________________________________________________________________________________
                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 1934
                   For the fiscal year ended December 31, 1998
                                       or
[ ]    Transition report pursuant to Section 13 or 15(d) of the 
        Securities Exchange Act of 1934
                  For the transition period from _____ to _____

                         Commission file number 0-22696

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

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

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

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

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

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

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

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

     Indicate  by check mark  whether the  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 [ ]

     At March 1, 1999,  the  aggregate  market value of the voting stock held by
non-affiliates  of  Registrant  was  approximately  $13.7  million  based on the
closing price of the Common Stock on the Nasdaq Stock Market on that date.

     At March 1, 1999, the Registrant had outstanding 5,518,412 shares of Common
Stock, $.01 par value per share.

Documents  Incorporated by Reference:  The Registrant's  Proxy Statement for its
1999 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:  (1)  to  increase  the
Company's  share of print  and  packaging  sales  within  its  primary  markets,
including music, home video,  pharmaceutical,  cosmetic,  publishing and general
consumer  products;  (2)  to  acquire  other   strategically-located   specialty
packaging and printing  companies that serve  geographic  markets and industries
near existing and potentially new customers,  as well as position the Company to
offer a service  and cost  advantage  over its  competitors;  and (3) to develop
innovative packaging designs and techniques for new and existing markets.

     Disc Graphics is actively involved in investigating additional printing and
packaging related business opportunities. However, the Company is not a party to
any  definitive  agreement  with respect to any such  acquisition.  In addition,
there  can be no  assurance  that the  Company  will  consummate  any  potential
acquisition,  or if completed,  that any such acquisition will be profitable for
the Company.

     Historically,  the Company has grown  primarily  through the development of
new customers by capitalizing on its superior service and response  capabilities
and increases in orders from existing  customers.  In 1996, the Company acquired
Pointille,  Inc., a packaging printer,  and in 1997, the Company acquired Benham
Press,  Inc.,  an  Indiana  based  commercial  printing  company,  and has since
integrated each of their manufacturing  facilities and sales/marketing  programs
into Disc  Graphics.  The Company  intends to continue  and enhance its historic
growth by acquiring strategically-located folding carton and printing companies,
expanding  existing  facilities to serve regional U.S.  markets,  broadening the
Company's product line and continuing ongoing internal expansion.

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

                                        1


Background

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

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

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

Packaging/Printing Industry

     Approximately  64% of the  Company's  revenue in 1998 was derived  from the
manufacture  and  sale  of  paperboard   folding  cartons.   An  industry  trade
publication  has estimated that in 1998 there were  approximately  298 companies
operating 474 folding carton  manufacturing  plants in the United States and the
total revenues from the sale of folding cartons was approximately  $5.1 billion,
remaining  at the same  level as 1997.  The  number  of  folding  carton  plants
remained  steady from 1997 and the  reversal  of a decline in industry  revenues
seen in the past  reflects  the  development  of market  niches  by many  carton
manufacturers to compete with alternative forms of packaging.

     Folding  carton   manufacturers  are  divided  into  three  main  segments:
integrated  manufacturers (those owned by or affiliated with a paperboard mill),
non-integrated   or  independent   manufacturers,   and  in-plant  or  "captive"
manufacturers  which are owned directly by the end user.  The Company  generally
competes with independent manufacturers.

     The Company focuses on those markets that use the folding carton as part of
a  product's  marketing.  The  promotional  function  of the  carton  may employ
multiple  colors,  coatings,  several  printing  techniques,  stamping and other
graphic design considerations. The Company has

                                        2

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  1998  was  approximately  $78  billion.  The  industry  is
fragmented with many small printing  companies  serving  regional  markets.  For
example,  within  the New York City  Metropolitan  area,  there  are over  3,000
printing establishments with an average of 22 employees. Based on 1997 revenues,
the  Company  was ranked  128 in the top 500  printing  companies  in the United
States by an industry trade publication.

Packaging Products

     The Company's  largest  market for folding  cartons is  video/entertainment
software.  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/software  markets.  The Company's  catalogue  customers
typically  have  licensed or  purchased  products  from major  movie  production
studios.  As in prior years,  special  interest video  continues to be a growing
product  line.   Packaging  for  these  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.

     Software  packaging  continues  to be a growing  portion  of the  Company's
revenues.  The Company produces packaging for some of the largest  entertainment
software  companies and  applications  software  companies,  including  Computer
Associates.  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 manufactures  compact disc packaging,  including tray cards and
booklets,  pre-recorded  cassette  packaging,  such  as  insert  or  "J"  cards,
cassingles  (cassettes  with  only one or a few  songs),  as well as audio  book
packaging and other printed  materials for the music/audio  industry.  The music
industry  customers  often  require that  packaging be produced  quickly,  often
within  days of placing an order.  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 many of the 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 markets.


     The other major component of this market is audio publishing 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.  The
Company also  manufactures  packaging  for self- help and  specialty  cassettes,
which are a growing portion of this market.

     The  Company  manufactures  cartons  and  packaging  for  fragrances,  skin
lotions,  pet products,  food and other  specialty  packaging for these markets.
Given the high value added nature 

                                        3

of the packaging, these markets are a prime focus for the Company. Recently, the
Company started  Cosmetic  Sampling  Technologies,  Inc.  ("CST") a wholly owned
subsidiary.  CST has applied  for a patent on  TRYALS(TM),  its unique  lipstick
sampler.  TRYALS(TM) is a unit dose, self applicator, for a trial size amount of
lipstick.  Management  has committed  resources to the  development  of this and
other innovative  packaging to penetrate the cosmetic  market.  To date, CST has
not received any orders for  TRYALS(TM)  and  TRYALS(TM)  has not  generated any
revenues, and there can be no assurance that it will do so in future periods.

     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  manufacturers  and contract
drug manufacturers.

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

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

Marketing and Sales

     The Company's revenues are derived from several markets. The largest market
as a percentage of total 1998 net sales was video/entertainment  software, which
accounted for approximately 36%; followed by consumer product  packaging,  which
accounted for approximately 23%; next were music/audio  packaging and commercial
printing,  which  accounted  for  approximately  15%  each;  then  labels  which
accounted for  approximately  6%; and  pharmaceutical/vitamin  packaging,  which
accounted for approximately 5%. These markets represent product lines within the
business segment in which the Company operates.

     The Company's sales are primarily the result of direct  solicitation by its
executive officers and full-time sales people. 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 order  backlog,  with most
orders processed and delivered in one to four weeks.

Seasonality

     Historically,  the Company's revenues have been moderately seasonal. In the
last two quarters of 1998 and 1997,  the Company's  revenues were  approximately
54% of annual sales. This seasonality is primarily the result of certain markets
which the Company services,  such as music/audio packaging,  video/entertainment
software packaging and consumer product  packaging,

                                        4


which require that products be produced and shipped  between  August and October
for sale  during the  holiday  season.  These  three  categories  accounted  for
approximately  74% of the Company's sales in each of 1998 and 1997,  causing the
Company's  revenues to be greater in the last six months of each  calendar  year
versus the first six months.

Competition

     The Company  competes with a small number of printed  paperboard  packaging
companies  within  each  of  its  markets.  In the  music,  video  and  software
industries,  the  Company  has  several  competitors,  the  largest  of which is
Shorewood Packaging Corporation.  There are no significant  competitors in other
markets.  These industries  require high quality packaging with rapid turnaround
time and competitive pricing.  These competitive factors are also evident in the
Company's  other markets.  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.

     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  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 15, 1999, the Company had  approximately  455 employees.  Of
these employees,  304 are located in the Company's Hauppauge, New York facility,
with 243  serving in  manufacturing  capacities  and 61  serving in selling  and
administrative  capacities.  Eighty  employees  are  located  in  the  Company's
Burbank, California facility, with 68 serving in manufacturing capacities and 12
serving in selling and  administrative  capacities.  Twenty-five  employees  are
located  in the  Company's  Rockaway,  New Jersey  facility,  with 22 serving in
manufacturing  capacities  and  three  serving  in  selling  and  administrative
capacities.  Forty-six  employees  are  located in the  Company's  Indianapolis,
Indiana facility, with 34 serving in manufacturing  capacities and 12 serving in
selling and administrative capacities. A majority of the manufacturing employees
located in Burbank,  California  facility are represented by a labor union.  The
Company  considers its relationship  with its employees to be satisfactory.  See
"Item 3. Legal Proceedings," below.

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  with
several alternate sources for each. The Company has been successful in obtaining
adequate  materials to satisfy all sales  orders,  and does not  anticipate  any
significant  difficulties in obtaining supplies of such materials in the future.
There are no assurances, however, that the Company will not encounter difficulty
in obtaining supplies of such material to fulfill its requirements.


                                        5
Equipment

     Disc  Graphics,  Inc. owns or leases  various  manufacturing,  computer and
other   equipment  used  in  the   manufacture  of  its  products  and  for  its
administrative support. As a specialty printing company, the Company's continued
growth  and  competitiveness   requires  a  continuous   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 sustain
current  growth rates in net sales;  the  potential  inability of the Company to
implement its expansion,  marketing and other business  strategies;  the amounts
required for capital  expenditures and regulatory  compliance in future periods;
the availability and cost of materials;  potential effects of Year 2000 problems
on the Company's business;  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.



                                        6


Executive Officers of the Registrant

     Donald Sinkin (50 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 (45  years  of age) is a Member  of the  Board,  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, Mr. Frey held various  management  positions with Kordet Color Corporation
and Terrace Litho.

     John  Rebecchi  (43 years of age) is a Member  of the  Board,  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's  formation in 1983, he served as  Controller.  After a brief absence
from the  Company,  Mr.  Rebecchi  re-joined  Disc 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 (39 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, 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 (51 years of age) is Vice  President  for Legal  Affairs and
Human Resource Policy and General  Counsel of the Company.  Mr. Bress joined the
Company 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.


                                        7



TEM 2.           Properties

     As of  December  31,  1998,  the  Company's  principal  properties  were as
follows:

                                                            Approximate Square
Location           Activities Conducted                    Footage of Facility

Hauppauge, NY      Executive offices and manufacturing (1)            55,000
Hauppauge, NY      Warehouse (2)                                      40,000
Burbank, CA        Manufacturing (3)                                  30,000
Indianapolis, IN   Manufacturing (4)                                  27,000
Rockaway, NJ       Manufacturing (5)                                   8,400
New York, NY       Sales (6)                                           1,200


(1)  The lease for this facility  terminates on December 31, 2007.  The facility
     is  owned  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.

(2)  The lease for this property is scheduled to terminate on August 31, 2001.

(3)  This lease is scheduled to terminate on May 17, 2000.

(4)  The Company owns this facility, subject to a mortgage.

(5)  This lease is scheduled to terminate on June 30, 200l.

(6)  This  lease  will  terminate  on  August 9,  1999 and is  renewable  at the
     Company's option through August 9, 2000.

     Management of the Company believes that the facilities are adequate to meet
current operational needs.



ITEM 3.           Legal Proceedings

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


                                        8


     Recently, the Company overwhelmingly  defeated an attempt by Local One-L of
the Amalgamated  Lithographers of America, Graphic Communications  International
Union to represent a small group of employees in its Hauppauge  facility.  Local
One-L filed a petition on January 25,  1999 with the  National  Labor  Relations
Board ("NLRB") seeking a representation  election.  The NLRB supervised election
was held on March 4, 1999, and the Company prevailed by a 4-to-1 margin.



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

     During the fourth quarter of the year ended  December 31, 1998,  there were
no matters  submitted  to a vote of the Disc  Graphics,  Inc.  security  holders
through the solicitation of proxies or otherwise.


                                        9


                                     PART II

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

Price Range of Common Stock

     Since May 28, 1996,  the Company's  Common Stock,  par value $.01 per share
(the "Common  Stock"),  has been  authorized for trading on the Nasdaq  SmallCap
Market  under the symbol  DSGR.  From  October  31, 1995 to May 28,  1996,  Disc
Graphics,  Inc.'s Common Stock was listed on the American  Stock  Exchange under
the symbol DGI. The table set forth below contains the range of the high and low
closing bid prices on the Nasdaq SmallCap Market for the quarters noted.

     The Company's Class A Warrants are currently  authorized for trading on the
Nasdaq SmallCap Market under the symbol DSGRW.  From October 31, 1995 to May 28,
1996,  the Class A Warrants  were  quoted and traded on the OTC  Bulletin  Board
under the symbol DSGRW. The table set forth below contains the range of the high
and low closing bid prices on the Nasdaq SmallCap Market for the quarters noted.


                            Common Stock                     Class A Warrants
                        High              Low             High              Low

 Quarter Ended

 March 31, 1997        $3.188            $2.188          $.125             $.438
 June 30, 1997          3.625             2.625           .313              .688
 September 30, 1997     4.000             2.875           .313              .813
 December 31, 1997      5.000             3.750           .500              .875
 March 31, 1998         4.750             4.125           .688              .563
 June 30, 1998          4.625             3.625           .625              .375
 September 30, 1998     5.125             3.688           .688              .375
 December 31, 1998      5.188             4.000          1.000              .438

     On February 24,  1999,  the closing bid prices for the Common Stock and the
Class A Warrants were $4.875 and $.625, respectively.

Holders of Common Stock

     As of February 2, 1999,  there were 46 holders of record and  approximately
500 beneficial  owners of the Common Stock, and two holders of record of Class A
Warrants.

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  


                                       10

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 19) thereto, all of which are contained
in this Annual Report on Form 10-K.


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

                             Year Ended December 31,

________________________________________________________________________________
                                   1998      1997      1996     1995        1994
________________________________________________________________________________


Income statement data:
<S>                              <C>       <C>       <C>       <C>       <C>    
Net Sales ....................   $58,882   $48,445   $42,575   $36,149   $30,550
Gross Profit .................    15,799    12,693    10,911     7,481     6,797
Operating expenses ...........    10,550     8,483     7,612     5,733     5,020
Operating income .............     5,249     4,210     3,299     1,748     1,777
Interest expense .............       634       612       764       838       837
Net income ...................     2,864     2,159     1,454       501       502
Net income per common share
         Basic                       .52       .40       .29       .18       .22
         Diluted                     .52       .40       .29       .18       .22

Weighted average number
of shares outstanding

          Basic                    5,474     5,387     5,091     2,714     2,247
          Diluted                  5,492     5,397     5,098     2,714     2,247
</TABLE>
<TABLE>

                               As of December 31,

________________________________________________________________________________
                                   1998      1997       1996     1995       1994
________________________________________________________________________________

Balance sheet data:
<S>                              <C>       <C>       <C>       <C>       <C>    
Total assets .................   $28,372   $26,747   $22,046   $18,604   $14,048
Long term liabilities ........     6,737     8,494     5,598     7,243     6,933
Stockholders' equity .........    13,940    11,112     8,964     7,427     2,280

</TABLE>

                                       12



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.

Pointille Acquisition

     On May 18, 1996, the Company acquired  substantially  all of the assets and
certain liabilities of Pointille,  Inc., a California corporation ("Pointille" )
pursuant to an asset purchase  agreement  dated as of May 17, 1996, by and among
the Company, Pointille and the sole shareholder of Pointille. The purchase price
consisted of $662,545 in cash,  74,074 shares of the Company's Common Stock, and
a  promissory  note in the  amount  of  $330,000,  payable  in 36 equal  monthly
installments  of  principal  and  interest  beginning  on  June  17,  1996,  and
transaction  costs.  This was offset by a  receivable  from the former  owner of
$175,633,  which was $0 as of December 31, 1998. The Pointille  acquisition  was
recorded using the purchase method of accounting and,  accordingly,  the results
of  Pointille's  operations  are included in the Company's  results of operation
from the date of the acquisition.

Benham Acquisition

     On October 24, 1997, the Company acquired  substantially  all of the assets
and certain liabilities of Benham Press, Inc., an Indiana based printing company
("Benham"),  for $87,043 in cash, the issuance of 10,499 shares of the Company's
common  stock  and  the  assumption  of  certain  liabilities   associated  with
outstanding  borrowing  under a line  of  credit  agreement  and  notes  payable
totaling approximately $2,637,000.  The Company liquidated such liabilities with
additional  borrowings under the Company's line of credit.  The Company recorded
the value of the 10,499  shares of common stock at the  estimated  fair value at
the date of acquisition.  The Benham acquisition was recorded using the purchase
method of accounting  and  accordingly,  the results of Benham's  operations are
included in the Company's results of operation from the date of the acquisition.

                                       13


Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Net Sales

     Net sales for the year ended December 31, 1998 were $58,882,000 compared to
$48,445,000  for the same  period the prior  year,  representing  an increase of
$10,437,000  or  22%.  The  Benham   acquisition   accounted  for  approximately
$3,507,000  of the increase in sales.  The overall  increase was most evident in
video and  entertainment  software  packaging  ($6,138,000 or 41%) and music and
audio  packaging  ($396,000  or 5%) between  the  comparison  periods.  Consumer
product packaging has increased  $1,448,000 or 12%. The Company has continued to
focus on high end specialty  packaging and has focused less on the lower margin,
less value added product  categories,  resulting in a decline in sales levels in
those categories.

     The increase in video and  entertainment  software  packaging and music and
audio  packaging has been achieved  through intense sales efforts and investment
in  both  sales  and  customer  service  personnel.   The  competitive   pricing
environment which exists throughout these product  categories has been mitigated
by  the  Company's  strategy  of  concentrating  on  custom-designed   specialty
packaging,  as  evidenced  by the  development  of a  lipstick  sampler  and the
start-up of a new division,  Cosmetic Sampling Technologies,  Inc. Although this
product was not in  production  in 1998,  it has  provided  the  opportunity  to
increase   sales  in  consumer   product   packaging  by   developing   customer
relationships  with  cosmetic  companies.   New  product  development  has  been
important to the Company's growth and diversification strategy.

Gross Profit

     Gross profit for the year ended December 31, 1998 was  $15,799,000 (a 26.8%
profit  margin)  compared to  $12,693,000  (a 26.2% profit margin) for the prior
year,  representing  an increase of  $3,106,000 or 24%.  Improvements  in profit
margin  continue  to be  increasingly  more  challenging  in an  environment  of
downward price pressure.  Improving manufacturing  efficiencies through improved
processes,  competitive purchasing practices, and capital investment has enabled
the Company to remain competitive and improve profitability.

Selling, General and Administrative Expenses

     Selling,  general and  administrative  ("SG&A") expenses for the year ended
December 31, 1998 were  $10,550,000  (17.9% of net sales) compared to $8,483,000
(17.5% of net sales) for the prior year, an increase of $2,067,000, or 24%. This
increase  was due  primarily  to revenue  related  expenses  (such as freight to
customers and  commissions),  costs  associated with the Indiana  facility,  and
investment in sales and customer service  personnel to focus on  custom-designed
packaging.

Interest Expense

     Interest expense for the year ended December 31, 1998 was $634,000 compared
to $612,000  for the prior  year.  The slight  increase in interest  expense was
primarily  related to the increase in investments in equipment  through  capital
leases, offset by interest earned on overnight investments.


                                       14


Income Taxes

     The  provision  for  income  taxes for the year  ended  December  31,  1998
increased primarily due to the increase in pretax income of $1,168,000.

Net Income

     Net income for the year ended December 31, 1998 was $2,864,000  compared to
$2,159,000  for the prior year,  an increase of $705,000,  or 33%. This increase
was a result of an increase in net sales, gross margin improvement,  and gain on
the sale of certain equipment ($150,000), offset slightly by increased SG&A. The
Company's strategy of growing revenue both internally and through  acquisitions,
coupled with cost  reduction  projects and  investments,  has resulted in strong
earnings growth in 1998 compared to 1997.

                                       15


Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Net Sales

     Net sales for the year ended December 31, 1997 were $48,445,000 compared to
$42,575,000  for the same  period the prior  year,  representing  an increase of
$5,870,000 or 14%. This increase was primarily due to the Pointille acquisition,
which accounted for  approximately  $3,786,000 of the increase in net sales. The
categories  of  the  business   which   experienced   significant   growth  were
video/software  packaging,  which  increased  $2,714,000  or  22%,  followed  by
commercial,  which  increased  $1,764,000 or 45%;  music/audio,  which increased
$1,301,000 or 17%; and consumer product  packaging,  which increased $566,000 or
5%. The Company  continued to experience  strong growth in both CD-ROM and video
sales between 1996 and 1997. The Company became better  positioned  between 1996
and 1997 to compete in these categories of the West Coast markets.  As a result,
$1,722,000  or 29% of the  Company's  increased  net sales in 1997 were from the
additional video/software packaging sales at the California facility.

     Both the Pointille and Benham  acquisitions have contributed  significantly
to the growth in  commercial  sales  between  comparison  periods.  The  Indiana
facility is primarily  engaged in  commercial  printing,  and  contributed  over
$600,000  in sales  from  October  24,  1997  through  December  31,  1997.  The
music/audio   category  continues  to  grow  in  the  New  York  and  California
facilities. Indiana also added to this category with over $100,000 in sales over
the same October to December period.

     Both pharmaceutical/vitamin  packaging and label sales experienced a slight
decrease of $362,000 or 8% and  $113,000 or 4%,  respectively,  between 1996 and
1997  periods.  This was a result of the  Company's  continued  focus on growing
earnings by  concentrating  on more  profitable  accounts  within these business
categories.

Gross Profit

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

Selling, General and Administrative Expenses

     SG&A expenses for the year ended December 31, 1997 were  $8,483,000  (17.5%
of net sales) compared to $7,612,000 (17.9% of net sales) for the prior year, an
increase of $871,000, or 11%. This increase was due primarily to revenue related
expenses  (such as freight to customers and  commissions)  and costs  associated
with both the  California and Indiana  facilities.  The Company will 

                                       16

continue to focus on reducing SG&A costs  through  synergies  among  facilities,
thus leveraging its fixed cost base with business growth.

Interest Expense

     Interest  expense  for the year  ended  December  31,  1997  was  $612,000,
compared to $764,000  for the prior  year.  The decline in interest  expense was
primarily  related to the improved  borrowing rate under a new revolving  credit
agreement  with Key Bank,  National  Association  (the  "Credit  Agreement")  as
compared to the rate under the former financing agreement.

Income Taxes

     The  provision  for  income  taxes for the year  ended  December  31,  1997
increased primarily due to the increase in pretax income of $1,063,000.

Net Income

     Net income for the year ended December 31, 1997 was $2,159,000  compared to
$1,454,000  for the prior year,  an increase of $705,000,  or 48%. This increase
resulted from an increase in net sales and the gross margin  improvement  at all
facilities.  Management's continued focus on cost reductions resulted in savings
in professional fees and interest  expenses.  The Company's  strategy of growing
revenue both  internally  and through  acquisitions  coupled with cost reduction
projects and investments  resulted in strong earnings growth in 1997 compared to
1996.

Liquidity and Capital Resources

     The primary sources of cash for the Company's business activities have been
cash provided from operations and borrowings under the Credit Agreement with its
current bank lender. As of December 31, 1998, the Company had working capital of
$8,684,000 compared to $7,434,000 as of December 31, 1997.

     Net cash provided by operating  activities  for the year ended December 31,
1998 was $3,691,000  compared to $1,854,000  for the prior year,  which reflects
the Company's  increase in earnings  between  comparison  periods.  Cash used in
investing  activities  was primarily for capital  expenditures,  net of proceeds
from the sale of equipment.

     Capital  expenditures  have been  primarily for purchases of  manufacturing
equipment, building and building improvements, and the purchase of furniture and
fixtures. Capital expenditures in 1998 were $1,026,000 as compared to $2,420,000
in 1997. The focus of the capital  expenditures has been to improve  efficiency,
quality,  and safety of the Company's  operations.  As of December 31, 1998, the
Company committed to purchase a $1,000,000 stamping press.

     On December 1, 1998,  the Company  renegotiated  certain  provisions of the
Credit  Agreement.  The Credit Agreement allows for borrowing up to $10,000,000.
The Credit Agreement is secured 

                                       17


by substantially  all of the unencumbered  assets of the Company.  The borrowing
rate under  this  agreement  is either  (i) LIBOR  plus 100 to 150 basis  points
depending on the Debt  Coverage  Ratio (as defined) or (ii) the Bank's Base Rate
(as defined), which was


7.75% per annum at December  31, 1998.  The Credit  Agreement  contains  certain
covenants  which  require Disc  Graphics,  Inc. to satisfy  certain  performance
criteria,  net worth levels and debt service  ratios.  At December 31, 1998, the
Company was in  compliance  with all the  covenants.  At December 31, 1998,  the
Company had  approximately  $9,130,000  available for borrowing under the Credit
Agreement.

     On September 3, 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.  In connection  with the  transaction,  the Company
entered  into a seven year capital  lease  arrangement  with the Suffolk  County
Industrial Development  Association ("SCIDA"),  pursuant to which the SCIDA: (a)
issued a $2,003,657  industrial  development bond to finance its purchase of the
press;  (b) leased the press to the Company;  and (c) assigned its rights in the
lease to GECPF,  which  purchased the bond.  The carrying value of the old press
approximated the related  obligation and,  therefore,  no gain was recognized on
the trade-in of the press.  The new lease contains certain  provisions  limiting
the Company's capital  expenditures in Suffolk County over the next three years,
and certain debt  covenants  consistent  with those  contained in the  Company's
amended  Credit  Agreement.  The lease payments are calculated on the basis of a
below market  interest  rate,  which is subject to an increase to the prevailing
market rate in the event the Company exceeds the capital expenditure limits. The
Company believes that any such rate increase would not have a material effect on
the  Company,  because the  Company  presently  has and intends to maintain  the
ability to satisfy  its lease  obligations  through  its Credit  Agreement.  The
Company also has the option to terminate the lease at any time upon payment of a
scheduled prepayment amount.

     The Company believes that it has adequate  liquidity and sufficient capital
to fund its current operating plans.

Inflation and Seasonality

     The Company has  experienced  increases in variable  and fixed  costs.  The
Company has continued to manage the impact of these cost  increases by 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.

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

     Historically,  a portion  of 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.

                                       18


New Accounting Pronouncements

     The Financial Accounting Standards Board has issued Statements of Financial
Accounting   Standards   No.  132  and  133  related  to  "Pensions   and  Other
Postretirement  Benefit Disclosures" and "Accounting for Derivative  Instruments
and Hedging  Activities,"  respectively.  Statement No. 132 is not applicable to
the Company.  Statement No. 133 is not expected to have a material impact on the
consolidated financial statements of the Company.

Year 2000 Date Conversion

     The  Company is in the process of  identifying,  assessing  and  developing
contingency  plans  to  address  problems  that may  arise  as a  result  of the
inability  of the  Company's  computers,  or those of its  material  vendors and
customers, to properly recognize and manipulate dates in the Year 2000 beginning
with the first two digits "20" instead of "19." In its evaluation  process,  the
Company  considers a computer to be Year 2000  compliant if: (a) any valid date,
both before and after December 31, 1999 (including  February 29, 2000), does not
cause an  interruption in the desired  operation;  and (b) (i) the computer will
correctly  sort,  calculate  and  compare  all dates;  and (ii) if the first two
digits  of the date are  implicit,  ( i.e.,  the date is  represented  by only 2
digits,  e.g., "99" for "1999" and "00" for "2000"), the computer will interpret
the dates consistently and with the result that "99" always means 1999, and "00"
always means 2000).

     The Company's  evaluation of the Year 2000 problem  includes the assessment
of its computer  systems and its equipment and other systems that are controlled
or monitored by computers  or embedded  computer  chips,  and the ability of its
critical  vendors and customers to ensure timely  delivery of goods and services
and payment of invoices, respectively.

     In March 1997, the Company  installed a  fully-integrated  computer  system
that is Year 2000 compliant. The software calculates the date incrementally from
a fixed past  date,  using a  five-byte  data field  (compared  to the  standard
two-byte data field). For example,  from the date of March 1, 1916, the software
can  calculate  incrementally  99,999 days from that fixed  date,  approximately
until the year 2189.  Each software  module has been examined to confirm that it
uses the five-byte date field in all date sorts,  calculations  and comparisons.
During the fourth  quarter of 1998,  the  Company  performed  a full test of the
software by advancing the date past 2000  (including  February 29, 2000) and ran
each  software  module  with test data to  confirm  empirically  that the system
accommodates the century rollover.  The test confirmed that all mission critical
modules are Y2K compliant. Several modules contained two or eight character date
fields that are not used in calculations,  and are not adversely effected by the
date  change.  One module  contains a two  character  date field that is used in
calculations  and must be fixed.  The Company expects to fix all the modules and
fully retest the system by June 30, 1999.

     The Company has also undertaken to test the Year 2000 compatibility of each
desktop and portable computer and each piece of equipment containing an embedded
computer chip, by confirming  empirically  that each computer and its associated
software and each piece of equipment will function properly with dates occurring
both before and after 2000.  The tests of personal  computers  is expected to be
completed by June 30, 1999.


                                       19

     The Company's  business  could be materially  affected if various  material
vendors and customers are not themselves Year 2000 compliant. In particular,  if
the Company is unable to obtain necessary supplies, services or critical machine
parts,  its operations  could suffer.  If its major customers are unable to make
payments  or continue  purchases,  the  Company's  cash flow could  suffer.  The
inability of major  utilities to supply  power or  telephone  service  after the
rollover  could also  adversely  affect the  Company's  operations.  In order to
assess and address such problems, the Company is in the process of surveying all
its material  vendors and customers to determine their likely state of Year 2000
compliance at the  rollover.  The survey is expected to be completed by June 30,
1999.

     Although  the  Company  is  currently  unaware  of any  material  vendor or
customer  who will not be Year  2000  compliant,  it has and  will  continue  to
develop  contingency  plans in the event any material  vendors or customers  are
unable in the Year 2000 to fulfill  their supply or payment  obligations  to the
Company.  In  particular,  the  Company  has  taken  steps  to  ensure  that  no
significant  vendor is a sole-source or limited-source  supplier,  by arranging
multiple  sources  for all  critical  resources,  by  warehousing  or stocking a
limited supply of critical materials and parts, and by developing the ability to
fabricate critical machine parts in an in-house facility.

     The Company is exploring with its insurer whether present  policies provide
any coverage  for  potential  business  losses and  liability  to third  parties
resulting from the Company's  failure or inability to be Year 2000 compliant due
to  factors  not  under its  control,  and if not,  whether  such  policies  are
available.

     The Company has established a Year 2000 Compliance  Committee to assess the
impact of the Year 2000 problem on the Company's business and to ensure its Year
2000  compliance.  The Committee is  co-chaired by the Vice  President for Legal
Affairs  and  Human  Resource  Policy  and the  Management  Information  Systems
Manager,  and is comprised of representatives from all major departments and all
facilities  within the Company.  Management  has committed all  resources,  both
financial and personnel,  reasonably  necessary to achieve Year 2000  compliance
and/or  implement  its  contingency  plans for events  outside its control.  The
Company  does not believe  that the costs it has  incurred to date or  currently
expects to incur in future  periods are or will be material,  in the  aggregate,
primarily  because these costs have been and will be incurred in connection with
projects  begun before,  and/or  budgeted  without regard to, the Company's Year
2000 compliance efforts.

     Although the Company  believes it will be Year 2000 compliant no later than
June 30,  1999,  there can be no assurance  that the Company  will  successfully
identify all systems,  vendors or customers  which are not Year 2000  compliant,
that the  Company  will  not have to  increase  significantly  its  expenditures
relating  to any  such  non-  compliance,  or  that  its  business  will  not be
materially adversely affected by any such non-compliance.


                                       20

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  stated or
implicit  interest  rates on such  obligations  are  generally  fixed.  In those
instances  where rates are  variable,  the Company will  generally  fix the rate
through an interest  rate swap  agreement.  Accordingly,  the  Company  does not
believe it is materially exposed to changes in interest rates.

     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.


                                       21


ITEM 8.  Financial Statements and Supplementary Data

                                                                           Page

Independent Auditors' Report.................................................F-1
Consolidated Balance Sheets as of December 31, 1998
      and 1997...............................................................F-2
Consolidated Statements of Income for the years ended
      December 31, 1998, 1997, and 1996 .....................................F-3
Consolidated Statements of Stockholders' Equity for
      the years ended December 31, 1998, 1997, and 1996......................F-4
Consolidated Statements of Cash Flows for the years ended
      December 31, 1998, 1997 and 1996.......................................F-5
Notes to Consolidated Financial Statements...................................F-6


                                       22



                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                        Consolidated Financial Statements

                           December 31, 1998 and 1997

                   (With Independent Auditors' Report Thereon)













<PAGE>

                          Independent Auditors' Report
                          ----------------------------

The Board of Directors
   and Stockholders
Disc Graphics, Inc.


We have audited the accompanying  consolidated  balance sheets of Disc Graphics,
Inc.  and  subsidiaries  as of  December  31,  1998,  and 1997,  and the related
statements of income,  stockholders' equity and cash flows for each of the years
in the three-year  period ended December 31, 1998. In connection with our audits
of the  consolidated  financial  statements,  we have also audited the financial
statement  schedule  as listed in the  accompanying  index.  These  consolidated
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated  financial statements and financial statement schedule based on our
audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Disc Graphics,  Inc.
and  subsidiaries  as of December  31,  1998 and 1997,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1998 in  conformity  with  generally  accepted  accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.

                                   /s/ KPMG LLP
                                   KPMG LLP


Melville, New York 
January 28, 1999

                                       F-1
<TABLE>
<CAPTION>

                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997

                   Assets                                  1998             1997
                   ------                                  ----             ----

Current assets:
<S>                                                  <C>                 <C>   
   Cash and cash equivalents ......................  $    43,313         31,753
   Accounts receivable, net of allowance
     for doubtful accounts of
     $1,332,000 and $1,162,000, respectively .......  12,721,102     11,698,364
   Inventories ....................................    2,379,627      1,906,694
   Prepaid expenses and other current assets ......      271,462        389,659
   Deferred income taxes ..........................      963,000        549,000
                                                         -------        -------
          Total current assets .................      16,378,504     14,575,470

   Property, plant and equipment, net .............    9,997,743     10,510,266
   Goodwill, net ..................................    1,265,210      1,379,408
   Security deposits and other assets .............      730,084        281,503
                                                         -------        -------

          Total assets .........................     $28,371,541     26,746,647
                                                     ===========     ==========

    Liabilities and Stockholders' Equity
    ------------------------------------

Current liabilities:
   Current maturities of
     equipment notes payable ......................  $   123,948        451,403
   Current portion of long-term debt ..............      112,613        103,530
   Current maturities of capitalized
   lease obligations payable ....................      1,433,328      1,069,209
   Accounts payable ...............................    2,373,626      2,281,609
   Accrued expenses ...............................    2,834,852      2,725,463
   Income taxes payable ...........................      815,952        509,927
                                                         -------        -------

     Total current liabilities .....................   7,694,319      7,141,141

Long-term debt, less current maturities ........       1,415,625      2,805,113
Equipment notes payable, less
  current maturities ...........................          53,325      1,447,860
Capitalized lease obligations payable,
  less current maturities ......................       3,944,868      3,492,857
Deferred income taxes ..........................       1,323,000        748,000
                                                       ---------        -------
          Total liabilities .....................     14,431,137     15,634,971

Commitments and contingencies

Stockholders' equity:
 Preferred stock:
  - $.01 par value; authorized 5,000 shares;
      no shares issued and outstanding                ---                ---
      Common stock:
  -  $.01 par value; authorized 20,000,000 shares;
     issued 5,548,761 in 1998 and 5,440,256 in 1997    55,488         54,403
   Additional paid-in capital                       5,009,671      5,044,934
   Retained earnings                                8,906,581      6,042,154
                                                    ---------      ---------
                                                   13,971,740     11,141,491

Less:
  Treasury stock, 30,349 and 30,059 common shares
    in 1998 and 1997, respectively                    (31,336)     ( 29,815 )
                                                      -------      --------  
          Total stockholders' equity               13,940,404    11,111,676
                                                   ----------    ----------

          Total liabilities and 
               stockholders' equity            $   28,371,541    26,746,647
                                                   ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-2


<TABLE>
<CAPTION>

                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                        Consolidated Statements of Income

                  Years ended December 31, 1998, 1997, and 1996

                                            1998         1997            1996
                                            ----         ----            ----

<S>                                    <C>             <C>            <C>       
Net sales .........................    $58,881,533     48,444,890     42,575,120
Cost of sales .....................     43,082,081     35,751,899     31,663,934
                                        ----------     ----------     ----------

    Gross profit ..................     15,799,452     12,692,991     10,911,186

Operating expenses:
    Selling and shipping
      expenses ....................      6,018,562      4,426,729      3,682,886
    General and administrative
      expenses ....................      4,531,620      4,056,293      3,929,521
                                         ---------      ---------      ---------

    Operating income...............      5,249,270      4,209,969      3,298,779

Interest expense, net .............        633,512        612,181        763,793
Gain on disposal of equipment .....        149,669           --             --  
                                           -------       --------       --------

Income before provision for
  income taxes ....................      4,765,427      3,597,788      2,534,986

Provision for income taxes ........      1,901,000      1,439,000      1,081,000
                                         ---------      ---------      ---------

    Net income .................... $    2,864,427      2,158,788      1,453,986
                                         =========      =========      =========

Net income per share:

    Basic                           $          .52            .40            .29
                                               ===            ===            ===

    Diluted                         $          .52            .40            .29
                                               ===            ===            ===

Weighted average shares outstanding:

    Basic ................               5,474,444      5,387,240      5,090,810
                                         =========      =========      =========

    Diluted ..................           5,492,050      5,397,130      5,097,566
                                         =========      =========      =========

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





                                       F-3



<TABLE>
<CAPTION>


                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1998, 1997, and 1996

                                                                                     Additional      
                                 Preferred stock              Common stock            paid in      Retained    Treasury       
                                Shares     Amount         Shares        Amount        capital      earnings     stock       Total  
                                ------     ------         ------        ------        -------      --------      -----       -----  
                                                                                                                                    
           <S>                    <C>       <C>            <C>           <C>           <C>           <C>           <C>       <C>    
Balance, December 31, 1995        --      $  --        4,962,188     $   49,622     4,948,119     2,429,380         --    7,427,121 

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

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

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

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

Additional common shares issued in
  connection with Disc/RCL Merge  --         --          342,256          3,423        (3,423)         --           --         ---  
                                                                                                                                    

Net income                        --         --              --             --           --       1,453,986         --    1,453,986 
                                -----      -----          ------         -------      -------    ---------       ------   --------- 


Balance, December 31, 1996        --         --        5,378,518         53,786     5,051,555     3,883,366     (24,661)  8,964,046 

Shares issued in connection with 
     an acquisition               --         --           10,499            105        37,395          --           --       37,500 
Shares issued in connection with  
     warrant exchange offer       --         --           51,239            512       (44,016)         --           --      (43,504)
                                                                                     
Purchase of treasury stock        --         --              --             --           --            --        (5,154)     (5,154)
                                                                                      
Net income                        --         --              --             --           --       2,158,788         --    2,158,788 
                                -----      -----           -----          -----       -----       ---------      -------  --------- 

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

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 
                              ======      =====        =========     ==========     =========     =========     =======  ========== 


See accompanying notes to consolidated financial statements.

</TABLE>


<TABLE>
<CAPTION>

                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1998, 1997, and 1996

                                                1998         1997        1996
                                                ----         ----        ----

Cash flows from operating activities:
<S>                                        <C>          <C>           <C>      
Net income                             $   2,864,427    2,158,788     1,453,986
    Adjustments to reconcile net income 
     to net cash provided by operating 
     activities:
      Depreciation and amortization        2,216,705    2,124,596     1,529,246
      Deferred income tax                    161,000       89,000        78,406
      Allowance for doubtful accounts        402,470      526,548       496,662
      Gain on disposal of equipment         (149,669)          --          --- 
      Change in assets and liabilities, 
        net of acquisition of business:
         Accounts receivable              (1,425,208)  (2,515,895)     (637,390)
         Inventories                        (472,933)     322,582        42,407
         Prepaid expenses and other 
           current assets                     57,458      269,381      (156,577)
         Accounts payable and 
           accrued liabilities               201,406     (731,561)    1,765,149
         Income taxes payable                306,025     (444,161)      691,862
         Security deposits and 
                other assets                (470,413)      54,768        45,135
                                            --------       ------        ------
         Net cash provided by operating
          activities                       3,691,268    1,854,046     5,308,886
                                           ---------    ---------     ---------

Cash flows from investing activities:
    Capital expenditures                  (1,025,613)  (2,419,829)     (782,374)
    Purchase of net assets of 
       business acquired                      18,211     (206,497)     (662,545)
    Proceeds from sales of equipment         166,900       55,200         ---
                                             -------       ------      --------
      Net cash used in investing activities (840,502)  (2,571,126)   (1,444,919)
                                            --------   ----------    ---------- 

Cash flows from financing activities:
    Proceeds from (repayments of) 
          long-term debt, net             (1,380,405)    (493,382)   (3,820,459)
    Payments of notes receivable              40,406       43,261        57,700
    Proceeds from capital lease obligations  745,549    2,524,917        79,688
    Principal payments of 
     equipment notes payable                (333,755)    (460,226)     (500,077)
    Principal payments of capital 
     lease obligations                    (1,875,302)    (847,938)     (867,576)
    Additional merger expenses                  --            --        (35,000)
    Purchase of warrants                     (34,178)         --        (32,400)
    Purchase of treasury stock                (1,521)      (5,154)      (24,661)
    Expenses incurred in relation 
     to the exchange offer                     --         (43,504)           --
                                              -----       --------       - ----
          Net cash provided by (used by)
              financing activities         (2,839,206)    717,974    (5,142,785)
                                           ----------     -------    ---------- 

Net increase (decrease) in cash 
    and cash equivalents                       11,560         894    (1,278,818)

Cash and cash equivalents at 
     beginning of year                         31,753      30,859     1,309,677
                                               ------      ------      ---------

Cash and cash equivalents at end of year  $    43,313      31,753        30,859
                                          ===========      ======        ======

</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-5



                               DISC GRAPHICS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

(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.

     On October 30,  1995,  Disc  Graphics,  Inc., a New York  corporation  (Old
Disc),  merged with and into RCL Capital  Corp.  (RCL).  All of the  outstanding
common stock of Old Disc was  converted  into the right to receive  common stock
and warrants to purchase  common stock of RCL.  RCL  simultaneously  changed its
name to Disc  Graphics,  Inc.  and adopted  Disc's year end of December  31. For
accounting purposes, the acquisition was treated as a re- capitalization of Disc
with Disc as the acquirer (reverse acquisition).

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

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

     (b)  Principles of Consolidation
          ---------------------------

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



                                       F-6

     (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 1996,
1997 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

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

     (g)  Goodwill
          --------

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

     (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 statement carrying amounts
of existing assets and liabilities and their  respective tax bases and operating
loss tax credit carryforwards.  Deferred tax assets and liabilities are measured
using  enacted  tax rates  expected  to apply to taxable  income in the years in
which those temporary  differences are expected to be recovered or settled.  The
effect  on  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized in income in the period that includes the enactment date.



                                       F-7

     (i)  Net Income Per Share
          --------------------

     Earnings  per  share is  computed  in  accordance  with the  provisions  of
Statement of Financial  Accounting Standards (SFAS) No. 128, Earnings Per Share,
which became  effective  for the Company as of December 31, 1997. As required by
the  Statement,  earnings per share for all prior  periods  presented  have been
restated.  Basic earnings per share is computed by dividing income  available to
common  stockholders  (which for the Company  equals its recorded net income) by
the weighted  average  number of common  shares  outstanding  during the period.
Diluted  earnings per share reflects the potential  dilution that could occur if
securities  to issue common  stock,  such as stock  options and  warrants,  were
exercised,  converted into common stock or otherwise resulted in the issuance of
common stock. The computation of weighted  average shares  outstanding for 1996,
1997 and 1998  does not  include  incremental  shares  relating  to  outstanding
warrants since the exercise price of the warrants exceeded the market price.

     (j)  Stock Option Plan
          -----------------

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

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

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

     (1)  Comprehensive Income
          --------------------

     Effective  January 1, 1998,  the Company  adopted SFAS No. 130,  "Reporting
Comprehensive  Income." This Statement  requires that all items recognized under
accounting standards as components of comprehensive income be reported in annual
consolidated  financial  statements and be displayed with the same prominence as
other items in annual  consolidated  financial  statements.  Other comprehensive
income may include foreign  currency  translation  adjustments,  minimum pension
liability adjustments,  and unrealized gains and losses on marketable securities
classified  as  available  for  sale.  The  Company  has no  elements  of  other
comprehensive  income  other than net income, therefore,  comprehensive  income
equals reported net income.


                                       F-8


     (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. Actual results could differ from those estimates.

     (n)  Reclassifications
          -----------------

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

(2)      Acquisitions
         ------------

     (a)  Benham Press, Inc.
          ------------------

     On October 24, 1997, the Company acquired  substantially  all of the assets
     and certain  liabilities  of Benham Press,  Inc., an Indiana based printing
     company (Benham), for $87,043 in cash, the issuance of 10,499 shares of the
     Company's common stock and the assumption of certain liabilities associated
     with  outstanding  borrowing  under a line of  credit  agreement  and notes
     payable  of   approximately   $2,637,000.   The  Company   liquidated  such
     liabilities with additional  borrowings under the Company's line of credit.
     The Company  recorded the value of the 10,499 shares of common stock at the
     estimated fair value at the date of acquisition.  The results of operations
     of Benham have been included in the accompanying  financial statements from
     the date of  acquisition.  The  acquisition  was  accounted  for  using the
     purchase method of accounting.  Goodwill  amortization  amounted to $21,598
     and $5,325 for the years ended December 31, 1998 and 1997, respectively.


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

                  Purchase price:
                  Cash                                        $  87,043
                  Common stock                                   37,500
                  Transaction costs                             101,242
                                                                -------
                                                                225,785

                  Net deficit of business acquired
                    (fair value of tangible assets and
                     liabilities acquired approximated
                     carrying value)                           (247,752)
                                                               -------- 
                                                                473,537

                  Allocated to:
                  Covenant not to compete                       100,000
                                                                -------
                  Goodwill                                    $ 373,537
                                                              =========

(b)      Pointille, Inc.
         ---------------

     On May 17, 1996, the Company acquired  substantially  all of the assets and
     certain liabilities of Pointille, Inc., a California based printing company
     (Pointille),  for $662,545 in cash,  the  issuance of 74,074  shares of the
     Company's common stock, and the issuance of a promissory note in the

                                       F-9

     amount of $330,000  (principal and  interest),  payable in 36 equal monthly
     installments  of  principal  and interest  beginning on June 17, 1996.  The
     Company  recorded the value of the 74,074  shares of the  Company's  common
     stock issued at the  estimated  fair value at the date of the  acquisition.
     The  acquisition was accounted for using the purchase method of accounting.
     Goodwill  amortization  amounted to $74,388 and $74,175 for the years ended
     December 31, 1998 and 1997, respectively.

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

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

           Net asset value of business acquired
              (fair value of tangible assets and
              liabilities acquired approximated
              carrying value)                                      --
                                                               ---------

           Allocated to Goodwill                       $       1,115,856
                                                               =========

     The  following  unaudited  pro forma  information  presents  a  summary  of
consolidated  results of  operations  of the  Company  and  Pointille  as if the
acquisition  had occurred on January 1, 1996. The effect of Benham's  operations
to the  consolidated  financial  statements  of the  Company for the years ended
December 31, 1997 and 1996 was not material and  therefore  pro forma  financial
information is not presented.

     The unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments such as (i) additional amortization expense
due to goodwill  resulting from the acquisition  and (ii) an increased  interest
expense due to cash borrowed  under the Company's  financing  agreement with the
bank for the payment of the purchase price and the repayment of Pointille's bank
line of credit and notes payable  (which was partially  offset by the payment of
Pointille's  bank line of credit and notes  payable).  These unaudited pro forma
results do not  purport to be  indicative  of the  results of  operations  which
actually  would have resulted had the purchase been effected on January 1, 1996,
nor of future results of operations of the consolidated entities.

                                                                  1996
                                                                  ----
                                                       (in thousands, except
                                                        per share amounts)

   Net sales                                           $           45,401
   Net income                                          $            1,487
   Net income per share:
        Basic and diluted                              $              .29


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

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


                                      F-10


                                      1998              1997                1996
                                      ----              ----                ----

     Cash paid during the year for:

       Interest                  $ 664,586           581,162             812,747

       Income taxes              1,448,500         1,986,692             460,071

(4)  Covenant Not to Compete
     -----------------------

In 1997,  the Company  obtained a non-compete  agreement in connection  with the
acquisition  of  Benham.  Under  the  terms of the  acquisition  agreement,  the
non-compete  agreement was valued at $100,000.  The non-compete agreement has an
original life of 5 years and will be amortized using the  straight-line  method.
Amortization  of the  intangible  asset  amounted  to $20,000 and $3,763 for the
years ended December 31, 1998 and 1997,  respectively.  The unamortized balances
of $76,237  and  $96,237 as of December  31,  1998 and 1997,  respectively,  are
included in security deposits and other assets in the accompanying  consolidated
balance sheets.

(5)  Inventories
     -----------

     Inventories consist of the following:

                                                  1998                    1997
                                                  ----                    ----

     Raw materials                    $         1,577,349              1,412,613
     Work-in-process                              659,552                359,743
     Finished goods                               142,726                134,338
                                                  -------                -------

                                      $         2,379,627              1,906,694
                                                =========              =========

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

     Property, plant and equipment consist of the following:

                                                1998                      1997
                                                ----                      ----

     Land and building                $       550,000                    550,000
     Machinery and equipment               15,145,272                 14,868,633
     Furniture and fixtures                 1,290,616                  1,205,516
     Leasehold improvements                 1,390,758                  1,234,793
     Automobiles and trucks                   217,565                    171,689
                                              -------                    -------
                                           18,594,211                 18,030,631
        Less accumulated depreciation
               and amortization             8,596,468                  7,520,365
                                            ---------                  ---------

                                     $      9,997,743                 10,510,266
                                            =========                 ==========


     Depreciation  and  amortization  expense of property,  plant, and equipment
     amounted  to  $2,078,554,  $2,020,999  and  $1,446,633  for the years ended
     December 31, 1998, 1997, and 1996, respectively.

                                      F-11

(7)  Accrued Liabilities
     -------------------

     Accrued  liabilities  at  December  31,  1998  and  1997  consisted  of the
following:

                                                1998                    1997
                                                ----                    ----

     Accrued payroll and other 
          employee benefits          $        1,610,996                1,781,295
     Accrued vacation                           438,342                  404,808
     Accrued commissions                        549,049                  377,658
     Accrued other                              236,465                  161,702
                                                -------                  -------

                                     $        2,834,852                2,725,463
                                              =========                =========



                                      F-12

(8)  Long-term Debt
     --------------

     Long-term Debt summarized as follows:

                                                       1998              1997
                                                       ----              ----

     Revolving line of credit (a)          $          870,000          2,760,000
     6.36% Promissory Note due in monthly
        installments of 9,167 through May 1999 (b)     45,113            148,643
     Mortgage payable due in varied monthly
       installments through February 2008 (c)         613,125              --- 
                                                      -------           -------
                                                    1,528,238          2,908,643
                  Less current portion                112,613            103,530
                                                      -------            -------

                                           $        1,415,625          2,805,113
                                                    =========          =========


     (a)  In February, 1997, the Company entered into a financing agreement with
          Key Bank,  N.A.  as  amended  on  December  1,  1998.  The eight  year
          Revolving Credit - Term Loan facility  provides the Company 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 loan provides financing as defined,  not to exceed $10,000,000.
          The  financing  agreement  bears  interest  at the lower of LIBOR plus
          1.00% to 1.50%  based on the debt  coverage  ratio or the bank's  base
          rate.  At December 31, 1998,  the base rate was 7.75%.  The  financing
          agreement  is secured by all  personal  property  of the  Company.  In
          addition, the financing agreement contains various covenants including
          the maintenance of certain financial ratios including consolidated net
          worth,  working capital,  debt service,  funded debt to EBITDA and the
          maintenance of net income.

     (b)  In connection with the acquisition of Pointille,  described in note 2,
          the  Company  issued  a  promissory  note in the  amount  of  $330,000
          (principal and interest)  payable in 36 equal monthly  installments of
          principal and interest that began in June 1996.

     (c)  On January 16,  1998,  the Company  secured a mortgage  with a lending
          institution  in the  amount  of  $675,000  for the  building  and land
          acquired in the  purchase of Benham.  The mortgage is payable over ten
          years 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.

(9)  Equipment Notes Payable
     -----------------------

     Notes payable at December 31, 1998 and 1997 consist of the following:

                                                             1998          1997
                                                             ----          ----

     Various secured equipment financing notes, payable
     In monthly installments aggregating $12,400 and
     $48,857, respectively, including interest at 8.2%
     maturing from October 1999 through September
     2000 secured by equipment with a net book value
     of $389,681 at December 31, 1998                     $177,273     1,861,055


                                      F-13


     Secured equipment financing note payable to a bank
     payable in monthly installments of $2,416 with
     interest at 7.9% through October 1998, personally
     guaranteed by the president and two vice presidents     --           23,300

     Other                                                   --           14,908
                                                           -----          ------

                                                           177,273     1,899,263

     Less current maturities                               123,948       451,403
                                                           -------       -------

                                                          $ 53,325     1,447,860
                                                          ========     =========

(10)     Leases
         ------

          The Company is  obligated  under  several  capital  leases for certain
          machinery and  equipment  that expire at various dates during the next
          seven years.  At December 31, 1998 and 1997, the gross amount of plant
          and  equipment and related  accumulated  amortization  recorded  under
          capital leases were as follows:

                                                        1998             1997
                                                        ----             ----

         Machinery and equipment            $        7,921,301         6,201,998
         Less accumulated amortization               2,051,589         1,341,922
                                                     ---------         ---------
                                            $        5,869,712         4,860,076
                                                     =========         =========


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

          Rent expense under  operating  leases for the years ended December 31,
          1998,  1997  and  1996  was  $1,162,154,   $1,034,416,  and  $900,442,
          respectively.


          Future minimum lease payments under  non-cancelable  operating  leases
          (with  initial  remaining  lease  terms in excess of one year) and the
          present value of future minimum  capital lease payments as of December
          31, 1998 are:


                                                          Capital      Operating
                                                          Leases          Leases
                                                          ------          ------
               Year ending December 31:
                    1999                       $        1,817,273      1,163,492
                    2000                                1,542,991        890,629
                    2001                                1,122,786        588,276
                    2002                                  781,570        462,546
                    2003                                  350,100        385,023
                    2004 and thereafter                   612,675      1,044,000
                                                          -------      ---------

         Total minimum lease payments                   6,227,395      4,533,966
                                                        =========      =========

         Less amount representing interest (at
         rates ranging from 5.9% to 10.5%)                849,199
                                                          -------
 
                                     F-14


        Net principal portion                            5,378,196
        Less portion due within one year                 1,433,328
                                                         ---------
        Long-term portion                       $        3,944,868
                                                         =========

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

     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 over the next three years 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 is $2,003,657.

     In 1998, the Company also converted three of its capital lease  obligations
     with variable  rates to fixed rates through an interest rate swap agreement
     with an affiliate of the lessor. The present value of these three leases as
     of December 31, 1998, was $1,933,325.

(11)     Stockholders' Equity
         --------------------

         (a)      Stock Options
                  -------------

     Concurrent  with the merger with RCL, the Company's  stockholders  approved
     the  adoption  of the 1995  Incentive  Stock  Option  Plan (the  Plan).  An
     aggregate of 500,000 shares of the Company's  common stock are reserved for
     issuance upon the exercise of options pursuant to the Plan.  Officers,  key
     employees,  directors and certain  consultants  and advisors to the Company
     are eligible to participate in the Plan. The Plan may issue incentive stock
     options and nonqualified  stock options.  Options are granted at the market
     price on the date of grant and expire in five or ten years. The duration of
     any option  granted under this Plan shall be fixed by the  Incentive  Stock
     Option  Committee  in its sole  discretion  and no option may be  exercised
     until at least six months  after the date of grant.  At December  31, 1998,
     there were 214,355 additional shares available for grant under the Plan.

Changes in options outstanding are as follows:

                                                               Weighted-average
                                                   Shares         exercise price
                                                   ------         --------------

Outstanding December 31, 1995 .................    62,500               $   4.13
Granted .......................................    61,000                   2.89
                                                   ------

Outstanding December 31, 1996 .................   123,500                   3.51
Granted .......................................    52,000                   4.66
                                                   ------

Outstanding December 31,1997 ..................   175,500                   3.85
Granted .......................................   110,145                   4.06
                                                  -------

Outstanding December 31, 1998 .................   285,645                   3.93
                                                  =======


Exercisable at December 31, 1998 ..............   177,500               $   3.86
                                                  =======               ========

     The weighted average  remaining life of options  outstanding as of December
     31, 1998, was 7.25 years.



                                      F-15


     The  assumptions  used in  determining  the weighted  average fair value of
     options granted are as follows:

                                             1998           1997           1996
                                             ----           ----           ----

          Weighted average fair value      $ 2.91           2.61           1.43
          Divided yield                       ---            ---            ---
          Risk free interest rate           5.73%          5.99%           6.49%
          Stock volatility                    59%            63%             31%
          Expected option Life               9.77           5.19            9.80

     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:

                                      1998              1997            1996
                                      ----              ----            ----
               Net income:
                    As reported      $2,864,427        2,158,788       1,453,986
                    Pro forma        $2,744,554        2,116,869       1,368,329

               Net income per share:
                    As reported: basic and diluted  
                                     $      .52              .40             .29

                    Pro forma: basic and diluted    
                                     $      .50              .39             .27

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

     The Company has 1,242,105 Class A warrants outstanding that were originally
     issued in connection with RCL's initial public offering (IPO). The warrants
     are separable and tradable and each warrant entitles the holder to purchase
     one  share  of the  Company's  common  stock at $5.50  per  share  prior to
     November 9, 1999. The warrants may be redeemed, at the Company's option, at
     a price of $.05 per warrant provided the closing bid price per share equals
     or exceeds $9.50 for the 20 trading days within a period of 30  consecutive
     trading days prior to the notice of redemption.

     In 1997,  the Company  made an exchange  offer to holders of the  warrants.
     Under the terms of the offer, each warrant holder was entitled to one share
     of  the  Company's  common  stock  for  approximately  every  8.5  warrants
     exchanged.  The exchange offer expired in August 1997.  During the exchange
     period  435,595  warrants were exchanged for 51,239 shares of common stock.
     In 1998,  third  parties  exchanged  922,300  Class A warrants  for 108,505
     shares of common stock, at a ratio similar to the 1997 exchange offer.

     During 1996, 168,000 Class A warrants were repurchased for $32,400.  During
     1998, 100,000 Class A warrants were repurchased for $34,178.

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

     In  connection  with RCL's IPO,  warrants  to purchase  135,000  units were
     issued  to the  underwriter  (Underwriters'  Warrants).  The  Underwriters'
     Warrants are  exercisable  at a price of $9.00 per unit  consisting  of one
     share of the  Company's  common stock and two Class A warrants  (Units) and
     expire on  November  9, 1999.  The  exercise  price of the Class A warrants
     contained in the Units is $5.50 per share.


                                      F-16


(12)     Notes Receivable-Stockholders
         -----------------------------

     In December  1991,  the  president  and two vice  presidents  were advanced
     $536,360 in exchange for notes  receivable.  These notes were unsecured and
     provided for interest at 9%. The  president  satisfied  his note balance in
     1995  and the  balance  of the  notes  from the two  vice  presidents  were
     received during 1997.

(13)     Income Taxes
         ------------

     The  provision  for  (benefit  of)  income  taxes for the years  ended
     December 31, 1998, 1997 and 1996 consists of the following:


                                        1998             1997             1996
                                        ----             ----             ----

          Current
               Federal    $        1,484,000       1,204,000            931,400
               State                 256,000         324,000            228,000
                                     -------         -------            -------

                                   1,740,000       1,528,000          1,159,400

          Deferred:
               Federal               200,000         (79,000)           (66,640)
               State                 (39,000)        (10,000)           (11,760)
                                     -------         -------            ------- 

                                     161,000         (89,000)           (78,400)
                                     -------         -------            ------- 

                          $        1,901,000       1,439,000          1,081,000
                                   =========       =========          =========

     The provision for income taxes for the years ended December 31, 1998, 1997,
     and 1996 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 liability at December 31, 1998 and 1997 are
     as follows:

                                                 1998                      1997
                                                 ----                      ----

Deferred tax assets:
  Inventory valuation                       $     44,000                  38,000
  Allowance for doubtful accounts                387,000                 176,000
  Uniform cost capitalization for inventory       40,000                  33,000
  Accrued vacation                               143,000                 134,000
  Accrued salaries and commissions                68,000                  10,000
  Sales return allowance                          30,000                  23,000
  Investment tax credit carryforwards            457,000                 476,000
                                                 -------                 -------
     Total deferred tax assets                 1,169,000                 890,000

          Less valuation allowance               206,000                 341,000
                                                --------                 -------

     Net deferred tax assets                     963,000                 549,000

                                      F-17


Deferred tax liability:
  Accelerated depreciation for 
     tax purposes                             (1,323,000)              (748,000)
                                               ---------                --------

  Net deferred tax liability      $              360,000                199,000
                                                 =======                =======


     The valuation allowance for deferred tax assets as of December 31, 1998 and
     1997 was $206,000 and $341,000,  respectively.  The net change in the total
     valuation allowance for the years ended December 31, 1998 was a decrease of
     $135,000. In assessing the realizability of deferred tax assets, management
     considers  whether it is more likely  than not that some  portion or all of
     the deferred tax assets will not be realized.  The ultimate  realization of
     deferred  tax assets is dependent  upon the  generation  of future  taxable
     income  during the  periods in which  those  temporary  differences  become
     deductible.  Management  considers the  scheduled  reversal of deferred tax
     liabilities,  projected future taxable income, and tax planning  strategies
     in making  this  assessment.  Based  upon the level of  historical  taxable
     income and projections for future taxable income over the periods which the
     deferred tax assets are  deductible,  management  believes  that it is more
     likely than not the Company will  realize the benefits of these  deductible
     differences, net of the existing valuation allowances at December 31, 1998.

     At December 31, 1998,  the Company has available New York State  investment
     tax  credit  carryforwards   aggregating  approximately  $693,000  expiring
     through 2013.

(14)     Related Party Transactions
         --------------------------

     The Company leases one of its operating  facilities from an entity which is
     owned by several officers,  directors and stockholders of the Company.  The
     lease is for a fifteen  year term  expiring  in 2007 and  requires  minimum
     annual  rental  payments  of  $348,000.  Rentals  paid to the  entity  were
     $348,000 in each of the years ended December 31, 1998, 1997 and 1996, and a
     security  deposit of  $115,000  paid on the lease is  included  in security
     deposits and other assets at December 31, 1998.

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

(15)     Commitments and Contingencies
         -----------------------------

     In 1992, the Company entered into  consulting  agreements,  as amended,  to
     provide three of its  shareholders a minimum annual fee of $37,333  through
     August 31, 2001. The aggregate expense under these agreements was $111,999,
     $111,999 and $132,412 for 1998, 1997 and 1996, respectively.

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

(16)     Benefit Plans
         -------------

     The  Company  maintains  an Employee  401(k)  Savings  Plan.  The plan is a
     defined  contribution  plan  which  is  administered  by the  Company.  All
     employees are eligible for voluntary  participation  upon completing  three
     consecutive  months of  service.  The plan  provides  for growth in savings
     through  contributions  and income from  investments.  It is subject to the
     provisions of the Employee Retirement Income Security Act

                                      F-18


     of 1974 (ERISA), as amended.  Plan participants are allowed to contribute a
     specified  percentage  of  their  base  salary.  The  Company  matches  the
     participants'  contributions  up to a maximum  of 2% of  compensation.  The
     costs related to the plan approximated $115,800, $123,500, and $117,700 for
     the years ended December 31, 1998, 1997 and 1996, respectively.

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

     The  fair  value of a  financial  instrument  is the  amount  at which  the
     instrument  could be exchanged  in a current  transaction  between  willing
     parties.  The carrying value of all financial  instruments  classified as a
     current  asset or current  liability  is deemed to  approximate  fair value
     because  of the short  maturity  of these  investments.  In the  opinion of
     management,  the fair values of equipment notes payable, long-term debt and
     capital  leases are not materially  different  from their  carrying  values
     based on the related  interest rates compared to rates currently  available
     to the Company.

(18)     Business and Credit Concentrations
         ----------------------------------

     Most of the  Company's  customers  are located in the  northeastern  United
     States. No one customer  accounted for more than 10% of the Company's sales
     for 1998,  1997,  and 1996. At December 31, 1998 and 1997,  four  customers
     (aggregating 35%) and three customers  (aggregating 20%) 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.


(19)     Unaudited Quarterly Financial Information
         -----------------------------------------

     The  following is a summary of unaudited  quarterly  operating  results for
     fiscal 1998 and 1997 (in thousands, except per share amounts):

                                              1998
                                              ----

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

Net sales                     $  12,612     14,306      15,674     16,290
Gross profit                      2,897      3,840       4,448      4,614
Net income                          118        632         951      1,163
Net income per share:
     Basic and diluted              .02        .12         .17        .21
                                    ===        ===         ===        ===


                                              1997
                                              ----

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

Net sales                     $ 11,198       11,065      13,234     12,948
Gross profit                     2,983        2,690       3,624      3,396
Net income                         504          245         798        612
Net income per share:
Basic and diluted                  .09          .05         .15        .11
                                   ===          ===         ===        ===


                                      F-19


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


         Not applicable.



                                    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 from the  Registrant's  definitive  proxy
statement pursuant to Regulation 14A for the Registrant's 1999 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, 1998.

      (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 1998.

(c)   Exhibits.  See Exhibit Index included elsewhere in this Report.

(d)   Financial Statement Schedules.  See Items 8 and 14(a)(2) above.


                                       23
<TABLE>
<CAPTION>

                              DISC GRAPHICS, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


              Col. A                            Col. B            Col. C          Col. D           Col. E          Col. F
              ---------------------------------------------------------------------------------------------------------------------

                                              Balance at        Charged to                                      Balance at
                                               Beginning         Cost and                                        End of
              Classification                  of Period          Expense         Deductions (1)     Other         Period




<S> .................                              <C>              <C>             <C>               <C>             <C> 
For the year ended December 31, 1996: ..........  494,000         497,000        (147,000)                         844,000
       Allowance for doubtful accounts


For the year ended December 31, 1997: ..........  844,000         527,000        (229,000)          20,000(2)    1,162,000
       Allowance for doubtful accounts


For the year ended December 31, 1998: ..........1,162,000         403,000        (233,000)                       1,332,000
       Allowance for doubtful accounts

</TABLE>


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

(2)  Allowance for doubtful accounts of acquired business

                                       24


                                  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]*).

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

3.b  Amended and Restated  By-Laws of the Registrant  (filed as Exhibit 3.2
      to Form 8-A, filed June 21, 1996*).

4.a  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.b  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.c  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.d  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*).

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

4.f  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*).

9.a  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*).

                                       25

10.a 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.b 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.c 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.d 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.e 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.f 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.g 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.h 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.i 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*).

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

10.k 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*).

                                       26


10.l 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.m $675,000  Mortgage  and  Security  Agreement  between  Registrant  and
      KeyBank  National  Association  dated  January  16,  1998 (filed as an
      Exhibit  to the  Registrant's  Form  10-K for the  fiscal  year  ended
      December 31, 1997*).

10.n Amended and Restated  Credit  Agreement dated December 1, 1998 between
     the Registrant and KeyBank National Association.**

10.o Borrower's  Confirmation of Security  Agreement dated December 1, 1998
     between the Registrant and KeyBank National Association.**

21.1 Subsidiaries of the Company.**

23   Consent of Independent Accountants.**

25.1 Power of Attorney (included in the signature page of this Report).**

27   Financial Data Schedule.**



  *Document previously filed and incorporated herein by reference.
**Document filed herewith.

                                       27

           



                        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,  thereunto  duly  authorized  on the 15th day of
March, 1999.

                                             DISC GRAPHICS, INC



                                          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.


                                       28


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below on March 15, 1999 by the  following  persons in the
capacities indicated:


Signature                                                Title
---------                                                -----



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


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



/s/Margaret Krumholz                        Chief Financial Officer and Senior
--------------------                        Vice President of Finance
Margaret Krumholz                           (Principal Accounting Officer)



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



s/Frank A. Bress                            Vice President for Legal Affairs and
-----------------                           General Counsel
Frank A. Bress



/s/Daniel Levinson                          Director
-------------------
Daniel Levinson



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



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

                                       29