|UNITED STATES 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 1934For the fiscal year ended December 31, 2000
or
[      ]  Transition report pursuant to Section 13 or 15(d) of the
        Securities Exchange Act of 1934For the transition period from _____ to _____

Commission file number 0-22696

DISC GRAPHICS, INC.(Exact Name of Registrant as specified in its charter)
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|                                                                       |                                            
|---------------------------------------------------------------------- | -------------------------------------------
|Delaware(State or other jurisdiction of
incorporation or organization) | 13-3678012(IRS Employer Identification No.)
|                                                                       |                                            
|10 Gilpin Avenue, Hauppauge, New York                                  | 11788                                      
|(Address of Principal Executive Offices)                               | (Zip Code)                                 
|                                                                       |                                            
|Registrant's telephone number, including area code:                    | (631) 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
| |                             

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

Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ x ]

At March 30, 2001,  the  aggregate  market
value of the voting and non-voting stock held by non-affiliates  of  Registrant
was  approximately  $2.8 million, based on the closing price of the Common Stock
on the Nasdaq Stock Market on that date.

At March 30, 2001, the Registrant had outstanding
5,518,242 shares of Common Stock, $.01 par value per share.

Documents  incorporated by reference:  The Registrant's  Proxy Statement for its
2001 Annual Meeting of  Stockholders  is incorporated by reference into Part III
(Items 10, 11, 12, and 13 of this Form 10-K).
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART I

ITEM 1.     Business

General

Disc Graphics, Inc. ("Disc Graphics" or the "Company"), headquartered
in Hauppauge, New York, is a diversified manufacturer and printer of specialty
paperboard packaging focused on the home video, music, entertainment software,
cosmetics, pharmaceutical, and other consumer markets. Products include:
pre-recorded video sleeves, compact disc ("CD") and audio cassette packaging;
folding cartons for entertainment software, food, pharmaceuticals and cosmetics;
posters, pressure sensitive labels and general commercial printing. Customers
include leading software, CD-ROM and video distributors; vitamin, cosmetic and
fragrance companies; major book publishers; and many Fortune 500 companies. The
Company operates in one business segment: the manufacturing and printing of
specialty paperboard packaging.

The Company's primary business strategies are to increase the Company's
share of print and packaging sales within its primary markets and to develop
innovative packaging designs and techniques for new and existing markets. The
Company is actively involved in investigating additional printing and packaging
related business opportunities, joint ventures, or other business relationships.
The Company has entered into a joint venture arrangement with Southern Container
Corporation and Schiffenhaus Industries, Inc. for the purpose of acquiring and
operating a facility in New Jersey to produce reinforced folding cartons. This
technology will use high-speed equipment to "laminate" printed sheets to
single-faced corrugation. This venture will attempt to meet the demand for
high-end graphic packaging with the structural attributes of corrugation
 (see Note 13 to Consolidated Financial Statements).

Historically, the Company has grown primarily by developing new
customers, increasing orders from existing customers, and by capitalizing on its
superior service and response capabilities and through acquisitions. In 1996,
the Company acquired the assets and certain liabilities of Pointille, Inc., a
California based packaging printer; in 1997, the Company acquired the assets and
certain liabilities of Benham Press, Inc., an Indiana based commercial printing
company (the "Benham Acquisition") which, as discussed below, the Company plans
to close during the second quarter of 2001; and in 1999, the Company acquired
the assets and certain liabilities of Contemporary Color Graphics, Inc. ("CCG"),
a New York based commercial printing company (the "CCG Acquisition") which was
subsequently consolidated into the Hauppauge, New York facility during 2000, See
Supra, Item 3, "Legal Proceedings", and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Contemporary Color
Graphics, Inc. Acquisition". The Company has since integrated each of their
manufacturing capabilities and sales and marketing programs into Disc Graphics'
operations. Since 1995, the Company has operated a facility in Rockaway, New
Jersey, which produces pressure sensitive labels for Disc Graphics.

The Company began experiencing weakness in sales during the third and
fourth quarters of 2000, which has continued into the first quarter of 2001.
This is due in part to lower sales of video, entertainment and software
packaging products to certain customers, and a general weakness in the economy.

While the Company believes the reduction in demand for its products is
temporary, it is currently taking aggressive steps to reduce capacity and bring
its operations more in line with both current and projected revenue levels. The
Company believes that its planned consolidation, discussed below, will not
compromise the Company's ability to achieve growth in the markets that we
currently serve. This is due in part to the investments that the Company has
made in digital workflow, which has significantly improved turnaround times and
has made it possible for the Company to consolidate its manufacturing
facilities, as discussed below.

-2-

As part of the planned consolidation, which was approved by the
Company's Board of Directors in March 2001, the Company has made plans to shut
down its Indianapolis, Indiana facility during the second quarter of 2001. The
Company believes that the majority of sales and required manufacturing capacity
associated with the Indiana location can be absorbed by the Company's remaining
locations, where there is presently sufficient capacity. In addition, the
Company will further streamline its operations by selling certain other
equipment in an effort to further realign its capacity. The Company believes
this operating realignment will provide a reduced cost structure and improve the
Company's profit potential. In connection with these consolidation initiatives,
the Company has written-down the related assets to their net realizable value
and recorded a charge of $3,458,000 related to the revaluation of these impaired
assets in the fourth quarter of 2000. In connection with the consolidation, the
Company expects to incur certain exit costs, principally severance, estimated at
$500,000. Such amounts will be expensed in 2001.

The Company believes that the completion of these initiatives will
improve the Company's cost structure and profit margins and strengthen its
competitive position in both current and new markets. By consolidating
operations, the Company believes it will achieve improved production efficiency,
profitability and asset utilization. There can be no assurance, however, that
the Company's consolidation initiative described above will succeed in making
the Company more profitable.

The Company's principal executive offices and principal manufacturing
operations are located at 10 Gilpin Avenue, Hauppauge, New York 11788. Its
telephone number is (631) 234-1400.

Background

The Company was formed as the result of the acquisition by RCL Capital
Corp ("RCL") of a printing company formerly known as Disc Graphics, Inc., a New
York corporation ("Old Disc"). RCL was incorporated in August 1992 to serve as a
vehicle to acquire an operating business. On November 18, 1993, RCL completed a
public offering of units ("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 expenses yielded approximately $6,400,000, which
was put into escrow pending the acquisition of an operating business.

On October 30, 1995, RCL consummated the acquisition of Old Disc, which
was structured as a merger of Old Disc with and into RCL. Following the merger,
RCL changed its name to Disc Graphics, Inc. In connection with the merger, the
Company redeemed approximately 185,000 shares of Common Stock held by the Old
Disc shareholders at $5.15 per share, which left the Company with approximately
$5 million (net of merger transaction costs) of the $6.4 million public offering
proceeds. These proceeds were used primarily to reduce certain indebtedness of
the Company and for working capital purposes. The merger was treated for
accounting and financial reporting purposes as a reverse merger of RCL into Old
Disc. In addition, in connection with the merger, Disc Graphics, Inc. adopted a
December 31 fiscal year.

Packaging/Printing Industry

The Company's revenue in 2000 was derived primarily from the
manufacture and sale of paperboard folding cartons. An industry trade
publication estimates that domestic shipments of folding cartons increased
approximately 2% over 1999 levels with estimated 2000 revenues from folding
cartons of approximately $8.4 billion. Despite slight growth in the overall
industry, several of our markets experienced sales declines in 2000.There were many
factors that affected our markets in 2000 including consolidation, the
PC-based entertainment software market delayed or canceled the release of new
products, and the introduction of PlayStation II® kept software producers and
consumers unsure of the market's direction. The overall folding carton market
continues to see significant competition from resin based alternative packaging
and growth in corrugated as an alternative to paperboard packaging. Disc
Graphics has entered into a three-party joint venture for the manufacturing of
mini-flute corrugated packaging to create new market opportunities.

-3-
Folding carton manufacturers are divided into three main categories:
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. Traditionally, the
Company has competed with independent manufacturers. Several of our largest
competitors, including Shorewood Packaging and IMPAC Group (AGI), have been
acquired by paper companies, thus placing the Company in the position of
competing with significantly larger integrated manufacturers.

The Company focuses on those markets that use the folding carton as a
point of purchase marketing enhancement for their products. A carton's color
scheme, coatings, print, stamping and other graphic design features all
contribute to the carton's promotional potential. The Company has concentrated
in markets, such as the home video, software, cosmetics, music and
pharmaceutical packaging markets, which utilize those techniques to a
significant extent. The Company has devoted substantial resources toward
developing the specialized processes required in such markets.

The Company's business also includes commercial printing and labels.
Industry trade sources have estimated that the total United States commercial
printing market in 2001 to be approximately $88 billion. The industry is
fragmented with many small printing companies serving regional markets. For
example, within the New York City Metropolitan area, there are approximately
2,800 printing establishments with an average of 20 employees.

Based on 1999 revenues, the Company was ranked 106 in the top 400
printing companies in the United States by an industry trade publication, as
compared to 117 in 1998. Comparable rankings for 2000 were not available at the
date of this report.

The Company's Packaging Products

The Company's largest markets for folding cartons are the video and
entertainment software markets. For the home video market, the Company
manufactures bottom-load video sleeves, multi-packs and other specialty items.
In addition to printing for major studios, the Company has historically
concentrated on the catalogue and special interest video and software markets.
The Company's catalogue customers typically have licensed or purchased products
from major movie production studios. According to one industry trade group, the
videocassette market showed a decline in 2000 in total "duplicated" units
produced by approximately 4%. However, DVD production has been increasing since
its development and the Company has focused its resources in this area.
Packaging for these DVD videos is often sold to independent distributors and
videotape duplicators. Through these distributors and duplicators, the Company
has produced packaging for many Fortune 500 companies. Many home video companies
are converting catalog titles or introducing new titles on DVD. The Company
believes that this format for the delivery of movies has created new packaging
opportunities, which will be a growth market for the Company.

The Company produces packaging for some of the largest entertainment
software companies in the United States. The Company believes that its national
network of production facilities and its capabilities in producing high
value-added packaging are strategic advantages in competing in this market. The
Company also produces packaging for independent developers of console based
(e.g., Nintendo(R) and PlayStation(R)) games and considers this market to be a
growth opportunity.

-4-
The Company manufactures CD packaging, including tray cards and
booklets, pre-recorded cassette packaging, such as insert or "J" cards, as well
as audio book packaging and other printed materials for the music and audio
industries. The Company's music industry customers often require that packaging
be produced quickly, often within days of placing an order. The Company has
assembled a combination of skilled workers, advanced equipment, and production
systems to meet these requirements. The Company has long standing customer
relationships with major record companies in the United States and also
manufactures packaging for major duplicators in the United States. Additionally,
the Company manufactures packaging for special interest and secondary music and
audio markets. The other major component of this market is audio book packaging.
The Company believes that it has a significant share of this market. The
Company's principal customers include two of the largest publishers in this
market. Despite the overall decline of 12% during 2000 in the pre-recorded audio
cassette market, Disc Graphics' sales increased in this market due to the
Company's effort of maintaining strong relationships with many major companies.

In the consumer products market, the Company manufactures cartons and
packaging for personal care, luxury goods, pet products, food and other
specialty packaging for these markets. Based on industry trade publications,
some of these market segments show high growth potential in print and packaging.
Given the growth opportunities and the high-value added nature of the packaging,
these markets are a prime focus for the Company.

The Company produces folding cartons for over-the-counter ("OTC")
pharmaceuticals, vitamins and nutritional supplements. A large part of the
Company's revenue for OTC-style cartons is for "private label" products. Vibrant
designs are emphasized in the packaging, which requires the use of multi-color
graphics to convey product identity and brand recognition. Sales of these
cartons are made directly to several major vitamin and drug manufacturers.

In the commercial printing market, the Company prints brochures,
posters, sell sheets and other promotional material. Due to the scheduled
closure of the Indiana facility in the second quarter of 2001, the Company is
anticipating a reduction in commercial sales to these local customers.

The Company prints labels on pressure sensitive stock that is die cut
to a customer's specifications. The primary markets for labels are
pharmaceuticals, vitamins, video packages, pet products and specialty items.
Many video and folding carton orders include an order for the corresponding
labels.

The Company distributes all packaging products directly to its
customers.

Marketing and Sales

The Company's revenues are derived from several product lines. The
largest product line as a percentage of total 2000, 1999, and 1998 net sales
were the video and entertainment software market, which accounted for
approximately 32%, 38%, and 36%, respectively; followed by the consumer product
packaging market, which accounted for approximately 24%, 23%, and 23%,
respectively; the music and audio packaging market accounted for approximately
17%, 15%, and 15%, respectively; and the commercial printing market accounted
for approximately 15%, 13%, and 15%, respectively. These markets correspond to
product lines within the business segment in which the Company operates.


The Company's sales and marketing efforts are conducted through direct
solicitation by its sales staff and executive officers. The Company's package
engineering staff assists customers with new package design and development.
Because the Company has a short turnaround time, it has a small backlog of
orders, as most orders are produced and delivered in one to four weeks.
-5-
Seasonality

Historically, the Company's revenues have been moderately seasonal.
However, because of the decline in revenue during the third and fourth quarters
of fiscal 2000, the Company did not experience the same seasonality as it has in
prior years. In the last two quarters of 2000 and 1999, the Company's revenues
were approximately 51% and 56%, respectively, of annual sales. This seasonality
is primarily the result of certain markets, such as the music and audio
packaging markets, the video and entertainment software packaging markets and
the consumer product packaging market, which require that products be produced
and shipped between August and October of each year for sale during the holiday
season.

Competition

The Company competes with a small number of printed paperboard
packaging companies within each of its markets. These industries require high
quality packaging with rapid turnaround time and competitive pricing. The
Company 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. The Company's principal methods of competition are price,
service, and product quality.

Traditionally, the Company has competed with independent
manufacturers. Several of our largest competitors, including Shorewood Packaging
and IMPAC Group (AGI), have been acquired by paper companies, thus placing the
Company in the position of competing with significantly larger integrated
manufacturers.

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

Employees

As of February 22, 2001, the Company had approximately 458 employees.
Of these employees, 299 are located in the Company's Hauppauge, New York
facility, with 241 serving in manufacturing capacities and 58 serving in selling
and administrative capacities. The Company's Burbank, California facility has 87
employees, with 73 serving in manufacturing capacities and 14 serving in selling
and administrative capacities. Disc Graphics' Rockaway, New Jersey facility has
21 employees, with 20 serving in manufacturing capacities and one serving in
selling and administrative capacities. The Company's Indianapolis, Indiana
facility has 51 employees, with 42 serving in manufacturing capacities and 9
serving in selling and administrative capacities, however in connection with the
planned closing during the second quarter of 2001, employment is expected to
cease at this location. See Supra, Item 1. "Business-General". A majority of the
manufacturing employees located in the Burbank, California facility are
represented by a labor union. The Company believes that its employee relations
are good.

Materials

The Company uses a variety of raw materials. The most significant types
of raw materials utilized are paperboard, paper, label paper, ink, coating,
films and plates. These materials are purchased from a variety of suppliers, and
the Company has several alternate sources for each. The Company has historically
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 can be no assurances, however, that the Company
will not encounter difficulty in obtaining supplies of such material to fulfill
future requirements.

In the fourth quarter of 2000, the Company implemented a cost
containment initiative. As part of this initiative, Disc has negotiated more
favorable pricing arrangements with certain of its main suppliers.
-6-
Equipment

The Company owns or leases certain manufacturing, computer and other
equipment used in the manufacture of its products and for its administrative
support. As a specialty printing company, the Company's continued growth and
competitiveness requires a significant investment in capital equipment.

Forward Looking Statements

This Form 10-K contains predictions, projections and other
statements about the future that are intended to be "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from
those expressed or implied by such statements. Such risks, uncertainties, and
other important factors include, among others: the Company's ability to fulfill
its stated business strategies; the Company's ability to improve its revenue
margin; the Company's ability to improve its position in current or new markets;
the Company's ability to identify and consummate strategic business
opportunities; the Company's ability to identify and develop additional product
innovations; the Company's ability to achieve growth in net sales of its
products; the effects of recent equipment purchases and leases for additional
space on the Company's operations; the Company's ability to continue to achieve
efficiencies through the purchase or lease of equipment; the effects of the
Company's planned consolidation efforts; the effects of the Company's ISO
certification efforts; the amounts required for capital expenditures in future
periods; the availability and cost of materials; and continuing industry-wide
pricing pressures and other industry conditions. Such forward-looking statements
speak only as of the date of this Report, and the Company disclaims any
obligation or undertaking to update such statements. Each forward-looking
statement that the Company believes is material is accompanied by one or more
cautionary statements identifying important factors that could cause actual
results to differ materially from those described in the forward-looking
statement. The cautionary statements are set forth following the forward-looking
statement, in other sections of this Form 10-K, and/or in the Company's other
documents filed with the Securities and Exchange Commission, whether or not such
documents are incorporated herein by reference. In assessing forward-looking
statements, readers are urged to read carefully all such cautionary statements.

Regulation

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

-7-
Executive Officers of the Registrant


Donald  Sinkin  (53  years of age) has been  Chairman  of the  Board,  President,  Chief  Executive  Officer  and the  largest
shareholder  of the Company  since 1986.  Mr. Sinkin  joined Disc  Graphics as Pre-Press  Supervisor  and became Plant Manager in 1982.
Prior to joining Disc Graphics,  Mr. Sinkin helped found and manage Rutgers  Packaging,  a division of Queens Group,  Inc. d/b/a Queens
Litho.

Stephen Frey (47 years of age) is a Director, Senior Vice President of
Operations, Secretary and a major shareholder of the Company. Mr. Frey joined
Disc Graphics in the Pre-Press Department in 1978, became Supervisor of that
department in 1983, and established the Production and Planning Department in
1985. Mr. Frey was elected Vice President and Secretary in 1988 and a Director
in 1990. He served as Chief Operating Officer from 1991 to 1995 and was elected
Senior Vice President of Operations in 1998. Prior to joining Disc Graphics, Mr.
Frey held various management positions with Kordet Color Corporation, a high-end
commercial printer and Terrace Litho, a printing company servicing the book and
publishing industries.

John Rebecchi (46 years of age) is a Director, Senior Vice President of
Sales & Marketing, and a major shareholder of the Company. Mr. Rebecchi joined
Disc Graphics' predecessor in the Accounting Department and, upon Disc Graphics'
formation in 1983, he served as Controller. After a brief absence from the
Company, Mr. Rebecchi re-joined Disc Graphics in 1988 and was elected Vice
President and Treasurer in 1988 and a Director in 1990. He served as Chief
Financial Officer from 1991 through 1995 and was elected Senior Vice President
of Sales & Marketing in 1998.

Margaret M. Krumholz (41 years of age) is Senior Vice President of
Finance and Chief Financial Officer of the Company. Ms. Krumholz joined Disc
Graphics in 1994 and served as Controller until 1996 when she was elected Chief
Financial Officer. She was elected Senior Vice President of Finance in August
1998. Prior to joining Disc Graphics, Ms. Krumholz held various financial and
accounting positions, including Corporate Finance Manager for General Foods
Baking Company, and received her C.P.A. while employed with
PricewaterhouseCoopers.

Frank A. Bress (53 years of age) is Vice President for Legal Affairs
and Human Resource Policy and General Counsel of the Company. Mr. Bress joined
Disc Graphics in January 1998 as General Counsel, and was elected Vice President
for Legal Affairs in August 1998 and Vice President for Human Resource Policy in
October 1998. Prior to joining Disc Graphics, Mr. Bress served as principal
outside counsel to the Company from 1988 through 1997 while a partner in various
law firms. Mr. Bress was an Associate Professor of Law at New York University
School of Law from 1974 to 1986, and a Professor of Law and Associate Dean at
Pace University School of Law from 1986 to 1988.


-8-
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ITEM 2.     Properties

As of December 31, 2000, the Company's principal properties
were as follows:

|                 |                                         |                                      
|---------------- | --------------------------------------- | -------------------------------------
|Location         | Activities Conducted                    | Approximate SquareFootage of Facility
|Hauppauge, NY    | Sales Offices and Manufacturing (1)     | 87,000                               
|Hauppauge, NY    | Executive Offices and Manufacturing (2) | 55,000                               
|Hauppauge, NY    | Warehouse (3)                           | 40,000                               
|Burbank, CA      | Manufacturing (4)                       | 30,000                               
|Indianapolis, IN | Manufacturing (5)                       | 27,000                               
|Edgewood, NY     | Manufacturing (6)                       | 22,000                               
|Rockaway, NJ     | Manufacturing (7)                       | 14,400                               
|New York, NY     | Sales (8)                               | 2,400                                
|Hauppauge, NY    | Offices and Manufacturing (9)           | 1,000                                

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The lease for this facility was entered on January 1, 2000, and expires
January 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | The lease for this facility terminates on December 31, 2007. The facility
         is owned indirectly by certain principals of the Company through a
         limited partnership, and the Company believes that the lease terms were
         and are at least as favorable to the Company as terms which could have
         been obtained from unaffiliated third parties for similar office and
         manufacturing space.                                                                                                                                                                                                                                                                                                                                                                
|(3) | On  January 1, 2000, the Company entered into a lease expiring August 31,
         2001 to sublet to a third party approximately 36,000 square feet of the
         40,000 square feet at the warehouse facility in Hauppauge, New York.
         The subtenant subsequently filed a bankruptcy petition, elected to
         terminate the lease and vacated the facility on February 2, 2001. On
         February 19, 2001, the Company entered into two leases expiring August
         30, 2001 with third parties for the entire 36,000 square feet. The
         Company also entered into subleases dated July 1, 2000, November 1,
         2000 and March 2001, all expiring August 30, 2001, with third parties
         for the balance of the office space in the warehouse facility.
|(4) | This lease is scheduled to terminate on May 18, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(5) | The Company owns this facility, subject to a mortgage. In connection with
         the Company's consolidation initiatives, the Company intends to market
         this facility for sale during the second quarter of 2001. See, Supra,
         Item 1, "Business-General".                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(6) | This lease is scheduled to terminate on July 14, 2003. In July 2000, the
         Company entered into a lease expiring July 14, 2003 to sublet
         approximately 18,000 square feet of this manufacturing facility to a
         third party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7) | This lease is scheduled to terminate on June 30, 2007. On July 1, 2000, the
         Company entered into a lease for an additional 6,000 square feet
         scheduled to terminate on June 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(8) | On January 1, 1999, the Company entered into a new lease expiring December
30, 2009 for this facility.The Company is currently negotiating the surrender of
the lease without penalty by May 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(9) | On  August 1, 2000, the Company entered into this lease to house its
         Cosmetic Sampling Technologies, Inc. operations. The lease is scheduled
         to expire on July 31, 2001, but may be extended for two additional
         six-month terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

-9-

|ITEM 3.     Legal Proceedings

As of December 31, 2000, there were no lawsuits pending against the
Company. However, there was one asserted claim.
On October 4, 2000, CCG asserted a claim against the Company for
principal and interest payments allegedly due on August 1, 2000 under terms of a
$1 million dollar note (the "CCG Note") and a $600,000 convertible debenture
(the "CCG Debenture") given by the Company as partial payment of the purchase
price in the CCG Acquisition. See, infra, Item 7. Management's Discussion and
Analysis of Financial Condition; Contemporary Color Graphics Acquisition. Pursuant to the terms of the CCG
asset purchase agreement, the CCG Note and the CCG Debenture, amounts due under the CCG Note and the CCG Debenture
are diminished according to a formula contained in the Asset Purchase Agreement, dated
as of July 1, 1999 between the Company, CCG and CCG's shareholders (the "CCG Asset Purchase
Agreement"), as a result of a shortfall between required CCG sales and actual CCG sales.
The Company believes that no payments are due to CCG under the terms of the CCG Asset Purchase
Agreement.  Under the terms of a subordination agreement executed by CCG in favor of the Dime
Savings Bank in connection with the CCG Acquisition, CCG may not pursue its claim
without the consent of the Dime Savings Bank, which consent has been refused.


The Company believes that its potential liability under the asserted
claim is not material.

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

During the fourth quarter of the year ended December 31, 2000, there
were no matters submitted to a vote of the Company's security holders through
the solicitation of proxies or otherwise.
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-10-

PART II

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

Price Range of Common Stock

The Company's Common Stock, par value $.01 per share (the "Common
Stock") trades on the Nasdaq SmallCap Market under the symbol DSGR. The table
set forth below contains the range of the high and low bid prices on the Nasdaq
SmallCap Market for the quarters noted.

The Company's Class A Redeemable Common Stock Purchase Warrants (the
"Class A Warrants") were authorized for trading on the Nasdaq SmallCap Market
under the symbol DSGRW. On November 9, 1999 these Class A Warrants expired by
their terms. The table set forth below contains the range of the high and low
bid prices on the Nasdaq SmallCap Market for the quarters noted.

|                      |         |         |         |        
|--------------------- | ------- | ------- | ------- | -------
|                     
|                      | High    | Low     | High    | Low    
|Quarter Ended         |        
|                     
|March 31, 1999        | $ 5.563 | $ 4.250 | $  .844 | $  .375
|June 30, 1999         | 5.000   | 3.750   | .938    | .125   
|September 30, 1999    | 5.313   | 3.625   | .313    | .031   
|December 31, 1999 (a) | 3.750   | 2.313   | 0.31    | .000   
|March 31, 2000        | 4.438   | 2.563   | N/A     | N/A    
|June 30, 2000         | 4.063   | 2.563   | N/A     | N/A    
|September 30, 2000    | 3.500   | 1.938   | N/A     | N/A    
|December 31, 2000     | 2.875   | .750    | N/A     | N/A    

On April 2, 2001, the closing bid price for the Common Stock on the
Nasdaq Small Cap Market was $1.06.

|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(a) | On November 9, 1999, the Company's Class A Redeemable Common Stock
purchase warrants expired by their term.

Holders of Common Stock

As of March 1, 2001, there were 45 holders of record and approximately
580 beneficial owners of the Common Stock.

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
the Company's revenues and earnings, capital requirements and general financial
condition and any other factors deemed relevant by the Company's Board of
Directors. The Company presently intends to retain all earnings for use in the
Company's business operations and to further the growth of the Company's
business. Accordingly, the Company's Board of Directors does not anticipate
declaring any dividends in the foreseeable future.

-11-

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 the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements and
notes (including without limitation Note 18) thereto, all of which are contained
in this Annual Report on Form 10-K.

SUMMARY FINANCIAL DATA
    (In thousands, except per share amounts)

`Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------------------------
                                        2000              1999             1998              1997             1996
---------------------------------------------------------------------------------------------------------------------------------------
Income statement data:
Net sales                              $ 65,376         $ 67,988          $ 58,882         $ 48,445          $ 42,575
Gross profit                             11,732           17,290            15,799           12,693            10,911

Operating income (loss)                 *(5,610)           4,930             5,249            4,210             3,299
Net income (loss)                        (4,728)           2,507             2,864            2,159             1,454
Net income (loss) per
     common share
         Basic                             (.86)             .45               .52              .40               .29
         Diluted                           (.86)             .45               .52              .40               .29

Weighted average number
 of shares outstanding
         Basic                            5,518            5,518             5,474            5,387             5,091
         Diluted                          5,518            5,540             5,492            5,397             5,098

* Includes a $3,458,000 pre-tax asset impairment charge.

                                                                   As of December 31,
---------------------------------------------------------------------------------------------------------------------------------------
                                        2000              1999             1998               1997           1996
---------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Total assets                           $ 42,144         $ 42,508          $ 28,372         $ 26,747          $ 22,046
Long term liabilities                    22,173           15,493             6,737            8,494             5,598
Stockholders' equity                     11,718           16,447            13,940           11,112             8,964`

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|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 periods indicated. This
discussion should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included in this Annual Report.
Results for the periods reported herein are not necessarily indicative of
results that may be expected in future periods.

-12-

Contemporary Color Graphics, Inc. Acquisition

On July 1, 1999, the Company acquired substantially all of the assets
and certain liabilities of Contemporary Color Graphics, Inc. ("CCG"), a New York
based commercial printer. The purchase price consisted of $3,500,000 in cash,
and a promissory note in the amount of $1,000,000, a supplemental note in the
amount of $1,000,000, convertible debentures in the amount of $600,000 and
assumed debt of approximately $1,200,000, subject to adjustment. The Company
paid the cash portion of the purchase price from borrowings under its revolving
credit facility. Principal payments were scheduled to commence on August 1, 2000
with respect to the promissory note and debentures, and on August 1, 2003 with
respect to the supplemental note. The former shareholders of CCG have the option
of converting the debentures into shares of the Company's common stock, valued
at $5.50 per share, at least 30 days before any principal or interest payment on
the debentures. The CCG Acquisition was accounted for using the purchase method
of accounting and accordingly, the results of CCG's operations are included in
the Company's results from the date of the CCG Acquisition.

During the second quarter of fiscal 2000, the Company increased the
goodwill associated with the acquisition of CCG by approximately $185,000 to
properly reflect the value of certain assets and liabilities assumed as of the
acquisition date. In accordance with the terms of the acquisition agreement, an
adjustment would be made to the purchase price as a result of the actual fair
value of assets and liabilities acquired.

Because post-closing minimum sales amounts required under the asset
purchase agreement were not achieved, the CCG purchase price was reduced by
$404,000 during the third quarter of fiscal 2000. This reduction was reflected
in the non-payment by the Company of the principal amount due on the promissory
note and convertible debentures on August 1, 2000 of $320,000, and a further
reduction of $84,000 in the remaining balances of the promissory note and
convertible debenture. As a result of the downward adjustment in the purchase
price, goodwill was also reduced accordingly in the amount of $404,000. See,
Supra, "Item 3 - Legal Proceeding".

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Net Sales

Net sales for the year ended December 31, 2000 were $65,376,000
compared to $67,988,000 for the same period the prior year, representing a
decrease of $2,612,000 or 3.8%. The $2,612,000 decline in revenues was due
principally to lower than anticipated sales from existing and potential new
customers in video, entertainment, and video software packaging. Additionally,
the bankruptcy of one of the Company's largest customers also contributed to the
reduction. Furthermore, decreased sales were partially the result of the
Company's decision to eliminate low margin and unprofitable commercial sales in
an effort to concentrate our resources on more profitable product lines within
commercial and other categories. Historically, the Company has competed with
independent manufacturers, however, in fiscal 2000, paper companies have
purchased two of the Company's largest competitors. This puts the Company in the
position of competing with significantly larger integrated manufacturers. In
2000, the Company's top ten customers accounted for 30% of revenues for the year
as compared to 39% in 1999.

-13-

Gross Profit

The Company recognized gross profit of $11,732,000 (a 17.9% profit
margin) for the year ended December 31, 2000, as compared to $17,290,000 (a
25.4% profit margin) for the prior year, representing a decrease of $5,559,000,
or 32.1%. The Company's operating results were negatively affected by lower than
expected sales volume, an increased cost structure and production inefficiencies
associated with the expansion of our facilities and the acquisition of large
format equipment. See "Subsequent Events" for further discussion. Also
contributing to the reduction in gross profit is an increase in raw material
costs which can only be partially passed on to customers, as well as costs
associated with the closing of the Edgewood facility in 2000. The Company
expected to receive its ISO 9001 certification during fiscal 2000, but has
delayed the certification process until 2001. In the fourth quarter of 2000, the
Company implemented a cost containment initiative. As part of this initiative,
Disc has negotiated more favorable pricing arrangements with several of its
main suppliers.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the year
ended December 31, 2000 were $13,883,000 (21.2% of net sales) compared to
$12,360,000 (18.2% of net sales) for the prior year, an increase of $1,523,000.
The increase in the dollar amount of SG&A is primarily due to an increase in bad
debt expense, increased headcount and labor costs, as well as the amortization
of goodwill associated with the CCG Acquisition.

Charge Related to Impairment of Long Lived Assets

In the fourth quarter of 2000, the Company recorded a charge related to
the impairment of long lived assets of $3,458,000. This charge is comprised of
the write-off of goodwill associated with the closure of the Indiana facility
and the write down of certain manufacturing equipment and a building to net
realizable value, which will be sold. See "Subsequent Events" for further
discussion.

Interest Expense

Net interest expense for the year ended December 31, 2000 was
$1,662,000 compared to $747,000 for the prior year. Interest expense includes
interest payable under the Company's revolving credit facility, its notes and
capital lease obligations on equipment, as well as its note, supplemental note
and debenture issued in connection with the CCG Acquisition. The increase in net
interest expense is due to increased borrowings under the Company's revolving
credit facility during the year for its capital improvement program, as well as
a full year of interest expense on the note, supplemental note and debenture
related to the CCG Acquisition.

Income Taxes

As a result of the loss for the year ended December 31, 2000, the
Company recorded a tax benefit of $2,543,000 as compared to a provision for
income taxes of $1,676,000 for the year ended December 31, 1999, with a change
in the effective tax rate to 35% in 2000 from 40% in 1999.

Net Income (Loss)

The net loss for the year ended December 31, 2000 was $4,728,000,
compared to a net income of $2,507,000 for the same period in the prior year, a
decrease of $7,235,000. The decrease in net income is due to lower than expected
sales volume, coupled with the increased cost structure associated with the
expansion of our facilities to accommodate large format equipment, costs
associated with closing the Edgewood facility, the impairment charge discussed
above, and an increase in paper costs.

-14-

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net Sales

Net sales for the year ended December 31, 1999 were $67,988,000
compared to $58,882,000 for the same period the prior year, representing an
increase of $9,106,000 or 15.5%. The CCG Acquisition accounted for $2,803,000 of
the increase in sales. The overall increase, excluding the effect of the CCG
Acquisition, was most evident in video and entertainment software packaging
($4,857,000 or 23.1%), music and audio packaging ($1,393,000 or 15.3%) and
consumer product packaging ($1,920,000 or 14.0%) between the comparison periods.
Within the video and entertainment software category, entertainment software,
specifically computer games, continues to be the primary driver in sales growth.
Music/audio packaging sales also increased as a result of increased unit volume
within this category, which enabled the Company to offset pricing pressures in
the music and audio packaging industry.

Gross Profit

The Company recognized gross profit of $17,290,000 (a 25.4% profit
margin) for the year ended December 31, 1999, as compared to $15,799,000 (a
26.8% profit margin) for the prior year, representing an increase of $1,491,000,
or 9.4%. The increased dollar amount is primarily due to the increase in net
sales between comparison periods, as discussed above. The decrease of 1.4
percentage points in gross profit margin was due to increased costs in 1999
associated with downward pricing pressures, the Company's decision to invest
significantly in the expansion of its capacity, the integration of the CCG
Acquisition, and its implementation of ISO 9001 procedures.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the year
ended December 31, 1999 were $12,360,000 (18.2% of net sales) compared to
$10,550,000 (17.9% of net sales) for the prior year, an increase of $1,810,000.
The increase in the dollar amount of SG&A is primarily due to normal operating
expenses and the amortization of goodwill, in each case associated with the CCG
Acquisition. In addition, on April 29, 1999, Disc Graphics retained a consulting
firm to assist the Company in becoming ISO certified. The Company expects its
ISO 9001 certification to be complete by the end of 2001. Disc Graphics believes
that this investment will ultimately transform the processes of the organization
to improve product quality, increase production volume, and shorten the
manufacturing time cycle. The Company believes that this commitment to improve
customer satisfaction should enhance its competitive edge in current and new
markets, but there can be no assurance of this. The remainder of the increase is
due to normal inflationary increases, and revenue related expenses such as
freight to customers and commissions.

Interest Expense

Net interest expense for the year ended December 31, 1999 was $747,000
compared to $634,000 for the prior year. Interest expense includes interest
payable under the Company's revolving credit facility, its capital lease
obligations on equipment and its note, supplemental note and debenture issued in
connection with the CCG Acquisition. The increase in net interest expense is due
to increased borrowings under the Company's revolving credit facility and the
note, supplemental note and debenture related to the CCG Acquisition.

-15-

Income Taxes

The provision for income taxes for the year ended December 31, 1999
decreased from the 1998 level primarily due to the decrease in pretax income of
$583,000 between comparison periods, with no significant change in the effective
tax rate.

Net Income

Net income for the year ended December 31, 1999 was $2,507,000,
compared to $2,864,000 for the prior year, a decrease of $358,000, or 12.5%.
Downward pricing pressures, the Company's decision to invest significantly in
the expansion of its capacity, the integration of the CCG acquisition, and its
implementation of ISO 9001 procedures all contributed to the decrease in net
income.

Liquidity and Capital Resources

The primary source of cash for the Company's business has been cash
flow from operations and availability under the Company's revolving
credit facility. Cash as of December 31, 2000 was $59,000, compared to $143,000
as of December 31, 1999. Net cash provided by operations for the year ended
December 31, 2000 was $776,000 compared to $4,533,000 for the year ended
December 31, 1999. The decrease in cash flows from operations is primarily
attributable to the loss from operations discussed above. As of December 31,
2000, the Company had working capital of $10,519,000.

At December 31, 2000, the Company was not in compliance with certain financial covenants contained in the Credit
Agreement. On April 13, 2001, following the adoption by the Company of a consolidation plan (see note 17), the
Company received a commitment letter from the lender which will restructure the Credit Agreement. The commitment
letter waives the covenant violations. In addition, the commitment letter establishes revised covenants to
reflect the Company's 2001 projections and consolidation plan. While the Company believes it will meet its 2001
projections, there can be no assurance that such projections can be attained as a result of the softness in
revenues experienced during the fourth quarter of 2000 and the first quarter of 2001.

The commitment letter also includes the following changes to the Credit Agreement: (i) reduction in maximum
borrowing amount to $12,700,000, subject to a borrowing base formula based on eligible accounts receivable and
inventory, (ii) change in maturity date to April 15, 2002 (with no conversion to a term loan as provided for in
the original agreement), (iii) change in interest rate to the bank's base rate plus 1%, and (iv) required
prepayment and reduction in availability of the facility equal to a portion of the Federal tax refund received by the Company.

Beginning in the third quarter of 1999 and through December 31, 2000,
the Company made $9.7 million of capital improvements in connection with the
purchase of additional manufacturing equipment. On December 29, 2000 and January
9, 2001, the Company refinanced $6.4 million of existing operating equipment. As
a result of the CCG Acquisition in 1999 and the purchase of additional
manufacturing equipment over the past two years, the Company's total
indebtedness and future debt service obligations have increased significantly
from prior levels. The Company intends to fund these debt service obligations
from operating cash flow in future periods, and believes that it will have
sufficient funds to do so. In addition, proceeds from the sale of equipment and
a building discussed below will be utilized to pay down borrowings under the
Company's debt agreements.

-16-

Subsequent Events

The Company began experiencing weakness in sales during the third and
fourth quarters of 2000, which has continued into the first quarter of 2001.
This is due in part to lower sales of video, entertainment and software
packaging products to certain customers, and a general weakness in the economy.

While the Company believes the reduction in demand for its products is
temporary, it is currently taking aggressive steps to reduce capacity and bring
its operations more in line with both current and projected revenue levels. The
Company anticipates that its planned consolidation, discussed below, will not
compromise the Company's ability to achieve growth in the markets that we
currently serve. The investments which have been made in digital workflow have
significantly improved turnaround times essentially eliminating the need for a
physical presence in Indiana.

Pursuant to the Company's planned consolidation, which was approved by
the Company's Board of Directors in March 2001, the Company intends to close its
Indiana location during the second quarter of 2001. The Company believes that
the majority of sales and required manufacturing capacity associated with the
Indiana location can be absorbed by the Company's remaining locations, where
there is presently sufficient capacity. In addition, the Company intends to
streamline further its operations by selling certain other equipment in an
effort to further realign its capacity. The Company believes that this operating
realignment will provide a reduced cost structure and improve the Company's
profit potential. In connection with these consolidation initiatives, the
Company has written-down the related assets to their net realizable value and
recorded a charge of $3,458,000 related to the revaluation of these impaired
assets in the fourth quarter of 2000. In connection with the consolidation, the
Company expects to incur certain exit costs, principally severance, estimated at
$500,000. Such amounts will be expensed in 2001.

A summary of the charges relating to the closing of the Indiana
facility and expected sale of equipment is presented below:

| |                                     |  |                 | 
| | ----------------------------------- |  | --------------- | 
| | Write-off of goodwill               |  | $    295,000    | 
| | Estimated loss on sale of equipment |  | 3,163,000       | 
| | Total                               |  | $ 3,458,000

The goodwill relates to the Indiana acquisition in 1997. The Company
has provided for the loss on sale of equipment by using the estimated fair
market value less any costs related to the sale based on information received
from equipment manufacturers and brokers. Such estimates of the value of
equipment could change based on the actual proceeds received by the Company.
Anticipated proceeds from the sale of equipment will be utilized to pay down
borrowings under the Company's debt agreements.

The Company believes that these initiatives will improve its cost
structure and profit margins and strengthen its competitive position in both
current and new markets. By consolidating operations, the Company believes that
it will achieve improved production efficiency, profitability and asset
utilization. However, there can be no assurance that the Company's profit
margins and competitive position will improve.

Inflation and Seasonality

The Company has experienced certain inflationary increases in variable
costs. The Company has continued to manage the impact of these cost increases by
renegotiating supplier contracts that provide price protection and price
roll-backs, as well as obtaining certain volume discounts through the purchase
of larger quantities of raw material and improving manufacturing efficiencies,
while providing the same high quality product at competitive prices.

Historically, a portion of the Company's business has been moderately
seasonal. The requirements of the home video, music and cosmetic markets for
products to be delivered for the holiday season generally causes an increase in
sales from August through October. See "Item 1. Business-Seasonality," above.

-17-

New Accounting Pronouncement

Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998.
This statement established accounting and reporting standards for derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, SFAS No. 138, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133" was issued, making SFAS No. 133 effective for all quarters of
fiscal years beginning after June 15, 2000, or the Company's fiscal 2001. Based
upon review of the provisions of this standard, the Company has determined that
it will not have a material impact on its financial position or results of
operations.

|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk

The Company finances the purchase of production equipment and other
capital expenditures through long-term debt and/or capital leases. The majority
of the Company's long term debt is its revolving line of credit, which is
exposed to changes in interest rates. As of December 31, 2000, the Company had
$12.8 million of debt outstanding on its revolving line of credit. The stated or
implicit rates on the Company's other borrowings, including capital leases, are
generally fixed or in those instances where rates are variable, the Company
generally fixes the rates through interest rate swap agreements. If current
interest rates were to increase by 10%, the effect to the Company would be an
additional annual expense of approximately $80,000.

The Company does not have any sales, purchases, assets or liabilities
denominated in currencies other than the U.S. dollar, and as such is not subject
to foreign currency exchange rate risk.

-18-

|        |                                            
|------- | -------------------------------------------
|ITEM 8. | Financial Statements and Supplementary Data

Page

|                                                                                                           |     
|---------------------------------------------------------------------------------------------------------- | ----
|Independent Auditors' Report                                                                               | F-1 
|Consolidated Balance Sheets as of December 31, 2000 
     and 1999                                         | F-2 
|Consolidated Statements of Operations for the years ended
     December 31, 2000, 1999, and 1998           | F-3 
|Consolidated Statements of Stockholders' Equity for
     the years ended December 31, 2000, 1999, and 1998 | F-4 
|Consolidated Statements of Cash Flows for the years ended
     December 31, 2000, 1999 and 1998            | F-5 
|Notes to Consolidated Financial Statements                                                                 | F-6 
|Schedule II:
Valuation and Qualifying Accounts for the years ended
     December 31, 2000, 1999 and 1998   | F-22

-19-

#### DISC GRAPHICS, INC.
                AND SUBSIDIARIES

               Consolidated Financial Statements

               December 31, 2000 and 1999

            (With Independent Auditors' Report Thereon)

### 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, 2000 and
1999, and the related  statements of operations, stockholders'  equity and cash flows for each of the years in the three-year period ended
December  31, 2000.  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 auditing standards generally  accepted  in the United States of America.  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, 2000 and 1999, and the results of their operations and their cash
flows for each of the years in the  three-year  period  ended  December  31, 2000 in  conformity  with accounting principles generally
accepted in the United States of America.  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.

Melville, New York
February 2, 2001, except for
Notes 6, 8 and 17, which are as of April 13, 2001

-F1-

DISC GRAPHICS, INC.
           AND SUBSIDIARIESConsolidated Balance Sheets

      December 31, 2000 and 1999

`2000           1999
                                                          ----           ----
  Assets
  ------

Current assets:
      Cash                                            $    59,489        142,531
      Accounts receivable, net of allowance for
        doubtful accounts of $1,498,000 and
                $1,418,000, respectively               12,343,062     13,579,201
      Inventories                                       2,695,377      4,428,374
      Prepaid expenses and other current assets           355,626        448,364
      Income taxes receivable                           1,281,284            --
      Deferred income taxes                             2,037,000      1,092,000
                                                        ---------      ---------
                       Total current assets            18,771,838     19,690,470

Plant and equipment, net (including $6,020,000
        of assets held for sale at December 31, 2000)  16,782,729     14,574,393
Goodwill, net of amortization of $946,000 and
        $499,000, respectively                          5,293,688      6,247,588
Covenants not to compete, net of amortization
        of $364,000 and $144,000, respectively            736,236        956,236
Security deposits and other assets                        559,168      1,039,119
                                                          -------      ---------

                       Total assets                  $ 42,143,659     42,507,806
                                                     ============     ==========

        Liabilities and Stockholders' Equity


Current liabilities:
      Current maturities of long term debt           $  1,458,290        564,425
      Current maturities of capitalized lease
         obligations payable                              710,485      1,287,753
      Accounts payable and accrued expenses             6,083,982      8,125,209
      Income taxes payable                                  --           590,104
                                                        ---------     ----------
                       Total current liabilities        8,252,757     10,567,491

Long term debt, less current maturities                20,509,060     11,309,675
Capitalized lease obligations payable,
        less current maturities                           416,634      2,604,586
Deferred income taxes                                   1,247,000      1,579,000
                                                        ---------      ---------
                       Total liabilities               30,425,451     26,060,752

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 5,548,761 shares            55,488         55,488
      Additional paid in capital                        5,009,671      5,009,671
      Retained earnings                                 6,685,012     11,413,501
                                                        ---------     ----------
                                                       11,750,171     16,478,660

Less:
      Treasury stock, at cost, 30,519 and 30,409
        shares at December 31, 2000 and December 31,
                1999, respectively                        (31,963)       (31,606)
                                                          -------        -------
                    Total stockholders' equity         11,718,208     16,447,054
                                                       ----------     ----------

                    Total liabilities and
                        stockholders' equity         $ 42,143,659   $ 42,507,806
                                                     ============   ============`

See accompanying notes to Consolidated Financial Statements.
-F2-

DISC GRAPHICS, INC.
                    AND SUBSIDIARIESConsolidated Statements of Operations

      Years ended December 31, 2000, 1999, and 1998

`2000              1999              1998
                                    ----              ----              ----

Net sales                    $    65,376,090       67,987,941         58,881,533
Cost of  sales                    53,644,234       50,697,468         43,082,081
                                 -----------      -----------         ----------

     Gross profit                 11,731,856       17,290,473         15,799,452

Operating Expenses:
     Selling and shipping          7,572,868        6,804,982          6,018,562
     General and administrative    6,310,521        5,555,369          4,531,620
     Asset impairment charge       3,458,000            -----              -----
                                   ---------        ---------          ---------
        Operating income (loss)   (5,609,533)       4,930,122          5,249,270

Interest expense, net              1,661,956          747,202            633,512
Gain on disposal of equipment           ----             ----            149,669
                                   ---------        ---------            -------

Income (loss) before provision
        for income taxes          (7,271,489)       4,182,920          4,765,427

Provision (benefit) for
        income taxes              (2,543,000)       1,676,000          1,901,000
                                  -----------      ----------          ---------

        Net income (loss)      $  (4,728,489)       2,506,920          2,864,427
                               =============        =========          =========
        Net income (loss)
                per share:

             Basic             $       (0.86)            0.45               0.52
                               =============             ====               ====

             Diluted           $       (0.86)            0.45               0.52
                               =============             ====               ====


        Weighted average number of shares outstanding

             Basic                 5,518,269        5,518,361          5,474,444

             Diluted               5,518,269        5,540,265          5,492,050`

See accompanying notes to Consolidated Financial Statements.
-F3-

DISC GRAPHICS, INC.
        AND SUBSIDIARIESConsolidated Statements of Stockholders' Equity

Years ended December 31, 2000, 1999, and 1998

`Additional
                             Preferred stock     Common Stock        paid in      Retained    Treasury
                             Shares   Amount   Shares     Amount     capital      earnings     Stock      Total

Balance,
December 31, 1997              ----   $----   5,440,256   $ 54,403  5,044,934    6,042,154   (29,815)  11,111,676

Shares issued in connection
 with warrants exchanged       ----    ----     108,505      1,085     (1,085)        ----      ----         ----

Purchase of treasury stock     ----    ----        ----       ----       ----         ----    (1,521)      (1,521)

Purchase of warrants           ----    ----        ----       ----    (34,178)        ----      ----      (34,178)

Net income                     ----    ----        ----       ----       ----    2,864,427      ----    2,864,427
                             ------  ------    --------    -------   ---------   ---------   --------- ----------
Balance,
December 31, 1998              ----    ----   5,548,761     55,488  5,009,671    8,906,581   (31,336)  13,940,404

Purchase of treasury stock     ----    ----       ----        ----       ----         ----      (270)        (270)

Net income                     ----    ----       ----        ----       ----    2,506,920       ----   2,506,920
                             ------  ------   ---------    -------   --------    ---------   --------   ----------
Balance,
December 31, 1999              ----    ----   5,548,761     55,488  5,009,671   11,413,501   (31,606)  16,447,054

Purchase of treasury stock     ----    ----       ----        ----       ----          ----     (357)        (357)

Net income (loss)              ----    ----       ----        ----       ----   (4,728,489)     ----   (4,728,489)
                             ------  ------   ---------   --------  ----------  -----------  --------  -----------
Balance,
December 31, 2000              ----  $----     5,548,761    55,488  5,009,671    6,685,012   (31,963)  11,718,208
                               ====   ====     =========    ======  =========    =========   ========  ==========`

See accompanying notes to consolidated financial statements.

-F4-

DISC GRAPHICS, INC.
   AND SUBSIDIARIESConsolidated Statements of Cash Flows

         Years ended December 31, 2000, 1999, and 1998

`2000         1999        1998
                                                ----         ----        ----

Cash flows from operating activities:
     Net income (loss)                     $ (4,728,489)   2,506,920   2,864,427
     Adjustments to reconcile net income
        (loss) to net cash provided by
                operating activities:
        Depreciation and amortization         3,623,455    2,477,667   2,216,705
        Deferred income tax expense
                        (benefit)            (1,277,000)     127,000     161,000
           Provision for doubtful accounts      940,324      422,721     402,470
           Asset impairment charge            3,458,000         ----        ----
           Loss on sale of assets related
            to consolidation of
               Edgewood facility                258,770         ----       -----
           Gain on disposal of equipment           ----         ----    (149,669)
           Changes in assets and liabilities,
                net of the effect of business acquired:
                  Accounts receivable           296,278     (210,400) (1,425,208)
                  Inventory                   1,732,997   (1,857,906)   (472,933)
                  Prepaid expenses and
                     other current assets       (75,747)     (46,677)     57,458
                  Accounts payable and
                     accrued expenses        (2,058,098)   1,641,772     201,406
                  Income taxes payable       (1,871,388)    (225,848)    306,025
                  Security deposits and
                     other assets               476,998     (302,272)   (470,413)
                                                -------     --------    --------
             Net cash provided by
                operating activities            776,100    4,532,977   3,691,268
                                                -------    ---------   ---------

Cash flows from investing activities:
     Capital expenditures                    (9,179,655)  (5,722,182) (1,025,613)
     Purchase of net assets of
        business acquired                        (7,500)  (3,581,806)     18,211
     Proceeds from sale of equipment            596,340         ----     166,900
                                                -------    ---------     -------
     Net cash used in investing activities   (8,590,815)  (9,303,988)   (840,502)
                                             ----------   ----------    --------

Cash flows from financing activities:
     Proceeds (repayments) of
          long-term debt                     10,497,250    6,356,356  (1,714,160)
     Principal proceeds from notes receivable      ----         ----      40,406
     Proceeds from capital lease obligations       ----         ----     745,549
     Principal payments of capital
          lease obligations                  (2,765,220)  (1,485,857) (1,875,302)
     Purchase of warrants                          ----         ----     (34,178)
     Purchase of treasury stock                    (357)        (270)     (1,521)
                                                   ----         ----      ------
     Net cash provided by (used in)
        financing activities                  7,731,673    4,870,229  (2,839,206)
                                              ---------    ---------  ----------

Net increase (decrease) in cash                 (83,042)      99,218      11,560

Cash at beginning of year                       142,531       43,313      31,753
                                                -------       ------      ------
Cash at end of year                          $   59,489      142,531      43,313
                                             ==========      =======      ======`

See accompanying notes to Consolidated Financial
Statements.-F5-

DISC GRAPHICS, INC.
                                                           AND SUBSIDIARIESNotes to Consolidated Financial Statements

                                                      December 31, 2000 and 1999

|    |                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Summary of Significant Accounting Policies
|    | (a)                                        | Description of Business

                  Disc Graphics, Inc. and subsidiaries (the "Company") operates in one business segment:  printing and manufacturing of
                  paperboard  packaging.  The Company's  customers  include  music,  home video,  pharmaceutical  and general  consumer
                  products  companies.  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.
|    | (b)                                        | Principles of Consolidation

                  The  consolidated  financial  statements  include  the  financial  statements  of the  Company  and its  wholly-owned
                  subsidiaries.  All significant inter-company balances and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                     
|    | (c)                                        | Revenue Recognition

                  Revenues are recognized when merchandise is shipped.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | (d)                                        | Cash Equivalents

                  For purposes of the  statements of cash flows,  the Company  considers all highly liquid debt  instruments  purchased
                  with an original  maturity of three months or less to be cash  equivalents.  There were no cash  equivalents in 2000,
                  1999 and 1998.                                                                                                                                                                                                                                       
|    | (e)                                        | Inventories

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

| |                         |  |               | 
| | ----------------------- |  | ------------- | 
| | 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 | 

Assets under capital leases and leasehold improvements 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.

-F6-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (g) | 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. The  assessment  of the  recoverability  of goodwill  will be impacted if  estimated  future
                  operating cash flows are not achieved.  In connection with the closing of the Company's Indiana facility (see Note 17),
                  related goodwill of $295,000 was written off in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (h) | 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.  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 realized 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (i) | Net Income (Loss) Per Share

                           Basic earnings per share are computed by dividing income (loss) available to common  stockholders  (which,  for the
                  Company,  equals its net income (loss)) by the  weighted  average  number of common  shares  outstanding  during the period.
                  Diluted  earnings  per share  reflect the  potential  dilution  that would  occur if all  securities  exercisable  or
                  exchangeable for or convertible into shares of common stock that were  outstanding  during the period,  such as stock
                  options,  warrants  and  convertible  debentures,  were  exercised  or  converted  into shares of common  stock.  The
                  computation of weighted  average shares  outstanding  used in the calculation of diluted  earnings per share does not
                  include  shares of common  stock that would be  issuable  upon the  exercise  of the  Company's  outstanding  Class A
                  Warrants or the  conversion  of the  convertible  debenture,  because the  exercise  price of such  warrants  and the
                  conversion  rate of such  debentures  exceeded  the market  price of the  Company's  common stock during the relevant
                  periods.  In 2000, the computation of diluted earnings per share does not include incremental shares issuable upon the exercise of stock
                  options since the Company experienced a loss.  Total options outstanding as of December 31, 2000 were 414,257.
| | (j) | Stock Option Plan

                  The Company  records  compensation  expense for  employee  stock  options  only if the  current  market  price of the
                  underlying  stock exceeds the exercise  price on the date of the grant.  The Company has elected not to implement the
                  fair value based  accounting  method for  employee  stock  options,  but has  elected to  disclose  the pro forma net
                  earnings  and pro forma  earnings  per share for  employee  stock  option  grants as if such  method had been used to
                  account for stock-based compensation cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

-F7-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (k) | Impairment of Long Lived Assets and Long Lived Assets to Be Disposed Of

                  The Company reviews long-lived assets and certain identifiable  intangibles 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 undiscounted estimated future net cash flows expected to
                  be generated  by the asset.  If such assets are  considered  to be  impaired,  the  impairment  to be  recognized  is
                  measured by the amount by which the carrying  amount of the assets exceed the fair value of the assets.  Assets to be
                  disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

                  Due to the planned closure of the Company's Indiana facility and the sale of certain equipment and a building,
                  the Company has revalued certain long lived assets based on the related fair values less costs to sell (see Note
                  17).  As of December 31, 2000, $6,020,000 of net property, plant and equipment is expected to be sold.
| | (l) | Comprehensive Income

                  The Company has no elements of other  comprehensive  income other than net income;  therefore,  comprehensive  income
                  equals reported net income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (m) | 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, including the estimated proceeds upon sale of
equipment and a building described in Note 17, the amount of the allowance for doubtful accounts,
projected future cash flows utilized in assessing the recoverability of long lived assets and the amortization period for
goodwill.  Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (2) | Acquisition of Contemporary Color Graphics, Inc.

     On July 1, 1999, the Company acquired substantially all of the assets and certain liabilities of
     Contemporary Color Graphics, Inc., a New York based commercial printer ("CCG"), for $3,500,000 in cash at
     closing, a promissory note in the amount of $1,000,000, a supplemental note in the amount of $1,000,000,
     convertible debentures in the amount of $600,000 and assumed debt of approximately $1,200,000, subject to
     adjustment.  See Note 8 for further information regarding the notes, debentures and debt assumed.  The
     Company paid the cash portion of the purchase price from borrowings under its revolving credit facility.
     The acquisition was accounted for using the purchase method of accounting and in accordance with generally
     accepted accounting principles.                                                                                                                                                                                                                                                                                                                                                                                                                                    

-F8-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | The total  purchase  price,  including  transaction  costs of $89,000,  was allocated to the fair value of the
     assets  acquired and liabilities  assumed.  The purchase price  allocation  resulted in goodwill of $5,266,300
     and covenants not to compete of $1,000,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The  following  unaudited pro forma  results have been  prepared for  comparative  purposes only and include
                  certain  adjustments such as (i) additional  amortization  expense due to goodwill (15 years) and the covenant not to
                  compete (5 years)  resulting from the CCG acquisition and (ii) increased  interest expense due to cash borrowed under
                  the Company's  financing  agreement for the payment of the purchase  price,  the repayment of CCG's notes payable and
                  the note,  supplemental note and convertible  debenture issued by the Company.  These unaudited pro forma results are
                  not  necessarily  indicative of the results of operations  which  actually  would have resulted had the purchase been
                  effected on January 1, 1998, nor of future results of operations of the consolidated entities.

| |                                          |  |          |  |          | 
| | ---------------------------------------- |  | -------- |  | -------- | 
| | (In thousands, except per share amounts)
| | 1999                                     |  | 1998     | 
| | Net sales                                |  | $ 71,606 |  | $ 66,350 | 
| | Net income                               |  | 2,307    |  | 2,874    | 
| | Net income per share:                    | 
| | Basic                                    |  | 0.42     |  | 0.52     | 
| | Diluted                                  |  | 0.42     |  | 0.52     | 
|

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the second quarter of 2000, the Company increased the goodwill  associated  with the acquisition of CCG
                 by  approximately  $185,000  to  properly  reflect  the value of  certain  assets and  liabilities  assumed as of the
                 acquisition  date.  In accordance  with the terms of the  acquisition  agreement an  adjustment  would be made to the
                 purchase price as a result of the actual fair value of assets and liabilities acquired.

                The principal  amount due on the  promissory  note and  convertible  debentures on August 1, 2000 of $320,000 was not
                  paid because minimum sales amount required under the asset purchase  agreement were not achieved for the year ended
                June 30, 2000.  In addition,  as a result of the sales shortfall,  the remaining  balances of the promissory note and convertible  debenture was reduced
                  by an additional  $84,000.  As a result of the downward  adjustment,  goodwill was also reduced  accordingly  in the
                  amount of $404,000.  

On October 4, 2000, the former owners of CCG asserted a claim against the Company for principal and interest
payments allegedly due on August 1, 2000 under the terms of the $1 million note and the $600,000 convertible
debentures.  The Company believes that no payments are currently due to the former owners of CCG since the
minimum sales levels discussed above were not achieved.

     In March 2000, the Company announced that it would close its Edgewood facility (the former CCG facility)
     and consolidate its operations with its Hauppauge, New York facility.  In connection with the consolidation,
     the Company recorded a charge of $324,000, principally relating to a loss on the sale of equipment.

-F9-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|    |  |                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|(3) |  | Supplemental Cash Flow Information

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

| |                                              |              |      |           |      |           | 
| | -------------------------------------------- | ------------ | ---- | --------- | ---- | --------- | 
| | 2000                                         |              | 1999 |           | 1998 |          
| | Cash paid during the year for:
     Interest | $ 1,562,496  |      | 737,073   |      | 664,586   | 
| | Income taxes                                 | $    605,388 |      | 1,774,848 |      | 1,448,500
|

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) |  | Covenants Not to Compete

         In 1999,  the Company  obtained  non-compete  agreements  from the former owners in connection  with the CCG  acquisition  The
         non-compete  agreements  were valued at $1,000,000.  The  non-compete  agreements are being  amortized over their term of five
         years using the  straight-line  method.  Amortization of these covenants not to compete  amounted to $200,000 and $100,000 for
         the years ended December 31, 2000 and 1999, respectively.

         In 1997, the Company  obtained a non-compete  agreement in connection with the  acquisition of Benham Press,  Inc., an Indiana
         based printing  company  ("Benham").  The non-compete  agreement was valued at $100,000.  The  non-compete  agreement is being
         amortized over its term of five years using the  straight-line  method.  Amortization of the covenant not to compete  amounted
         to $20,000 for each of the years ended December 31, 2000, 1999 and 1998.
|(5) |  | Inventories

         Inventories consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                  |  |                |  |           | 
| | ---------------- |  | -------------- |  | --------- | 
| | 2000             |  | 1999           | 
| | Raw materials    |  | $ 1,517,370    |  | 3,477,610 | 
| | Work-in-process  |  | 844,808        |  | 700,981   | 
| | Finished goods   |  | 333,199        |  | 249,783   | 
| | $ 2,695,377 |  | 4,428,374 | 
|

-F10-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|    |  |                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------
|(6) |  | Property,  Plant and Equipment

         Property, plant and equipment consist of the following:

| |                                                        |  |                    |  |            | 
| | ------------------------------------------------------ |  | ------------------ |  | ---------- | 
| | 2000                                                   |  | 1999               | 
| | Land and building                                      |  | $550,000           |  | 550,000    | 
| | Machinery and equipment                                |  | 27,637,361         |  | 21,249,849 | 
| | Furniture and fixtures                                 |  | 2,146,523          |  | 1,731,718  | 
| | Leasehold improvements                                 |  | 2,743,373          |  | 1,472,713  | 
| | Automobiles and trucks                                 |  | 268,450            |  | 222,328    | 
| | 33,345,707                                             |  | 25,226,608         | 
| | Less accumulated depreciation
    and amortization     |  | 13,399,978         |  | 10,652,215 | 
| | Reserve for loss on sale of equipment
    and building |  | 3,163,000          |  | ----       | 
| | $  16,782,729                                     |  | $  14,574,393 | 
|

| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation  and  amortization  expense of property,  plant,  and equipment  amounted to $2,953,208,  $2,076,563 and
         $2,078,554 for the years ended December 31, 2000, 1999, and 1998, respectively.

|    |  |                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|(7) |  | Accounts Payable and Accrued Liabilities

  Accounts payable and accrued liabilities at December 31, 2000 and 1999 consisted of the following:

| |                                               |  |                |  |           | 
| | --------------------------------------------- |  | -------------- |  | --------- | 
| | 2000                                          |  | 1999           | 
| | Accounts payable and accrued accounts payable |  | $2,297,973     |  | 4,275,144 | 
| | Accrued payroll and other employee benefits   |  | 2,399,112      |  | 2,582,444 | 
| | Accrued vacation                              |  | 402,330        |  | 396,688  
| | Accrued commissions                           |  | 374,929        |  | 643,773   | 
| | Accrued other                                 |  | 609,638        |  | 227,160   | 
| | $6,083,982                               |  | 8,125,209 | 
|

-F11-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|    |  |                                                                  
|--- |  | -----------------------------------------------------------------
|(8) |  | Long Term Debt

         Long Term Debt is summarized as follows:

| |                                               |  |                   |  |           | 
| | --------------------------------------------- |  | ----------------- |  | --------- | 
| | 2000                                          |  | 1999              | 
| | Revolving line of credit (a)                  |  | $  12,809,131     |  | 7,750,000 | 
| | Pinnacle Financing Corp. (b)                  |  | 2,989,600         |  | ----      | 
| | GE Capital Public Finance (c)                 |  | 1,471,375         |  | ----     
| | People's Capital and Leasing Corp. (d)        |  | 1,138,269         |  | ----      | 
| | Promissory Note (e)                           |  | 716,000           |  | 1,000,000 | 
| | Supplemental Note (f)                         |  | 1,124,950         |  | 1,041,650
| | Convertible Debenture (g)                     |  | 480,000           |  | 600,000  
| | Secured equipment financing note (h)          |  | 759,900           |  | 883,500   | 
| | Mortgage payable (i)                          |  | 478,125           |  | 545,625   | 
| | Various secured equipment financing notes (j) |  | ----              |  | 53,325   
| | 21,967,350                                    |  | 11,874,100        | 
| | Less current maturities                       |  | 1,458,290         |  | 564,425   | 
| | $ 20,509,060                             |  | $ 11,309,675 | 
|

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | In February,  1997, the Company entered into a financing agreement with Key Bank, N.A., now known as the Dime Savings
                  Bank of New York, FSB, as amended on December 1, 1998 (the "Credit  Agreement").  The Credit  Agreement  provides the
                  Company  with the option to convert the  outstanding  balance at February  21, 2001 to a fixed term loan to be repaid
                  over four years.  The revolving  credit  portion of the Credit  Agreement  provides  financing  (as defined),  not to
                  exceed  $15,000,000.  The  Credit  Agreement  bears  interest  at the lower of LIBOR  plus  2.00%,  based on the debt
                  coverage  ratio,  or the bank's base rate.  At  December  31, 2000 the base rate was 9.5%.  The Credit  Agreement  is
                  secured by substantially all of the Company's  unsecured assets. In addition,  the Credit Agreement  contains various
                  covenants,  including the maintenance of certain financial ratios, including consolidated net worth, working capital,
                  debt service, and funded debt to EBITDA.

At December 31, 2000, the Company was not in compliance with certain financial covenants contained in the Credit
Agreement. On April 13, 2001, following the adoption by the Company of a consolidation plan (see note 17), the
Company received a commitment letter from the lender which will restructure the Credit Agreement. The commitment
letter waives the covenant violations. In addition, the commitment letter establishes revised covenants to
reflect the Company's 2001 projections and consolidation plan. While the Company believes it will meet its 2001
projections, there can be no assurance that such projections can be attained as a result of the softness in
revenues experienced during the fourth quarter of 2000 and the first quarter of 2001.

The commitment letter also includes the following changes to the Credit Agreement: (i) reduction in maximum
borrowing amount to $12,700,000, subject to a borrowing base formula based on eligible accounts receivable and
inventory, (ii) change in maturity date to April 15, 2002 (with no conversion to a term loan as provided for in
the original agreement), (iii) change in interest rate to the bank's base rate plus 1%, and (iv) required
prepayment of the facility equal to a portion of the Federal tax refund received by the Company.
| | (b) | Secured equipment financing note payable to Pinnacle Capital  Corporation ("PCC") payable in 96 monthly  installments
                  of $43,799 including interest at a fixed rate of 9%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

-F12-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | Secured equipment  financing note payable to GE Capital Public Finance payable in 60 monthly  installments of $34,273
                  including  interest.  Interest is variable,  calculated at a rate of 1.50% plus LIBOR.  The dollar amount of payments
                  will not change with  fluctuations in the interest rate. An adjustment is made at the end of each three-month  period
                  and the subsequent installment payment is adjusted accordingly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (d) | Secured  equipment  financing note payable to People's Capital and Leasing Corp. payable in 84 monthly
                  installments of $18,134 including interest at a fixed rate of 9%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (e) | In  connection  with the  acquisition  of CCG, the Company  issued a  $1,000,000  promissory  note.  Principal on the
                  promissory note must be paid in three annual  installments  commencing on August 1, 2000. Interest at a rate of 8.33%
                  per annum on the note is paid  quarterly.  The principal  amounts of this note and the  debentures  referred to below
                  are subject to downward  adjustment if CCG does not meet certain  minimum  revenue  levels.  In the event such levels
                  are not met and the principal amounts are reduced, goodwill will be adjusted accordingly.

                  The  principal  amount due on the  promissory  note on August 1, 2000 of $200,000 was not paid because  minimum sales
                  amounts  for the year ended June 30, 2000 required  under the asset  purchase  agreement  were not  achieved.  In  addition,  as a result of the sales
                  shortfall, the remaining balances of the promissory note was reduced by an additional $84,000.

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (f) | In connection  with the  acquisition  of CCG, the Company  issued a $1,000,000  supplemental  note.  Principal on the
                  supplemental note must be paid in two annual  installments  commencing on August 1, 2003. Interest at a rate of 8.33%
                  per annum on the note must be paid on each principal  payment date.  Interest accrued on the supplemental  note as of
                  December 31, 2000 is $124,950.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (g) | In connection  with the  acquisition of CCG, the Company issued a $600,000  convertible  debenture.  The  convertible
                  debenture  must be paid in three annual  installments  commencing on August 1, 2000.  Interest at a rate of 8.33% per
                  annum on the note is paid  quarterly.  The former  shareholders  of CCG have the right to convert the debentures into
                  shares of the Company's  common stock,  not less than 30 days before any principal or interest payment date at a rate
                  of one share for every $5.50 of principal or interest.

                  The principal  amount due on the  convertible  debentures on August 1, 2000 of $120,000 was not paid because  minimum
                  sales amounts required for the year ended June 30, 2000 under the asset purchase agreement was not achieved.
| | (h) | Secured equipment financing note payable to a bank, payable in monthly  installments  ranging from $10,300 in 2000 to
                  $14,700 in 2006, plus interest.  Interest is variable,  calculated at a rate of 1.75% points below the bank's current
                  index rate,  which was 9.5% at December 31,  2000.  The interest  rate for this note was 7.75% at December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

-F13-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | (i) | In connection  with the  acquisition  of Benham,  the Company  secured a mortgage with a lending  institution  in the
                  amount of $675,000 for the building and land acquired.  The mortgage is payable over ten years,  commencing  March 1,
                  1998,  at a fixed rate of 8.125%.  This  mortgage is secured by a first lien on the  premises  and an  assignment  of
                  rents and leases on the premises.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | (j) | Various secured equipment financing notes in the amount of $350,488.
These notes were fully repaid in 2000.                                                                                                                                                                                                                                                                                                                                              
|Proceeds from the sale of equipment and a building, as discussed in Note 17, will be used to pay down long
     term debt.
         The  aggregate  maturities  of long-term  debt  outstanding  as of December 31 for each of the five years  subsequent to 2000,
         including amounts outstanding under the Credit Agreement,  are as follows:  $1,458,290 in 2001; $4,215,866 in 2002; $4,511,544
         in 2003; $5,062,382 in 2004; $4,484,064 in 2005; $2,235,204 thereafter.
|(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |     | Leases

         The Company is obligated  under  several  capital  leases for certain  machinery  and  equipment  that expire at various dates
         during the next two years.  At December 31, 2000 and 1999,  the gross amount of plant and  equipment  and related  accumulated
         amortization recorded under capital leases were as follows:                                                                                             

| |                               |  |                |  |           | 
| | ----------------------------- |  | -------------- |  | --------- | 
| | 2000                          |  | 1999           | 
| | Machinery and equipment       |  | $ 3,627,339    |  | 7,921,301 | 
| | Less accumulated amortization |  | 1,571,474      |  | 2,824,867 | 
| | $ 2,055,865              |  | 5,096,434 | 
|

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 12). 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, 2000,  1999 and 1998 was  $1,841,268,  $1,178,058,  and
         $1,162,154, respectively.

-F14-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

| |                                                                                                                                                                                                                                           | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | 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, 2000 are:

| |                                                                             |  |                    |  |                | 
| | --------------------------------------------------------------------------- |  | ------------------ |  | -------------- | 
| | CapitalLeases                                                               |  | OperatingLeases    | 
| | Year ending December 31:                                                    | 
| | 2001                                                                        |  | $ 772,686          |  | $ 1,537,546    | 
| | 2002                                                                        |  | 431,470            |  | 1,107,188      | 
| | 2003                                                                        |  | ----               |  | 1,021,218      | 
| | 2004                                                                        |  | ----               |  | 978,589        | 
| | 2005                                                                        |  | ----               |  | 940,248        | 
| | 2006 and thereafter                                                         |  | ----               |  | 2,037,892      | 
| | Total minimum lease payments                                                |  | 1,204,156          |  | 7,622,681 | 
| | Less amount representing interest (at
   rates ranging from 7.25% to 8.75%) |  | 77,037             | 
| | Net principal portion                                                       |  | 1,127,119          | 
| | Less portion due within one year                                            |  | 710,485            | 
| | Long-term portion                                                           |  | $     416,634 | 
|

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | In 1998,  the Company  traded in a printing  press,  which was  previously  financed by an  equipment  note through GE Capital
         Public Finance ("GECPF"),  for a new press. The carrying value of the old press,  approximately  $1,489,000,  approximated the
         related obligation,  and accordingly no gain or loss was recognized.  In connection with the transaction,  the Company entered
         into a seven year capital lease arrangement with the Suffolk County Industrial  Development  Association  ("SCIDA") and GECPF.
         The lease  contains  certain  provisions  limiting  the  Company's  capital  expenditures  in Suffolk  County and certain debt
         covenants  consistent  with those  contained  in the  Company's  revolving  credit  agreement  with Key Bank,  NA. The initial
         carrying  value of the new press and the net  present  value of the  related  capital  lease  obligation  was  $2,003,657.  On
         February 29, 2000,  the Company  refinanced  the lease with GECPF by entering into a seven year  promissory  note  arrangement
         that does not contain the same capital expenditure provisions, or debt
         covenants, as the SCIDA lease.

-F15-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|     |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) |     | Stockholders' Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     | (a) | Stock Options

                  Pursuant to the  Company's  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  granted  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 must 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,  2000,  there were  85,743  additional  shares
                  available for grant under the Plan.

| |                                               
| | ----------------------------------------------
| | Changes in options outstanding are as follows:

| |                                  |  |                                |  |            | 
| | -------------------------------- |  | ------------------------------ |  | ---------- | 
| | Shares                           |  | Weighted-averageexercise price | 
|
| | Outstanding December 31, 1997    |  | 175,500                        |  | $ 3.85     | 
| | Granted                          |  | 110,145                        |  | 4.06       | 
| | Outstanding December 31, 1998    |  | 285,645                        |  | 3.93       | 
| | Granted                          |  | 18,879                         |  | 4.50       | 
| | Outstanding December 31, 1999    |  | 304,524                        |  | 3.97       | 
| | Granted                          |  | 109,733                        |  | 3.06       | 
| | Outstanding December 31, 2000    |  | 414,257                   |  | 3.73       | 
| | Exercisable at December 31, 2000 |  | 285,645                   |  | $3.93
|

| |                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The exercise price of options exercisable as of December 31, 2000 was from $2.00 to $4.76.
    The weighted average remaining life of options outstanding as of December 31, 2000, was 6.37 years.
    The assumptions used in determining the weighted average fair value of options granted are as follows:

| |                             |      |       |       |       | 
| | --------------------------- | ---- | ----- | ----- | ----- | 
| | 2000                        | 1999 | 1998  |      
| | Weighted average fair value |      | $3.04 | 3.06  | 2.91  | 
| | Divided yield               |      | ----  | ----  | ----  | 
| | Risk free interest rate     |      | 6.56% | 4.70% | 5.73% | 
| | Stock volatility            |      | 179%  | 56%   | 59%   | 
| | Expected option life        |      | 10.00 | 10.00 | 9.77  | 
|

-F16-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

| |                                                                  |              |           |           | 
| | ---------------------------------------------------------------- | ------------ | --------- | --------- | 
| | 2000                                                             | 1999         | 1998      |          
| | Net income (loss):
    As reported                               | $(4,728,489) | 2,506,920 | 2,864,427 | 
| | Pro forma                                                        | $(4,873,956) | 2,395,469 | 2,744,554 | 
| | Net income (loss) per share:
     As reported: basic and diluted | $(.86)       | .45       | .52       | 
| | Pro forma: basic and diluted                                     | $(.88)       | .43       | .50       | 
|

|     |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | (b) | Warrants

                  In connection with the Company's merger with its predecessor,  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 1998, third parties exchanged 922,300 warrants which were issued in connection with the
              Company's predecessor's IPO for 108,505 shares of common stock.  In addition during 1998, 100,000
              warrants issued in connection with such IPO were repurchased for $34,178.
|(11) |     | Income Taxes

                  The  provision  for (benefit of) income taxes for the years ended  December 31, 2000,  1999 and 1998  consists of the
         following:                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                        |               |               |           | 
| | ---------------------- | ------------- | ------------- | --------- | 
| | 2000                   | 1999          | 1998          |          
| | Current
     Federal   | $   (990,000) | 1,268,000     | 1,484,000 | 
| | State                  | (276,000)     | 281,000       | 256,000   | 
| | (1,266,000)            | 1,549,000     | 1,740,000     |          
| | Deferred:
     Federal | (1,240,000)   | 82,000        | 200,000   | 
| | State                  | (37,000)      | 45,000        | (39,000)  | 
| | (1,277,000)            | 127,000       | 161,000       |          
| | $  (2,543,000)     | 1,676,000 | 1,901,000 |          
|

-F17-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The provision for income taxes for the years ended  December 31, 2000,  1999,  and 1998 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.
| | The tax effects of  temporary  differences  that give rise to a  significant  portion of the net  deferred  tax  asset (liability) at
         December 31, 2000 and 1999 are as follows:                                                                                                

| |                                                                      |                |               | 
| | -------------------------------------------------------------------- | -------------- | ------------- | 
| | 2000                                                                 | 1999           |              
| | Deferred tax assets:
   Inventory valuation                          | $   47,000     | 45,000        | 
| | Allowance for doubtful accounts                                      | 509,000        | 470,000       | 
| | Uniform cost capitalization for inventory                            | 47,000         | 67,000        | 
| | Accrued vacation                                                     | 110,000        | 133,000       | 
| | Accrued salaries and commissions                                     | 31,000         | 57,000        | 
| | Sales return allowance                                               | ----           | 48,000        | 
| | Reserve for asset impairment                                         | 1,176,000      | -------       | 
| | Investment tax credit carryforwards and others                       | 974,000        | 613,000       | 
| | Total deferred tax assets                                            | 2,894,000      | 1,433,000     | 
| | Less valuation allowance                                             | (857,000)      | (341,000)     | 
| | Net deferred tax assets                                              | 2,037,000      | 1,092,000     | 
| | Deferred tax liability:
   Accelerated depreciation for tax purposes | (1,247,000)    | (1,579,000)   | 
| | Net deferred tax asset (liability)                                   | $  790,000 | (487,000) | 
|

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The  valuation  allowance  for deferred tax assets as of December 31, 2000 and 1999 was $857,000 and  $341,000,  respectively.
         The net change in the total  valuation  allowance  for the year ended  December  31,  2000 was an  increase  of  $516,000.  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, as well as the availability of carryback claims,
         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, 2000.

         At December 31, 2000, the Company has available New York State investment tax credit carryforwards  aggregating  approximately
         $1,433,000 expiring through 2015.

-F18-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(12) | 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, 2000,  1999 and 1998,
         and a security deposit of $115,000 paid on the lease is included in security deposits and other assets at December 31, 2000.                                                                                                                                                                                                                                                                                                                         
|(13) | Commitments and Contingencies

         In 1992, the Company entered into consulting  agreements,  as amended,  to provide three of its  shareholders a minimum annual
         consulting fee of $37,333  through August 31, 2001. The aggregate  expense under these  agreements was $111,999 in each of the
         years ended December 31, 2000, 1999 and 1998.

     The Company has entered into a joint venture agreement with two other entities for the purpose of acquiring
     and operating a facility to produce reenforced folding cartons.  Initial funding of $225,000 is included in
     "Security Deposits and Other Assets" in the accompanying consolidated balance sheet as of December 31, 2000.
     The Company is obligated to fund an additional $625,000 which is expected to be made in 2001.  Additional
     contributions may also be required to fund the ventures operations.
|(14) | 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 3% of
         compensation.  The costs related to the plan approximated $322,000,  $224,000,  and $116,000 for the years ended December 31,
         2000, 1999 and 1998, respectively.         
|(15) | 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  values of all  financial  instruments  classified  as  current  assets  or  current
         liabilities  are deemed to  approximate  fair value  because of the short  maturity  of these  investments.  In the opinion of
         management,  the fair values of long-term  debt and capital leases are not  materially  different  from their carrying  values
         based on the related interest rates compared to rates currently available to the Company.                                                                                                                                                                                                           

-F19-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(16) | Business and Credit Concentrations

         Most of the  Company's  customers  are  located in the  United  States.  No one  customer  accounted  for more than 10% of the
         Company's sales for 2000, 1999, and 1998. At December 31, 2000 and 1999, three customers  (aggregating  20%) and two customers
         (aggregating 19%) each accounted for more than 5% of the net accounts receivable balance, respectively.

         The Company  generally  grants credit based upon analysis of the  customer's  financial  position and  previously  established
         buying and selling patterns.                                                                                                                                                                                                                                                                                                                                                                                                    
|(17) | Asset Impairment Charge

     As a result of weakening sales in the fourth quarter of 2000 and first quarter of 2001, the Company approved
     a plan to close its Indiana facility and sell certain manufacturing equipment during March 2001.  In
     connection with this plan, the Company reassessed the recoverability of the related long-lived assets.  This
     reassessment resulted in the recording of a non-cash charge of $3,458,000 during the fourth quarter of
     2000.  The Company wrote-off the remaining goodwill relating to the acquisition of the Indiana facility of
     $295,000.  In addition, the Company estimated a loss of $3,163,000 in connection with the sale of certain
     manufacturing equipment and a building.  The amount of the loss was estimated based on information received
     from equipment manufacturers and brokers and is subject to change based on the proceeds the Company realizes
     upon the actual sale of the related equipment and a building.

-F20-

DISC GRAPHICS, INC.
                            AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements(continued)

                               December 31, 2000 and 1999

|     |                                                                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(18) | Unaudited Quarterly Financial Information

         The following is a summary of unaudited quarterly  operating results for fiscal 2000 and 1999 (in thousands,  except per share
         amounts):

| |                                                    |               |              |               |          | 
| | -------------------------------------------------- | ------------- | ------------ | ------------- | -------- | 
| | 2000                                               |              
|
| | FirstQuarter                                       | SecondQuarter | ThirdQuarter | FourthQuarter |         
|
| | Net sales                                          | $  16,572     | 15,595       | 17,804        | 15,405   | 
| | Gross profit                                       | 2,894         | 1,845        | 3,299         | 3,694    | 
| | Net income (loss)                                  | (545)         | (1,291)      | (360)         | *(2,532) | 
| | Net income (loss) per share:
    Basic and diluted | (.10)      | (.23)     | (.07)      | (.46) | 
|
| | 1999                                               |              
|
| | FirstQuarter                                       | SecondQuarter | ThirdQuarter | FourthQuarter |         
|
| | Net sales                                          | $ 14,895      | 14,708       | 18,972        | 19,413   | 
| | Gross profit                                       | 3,424         | 4,091        | 4,903         | 4,872    | 
| | Net income                                         | 301           | 700          | 748           | 758      | 
| | Net income per share:    Basic and diluted         | .05        | .13       | .14        | .14   | 
|

| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net income per share  calculations  for each of the quarters are based on weighted  average  numbers of share  outstanding  in
         each period.  Therefore, the sum of the quarters in a year does not necessarily equal the year's earnings per share.

*  Includes a $2,248,000 (net of tax) asset impairment charge (see Note 17).

-F21-

DISC GRAPHICS, INC.SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

|                                                                                |                                |                           |              |         |                         
|------------------------------------------------------------------------------- | ------------------------------ | ------------------------- | ------------ | ------- | ------------------------
|Col. A.                                                                         | Col. B.                        | Col. C.                   | Col. D.      | Col. E. | Col. F.                 
|                                                                               
|Classification                                                                  | Balance at Beginning of Period | Charged toCost andExpense | Deduction(1) | Other   | Balance at End of Period
|                                                                               
|For the year ended December 31, 1998:
          Allowance for doubtful accounts | $  1,162,000                   | $  403,000                | $  (233,000) |         | $  1,332,000            
|                                                                               
|For the year ended December 31, 1999:
       Allowance for doubtful accounts    | $  1,332,000                   | $  423,000                | $  (337,000) |         | $  1,418,000            
|                                                                               
|For the year ended December 31, 2000:
  Allowance for doubtful accounts         | $  1,418,000                   | $  940,000                | $  (860,000) |         | $  1,498,000            
|                                                                               

-F22-

____________________(1)Deductions relate to uncollectible accounts charged off to valuation accounts, net of recoveries.

|        |                                                                                                     
|------- | ----------------------------------------------------------------------------------------------------
|ITEM 9. | Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.

-20-

PART III

In accordance with General Instruction G(3) to Form 10-K, except as
indicated in the following sentence, the information called for by Items 10, 11,
12 and 13 is incorporated by reference to the Registrant's definitive Proxy
Statement pursuant to Regulation 14A for the Registrant's 2001 Annual Meeting of
Stockholders. As permitted by General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K, the information on executive
officers called for by Item 10 is included in Part I of this Annual Report.

PART IV

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

|    |  |                                                                                                             |                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Documents filed with this Report:                                                                          
|    |  | (1)                                                                                                         | Financial Statements.  (See Item 8 above.) Disc Graphics,  Inc.  Consolidated  Financial Statements for each
    of the three years in the three-year period ended December 31, 2000.
|    |  | (2)                                                                                                         | Financial Statement Schedules.  (See Item 8 above.)
    Schedule II - Valuation and Qualifying Accounts                                                                              
|    |  | (3)                                                                                                         | Exhibits:  See Exhibit Index included elsewhere in this Report.                                                                                                                      
|(b) |  | Reports on Form 8-K.    No reports on Form 8-K were filed by
the Company during the fourth quarter of 2000.
|(c) |  | Exhibits.  See Exhibit Index included elsewhere in this Report.                                            
|(d) |  | Financial Statement Schedules.  See Items 8 and 14(a)(2) above.                                            

-21-

EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                                       
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                           
|2       |  | Agreement  and Plan of Merger  dated as of May 8, 1995 between the  Registrant  and Old Disc (filed as Exhibit 2.1 to
       the Form S-4 Registration Statement, Amendment No. 1 dated August 31, 1995 [File No. 33-94068]*).                                                                                                        
|2.1     |  | Asset Purchase  Agreement dated as of July 1, 1999, by and among the Registrant,  Contemporary  Color Graphics,  Inc.
                  ("CCG") and the  shareholders of CCG named therein (filed as Exhibit 2.1 to the  Registrant's  Form 8-K dated July 1,
                  1999 and incorporated herein by reference).           
|2.2     |  | Promissory  Note dated July 1, 1999,  made by the  Registrant to CCG in the  principal sum of $1.0 million  (filed as
    Exhibit 2.2 to the Registrant's Form 8-K dated July 1, 1999 and incorporated herein by reference).                                                                                                          
|2.3     |  | Supplemental  Note dated July 1, 1999,  made by the  Registrant to CCG in the principal sum of $1.0 million (filed as
                  Exhibit 2.3 to the Registrant's Form 8-K dated July 1, 1999 and incorporated herein by reference).                                                                                            
|2.4     |  | Security  Agreement dated July 1, 1999 between the Registrant and CCG (filed as Exhibit 2.4 to the Registrant's  Form
    8-K dated July 1, 1999 and incorporated herein by reference).                                                                                                                                               
|2.5     |  | Agreement of Amendment dated July 1, 1999, between KeyBank National  Association and the Registrant (filed as Exhibit
    2.5 to the Registrant's Form 8-K dated July 1, 1999 and incorporated herein by reference).                                                                                                                  
|3.1     |  | 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*).                                                                                                                              
|3.2     |  | Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to Form 8-A, filed June 21, 1996*).                                                                                                                                                                                                                              
|4.1     |  | Redeemable  Warrant Agreement  between the Registrant and American Stock Transfer & Trust Company,  as warrant agent,
    including  the  form of  Certificates  representing  the  Class A  Warrants  (filed  as  Exhibit  4.3 to the Form S-1
    Registration Statement, declared effective November 9, 1993 [File No. 33-62980]*).
|4.2     |  | Form of Merger  Warrants,  with Schedule  indicating  particular  terms of each of 60 individual  warrants  (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*).                                                                        
|4.3     |  | 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]*).                                                                                                                                                                      
|4.4     |  | Agreement  dated as of October 27, 1995 between certain  stockholders  of the Registrant and certain  stockholders of
    Old Disc, 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*).                              
|-22-   

|     |  |                                                                                                                                                                                                                                                                                         
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.5  |  | Form of  certificate  evidencing  shares of Common Stock (filed as an Exhibit to the  Registration  Statement on Form
    S-1, File No. 33-62980 declared effective on November 9, 1993*).                                                                                              
|4.6  |  | Option to  purchase  50,000  shares in favor of Jeffrey J. Bowe,  dated  October 24, 1997 (filed as an Exhibit to the
    Registrant's Form 10-K for the fiscal year ended December 31, 1997*).                                                                                         
|4.7  |  | Convertible Debenture due July 1, 2002, issued by the
    Registrant to CCG on July 1, 1999, in the principal amount of
    600,000 (filed as Exhibit 4.1 to the Registrant's Form 8-K
    dated July 1, 1999 and incorporated herein by reference).                                    
|9.1  |  | Voting and Registration  Rights Agreement dated October 30, 1995 among the Registrant and its shareholders  listed in
    Exhibit 1 thereto  (filed as Exhibit 4.b to the Current  Report on Form 8-K dated October 27, 1995, as amended by the
    Form 8-K/A Amendment No.1 thereto*).
|10.1 |  | Security Agreement dated February 26, 1997 between the Registrant and
    KeyBank National Association (filed as Exhibit 10.a to
    Registrant's Form 10-K for the fiscal year ended December 31,
    1996*).                                                                          
|10.2 |  | Asset Purchase Agreement dated as of May 17, 1996, by and among
  Registrant, Pointille, Inc. and the shareholders of Pointille
  (filed as Exhibit 2 to the Current Report on Form 8-K dated
 May 18, 1996*).                                                                          
|10.3 |  | 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*).    
|10.4 |  | 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*).                                    
|10.5 |  | Agreement of Lease, dated as of December 1, 1992 between Registrant 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*).                                             
|10.6 |  | Agreement of Lease,  dated as of September 15, 1993 between  Registrant  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*).                                                      
|10.7 |  | Agreement of Lease,  dated as of June 14, 1995 between Disc Graphics Label Group,  Inc. and Kertzner  Associates,  Ltd. (filed
    as an Exhibit to the Registration Statement on Form S-4, File No. 33-94068, declared effective on October 30, 1995*).                                
|10.8 |  | Form     of Employment Agreement, dated June 28, 1995, between
    Registrant 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*).                                                     
|10.9 |  | Form     of Employment Agreement, dated June 28, 1995, between
    Registrant 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*).                                                  
|-23-

|      |  |                                                                                                                                                                                                                                               
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10 |  | Form of Employment Agreement, dated June 28, 1995, between
    Registrant and Stephen Frey (filed as Exhibit to the
    Registration Statement on Form S-4, File No. 33-94068 declared
    effective October 30, 1995*).                      
|10.11 |  | Asset Purchase Agreement between Registrant and Benham Press, Inc. dated as of September 19, 1997 (filed as an
Exhibit to the Registrant's Form 10-K for the fiscal year ended December 31, 1997*).                                           
|10.12 |  | Employment  Agreement between Registrant and Jeffrey J. Bowe dated as of October 24, 1997 (filed as an Exhibit to the
    Registrant's Form 10-K for the fiscal year ended December 31, 1997*).                                               
|10.13 |  | $675,000 Mortgage and Security Agreement between Registrant
     and KeyBank National Association dated January 16, 1998 (filed
     as Exhibit "10.M" to the Registrant's Form 10-K for the fiscal
     year ended December 31, 1997*).      
|10.14 |  | Amended and Restated Credit Agreement dated December 1, 1998
    between the Registrant and KeyBank National Association (filed
    as Exhibit "10.N" to the Registrant's Form 10-K for the fiscal
    year ended December 31, 1998*).        
|10.15 |  | Borrower's Confirmation of Security Agreement dated December
    1, 1998 between the Registrant and KeyBank National
    Association (filed as Exhibit "10.O" to the Registrant's Form
    10-K for the fiscal year ended December 31, 1998*).
|10.16 |  | Assignment and Assumption,  dated as of January 1, 2000 between Allied Digital Technologies Corp., Registrant and Lee
    Halpern and Larry Halpern.**                                                                                        
|10.17 |  | Second Amendment to Commercial Lease,  dated as of February 16, 2000 between  Registrant and William S. Pine and Lisa
    Pine Trust u/d/t.**                                                                                                 
|10.18 |  | Extension and Expansion  Agreement  Lease,  dated as of February 17, 2000 between  Registrant and Kerzner  Associates
    Limited.**                                                                                                          
|10.19 |  | Sublease, dated as of January 1, 2000 between Registrant and Banco Union,
New York Agency.**                                                                                                                                                  
|10.20 |  | Amendment No. 2 to Amended and Restated  Credit  Agreement,  dated  December 1, 1998,  between the Registrant and the
    Dime Savings Bank of New York, FSB f/k/a KeyBank National Association.**                                            
|10.21 |  | Borrower's Confirmation of Security Agreement dated February
     25, 2000, between the Registrant and The Dime Savings Bank of
     New York, FSB, f/k/a KeyBank National Association.**                                                     
|10.22 |  | Supplemental Revolving Credit Note dated July 10, 2000,
     between the Registrant and The Dime Savings Bank of New York,
    FSB, f/k/a KeyBank National Association.                                                                       
|10.23 |  | Installment  Promissory  Note and Security  Agreement  dated  December 29, 2000 between the  Registrant  and Pinnacle
    Capital Corporation ("PCC").                                                                                        
|10.24 |  | Installment  Promissory  Note and Security  Agreement  dated  December 29, 2000  between the  Registrant  and Peoples
    Capital and Leasing Corp. ("People's").                                                                             
|-24- 

|                                                                                                                 |  |                                                                     
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------
|21.1                                                                                                             |  | Subsidiaries of the Company.**                                      
|23                                                                                                               |  | Consent of Independent Accountants.**                               
|25.1                                                                                                             |  | Power of Attorney (included in the signature page of this Report).**
|________________*  Document previously filed and incorporated herein by reference
**    Document filed herewith.

-25-

## Signatures and Power of Attorney

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, hereunto duly authorized.

|               |                                                                                                                                                         
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|               | DISC GRAPHICS, INC.                                                                                                                                     
|April 16, 2001 | By:  /s/ Donald Sinkin
            Donald Sinkin, Chairman of
    the Board, Chief Executive
    Officer and President
    (Principal Executive Officer)

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint Donald Sinkin, Margaret M.
Krumholz and Frank A. Bress, or any of them, with full power to act, his or her
attorney-in-fact, with the power of substitution for him or her in any and all
capacities, to sign any or all amendments to this report, and to file the same
with the Securities and Exchange Commission, hereby ratifying and confirming
that each of said attorneys-in-fact, or his or her substitute or substitutes,
may do or cause to be done by virtue hereof.

-26-

Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  this report has been signed  below by the  following
persons on behalf of the Registrant and in the capacities and on the dates indicated:

|                                       |  |                                                                                                                   |  |               
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --------------
|                                       |  |                                                                                                                   |  |               
|Signature                              |  | Title                                                                                                             |  | Date          
|/s/ Donald SinkinDonald Sinkin         |  | Chairman of the Board, Chief
Executive Officer and President
(Principal Executive Officer)                        |  | April 16, 2001
|/s/ Stephen FreyStephen Frey           |  | Senior Vice President of Operations
Secretary and Director
(Principal Operating Officer)                          |  | April 16, 2001
|/s/ Margaret KrumholzMargaret Krumholz |  | Chief Financial Officer and Senior
Vice President of Finance
(Financial Officer and Principal
Accounting Officer) |  | April 16, 2001
|/s/ John RebecchiJohn Rebecchi         |  | Senior Vice President of Sales
and Marketing and Director                                                         |  | April 16, 2001
|/s/ Frank A. BressFrank A. Bress       |  | Vice President for Legal Affairs and
General Counsel                                                              |  | April 16, 2001
|/s/ Daniel LevinsonDaniel Levinson     |  | Director                                                                                                          |  | April 16, 2001
|/s/ Seymour W. ZisesSeymour W. Zises   |  | Director                                                                                                          |  | April 16, 2001
|/s/ Mark L. FriedmanMark L. Friedman   |  | Director                                                                                                          |  | April 16, 2001

-27-

## Exhibit 21.1Subsidiaries of the Company

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

-28-