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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                     ------
                                    Form 10-K
                                   (Mark One)
[X] Annual report  pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 For the fiscal year ended December 31, 1997
                                       or
[ ] Transition  report  pursuant  to  Section  13 or  15(d) of the
            Securities Exchange Act of 1934 For the transition period
                              from _____ to _____

                         Commission file number 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 [ ]

  At March 30,  1998,  the aggregate  market value of the voting stock held by
non-affiliates  of  Registrant  was  approximately  $9,117,554  based  on the
closing price of the Common Stock on the Nasdaq Stock Market on that date.

  At March 30, 1998, the Registrant  had  outstanding  5,440,256  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, ("Disc Graphics,  Inc." 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,  Disc Graphics,  Inc.  adopted a December 31 fiscal
year.

General

  Disc  Graphics,  Inc.,  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.

     Disc Graphics,  Inc.'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  Disc
Graphics,  Inc. to offer a service and cost advantage over its competitors;  and
(3) to develop innovative  packaging designs and techniques for new and existing
markets.
<PAGE>
     Disc  Graphics,  Inc. is  actively  involved  in  investigating  additional
printing and  packaging  related  business  opportunities,  including  potential
acquisitions  similar to the  acquisition  of Benham  Press,  Inc.  (Benham),  a
commercial  printer,  in October  1997.  However,  Disc  Graphics,  Inc. has not
entered into any definitive  agreement with respect to any such acquisition.  In
addition, there can be no assurance that Disc Graphics, Inc. will consummate any
potential  acquisition,  or if  completed,  that  any such  acquisition  will be
profitable for Disc Graphics, Inc.

     Historically,   Disc  Graphics,   Inc.  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,  Disc
Graphics,  Inc.  acquired Four Seasons  Litho,  Inc., a commercial  printer with
revenues of  approximately  $3 million per year; in 1996,  Disc  Graphics,  Inc.
acquired Pointille,  Inc., a packaging printer with revenues of approximately $8
million per year and in 1997, Disc Graphics,  Inc. acquired substantially all of
the assets and certain  liabilities of Benham and has since  integrated  each of
their manufacturing  facilities and sales/marketing programs into Disc Graphics.
Disc  Graphics,  Inc.  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,  expanding Disc Graphics,  Inc.'s
product line and continuing ongoing internal expansion.

     Disc   Graphics,   Inc.'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 65% of Disc Graphics, Inc.'s revenue in 1997 was derived from
the  manufacture  and sale of  paperboard  folding  cartons.  An industry  trade
publication  has estimated that in 1997 there were over 300 companies  operating
473  folding  carton  manufacturing  plants in the  United  States and the total
revenues  from the sale of  folding  cartons  was  approximately  $5.1  billion,
reflecting  a 5.5%  decline  from 1996.  The  reduction in the number of folding
carton  plants and a decline in industry  revenues  reflects  the loss of market
share to alternative  forms of packaging and a consolidation  or closure of some
U.S. plants.

     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.  Disc  Graphics,  Inc.
<PAGE>
generally competes with independent  manufacturers.  Disc Graphics, Inc. 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.
Disc  Graphics,  Inc.  has  concentrated  in  markets,  such as the home  video,
software,  cosmetics,  music and pharmaceutical packaging markets, which utilize
those  techniques  to a  significant  extent.  Disc  Graphics,  Inc. has devoted
substantial  resources toward developing the specialized  processes  required in
such markets.

     Disc Graphics, Inc.'s business includes commercial printing, book component
printing and labels. Industry trade sources have estimated that the total United
States commercial  printing market in 1997 was  approximately  $78 billion.  The
industry is  fragmented  with many small  printing  companies  serving  regional
markets. For example, within the New York City Metropolitan area, there are over
3,000 printing  establishments  with 76% having fewer than ten  employees.  Disc
Graphics,  Inc. is listed in the top 200 printers in the United States, based on
revenues.  Based on 1996 revenues, Disc Graphics, Inc. was ranked 142 in the top
500 printing companies in the United States by an industry trade publication.

Products

     Video/Entertainment Software Packaging
     --------------------------------------
     Disc Graphics,  Inc.  manufactures  video packaging,  including bottom load
video  sleeves,  multi-packs  and  specialty  items.  Disc  Graphics,  Inc.  has
historically  concentrated on the catalogue and special interest  video/software
markets.  Disc Graphics Inc.'s  catalogue  customers  typically have licensed or
purchased  products  from major movie  production  studios.  As in prior  years,
special  interest  video  continues  to be a  growing  segment  of  the  market.
Packaging for these videos is often sold to independent  distributors  and video
tape duplicators. Through these distributors and duplicators Disc Graphics, Inc.
has produced  packaging for many Fortune 500 companies.  Disc  Graphics,  Inc.'s
west coast operation is producing video packaging for major film studios.

     Software packaging continues to be a growing segment of Disc Graphics, Inc.
revenues.  Disc  Graphics,  Inc.  produces  packaging  for  some of the  largest
entertainment   software  companies   including  GT  Interactive   Software  and
Activision.  In  addition,  Disc  Graphics,  Inc.  has  made  in-roads  into the
applications  software market producing packaging for companies such as Computer
Associates.

     Music/Audio Packaging
     ---------------------
     Disc Graphics, Inc. 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.
<PAGE>
     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,  Disc  Graphics,  Inc. has assembled a combination  of
skilled  workers,  advanced  equipment,  and  production  systems  to meet these
requirements.

     Disc Graphics,  Inc. 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,  Disc Graphics,  Inc.
manufactures  packaging for special interest and secondary markets.  Many of the
largest  music/audio  companies produce or distribute  product from the mid-west
region of the United  States.  The recent  acquisition  of Benham Press provides
Disc  Graphics,  Inc.  with a  location  in  close  proximity  to many of  these
distribution centers.

     The other major segment of this market is audio publishing packaging.  Disc
Graphics,  Inc.  believes that it has a significant  share of this market.  Disc
Graphics,  Inc.'s principal  customers include two of the largest  publishers in
this market. Disc Graphics,  Inc. 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. Disc Graphics,  Inc. 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 Disc Graphics,  Inc.'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
Disc Graphics,  Inc.'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
     --------------------------
     Disc Graphics, Inc. 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
promotions  for  the  major  cosmetic  companies  or  educational  packages  for
pharmaceutical  companies.  Disc Graphics,  Inc. sells packaging for this market
both directly and through brokers representing national brands and private label
companies.
<PAGE>
     Commercial Printing
     -------------------
     In the area of commercial printing,  Disc Graphics,  Inc. prints brochures,
posters, sell sheets and other promotional material.  Disc Graphics, Inc. prints
book  jackets  and  covers,  as well as  children's  books and "cut  labels" for
vitamin and food packaging.

     Labels
     ------
     Disc Graphics,  Inc. 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

     Disc  Graphics,  Inc.'s  revenues  are derived from  several  markets.  The
largest market as a percentage of total 1997 net sales, was  video/entertainment
software which accounted for  approximately  30%;  followed by consumer  product
packaging,   which  accounted  for  approximately   25%;  next  was  music/audio
packaging,  which accounted for  approximately  18%; then  commercial  printing,
which accounted for approximately  12%; then  pharmaceutical/vitamin  packaging,
which   accounted  for   approximately   9%;  and  labels  which  accounted  for
approximately 6%.

     Disc Graphics, Inc.'s sales are primarily the result of direct solicitation
by its executive  officers and full-time  sales people.  Disc  Graphics,  Inc.'s
package  engineering  staff  assists  customers  with  new  package  design  and
development.  Because Disc Graphics, Inc. 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 Notes thereto located
elsewhere in this Annual Report.

Seasonality

     Historically, Disc Graphics, Inc.'s revenues have been moderately seasonal.
In the last two quarters of 1997 and 1996,  Disc Graphic,  Inc.'s  revenues were
approximately  54% and 56% of annual sales,  respectively.  This  seasonality is
primarily the result of certain markets which Disc Graphics, Inc. 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 74% of Disc Graphics, Inc.'s sales in 1997,
the revenues of Disc Graphics, Inc. are typically greater in the last six months
of the calendar year versus the first six months.
<PAGE>
Competition

     Disc  Graphics,  Inc.  competes  with a small number of printed  paperboard
packaging companies within each of its markets. In the music, video and software
industries, Disc Graphics, Inc. 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.  Disc  Graphics,  Inc.
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.

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

Employees

     As of  February  15,  1998,  Disc  Graphics,  Inc.  had  approximately  456
employees.  304 of these employees are located in the Company's  Hauppauge,  New
York facility,  with 246 serving in  manufacturing  capacities and 58 serving in
selling and administrative capacities.  Eighty-five employees are located in the
Company's  Burbank,  California  facility,  with  75  serving  in  manufacturing
capacities and 10 serving in selling and administrative capacities.  Twenty-four
employees are located in the Company's  Rockaway,  New Jersey facility,  with 21
serving in manufacturing  capacities and 3 serving in selling and administrative
capacities.  Forty-three  employees are located in the  Company's  Indianapolis,
Indiana facility, with 30 serving in manufacturing  capacities and 13 serving in
selling and administrative capacities. A majority of the manufacturing employees
located in Burbank,  California  facility are represented by a labor union. Disc
Graphics, Inc. considers its relationship with its employees to be satisfactory.

Materials

     Disc Graphics,  Inc. 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,  Disc  Graphics,  Inc. 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 Disc Graphics,  Inc. will
not encounter  difficulty in obtaining  supplies of such material to fulfill its
requirements.
<PAGE>
Equipment

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

Regulation

     Disc  Graphics,  Inc.'s  activities  are subject to various  environmental,
health and employee  safety laws.  Disc Graphics,  Inc. 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 Disc  Graphics,  Inc.'s capital
expenditures, earnings or competitive position, and Disc Graphics, Inc. does not
anticipate  that such  compliance  will have a material effect on Disc Graphics,
Inc. in the future.  Although Disc Graphics,  Inc. 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.

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 the founder of Colt
     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 Specialty Retail Group, Inc. and several other companies.

     Mark L.  Friedman is a Director of the  Company,  and is counsel to the New
     York law firm of Baer Marks & Upham, LLP.

     Margaret M. Krumholz is Chief Financial Officer of the Company.
<PAGE>
ITEM 2.   Properties

     Disc Graphics, Inc.'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 Disc Graphics, Inc. through a limited partnership and Disc
Graphics,  Inc. believes that the lease terms were and are at least as favorable
to Disc  Graphics,  Inc. as the lease terms which could have been  obtained from
unaffiliated  third  parties for similar  office,  manufacturing  and  warehouse
space.  Disc Graphics,  Inc.'s warehouse  facility is a building adjacent to its
executive offices of which 40,000 square feet is occupied by Disc Graphics, Inc.
The monthly lease payment for the warehouse is $12,500 and the lease  terminates
on August 31, 1998. Disc Graphics, Inc. also leases an office in Manhattan.  The
monthly  lease  payment  for the  office is $2,800 and the lease  terminates  on
August 9, 1998. Disc Graphics, Inc. also maintains an 8,400 square foot printing
facility in Rockaway,  New Jersey.  The monthly lease payment for the New Jersey
facility is $3,458 and the lease  terminates  on June 13, 1998.  Disc  Graphics,
Inc. 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.  Disc Graphics,  Inc. also owns a 27,000 square foot
manufacturing  facility in Indianapolis,  Indiana.  The monthly mortgage payment
for this facility is $8,253 and  terminates  on February 1, 2008.  Management of
Disc  Graphics,  Inc.  believes that the facilities are adequate to meet current
operational needs.

ITEM 3.   Legal Proceedings

     From time to time, Disc Graphics,  Inc. 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 Disc Graphics, Inc.

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

     During the fourth quarter of the year ended  December 31, 1997,  there were
no matters  submitted  to a vote of the Disc  Graphics,  Inc.  security  holders
through the solicitation of proxies or otherwise.
<PAGE>
                                     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 Nasdaq  SmallCap
Market  under the symbol  DSGR.  From  October  31, 1995 to May 28,  1996,  Disc
Graphics,  Inc.'s Common Stock was listed on the American  Stock  Exchange under
the symbol DGI The table set forth below  contains the range of the high and low
closing  bid  prices  on the  Nasdaq  SmallCap  Market  for the  quarters  ended
September 30, 1996, December 31, 1996, March 31, 1997, June 30, 1997,  September
30, 1997,  and December  31, 1997.  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 Company's Class A Warrants are currently  authorized for trading on the
Nasdaq 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. The table set forth below contains the range of the high
and low closing bid prices on the Nasdaq  SmallCap Market for the quarters ended
September 30, 1996, December 31, 1996, March 31, 1997, June 30, 1997,  September
30,  1997 and  December  31,  1997.  The prices of the Class A Warrants  for the
quarters  ended  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
                           High      Low            High          Low
                           ----      ---            ----          ---
Quarter Ended
-------------
<S>                       <C>       <C>            <C>           <C>
     March 31, 1996       $4.250    3.313          .813          .438
     June 30, 1996         3.938    2.628          .750          .375
     September 30, 1996    2.938    1.688          .375          .125
     December 31, 1996     2.750    2.125          .250          .125
     March 31, 1997        3.188    2.188          .125          .438
     June 30, 1997         3.625    2.625          .313          .688
     September 30, 1997    4.000    2.875          .313          .813
     December 31, 1997     5.000    3.750          .500          .875
</TABLE>

     On March 19,  1998,  the  closing  bid prices for the Common  Stock and the
     Class A Warrants were $4.50 and $.5625, respectively.
<PAGE>
     (b)  Holders of Common Stock

     As of March 26, 1998, there were 52 holders of record and approximately 500
beneficial  owners  of the  Common  Stock  and 3  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 Disc
Graphics,  Inc.'s  revenues  and  earnings,  capital  requirements  and  general
financial  condition and any other factors deemed relevant by the Disc Graphics,
Inc. Board of Directors.  Disc Graphics,  Inc.  presently  intends to retain all
earnings for use in Disc Graphics, Inc.'s business operations and to further the
growth of Disc Graphics' business. Accordingly, the Disc Graphics, Inc. Board of
Directors does not anticipate declaring any dividends in the foreseeable future.

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.

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

                             Year Ended December 31,
---------------------------------------------------------------------------------
                                1997      1996       1995       1994       1993
---------------------------------------------------------------------------------
<S>                           <C>        <C>        <C>        <C>        <C>
Income statement data:
Sales                         $48,445    $42,575    $36,149    $30,550    $26,651
Gross profit                   12,693     10,911      7,481     6,797       5,819
Operating expenses              8,483      7,612      5,733     5,020       4,559
Income from operations          4,210      3,299      1,748     1,777       1,260
Interest expense                  612        764        838       837         697
Net income                      2,159      1,454        501       502         215
Net income per common share
     Basic                       0.40       0.29       0.18      0.22        0.10
     Diluted                     0.40       0.29       0.18      0.22        0.10
Weighted average number
 of shares outstanding
     Basic                      5,387      5,091      2,714     2,247       2,247
     Diluted                    5,397      5,098      2,714     2,247       2,247


                               As of December 31,
---------------------------------------------------------------------------------
                                1997      1996       1995       1994       1993
---------------------------------------------------------------------------------

Balance sheet data:
Total assets                  $26,747    $22,046     18,604   $14,048     $12,831
Current liabilities             7,141      7,483      3,934     4,835       4,257
Long term liabilities           8,494      5,598      7,243     6,933       6,796
Stockholders' equity           11,112      8,964      7,427     2,280       1,778
</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,  1997.  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.

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.
<PAGE>
       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, Disc 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.  This was offset by a  receivable  from the former  owner of
$175,633, which was $55,268 at December 31, 1997. 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  $993,000 at
December 31, 1997.

Benham Acquisition
------------------
       On October 24, 1997, the Company acquired substantially all of the assets
and certain liabilities of Benham Press, Inc., an Indiana based printing company
("Benham"), for $128,781 in cash, the issuance of 10,499 shares of the Company's
common  stock  and  the  assumption  of  certain  liabilities   associated  with
outstanding  borrowing  under a line of credit  agreement  and notes  payable of
approximately   $2,637,000.   The  Company   liquidated  such  liabilities  with
additional  borrowings under the Company's line of credit.  The Company recorded
the value of the 10,499  shares of common stock at the  estimated  fair value at
the date of Acquisition.  The results of operations of Benham have been included
in the accompanying  financial  statements from the date of acquisition  through
December 31, 1997.  The  acquisition  was accounted for using the purchase price
method  of  accounting  in  accordance   with  generally   accepted   accounting
principles. Goodwill amortization amounted to $5,325 for the year ended December
31, 1997.
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
---------------------------------------------------------------------
Net Sales
---------
     Net sales for the year ended December 31, 1997 were $48,445,000 compared to
$42,575,000  for the same  period the prior  year,  representing  an increase of
$5,870,000 or 14%. This increase was primarily due to the  California  Division,
which accounted for  approximately  $3,786,000 of the increase in net sales. The
categories  of  the  business   which   experienced   significant   growth  were
video/software  packaging,  which  increased  $2,714,000  or  22%,  followed  by
commercial  which  increased  $1,764,000  or 45%;  music/audio  which  increased
$1,301,000 or 17%;  consumer product packaging  increased  $566,000 or 5%. There
continues to be strong growth in both CD-ROM and video sales.  As expected,  the
Company  has been  better  positioned  over the past  year to  compete  in these
segments  of the west  coast  markets.  As a  result,  $1,722,000  or 29% of the
Company's  increased net sales were from the additional video/software packaging
sales at the California facility.

       Both  the   California   and  Indiana   Acquisitions   have   contributed
significantly  to the  growth in  commercial  sales.  The  Indiana  facility  is
primarily  engaged in commercial  printing,  contributing over $600,000 in sales
since October 24, 1997. The  music/audio  category  continues to grow in the New
York and  California  facilities.  Indiana also added to this category with over
$100,000 in sales over the two months.

       Both  pharmaceutical/vitamin  packaging  and label  sales  experienced  a
slight decrease of $362,000 or 8% and $113,000 or 4%,  respectively.  This was a
result of the Company's  continued  focus to grow earnings by  concentrating  on
more profitable accounts within these business categories.

Gross Profit
------------
       Gross  profit for the year ended  December  31, 1997 was  $12,693,000  (a
26.2% profit  margin)  compared to  $10,911,000  (a 25.6% profit margin) for the
prior year  representing  an increase of $1,782,000 or 16%. The increase was due
primarily to the  reduction  in costs of goods sold as a percentage  of revenue,
increased  sales  volume  and  both  the  California   Acquisition  and  Indiana
Acquisition.  The  Company has  continued  to focus on  improving  manufacturing
processes and capital investment of more efficient equipment.  This strategy has
resulted in improved gross profit  margins at all  facilities  during the twelve
months ended  December  31,  1997.  This focus has enabled the Company to remain
competitive, as well as improve profitability.

Selling, General and Administrative Expenses
--------------------------------------------
       Selling,  general and administrative ("SG&A") expenses for the year ended
December 31, 1997 were  $8,483,000  (17.5% of net sales)  compared to $7,612,000
(17.9% of net sales) for the prior year,  an increase of $871,000,  or 11%. This
<PAGE>
increase  was due  primarily  to revenue  related  expenses  (such as freight to
customers and  commissions)  and costs  associated  with both the California and
Indiana  facilities.  These  increases were offset by a decline in  professional
fees which  were  renegotiated  effective  January 1,  1997.  The  Company  will
continue to focus on reducing SG&A costs  through  synergies  among  facilities,
thus leveraging the fixed cost base with business growth.

Interest Expense
----------------
       Interest  expense  for the year ended  December  31,  1997 was  $612,000,
compared to $764,000 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 was primarily related
to the improved borrowing rate under the new Credit Agreement as compared to the
rate under the former Financing Agreement.

Income Taxes
------------
       The  provision  for income  taxes for the year ended  December  31,  1997
increased  primarily  due to the  increase in pretax  income of  $1,063,000  and
offset by a decrease  in the  effective  tax rate from 42.6% in 1996 to 40.0% in
1997.

Net Income
----------
       Net income for the year ended December 31, 1997 was  $2,159,000  compared
to $1,454,000 for the prior year, an increase of $705,000, or 48%. This increase
was a result of an  increase  in net sales of  approximately  14% along with the
gross profit  improvement  at all  facilities  with a total  improvement  of 0.6
percentage  points of sales.  Management's  continued  focus on cost  reductions
resulted in savings in professional  fees and interest  expenses.  The Company's
strategy of growing  revenue both  internally and through  acquisitions  coupled
with cost reduction  projects and  investments  has resulted in strong  earnings
growth in 1997 compared to 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
Disc Graphics,  Inc. to compete more  aggressively in the west coast markets and
that this should be beneficial as it relates to the entertainment  segment (i.e.
video/software  and music/audio  packaging) and CD-ROM packaging segment of Disc
Graphics, Inc.'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  music and audio  packaging
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 was 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  $3,430,000.  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 year 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 .
<PAGE>
       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.

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 was 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 year 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.

Liquidity and Capital Resources
-------------------------------
       The primary sources of cash for Disc Graphics, Inc.'s business activities
have  been  cash  provided  from  operations,  borrowings  under  the  financing
agreements  with its current bank lender (the "Credit  Agreement")  and proceeds
from the merger RCL and Old Disc. As of December 31, 1997,  Disc Graphics,  Inc.
had working  capital of  $7,434,000  compared to  $5,002,000  as of December 31,
1996. This increase was due primarily to the increase in accounts receivable and
decrease in accrued expenses and income taxes payable.
<PAGE>
       Net cash provided by operating activities for the year ended December 31,
1997 was  $1,854,000  compared to $5,309,000  from the prior year.  Cash used in
investing activities were primarily for capital expenditures.

       Capital  expenditures  have been primarily for purchases of manufacturing
equipment, building and building improvements, and the purchase of furniture and
fixtures.  Capital  expenditures in 1997 were $2,420,000 as compared to $782,000
in 1996.  In 1997,  the  Company  invested  in  several  higher  speed  and more
technologically  advanced  pieces of  equipment  to upgrade the  throughput  and
quality.

          On February 26, 1997 the Company  entered into a new revolving  credit
agreement  (the  "Credit  Agreement")  with a  different  bank 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 8.5% per annum
at December  31,  1997).  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.  The  Company  utilized
approximately  $2.7  million of the sublimit  for the Indiana  Acquisition.  The
Credit Agreement contains certain covenants which require Disc Graphics, Inc. to
satisfy certain performance criteria,  net worth levels and debt service ratios.
At December  31,  1997,  Disc  Graphics,  Inc.  was in  compliance  with all the
covenants.   At  December  31,  1997,  Disc  Graphics,  Inc.  had  approximately
$7,240,000 available for borrowing under the Credit Agreement.

       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 introducing a new process to certain  customers which provides high
quality products at a lower cost.
<PAGE>
       In addition,  despite inflationary increases in direct labor, the Company
has managed  through more efficient  equipment to continue to reduce the cost of
labor as a  percentage  of  revenues.  The Company,  like its  competitors,  has
whenever  possible  passed on  increased  costs by way of  increased  pricing in
various markets.

       Historically,  a portion of Disc's business has been moderately 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 Standards
------------------------
       In June 1997,  the  Financial  Accounting  Standards  Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income",  effective for fiscal years
beginning after December 15, 1997.  This Statement  requires that all items that
are  required to be  recognized  under  accounting  standards as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as other  financial  statements.  This  Statement  further
requires  that an entity  display  an amount  representing  total  comprehensive
income for the period in that financial statement.  This Statement also requires
that an entity classify items of other comprehensive income by their nature in a
financial statement. For example, other comprehensive income may include foreign
currency  items  and  unrealized  gains  and  losses  on  investments  in equity
securities.  Reclassifications  of  financial  statements  for earlier  periods,
provided for  comparative  purposes,  is required.  Based on current  accounting
standards,  this  Statement  is not  expected  to have a material  impact on the
Company's  consolidated  financial  statements.  The  Company  will  adopt  this
accounting standard effective December 1, 1999, as required.

       In June 1997,  the FASB  issued  Statement  No. 131,  "Disclosures  about
Segments of an Enterprise and Related  Information",  effective for fiscal years
beginning  after  December 15, 1997.  This Statement  establishes  standards for
reporting  information about operating  segments in annual financial  statements
and requires selected  information about operating segments in interim financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures  about products and services,  geographic areas and major customers.
Operating  segments  are  defined as  components  of an  enterprise  about which
separate financial  information is available that is evaluated  regularly by the
chief  operating  decision  maker in deciding how to allocate  resources  and in
assessing performance. This Statement requires reporting segment profit or loss,
certain specific revenue and expense items and segment assets, and other amounts
disclosed for segments to  corresponding  amounts  reported in the  consolidated
financial statements. Restatement of comparative information for earlier periods
<PAGE>
presented is required in the initial year of application. Interim information is
not required  until the second year of  application,  at which time  comparative
information  is  required.  The Company has not  determined  the impact that the
adoption of this new accounting standard will have on its consolidated financial
statements  disclosures.   The  Company  will  adopt  this  accounting  standard
effective December 1, 1999, as required.

Year 2000 Date Conversion
-------------------------
       On March 1, 1997,  the Company  implemented a fully  integrated  computer
system. In preparing the  system-specification for vendor selection, the Company
required that the system be Year 2000 compliant.  The newly implemented software
uses a five-byte  numeric field compared to the standard two-byte numeric field.
Consequently,  the software does accommodate century rollovers. The Company does
not anticipate any issues relating to Year 2000 system requirements. The Company
continues to assess the impact, if any, to its vendors and customers.

ITEM 8.   Financial Statements and Supplementary Data
                                                                            Page
                                                                            ----
Consolidated Financial Statements - Disc Graphics and Subsidiaries
Independent Auditors' Report...............................................   19
Consolidated Balance Sheets as of December 31, 1997 and 1996...............   20
Consolidated Statements of Income for the years ended December 31,
  1997, 1996, and 1995.....................................................   21
Consolidated Statements of Stockholders' Equity for
  the years ended December 31, 1997, 1996, and 1995........................   22
Consolidated Statements of Cash Flows for the years ended
   December 31, 1997, 1996 and 1995........................................   23
Notes to Consolidated Financial Statements.................................   24
<PAGE>
                             DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                       Consolidated Financial Statements

                           December 31, 1997 and 1996

                  (With Independent Auditors' Report Thereon)

<PAGE>





KPMG PEAT MARWICK LLP




                          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,  1997,  and 1996,  and the related
statements of income,  stockholders' equity and cash flows for each of the years
in the three-year  period ended December 31, 1997. 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 have  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,  1997 and 1996,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1997 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.



Jericho, New York
January 28, 1998
<PAGE>
                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996
<TABLE>
<CAPTION>
                          Assets                                     1997           1996
                          ------                                     ----           ----
<S>                                                              <C>            <C>
Current assets:
  Cash and cash equivalents                                      $    31,753        30,859
  Accounts receivable, net of allowance for doubtful accounts of
    $1,162,000 and $844,000, respectively                         11,698,364     9,055,995
  Inventories                                                      1,906,694     2,013,333
  Prepaid expenses and other current assets                          345,701       599,927
  Current maturities of notes receivable                              43,958        85,014
  Deferred income taxes                                              549,000       700,000
                                                                 -----------    ----------
             Total current assets                                 14,575,470    12,485,128

Property, plant and equipment, net                                10,510,266     8,254,920

Goodwill                                                           1,379,408     1,069,363
Security deposits and other assets                                   281,503       236,271
                                                                 -----------    ----------
             Total assets                                        $26,746,647    22,045,682
                                                                 ===========    ==========
           Liabilities and Stockholders' Equity
           ------------------------------------
Current liabilities:
  Current maturities of equipment notes payable                      451,403       456,651
  Current portion, long-term debt                                    103,530        97,167
  Current maturities of capitalized lease obligations payable      1,069,209       692,852
  Accounts payable                                                 2,281,609     2,088,473
  Accrued expenses                                                 2,725,463     3,194,098
  Income taxes payable                                               509,927       954,088
                                                                 -----------    ----------
             Total current liabilities                             7,141,141     7,483,329

Long-term debt, less current maturities                            2,805,113       515,234
Equipment notes payable, less current maturities                   1,447,860     1,902,838
Capitalized lease obligations payable, less current maturities     3,492,857     2,192,235
Deferred income taxes                                                748,000       988,000
                                                                 -----------    ----------
             Total liabilities                                    15,634,971    13,081,636

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
    5,440,256 in 1997 and 5,378,518 in 1996                           54,403        53,786
  Additional paid-in capital                                       5,044,934     5,051,555
  Retained earnings                                                6,042,154     3,883,366
                                                                 -----------    ----------
                                                                  11,141,491     8,988,707
Less:
  Treasury stock, 10,295 and 8,710 common shares
     in  1997 and 1996, respectively                                 (29,815)      (24,661)
             Total stockholders' equity                           11,111,676     8,964,046
                                                                 -----------    ----------
             Total liabilities and stockholders' equity          $26,746,647    22,045,682
                                                                 ===========    ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                        Consolidated Statements of Income

                  Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
                                                 1997        1996       1995
                                                 ----        ----       ----
<S>                                          <C>          <C>         <C>
     Sales                                   $48,444,890  42,575,120  36,149,096
     Cost of sales                            35,751,899  31,663,934  28,668,506
                                             -----------  ----------  ----------
            Gross profit                      12,692,991  10,911,186   7,480,590

     Operating expenses:
       Selling and shipping expenses           4,426,729   3,682,886   2,775,768
       General and administrative expenses     4,056,293   3,929,521   2,957,253
                                              ----------   ---------   ---------
            Operating income                   4,209,969   3,298,779   1,747,569

     Interest expense, net                       612,181     763,793     838,263
     Loss on disposal of equipment                    -           -      (40,777)
                                              ----------   ---------   ---------
     Income before provision for income taxes  3,597,788   2,534,986     868,529

     Provision for income taxes                1,439,000   1,081,000     368,000
                                              ----------   ---------   ---------
            Net income                        $2,158,788   1,453,986     500,529
                                              ==========   =========   =========
            Net income per share:
               Basic                          $      .40         .29         .18
                                              ==========   =========   =========
               Diluted                        $      .40         .29         .18
                                              ==========   =========   =========

       Weighted average shares outstanding:
               Basic                           5,387,240   5,090,810   2,714,229
                                              ==========   =========   =========
               Diluted                         5,397,130   5,097,566   2,714,229
                                              ==========   =========   =========
<FN>
     See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>


                              DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1997, 1996 and 1995
<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, 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

Shares issued in connection with
  an acquisition                   -        -      10,499        105      37,395            -          -        37,500
Shares issued in connection with
  warrant exchange offer           -        -      51,239        512     (44,016)           -          -       (43,504)

Purchase of treasury stock         -        -           -          -           -            -     (5,154)       (5,154)
Net income                         -        -           -          -           -    2,158,788          -     2,158,788
                              ------   ------   ---------   --------   ---------    ---------     ------    ----------
Balance, December 31, 1997         -   $    -   5,440,256   $ 54,403   5,044,934    6,042,154    (29,815)   11,111,676
                              ======   ======   =========   ========   =========    =========     ======    ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                        1997        1996             1995
                                                        ----        ----             ----
<S>                                                  <C>          <C>              <C>
Cash flows from operating activities:
  Net income                                         $2,158,788   1,453,986          500,529
  Adjustments to reconcile net income to net cash
   provided by operating activities:
      Depreciation and amortization                   2,124,596   1,529,246        1,062,873
      Deferred income taxes                              89,000      78,406          168,000
      Allowance for doubtful accounts                   526,548     496,662          197,624
      Loss on disposition of assets                        -           -              40,777
      Change in assets and liabilities, net of
       acquisition of business:
          Accounts receivable                        (2,515,895)   (637,390)        (231,563)
          Inventories                                   322,582      42,407         (196,656)
          Prepaid expenses and other current assets     269,381    (156,577)        (353,523)
          Accounts payable and accrued liabilities     (731,561)  1,765,149         (970,315)
          Income taxes payable                         (444,161)    691,862          (76,547)
          Security deposits and other assets             54,768      45,135          (38,892)
                                                     ----------   ---------        ---------
             Net cash provided by operating
                   activities                         1,854,046   5,308,886          102,307
                                                     ----------   ---------        ---------
Cash flows from investing activities:
  Capital expenditures                               (2,419,829)   (782,374)      (3,485,023)
  Purchase of  net assets of business acquired         (206,497)   (662,545)
  Proceeds from sale of equipment                        55,200        -                -
                                                     ----------   ---------        ---------
        Net cash used in investing activities        (2,571,126) (1,444,919)      (3,485,023)
                                                     ----------   ---------        ---------
Cash flows from financing activities:
  Repayments under revolving credit agreement,
      net of  proceeds                                 (493,382) (3,820,459)      (2,035,268)
  Payments of notes receivable                           43,261      57,700          247,774
  Proceeds under long-term debt                       2,524,917      79,688        2,700,292
  Principal payments of equipment notes payable        (460,226)   (500,077)        (176,188)
  Principal payments of capital lease obligations      (847,938)   (867,576)        (696,005)
  Net proceeds from issuance of common stock               -           -           4,646,966
  Decrease in paid in capital                              -        (35,000)
  Purchase of warrants                                     -        (32,400)            -
  Purchase of treasury stock                             (5,154)    (24,661)            -
  Expenses incurred in relation to the exchange offer   (43,504)       -                -
                                                     ----------   ---------        ---------
             Net cash provided by (used by)
                   financing activities                 717,974  (5,142,785)       4,687,571
                                                     ----------   ---------        ---------
Net increase (decrease) in cash and cash equivalents        894  (1,278,818)       1,304,855

Cash and cash equivalents at beginning of year           30,859   1,309,677            4,822
                                                     ----------   ---------        ---------
Cash and cash equivalents at end of year             $   31,753      30,859        1,309,677
                                                     ==========   =========        =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>

                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996


(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 moderately 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   re-capitalization   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 was
     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 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
          ----------------
   Forpurposes 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.  There  were  no  cash
      equivalents in 1996 and 1997.

                                                                (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:
<TABLE>
<S>                                              <C>
                Building                              30 years
                Machinery  and  equipment        3 to 11 years
                Furniture and fixtures           3 to 7 years
                Automobiles and trucks           3 to 5 years
                Leasehold improvements           2 to 10 years
</TABLE>
     Capitalized values of assets under leases are amortized  over the lesser of
          the 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   agreements   are   amortized   using  the
          straight-line method over the original life of the intangible asset.

   (h)    Net Income Per Share
          --------------------
     Earnings per  share  is  computed  in  accordance  with the  provisions  of
          Statement of Financial  Accounting  Standards (SFAS) No. 128, Earnings
          per share,  which became  effective for the Company as of December 31,
          1997. As required by the  Statement,  earnings per share for all prior
          periods  presented  have been  restated.  Basic  earnings per share is
          computed by dividing income  available to common  stockholders  (which
          for the  Company  equals its  recorded  net  income)  by the  weighted
          average number of common shares outstanding during the period. Diluted
          earnings per share reflects the potential dilution that could occur if
          securities to issue common stock,  such as stock options and warrants,
          were exercised,  converted into common stock or otherwise  resulted in
          the issuance of common  stock.  The  computation  of weighted  average
          shares   outstanding   for  1995,  1996  and  1997  does  not  include
          incremental shares relating to outstanding warrants since the exercise
          price of the warrants exceeded the market price.

   (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 on 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 Opinion,
      Accounting  for  Stock  Issued  to  Employees  (APB  No.25),  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
      SFAS, Accounting for Stock-Based Compensation (SFAS No.123), 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 whichthe  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.
<PAGE>
                                                       (Continued)
   (n)    Reclassifications
          -----------------
   Reclassifications  are made  whenever  necessary  to conform with the current
year's presentation.

Acquisitions
------------
   (a)    Benham Press, Inc.
          -----------------
   On October 24, 1997, the Company acquired substantially all of the assets and
      certain  liabilities  of Benham Press,  Inc.,  an Indiana  based  printing
      company  (Benham),  for $128,781 in cash, the issuance of 10,499 shares of
      the  Company's  common  stock and the  assumption  of certain  liabilities
      associated with outstanding borrowing under a line of credit agreement and
      notes payable of  approximately  $2,637,000.  The Company  liquidated such
      liabilities with additional borrowings under the Company's line of credit.
      The Company recorded the value of the 10,499 shares of common stock at the
      estimated fair value at the date of Acquisition. The results of operations
      of Benham have been included in the accompanying financial statements from
      the date of acquisition  through  December 31, 1997. The  acquisition  was
      accounted for using the purchase  price method of accounting in accordance
      with  generally  accepted  accounting  principles.  Goodwill  amortization
      amounted to $5,325 for the year ended December 31, 1997.

   On January  16,  1998,  Disc  Graphics  secured  a  mortgage  with a  lending
      institution  in the amount of $675,000 for the building and land  acquired
      in the purchase of Benham Press. The mortgage is payable over ten years at
      an  interest  rate  selected by the Company of either the bank's base rate
      plus 1/2 of a percent or the 30 day LIBOR rate plus 250 basis points.  The
      current  rate is 8.125%.  This  mortgage is secured by a first lien on the
      premises and an assignment of rents and leases on the premises.


   The allocation of the purchase price of Benham was as follows:
<TABLE>
<S>                                                    <C>
               Purchase price:
                        Cash                           $ 128,781
                        Common stock                      37,500
                        Transaction costs                 77,716
                                                       ---------
                                                         243,997
                        Net deficit                     (247,752)
                                                       ---------
                                                         491,749
               Allocated to:
                        Covenant not to compete          100,000
                                                       ---------
                        Goodwill                       $ 391,749
                                                       =========
</TABLE>
   (b)    Pointille, Inc.
          --------------

     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 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.  Goodwill amortization amounted to $74,175 and
          $46,493 for the years ended December 31, 1997 and 1996, respectively.

                                                                     (Continued)
<PAGE>
   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
                                                    ----------
                                                     1,115,856

                   Net asset value                        -
                                                    ----------
               Allocated to:
                   Goodwill                        $ 1,115,856
                                                   ===========
</TABLE>
   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. The effect of Benham's operation
      to the  consolidated  financial  statements  of the  Company  for the year
      ending  December  31,  1997  was not  material  and  therefore  pro  forma
      financial information is not presented.

   The 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 the 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.
<TABLE>
<CAPTION>
                                                1996           1995
                                                ----           ----
                                                (thousands except per
                                                   share amounts)

<S>                                        <C>                 <C>
               Net sales                   $   45,401          44,203
               Net income                       1,487             575
               Net income per share:
                    Basic                         .29             .21
                    Diluted                       .29             .21
</TABLE>

                                                       (Continued)
<PAGE>

(3)  Supplemental Cash Flow Information

   The  following  is  supplemental  information  relating  to the  consolidated
statement of cash flows:
<TABLE>
<CAPTION>

                                                1997         1996         1995
                                                ----         ----         ----
<S>                                         <C>             <C>          <C>
          Cash paid during the year for:
             Interest                       $  581,162      812,747      816,763
             Income taxes                    1,986,692      460,071      274,606

          Common stock issued in
             connection with an acquisition     37,500      175,000         -
          Assets under capital lease assumed      -       2,077,388         -
          Warrants exchanged for common stock      512         -            -
</TABLE>

(4)  Covenants Not to Compete
     ------------------------
     In   1997, the Company obtained a non-compete  agreement in connection with
          the  acquisition  of  Benham.  Under  the  terms  of  the  acquisition
          agreement,  the non-compete agreement was valued at $100,000, which is
          included in other assets in the  accompanying  consolidated  financial
          statements.  The non-compete agreement has an original life of 5 years
          and will be amortized using the straight-line method.  Amortization of
          the  intangible  asset  amounted to $3,763 for the year ended December
          31, 1997.

     In   1992, the Company  entered into a non-compete  agreement in connection
          with the acquisition of a company.  Under the  non-compete  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  consolidated
          financial  statements.  The non-compete  agreement was fully amortized
          during 1996.  Amortization of the intangible asset amounted to $11,544
          and  $34,632  for  the  years  ended   December  31,  1996  and  1995,
          respectively.

(5)  Inventories
     -----------
   Inventories consist of the following:
<TABLE>
                                        1997                1996
                                        ----                ----
<S>                                 <C>                   <C>
                  Raw materials     $ 1,412,613           1,425,230
                  Work-in-process       359,743             248,210
                  Finished goods        134,338             339,893
                                    -----------           ---------
                                    $ 1,906,694           2,013,333
</TABLE>


                                                       (Continued)
<PAGE>
(6)  Property,  Plant and Equipment
     ------------------------------
   Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>

                                               1997             1996
                                               ----             ----
<S>                                        <C>                <C>
          Land and building                $   550,000              -
          Machinery and equipment           14,868,633        11,664,480
          Furniture and fixtures             1,205,516           973,251
          Leasehold improvements             1,234,793         1,052,678
          Automobiles and trucks               171,689           149,546
                                           -----------        ----------
                                            18,030,631        13,839,955
          Less accumulated depreciation
             and amortization                7,520,365         5,585,035
                                           -----------        ----------
                                           $10,510,266         8,254,920
                                           ===========        ==========
</TABLE>
   Depreciation  and  amortization  expense  of  property,  plant and  equipment
      amounted to  $2,020,999,  $1,446,633  and  $1,022,601  for the years ended
      December 31, 1997, 1996 and 1995, respectively.

(7)  Accrued Liabilities
     -------------------
   Accrued liabilities at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>

                                                          1997           1996
                                                          ----           ----
<S>                                                   <C>              <C>
        Accrued payroll and other employee benefits   $ 2,186,103      2,723,754
        Accrued commissions                               377,658        253,751
        Accrued other                                     161,702        216,593
                                                      -----------      ---------
                                                      $ 2,725,463      3,194,098
                                                      ===========      =========
</TABLE>
(8)  Long-Term Debt
     --------------
     (a)  In February, 1997, the Company entered into a 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.  At
          December  31, 1997 the  outstanding  borrowings  under this  financing
          agreement aggregated $2,760,000.

                                                                (Continued)

<PAGE>
   (b)  In connection  with the  acquisition of Pointille,  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,  1997 is  $148,643,  of which
        $103,530 is currently payable on such date.

(9)  Equipment Notes Payable
     -----------------------
   Notes payable at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
                                                                                         1997           1996
                                                                                         ----           ----
<S>                                                                                 <C>                 <C>
     Various secured equipment financing notes,  payable in monthly installments
        aggregating  $48,857  including  interest at 8.2%  maturing from October
        1999 through June 2003 secured by equipment with a net book
          value of $1,995,087 at December 31, 1997                                  $    1,861,055      2,271,241

      Secured  equipment  financing  note payable to a bank payable in monthly
        installments  of $2,416 with  interest at 7.9% through  October  1998,
        personally guaranteed by the president & two vice presidents                        23,300         49,295
      Other                                                                                 14,908         38,953
                                                                                     -------------      ---------
                                                                                         1,899,263      2,359,489
     Less current maturities                                                               451,403        456,651
                                                                                     -------------      ---------
                                                                                     $   1,447,860      1,902,838
                                                                                     =============      =========
</TABLE>
     The  aggregate  maturities of equipment  notes payable for each of the five
          years subsequent to December 31, 1997 are as follows:  1998: $451,403;
          1999: $406,299; 2000: $335,678; 2001: $282,353 and 2002: $282,353.

(10) Leases
     ------
   The Company is obligated under several  capital leases for certain  machinery
      and equipment that expire at various dates during the next five years.  At
      December 31, 1997 and 1996,  the gross amount of plant and  equipment  and
      related  accumulated  amortization  recorded  under capital leases were as
      follows:
<TABLE>
<CAPTION>

                                                  1997             1996
                                                  ----             ----
<S>                                            <C>               <C>
               Machinery and equipment         $6,201,998        4,917,515
               Less accumulated amortization    1,341,922        1,850,842
                                               ----------        ---------
                                               $4,860,076        3,066,673
                                               ==========        =========
</TABLE>
                                                                     (Continued)

<PAGE>
  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   non-cancelable
      equipment leases.

   Rent expense under  operating  leases for the years ended  December 31, 1997,
      1996 and 1995 was $1,034,416, $900,442 and $1,012,975 respectively.

   Future minimum lease payments  under  non-cancelable  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, 1997 are:
<TABLE>
<CAPTION>
                                                Capital        Operating
                                                Leases           Leases
                                                -------        ---------
<S>                                          <C>                <C>
          Year ending December 31:
               1998                           $1,404,826        1,031,341
               1999                            1,375,644          739,973
               2000                            1,118,305          567,426
               2001                              817,476          446,885
               2002                              673,319          428,866
               2003 and thereafter                 6,130        1,770,035
                                              ----------        ---------
             Total minimum lease payments      5,395,700        4,984,526
                                                                =========
             Less amount representing interest
               (at rates ranging from 5.9% to
                20.9%)                           833,634
                                              ----------
             Net principal portion             4,562,066
             Less portion due within one year  1,069,209
                                              ----------
             Long-term portion                $3,492,857
                                              ==========
</TABLE>
   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 five or ten  years.  The
      duration  of any  option  granted  under  this Plan  shall be fixed by the
      Incentive Stock Option  Committee in its sole discretion and no option may
      be  exercised  until at least  six  months  after  the date of  grant.  At
      December 31, 1997,  there were 324,500  additional  shares  available  for
      grant under the Plan.
                                                  (Continued)
<PAGE>
   Changes in options outstanding are as follows:
<TABLE>
<CAPTION>
                                                            Weighted-average
                                                  Shares     exercise price
                                                  ------    ----------------
<S>                                               <C>             <C>
          Outstanding December 31, 1994                 -            -
          Granted                                  75,000         4.13
          Exercised                                     -            -
          Forfeited                               (12,500)        4.13
                                                  -------         ----
          Outstanding December 31, 1995            62,500         4.13
          Granted                                  61,000         2.89
          Exercised                                     -            -
          Forfeited                                     -            -
                                                  -------         ----
          Outstanding December 31, 1996           123,500         3.51
          Granted                                  52,000         4.66
          Exercised                                     -            -
          Forfeited                                     -            -
                                                  -------         ----
          Outstanding December 31,1997            175,500         3.85
                                                  =======
        Exercisable at December 31, 1997          125,500
                                                  =======
</TABLE>
   The options  outstanding  as of December 31, 1997 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--2.06       2.00           37,000        8-3/4 yrs
           $ 3.25--3.25       3.25            1,000            8 yrs
           $ 4.13--4.76       4.36          137,500        6-2/3 yrs
</TABLE>
   The pershare  weighted  average fair value of stock  options  granted  during
      1997, 1996 and 1995 was $2.61, $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, 1996 and 1997 - expected
      dividend  yield of 0%, risk free  interest  rates of 6.0 - 6.5%,  expected
      stock volatility of 39.5% and an expected option life of 5-10 years.

   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>


                                                     1997        1996       1995
                                                     ----        ----       ----
<S>                                              <C>           <C>         <C>
               Net income:
                 As reported                     $ 2,158,788   1,453,986   500,529
                 Pro forma                         2,116,869   1,368,329   478,350

               Net income per share:
                 As reported: basic and diluted  $       .40         .29       .18
                 Pro forma                               .39         .27       .18
</TABLE>
                                                       (Continued)

<PAGE>
   Proforma net earnings  reflect only options  granted in 1997,  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 2,264,405 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 1997, the company made an exchange offer to holders of the warrants. Under
      the terms of the offer,  each warrant  holder was entitled to one share of
      the Company's common stock for approximately every 8.5 warrants exchanged.
      The  exchange  offer  expired in August 1997.  During the exchange  period
      435,595 warrants were exchanged for 51,239 shares of common stock.

   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. These 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 Class A 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  president  satisfied his note balance in
      1995 and the  balance  of the  notes  from the two  vice  presidents  were
      received during 1997.

(13) Income Taxes
     ------------
   The provision (benefit)  for income  taxes for the years ended  December  31,
      1997, 1996 and 1995 consists of the following:


                                                       (Continued)
<PAGE>
<TABLE>
<CAPTION>


                                   1997           1996            1995
                                   ----           ----            ----
<S>                             <C>               <C>            <C>
               Current
                    Federal     $1,204,000        931,400        150,000
                    State          324,000        228,000         50,000
                                ----------      ---------        -------
                                 1,528,000      1,159,400        200,000
                                ----------      ---------        -------

                  Deferred:
                    Federal        (79,000)       (66,640)       126,000
                    State          (10,000)       (11,760)        42,000
                                ----------      ---------        -------
                                   (89,000)       (78,400)       168,000
                                ----------      ---------        -------
                                $1,439,000      1,081,000        368,000
                                ==========      =========        =======
</TABLE>

   The provision for income taxes for the years ended  December 31, 1997,  1996,
      and 1995 differed from the amounts computed by applying the Federal income
      tax rate of 34% primarily as a result of state and local income taxes, net
      of Federal  income tax  benefits,  offset by decreases in the beginning of
      the year valuation  allowance and  utilization of state net operating loss
      carryforwards.

   The tax effects  of  temporary  differences  that  give  rise to  significant
      portion of the net deferred tax liability at December 31, 1997 and 1996 is
      as follows:
<TABLE>
<CAPTION>

                                                          1997            1996
                                                          ----            ----
<S>                                                    <C>             <C>
      Deferred tax assets:
           Inventory valuation                         $  38,000          66,000
           Allowance for doubtful accounts, net          176,000         333,000
           Uniform cost capitalization for inventory      33,000          25,000
           Accrued vacation                              134,000         143,000
           Accrued salaries and commissions               10,000          57,000
           Sales return allowance                         23,000          66,000
           State net operating loss carryforward               -          32,000
           Investment tax credit carryforwards           476,000         450,000
                                                       ---------       ---------
                   Total deferred tax assets             890,000       1,172,000
                                                       ---------       ---------
           Less valuation allowance                     (341,000)       (472,000)
                                                       ---------       ---------
                   Net deferred tax assets               549,000         700,000
                                                       ---------       ---------
         Deferred tax liability:
           Accelerated depreciation for tax purposes     748,000         988,000
                                                       ---------       ---------
                   Net deferred tax liability          $ 199,000         288,000
                                                       =========       =========
</TABLE>
                                                                     (Continued)
<PAGE>
   The valuation allowance  for  deferred  tax  assets as of January 1, 1996 and
      1997 was $472,000 and $341,000,  respectively. The net change in the total
      valuation  allowance for the years ended  December 31, 1997 was a decrease
      of  $131,000.  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, 1997.

   At December 31, 1997, the Company has available New York State investment tax
      credit carryforwards  aggregating  approximately $721,000 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, 1997,  1996 and
          1995, and a security deposit of $115,000 paid on the lease is included
          in security deposits and other assets at December 31, 1997.

     On   January  1,  1996,  the  Company  assumed  three  leases  with  a  net
          capitalizable value of $2,077,388 from this 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 leases remaining
          lives.

(15) Commitments and Contingencies
     -----------------------------
     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
          $111,999, $132,412 and $117,500 for 1997, 1996 and 1995 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  $123,500,
          $117,700 and $116,500 for the years ended December 31, 1997,  1996 and
          1995   respectively.
                                                            (Continued)
<PAGE>

(17) Fair Value of Financial Instruments
     -----------------------------------

     The  fair  value of a  financial  instrument  is 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.

(18) Business and Credit Concentrations
     ----------------------------------
     Most of the  Company's  customers  are located in the  northeastern  United
          States. Three customers collectively accounted for 14%, 21% and 23% of
          the Company's sales for 1997, 1996 and 1995 respectively.  At December
          31,  1997,  three  customers  comprised  approximately  20% of the net
          accounts  receivable  balance.  At December  31, 1996,  two  customers
          comprised approximately 15% of the net accounts receivable balance.

     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 1997
          and 1996 (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                        1997
                                   ---------------------------------------------
                                     First       Second      Third       Fourth
                                    quarter      quarter     quarter     quarter
                                    -------      -------     -------     -------
<S>                                 <C>           <C>         <C>         <C>
             Net sales              $ 11,198      11,065      13,234      12,948
             Gross profit              2,983       2,690       3,624       3,396
             Net income                  504         245         798         612
             Net income per share:
                Basic                    .09         .05         .15         .11
                Diluted                  .09         .05         .15         .11
                                    ========      ======       =====      ======

                                                        1996
                                   ---------------------------------------------
                                     First       Second      Third       Fourth
                                    quarter      quarter     quarter    quarter
                                    -------      ------      -------    --------
             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:
                Basic                    .00         .05         .13         .10
                Diluted                  .00         .05         .13         .10
                                    ========      ======      ======      ======
</TABLE>
<PAGE>
     ITEM 9. Changes in and  Disagreements  With  Accountants  on Accounting and
             Financial Disclosure


   None


                                    Part III


     In  connection  with  the  1998  Annual  Meeting  of  Stockholders  of  the
Registrant,  the Registrant  intends to furnish  Stockholder with proxy material
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.



                                     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, 1995, 1996, and 1997 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>

                              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 (1)   Other (2)      Period
--------------------------------------------------------------------------------------------------------------

<S>                                      <C>           <C>              <C>             <C>            <C>
For the year ended December 31, 1995:    462,000       197,000          165,000                        494,000
   Allowance for doubtful accounts
       (deducted from accounts
        receivable)

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

For the year ended December 31, 1997:    844,000       527,000          229,000         20,000       1,162,000
   Allowance for doubtful accounts
       (deducted from accounts
        receivable)
<FN>
(1) Deductions relate to uncollectible accounts charged off to valuation accounts, net of recoveries
(2) Allowance for doubtful accounts of acquired business
</FN>
</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.  (Filed as Exhibit 3.2
          to Form 8A filed June 21, 1996)

     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 R egistration 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  Agreeme nt 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 War rants 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 Oct ober 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).
<PAGE>
     4.i  Form of  certificate  evidencing  shares of Commons Stock (filed as an
          Exhibit to the Registration  Statement on Form S-1, File No. 33- 62980
          declared effective on November 9, 1993).

     4.j  Option to purchase  50,000  shares in favor of Jeffrey J. Bowe,  dated
          October 24, 1997.

     10.a Credit  Agreement  dated  February 26, 1997 between the Registrant and
          Key Bank National Association.  (Filed as Exhibit 10.a to Registrant's
          Form 10-K for the fiscal year ended December 31, 1996)

     10.b Security  Agreement dated February 26, 1997 between the Registrant and
          Key Bank National Association.  (Filed as Exhibit 10.b to Registrant's
          Form 10-K for the fiscal year ended December 31, 1996)

     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,  dat ed 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
          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).
<PAGE>
          10.i Form of  Consulting  Agreement,  dated as of December  12,  1991,
               between  Disc and  Timothy  F.  Healy & 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 Exhibit to the  Registration  Statement
               on Form S-4, File No.  33-94068  declared  effective  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).

          10.p Asset  Purchase  Agreement  between Disc and Benham  Press,  Inc.
               dated as of September 19, 1997.

          10.q Employment Agreement between Disc and Jeffrey J. Bowe dated as of
               October 24, 1997.

          10.r $675,000  Mortgage  and Security  Agreement  between Disc and Key
               Bank National Association dated January 16, 1998.
<PAGE>
          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

          23   Consent of Independent Accountants

          27   Financial Data Schedules
<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 30th day of
March, 1998.

                                   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 30, 1998 by the following persons in the
capacities indicated:


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

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

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

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


  --------------------             Director
  Daniel Levinson


  --------------------             Director
  Seymour W. Zises

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