                                                     ----  
                                      First     Second    Third     Fourth
                                      quarter   quarter   quarter   quarter
                                      -------   -------   -------   -------

<S>                                   <C>        <C>       <C>       <C>  
Net sales                             $8,513     8,552     10,395    8,689
Gross profit                           1,806     1,720      2,084    1,870
Net income                               109        46        190      155
Net income per share                     .04       .02        .08      .04
                                      ======    ======     ======    ======
</TABLE>

Earnings per share  calculations  for each of the quarters are based on weighted
average numbers of shares outstanding in each period,  therefore, the sum of the
quarters does not necessarily equal the years' earnings per share.

<PAGE>

ITEM 9:   Changes in and Disagreements With Accountants on Accounting and 
          Financial Disclosure

     On November 10,  1995,  the Board of  Directors  voted to  terminate  Price
Waterhouse  LLP as regular  auditors  for the  Company  and to retain  KPMG Peat
Marwick LLP as the regular  auditors for the Company.  KPMG Peat Marwick LLP had
been the regular  auditors  for Old Disc prior to the Merger and the Board cited
their experience and knowledge of Old Disc in deciding to retain them.

     The reports of Price  Waterhouse LLP on the financial  statements for years
ended March 31, 1994 and 1995 did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty,  audit scope or
accounting  principles.  During the years ended March 31, 1994 and 1995, and the
period  ended  November  10,  1995,  there  were  no  disagreements  with  Price
Waterhouse  LLP on any matter of accounting  principles or practices,  financial
statement disclosure,  or auditing scope or procedure,  which disagreements,  if
not resolved to the  satisfaction of Price  Waterhouse LLP, would have caused it
to make reference to the subject matter of the  disagreement  in connection with
this report.

                                    PART III

     In  connection  with  the  1997  Annual  Meeting  of  Stockholders  of  the
Registrant,  the Registrant intends to furnish Stockholders with proxy materials
which set forth the information required by Items 10, 11, 12 and 13 of this Part
III. Copies of such material will be duly filed with the Securities and Exchange
Commission pursuant to Rule 14a-(6)(c) promulgated under the Securities Exchange
Act of 1934,  as  amended,  not later  than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.

<PAGE>



                                     PART IV

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  Financial Statements:

     (1)   See Index to Consolidated Financial Statements on page 17.

     (2)  The  following  financial  statement  schedule  for  the  years  ended
          December 31, 1994, 1995 and 1996 is submitted herewith:

          Schedule II - Valuation and Qualifying Accounts

          All  other  schedules  are  omitted  because  they  are not  required,
          inapplicable,  or the  information  is  included  in the  Consolidated
          Financial Statements or the Notes thereto.

     (3)  Exhibits:

          See Exhibit Index for list of exhibits filed with this report.

(b)  Reports on Form 8-K:

     None

<PAGE>


                                    SCHEDULE

                               DISC GRAPHICS, INC.

                 Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>

    Col. A               Col. B         Col. C         Col. D         Col. E         Col. F
                         Balance at     Charged to                                   Balance at
                         Beginning      Cost and                                     End of
  Classification         of Period      Expense        Deductions     Other          Period
  --------------         -----------    -----------    -----------    --------       ----------- 
<S>                      <C>             <C>            <C>           <C>                <C> 

For the year ended
   December 31, 1994:
   Allowance for
   doubtful accounts
   (deducted from
   accounts
   receivable)           434,000        145,000         117,000                        462,000
For the year ended
   December 31, 1995:
   Allowance for
   doubtful accounts
   (deducted from
   accounts receivable)  462,000        197,000         165,000                        494,000

For the year ended
   December 31, 1996:
   Allowance for
   doubtful accounts
   (deducted from
   accounts receivable)  494,000        497,000         147,000                        844,000

------------

(1) Deductions  relate to  uncollectible  accounts charged off to valuation
accounts, net of recoveries.
</TABLE>

<PAGE>


EXHIBIT INDEX

Exhibit    Description

   2      Agreement and Plan of Merger dated as of May 8, 1995 between the
          Registrant  and  Disc  Graphics,  Inc.  (filed  as  Exhibit  2.1 to 
          the Form S-4 Registration  Statement,  Amendment  No. 1 dated  August
          31,  1995  [File  No. 33-94068] and incorporated herein by reference).

 3.a      Restated  Certificate of  Incorporation  of the  Registrant  (filed as
          Exhibit 4.a to the Current  Report on Form 8-K dated October 27, 1995,
          as amended by the Form 8-K/A Amendment No. 1 thereto).

 3.b      Amended and Restated By-Laws of the Registrant.
 
 4.a      Restated  Certificate of  Incorporation  of the  Registrant  (filed as
          Exhibit 4.1 to the Current  Report on Form 8-K dated October 27, 1995,
          as amended by the Form 8-K/A Amendment No. 1 thereto).

 4.b      Voting and Registration  Rights Agreement dated October 30, 1995 among
          the Registrant and its shareholders listed in Exhibit 1 thereto (filed
          as Exhibit  4.b to the  Current  Report on Form 8-K dated  October 27,
          1995, as amended by the Form 8-K/A Amendment No. 1 thereto).

 4.e      Redeemable Warrant Agreement between the Registrant and American Stock
          Transfer & Trust  Company,  as warrant  agent,  including  the form of
          Certificates  representing  the Class A Warrants (filed as Exhibit 4.3
          to the Form S-1 Registration Statement, declared effective November 9,
          1993 [File No. 33-62980] and incorporated herein by reference).

 4.f      Form of 60 Merger Warrants with Schedule  indicating  particular terms
          of each individual warrant (filed as Exhibit 4.f to the Current Report
          on Form 8-K dated  October  27,  1995,  as  amended  by the Form 8-K/A
          Amendment No. 1 thereto).

 4.g      1995 Incentive Stock Option Plan (filed as Exhibit 4.5 to the Form 
          S-4 Registration Statement, Amendment No. 1 dated August 31, 1995 
          [File No. 33-94068] and incorporated herein by reference).

 4.h      Agreement dated as of October 27, 1995 between certain stockholders of
          the Registrant and certain stockholders of Disc Graphics,  Inc., a New
          York  corporation  (filed as Exhibit 4.h to the Current Report on Form
          8-K dated October 27, 1995, as amended by the Form 8-K/A Amendment No.
          1 thereto).

 4.i      Form of certificate evidencing shares of Common Stock (filed as an
          Exhibit to the Registration Statement on Form S-1, File No. 33-62980,
          declared effective on November 9, 1993).

 10.a     Credit Agreement dated February 26, 1997 between the Registrant and 
          KeyBank National Association.

 10.b     Security Agreement dated February 26, 1997 between the Registrant and 
          KeyBank National Association.

<PAGE>

 10.c     Asset Purchase  Agreement  dated as of May 17, 1996, by and among
          Disc Graphics,  Inc.,  Pointille,  Inc. and the  shareholders  of
          Pointille  (filed as Exhibit 2 to the Current  Report on Form 8-K
          dated May 18, 1996.)

 10.d     Form of Indemnification Agreement between RCL and the directors and 
          officers of the Registrant (filed as an Exhibit  to the Registration
          Statement on Form S-1, File No. 33-62980, declared effective on
          November 9, 1993).

 10.e     Management Agreement between RCL and RCL Capital Partners, Inc.,
          formerly RCL Management Corp., dated October 1, 1992 (filed as an 
          Exhibit  to the Registration Statement on Form S-1, File No. 33-62980,
          declared effective on November 9, 1993).     
 
 10.f     Agreement of Lease, dated as of December 1, 1992 between Disc and
          Horizon Equity Partners, LP (filed as an Exhibit to the Registration
          Statement on Form S-4, File No. 33-94068 declared effective on
          October 30, 1995).

 10.g     Agreement of Lease, dated as of September 15, 1993 between Disc and
          and Everis Realty Corp. (filed as an Exhibit to the Registration
          Statement on Form S-4, File No. 33-94068 declared effective on
          October 30, 1995).

 10.h     Agreement of Lease, dated as of June 14, 1995 between Disc Graphics
          Label Group, Inc. and Kertzner Associates, Ltd. (filed as an Exhibit
          to the Registration Statement on Form S-4, File No. 33-94068 
          declared effective on October 30, 1995).

 10.i     Form of Consulting Agreement, dated as of December 12, 1991, between 
          Disc and Timothy F. Healey & Co., Inc.(filed as an Exhibit
          to the Registration Statement on Form S-4, File No. 33-94068 
          declared effective on October 30, 1995).
 
 10.j     Form of Consulting Agreement, dated as of December 12, 1991, between 
          Disc and Holding Services Corp.(filed as an Exhibit to the 
          Registration Statement on Form S-4, File No. 33-94068 declared 
          effective on October 30, 1995).
    
 10.k     Form of Consulting Agreement, dated as of December 12, 1991, between 
          Disc and Investment Services Corp.(filed as an Exhibit
          to the Registration Statement on Form S-4, File No. 33-94068 
          declared effective on October 30, 1995).

 10.l     Form of Employment Agreement, dated June 28, 1995, between Disc and
          Donald Sinkin (filed as an Exhibit to the Registration Statement on 
          Form S-4, File No. 33-94068 declared effective on October 30, 1995).

 10.m     Form of Employment Agreement, dated June 28, 1995, between Disc and
          John A. Rebecchi (filed as an Exhibit to the Registration Statement on
          Form S-4, File No. 33-94068 declared effective on October 30, 1995).

 10.n     Form of Employment Agreement, dated June 28, 1995, between Disc and
          Steven Frey (filed as an Exhibit to the Registration Statement on 
          Form S-4, File No. 33-94068 declared effective on October 30, 1995).

 10.o     Form of Purchase Agreement, dated as of March 20, 1995, between Disc
          and KBA-Planeta North America, Inc. (filed as an Exhibit to the 
          Registration Statement on Form S-4, File No. 33-94068 declared 
          effective on October 30, 1995).     

 21       The following lists the Company's significant subsidiaries, all of 
          which are wholly-owned by the Company:

                                                 State of
          Name of Subsidiary                   Incorporation
          ------------------                   -------------      
          Disc Graphics Label Group, Inc.        Delaware
          Four Seasons Litho, Inc.               New York

 27       Financial Data Schedule

<PAGE>



     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly authorized on the 26th day of 
March, 1997.

                                DISC GRAPHICS, INC.


                                By:/s/ Donald Sinkin
                                     Donald Sinkin, Chairman of the Board,
                                     Chief Executive Officer and President
                                     (Principal Executive Officer)


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been  signed  below on March 26, 1997 by the  following  persons in 
the capacities indicated:


/s/ Donald Sinkin              Chairman of the Board, Chief Executive Officer
Donald Sinkin                  and President (Principal Executive Officer)

/s/ Stephen Frey               Vice President of Operations and Director
Stephen Frey                   (Principal Operating Officer)

/s/ Margaret Krumholz          Chief Financial Officer
Margaret Krumholz              (Principal Accounting Officer)

/s/ John Rebecchi              Vice President of Sales and Marketing
John Rebecchi                  and Director        

/s/ Daniel Levinson            Director
Daniel Levinson

/s/ Seymour W. Zises           Director
Seymour W. Zises

/s/ Mark L. Friedman           Director
Mark L. Friedman