---

#### UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

Form 10-K(Mark One)

#### [  X  ]    Annual report pursuant to Section 13 or 15(d) of the
       Securities Exchange Act of 1934For the fiscal year ended December 31, 2001
or
[      ]  Transition report pursuant to Section 13 or 15(d) of the
        Securities Exchange Act of 1934For the transition period from _____ to _____

#### Commission file number 0-22696

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

|                                                                       |                                            
|---------------------------------------------------------------------- | -------------------------------------------
|Delaware(State or other jurisdiction of
incorporation or organization) | 13-3678012(IRS Employer Identification No.)
|                                                                       |                                            
|10 Gilpin Avenue, Hauppauge, New York                                  | 11788                                      
|(Address of Principal Executive Offices)                               | (Zip Code)                                 
|                                                                       |                                            
|Registrant's telephone number, including area code:                    | (631) 234-1400                             

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

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

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

| |                             
| | ----------------------------
| | Common Stock, $.01 par value
| |                             

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

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

At February 22, 2002,  the  aggregate  market value of the voting and non-voting
stock held by non-affiliates  of  Registrant  was  approximately  $3,291,361 million, based on the
closing price of the Common Stock on the Nasdaq Stock Market on that date.

At February 22, 2002, the Registrant had outstanding 5,518,242 shares of Common
Stock, $.01 par value per share.

Documents  incorporated by reference:  The Registrant's  Proxy Statement for its
2002 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; major film studios,
vitamin, cosmetic and fragrance companies; major book publishers; and many
Fortune 500 companies. The Company operates in one business segment: the
manufacturing and printing of specialty paperboard packaging.

The Company's primary business strategies are to increase the Company's
share of print and packaging sales within its primary markets and to develop
innovative packaging designs and techniques for new and existing markets. The
Company is actively involved in investigating additional printing and packaging
related business opportunities, joint ventures, or other business relationships.

On September 22, 2000 the Company entered into a joint venture
arrangement with Southern Container Corporation ("Southern Container") and
Schiffenhaus Industries, Inc. ("Schiffenhaus") for the purpose of acquiring and
operating a facility in New Jersey to produce reinforced folding cartons
("GraphCorr LLC" or "GraphCorr"). GraphCorr's manufacturing technology uses
high-speed equipment to "laminate" printed sheets to single-faced corrugation.
This venture will attempt to meet the demand for high-end graphic packaging with
the structural attributes of corrugation. GraphCorr began manufacturing
operations during the fourth quarter of 2001. The Company made an initial
investment of $225,000 in 2000 and an additional $625,000 in 2001. On December
28, 2001, the joint venture agreement was amended wherein Schiffenhaus's
membership interest was dissolved and Liberty Diversified Industries, Inc.
("Liberty") acquired a membership interest in GraphCorr.

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

In the fourth quarter of 2001, the Company recorded a charge
related to the impairment of intangible assets in connection with the CCG
Acquisition of $3,617,000. During the fourth quarter, the Company made the
determination to abandon the business it acquired in the CCG Acquisition as it
was unprofitable, the acquired physical assets had been disposed of and the
former shareholders of CCG who were managing such business had terminated their
employment with the Company.

The Company began experiencing weakness in sales during the third and
fourth quarters of 2000, which continued throughout 2001. This was due in part
to a general weakness in the economy, the closure of the Indiana facility, the
significant reduction in commercial printing business (due to the abandonment of
the CCG Acquisition) and lower sales of video, entertainment and software
packaging products to certain customers.

-2-

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

As part of its consolidation strategy, which was approved by the
Company's Board of Directors in March 2001, the Company shut down its
Indianapolis, Indiana facility during the second quarter of 2001. As of December
31, 2001, substantially all of the machinery and equipment from the Indiana
facility had been sold or redeployed within the Company's other operations. A
portion of the production activity has been absorbed by the Company's remaining
facilities, where there is presently sufficient capacity. In addition, the
Company intends to streamline its operations further. The Company believes this
operating realignment will provide a reduced cost structure and improve the
Company's profit potential. In connection with these consolidation initiatives,
the Company in the fourth quarter of 2000 wrote down the assets to be disposed
of to their net realizable value and recorded a charge of $3,458,000 related to
the revaluation of these impaired assets. In connection with the consolidation,
the Company incurred certain exit costs, principally severance, of $292,000,
which were expensed and paid in 2001.

The Company attributes the improvement of its cost structure, liquidity
and profit margins and the strengthening of its competitive position in both
current and new markets to the cost-cutting initiatives referred to above. By
consolidating operations, the Company has achieved improved production
efficiency, profitability and asset utilization. The Company's focus on cash
management initiatives has also improved cash flow from operations by
approximately $6.2 million and reduced debt by approximately $6.7 million.

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

Background

The Company was formed as the result of the acquisition by RCL Capital
Corp ("RCL") of a printing company formerly known as Disc Graphics, Inc., a New
York corporation ("Old Disc"), on October 30, 1995. RCL was incorporated in
August 1992 to serve as a vehicle to acquire an operating business. On November
18, 1993, RCL completed a public offering of units ("Units"), each Unit
consisting of one share of RCL's Common Stock and two redeemable warrants. Net
proceeds of the public offering after the payment of certain expenses yielded
approximately $6,400,000, which was put into escrow pending the acquisition of
an operating business.

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

-3-

Packaging/Printing Industry

The Company's revenue in 2001 was derived primarily from the
manufacture and sale of paperboard folding cartons. An industry trade
publication estimates that domestic shipments of folding cartons increased
approximately 1.7% over 2000 levels with estimated 2001 revenues from folding
cartons of approximately $8.8 billion. Despite slight growth in the overall
industry, several of our markets experienced sales declines in 2001. There were
many factors that affected our markets in 2001, including continued industry
consolidation, as the overall folding carton market continues to see significant
competition from resin based alternative packaging and growth in corrugated as
an alternative to paperboard packaging. Disc Graphics has entered into the
GraphCorr joint venture for the purpose of creating new market opportunities
through the manufacturing of mini-flute corrugated packaging products.

Folding carton manufacturers are divided into three main categories:
integrated manufacturers (those owned by or affiliated with a paperboard mill),
non-integrated or independent manufacturers, and in-plant or "captive"
manufacturers which are owned directly by the end user. Traditionally, the
Company has competed with independent manufacturers but through recent
acquisitions of some of the Company's largest competitors by paper companies,
the Company is now in the position of competing with significantly larger
integrated manufacturers. See "Business-Competition."

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

The Company's business also includes commercial printing and labels.
Because commercial printing has proven to be an intensely competitive and a low
profit margin market segment, the Company made the decision in 2001 to
de-emphasize commercial printing and focus on more profitable folding carton
products. For example, the commercial printing industry is fragmented with many
small printing companies serving regional markets as evidenced by the
characteristics of the New York City Metropolitan area, where there are
approximately 2,800 printing establishments with an average of 20 employees.

Based on 2000 revenues, the Company was ranked 110 in the top 400
printing companies in the United States by an industry trade publication, as
compared to 102 in 1999. Comparable rankings for 2001 were not available to the
Company at the date of this report.

The Company's Packaging Products

The Company's largest markets for folding cartons are the video and
entertainment software markets. For the home video market, the Company
manufactures bottom-load video sleeves, multi-packs and other specialty items.
In addition to printing for major studios, the Company has historically
concentrated on the catalogue and special interest video and software markets.
The Company's catalogue customers typically have licensed or purchased products
from major movie production studios. According to one industry trade group, the
videocassette market showed a decline in 2001 in total "duplicated" units
produced by approximately 7%. However, DVD production has been increasing since
its development and the Company has focused its resources in this area. DVD
replication has increased by 63% in 2001. Packaging for these DVD videos is
often sold to major film studios, independent distributors and replicators and
duplicators. Through these distributors and duplicators, the Company has
produced packaging for a major film studio and many Fortune 500 companies. Many
home video companies are converting catalog titles or introducing new titles on
DVD. The Company believes that this format for the delivery of movies has
created new packaging opportunities, and that this will be a growth market for
the Company.

-4-

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

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

The Company manufactures CD and cassette packaging, including tray
cards and booklets, pre-recorded cassette packaging, such as insert or "J"
cards, as well as audio book packaging and other printed materials for the music
and audio industries. The Company's music industry customers often require that
packaging be produced quickly, often within days of placing an order. The
Company has assembled a combination of skilled workers, advanced equipment, and
production systems to meet these requirements. The Company has long standing
customer relationships with major record companies in the United States and also
manufactures packaging for major duplicators in the United States. Additionally,
the Company manufactures packaging for special interest and secondary music and
audio markets. The other major component of this market is audio book packaging.
The Company believes that it has a significant share of this market. The audio
publishing market is quickly moving to CD's from cassettes as the use of CD's
for audio books is now almost equal to the use of audio books on cassettes.

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

In the commercial printing market, the Company prints brochures,
posters, sell sheets and other promotional material. Due to the closure of the
Indiana facility in the second quarter of 2001 and the decision to abandon the
CCG Acquisition, the Company has experienced a reduction in commercial sales to
these local customers.

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

The Company distributes all packaging products directly to its
customers.

Marketing and Sales

The Company's revenues are derived from several product lines. The
largest product line as a percentage of total 2001, 2000, and 1999 net sales
were the video and entertainment software market, which accounted for
approximately 37%, 32%, and 38%, respectively; followed by the consumer product
packaging market, which accounted for approximately 26%, 24%, and 23%,
respectively; the music and audio packaging market accounted for approximately
17%, 17%, and 15%, respectively; the OTC pharmaceutical market accounted for
approximately 8%, 6%, and 5%, respectively; and the commercial printing market
accounted for approximately 6%, 15%, and 13%, respectively. These markets
correspond to product lines within the business segment in which the Company
operates.

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

Seasonality

Historically, the Company's revenues have been moderately seasonal.
However, because of the decline in revenue during the third and fourth quarters
of fiscal 2001, the Company did not experience the same seasonality as it has in
prior years. In the last two quarters of 2001, 2000, and 1999, the Company's
revenues were approximately 49%, 51%, and 56%, respectively, of annual sales.
Historically, seasonality has been primarily the result of certain markets, such
as the music and audio packaging markets, the video and entertainment software
packaging markets and the consumer product packaging market, which require that
products be produced and shipped between August and October of each year for
sale during the holiday season.

-5-

Competition

The Company's core business of manufacturing and printing of specialty
paperboard packaging is highly competitive. The Company competes with a small
number of printed paperboard packaging companies within each of its markets.
These industries require high quality packaging with rapid turnaround time and
competitive pricing. The Company believes that its ability to perform all
aspects of the manufacturing process in-house is an important factor in
maintaining and improving its competitive position. The Company's principal
methods of competition are price, service, and product quality.

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

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

Employees

As of February 14, 2002, the Company had approximately 354 employees.
Of these employees, 258 are located in the Company's Hauppauge, New York
facility, with 209 serving in manufacturing capacities and 49 serving in selling
and administrative capacities. The Company's Burbank, California facility has 78
employees, with 63 serving in manufacturing capacities and 15 serving in selling
and administrative capacities. Disc Graphics' Rockaway, New Jersey facility has
18 employees, with 16 serving in manufacturing capacities and 2 serving in
selling and administrative capacities. A majority of the manufacturing employees
located in the Burbank, California facility are represented by a labor union and
are covered by a collective bargaining agreement. The Company believes that its
employee relations are good. The Company maintains an Employee 401(k) Savings
Plan.

Materials

The Company uses a variety of raw materials. The most significant types
of raw materials utilized are paperboard, paper, label paper, ink, coating,
films and plates. These materials are purchased from a variety of suppliers, and
the Company has several alternate sources for each. The Company has historically
been successful in obtaining adequate materials to satisfy all sales orders, and
does not anticipate any significant difficulties in obtaining supplies of such
materials in the future. The Company does not believe the loss of any one of its
suppliers would have a material adverse effect on its business because
alternative sources of supply are readily available at competitive prices. There
can be no assurances, however, that the Company will not encounter difficulty in
obtaining supplies of such material to fulfill future requirements.

Beginning in the fourth quarter of 2000 and throughout 2001,
the Company implemented a cost containment initiative. As part of this
initiative, Disc negotiated more favorable pricing arrangements with certain of
its main suppliers.

-6-

Equipment

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

Forward Looking Statements

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

Regulation

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

-7-

Executive Officers of the Registrant

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

Stephen Frey (48 years of age) is a Director, Senior Vice President of
Operations, Secretary and a major shareholder of the Company. Mr. Frey joined
Disc Graphics in the Pre-Press Department in 1978, became Supervisor of that
department in 1983, and established the Production and Planning Department in
1985. Mr. Frey was elected Vice President and Secretary in 1988 and a Director
in 1990. He was elected Senior Vice President of Operations in 1998. Prior to
joining Disc Graphics, Mr. Frey held various management positions with Kordet
Color Corporation, a high-end commercial printer and Terrace Litho, a printing
company servicing the book and publishing industries.

John Rebecchi (47 years of age) is a Director, Senior Vice President of
Marketing and New Business Development, and a major shareholder of the Company.
Mr. Rebecchi joined Disc Graphics' predecessor in the Accounting Department and, upon
Disc Graphics' formation in 1983, he served as Controller.  After a brief absence
from the Company, Mr. Rebecchi re-joined Disc Graphics in 1988 and was elected Vice President
and Treasurer in 1988 and a Director in 1990.  He served as Chief Financial
Officer from 1991 through 1995 and was elected Senior Vice President of Sales
&Marketing in 1998.

Margaret M. Krumholz (42 years of age) is Senior Vice President of
Finance and Chief Financial Officer of the Company. Ms. Krumholz joined Disc
Graphics in 1994 and served as Controller until 1996 when she was elected Chief
Financial Officer. She was elected Senior Vice President of Finance in August
1998. Prior to joining Disc Graphics, Ms. Krumholz held various financial and
accounting positions, including Corporate Finance Manager for General Foods
Baking Company, and received her C.P.A. while employed with
PricewaterhouseCoopers.

Daniel R. Stolfi (52 years of age) has been Vice President of Sales of
the Company since joining Disc Graphics in June 2001. Prior to joining Disc
Graphics, Mr. Stolfi held the positions of Vice President of Sales for
Innovative Folding Carton Company and Vice President of Field Sales for Impaxx,
Innovative's holding company from 1995 through 2001. Prior to 1995, Mr. Stolfi
held various management positions in the printing industry with experience in
direct mail and pharmaceutical markets.

-8-

ITEM 2.        Properties

As of December 31, 2001, the Company's principal properties were as
follows:

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

|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The lease for this facility was entered on January 1, 2000, and expires
January 31, 2008.                                                                                                                                                                                                                                                                                                        
|   
|(2) | The lease for this facility terminates on December 31, 2007. The facility
   is owned indirectly by certain principals of the Company through a limited
   partnership, and the Company believes that the lease terms were and are at
   least as favorable to the Company as terms which could have been obtained
   from unaffiliated third parties for similar office and manufacturing
space.
|   
|(3) | This lease is scheduled to terminate on May 18, 2003.                                                                                                                                                                                                                                                                                                                                            
|   
|(4) | The Company owns this facility, subject to a mortgage. In connection with
   the Company's consolidation initiatives, the Company intends to market this
   facility for sale during 2002.                                                                                                                                                                                                       
|   
|(5) | This lease is scheduled to terminate on July 14, 2003. In July 2000, the
   Company entered into a lease expiring July 14, 2003 to sublet approximately
   18,000 square feet of this manufacturing facility to a third party.                                                                                                                                                                   
|   
|(6) | This lease is scheduled to terminate on June 30, 2007. On July 1, 2000, the
   Company entered into a lease for an additional 6,000 square feet scheduled to
   terminate on June 30, 2007.                                                                                                                                                                                                      

ITEM 3.        Legal Proceedings

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2001, there were no lawsuits pending against the
Company, with the following exception:Laurence Locks, et al. v. Disc Graphics: In July 2001, plaintiffs served a
   Summons and Complaint against the Company asserting claims related to the
   Company's previous purchase of the assets of Contemporary Color Graphics,
   Inc. ("CCG"). The claims concern principal and interest payments allegedly
   due on August 1, 2000 under terms of a $1 million dollar note (the "CCG
   Note"), and a $600,000 convertible debenture (the "CCG Debenture") given by
   the Company as partial payment of the purchase price in the CCG Acquisition.
   See, infra, Item 7. Management's Discussion and Analysis of Financial
   Condition; Contemporary Color Graphics Acquisition. Pursuant to the terms of
   the CCG asset purchase agreement dated as of July 1, 1999 between the
   Company, CCG and CCG's shareholders, (the "Asset Purchase Agreement"), the
   CCG Note and the CCG Debenture, amounts due under the CCG Note and the CCG
   Debenture are diminished according to a formula contained in the Asset
   Purchase Agreement as a result of a shortfall between required CCG sales and
   actual CCG sales. The Company believes that no payments are due to CCG under
   the terms of the CCG Asset Purchase Agreement. Under the terms of a
   subordination agreement executed by CCG in favor of the Dime Savings Bank in
   connection with the CCG Acquisition, the Company believes that CCG may not
   pursue its claim without the consent of the Dime Savings Bank, which consent
   has been refused. The action is pending in New York Supreme Court, Suffolk
   County. Individual plaintiff Laurence Locks has also asserted a claim for
   breach of his employment agreement with the Company regarding his
   termination. Locks asserts that he is due "in excess of $332,600" for the
   unexpired term of the employment agreement, with interest, because he was
   terminated "without cause."

   In lieu of answering the Complaint, the Company has moved to dismiss the
   action based on documentary evidence, namely, the provisions of the
   subordination agreement which are clear and unambiguous and which CCG had the
   opportunity to review and negotiate before executing. The motion has been
   fully briefed and submitted since December 2001 and the Company is awaiting
   the Court's decision on the motion.

-9-

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

During the fourth quarter of the year ended December 31, 2001, there
were no matters submitted to a vote of the Company's security holders through
the solicitation of proxies or otherwise.

PART II

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

Price Range of Common Stock

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

| |                    |       |       |       |       | 
| | ------------------ | ----- | ----- | ----- | ----- | 
| |                   
| | High               |       | Low   |      
| | Quarter Ended      |      
|
| | March 31, 2000     | 4.438 |       | 2.563 |      
| | June 30, 2000      |       | 4.063 |       | 2.563 | 
| | September 30, 2000 | 3.500 |       | 1.938 |      
| | December 31, 2000  | 2.875 |       | .750  |      
| | March 31, 2001     | 2.188 |       | .875  |      
| | June 30, 2001      |       | 1.180 |       | .500  | 
| | September 30, 2001 | .930  |       | .570  |      
| | December 31, 2001  | 1.300 |       | .800  |      

On February 20, 2002, the closing bid price for the Common Stock on the
Nasdaq Small Cap Market was $1.16.

Holders of Common Stock

As of February 20, 2002,  there were 48 holders of record and  approximately  563 beneficial  owners of the Common
Stock.

Dividends

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

-10-

ITEM 6.        Selected Financial Data

The following table sets forth selected data regarding the Company's
operating results and financial position. The data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements and
notes (including without limitation Note 18) thereto, all of which are contained
in this Annual Report on Form 10-K.

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

|                                              |                         |          |      |          |         |          |      |          |      |          |     |       | 
|--------------------------------------------- | ----------------------- | -------- | ---- | -------- | ------- | -------- | ---- | -------- | ---- | -------- | --- | ----- | 
|                                              | Year Ended December 31, |         
|                                             
|                                              | 2001                    |          | 2000 |          | 1999    |          | 1998 |          | 1997 |         
|                                             
|Income Statement data:                        |                        
|Net Sales                                     |                         | $ 52,672 |      | $ 65,376 |         | $ 67,988 |      | $ 58,882 |      | $ 48,445 |    
|Gross Profit                                  |                         | 10,594   |      | 11,732   |         | 17,290   |      | 15,799   |      | 12,693   |    
|                                             
|Operating (loss) Income                       |                         | *(2,906  | )    |          | *(5,610 | )        |      | 4,930    |      | 5,249    |     | 4,210 | 
|                                             
|Net (loss) Income                             |                         | (3,107   | )    |          | (4,728  | )        |      | 2,507    |      | 2,864    |     | 2,159 | 
|Net (loss) income percommon share   Basic     | (.56                    | )        |      | (.86     | )       |          | .45  |          | .52  |          | .40 |      
|Diluted                                       |                         | (.56     | )    |          | (.86    | )        |      | .45      |      | .52      |     | .40   | 
|                                             
|Weighted average number of shares outstanding |                        
|Basic                                         |                         | 5,518    |      | 5,518    |         | 5,518    |      | 5,474    |      | 5,387    |    
|Diluted                                       |                         | 5,518    |      | 5,518    |         | 5,540    |      | 5,492    |      | 5,397    |    

*  Includes a $3,617 and $3,458 pre-tax asset impairment charge for 2001
and 2000, respectively.

|                      |                    |          |      |          |      |          |      |          |      |         
|--------------------- | ------------------ | -------- | ---- | -------- | ---- | -------- | ---- | -------- | ---- | --------
|                      | As of December 31, |         
|                     
|                      | 2001               |          | 2000 |          | 1999 |          | 1998 |          | 1997
|                     
|Balance Sheet Data:   |                   
|Total Assets          |                    | $ 31,246 |      | $ 42,144 |      | $ 42,508 |      | $ 28,372 |      | $ 26,747
|Long term liabilities |                    | 15,839   |      | 22,173   |      | 15,493   |      | 6,737    |      | 8,494   
|Stockholders' equity  |                    | 8,580    |      | 11,718   |      | 16,447   |      | 13,940   |      | 11,112  

-11-

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

Significant Accounting Policies

Financial Reporting Release No. 60, which was recently issued by the
Securities and Exchange Commission ("SEC"), requires all registrants to discuss
critical accounting policies or methods used in the preparation of the financial
statements. The notes to the consolidated financial statements include a summary
of the significant accounting policies and methods used in the preparation of
the Company's consolidated financial statements. However, in the opinion of
management, the Company does not have any individual accounting policy that is
critical to the preparation of the consolidated financial statements. This is
due principally to the definitive nature of accounting requirements for our
business. Also, in many instances, the Company must use an accounting policy or
method because it is the only policy or method permitted under accounting
principles generally accepted in the United Statements of America. Further,
management of the Company has made a number of estimates and assumptions that
affect reported amounts of assets, liabilities, revenues and expenses, and
actual results may differ from those estimates. Those areas that require the
greatest degree of management judgement include adequacy of the allowance for
doubtful accounts, the estimated proceeds upon sale of equipment and building
held for sale, and the projected future cash flows utilized in assessing the
recoverability of long lived assets.

Company management believe that full consideration has been given to
all relevant circumstances that the Company may be subject to, and the financial
statements of the Company accurately reflect management's best estimate of the
results of operations, financial position and cash flows of the Company for the
years presented.

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.

Contemporary Color Graphics, Inc. Acquisition

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

Because certain contingencies required under the asset purchase
agreement were not achieved, the CCG purchase price was reduced by $404,000
during fiscal 2000 and $1,133,000 during the third quarter of fiscal 2001. This
adjustment was reflected as a reduction by the Company of the principal amount
due on the promissory note and convertible debentures and a corresponding
reduction in goodwill. See Supra, "Item 3 - Legal Proceeding".

In the fourth quarter of 2001, the Company recorded a charge for the
write-off of intangible assets associated with the abandonment of the CCG
Acquisition of $3,617,000. See "Charge Related to the Impairment of Intangible
Assets" for further discussion.

-12-

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net sales

Net sales for the year ended December 31, 2001 were
$52,672,000 compared to $65,376,000 for the same period the prior year,
representing a decrease of $12,704,000 or 19.4%. The closure of the Indiana
facility accounted for approximately $4,605,000 or 36.2% of the decline in
sales. The overall decline in net sales, excluding the effect of the Indiana
facility closure, was most evident in commercial printing (down $5,273,000 or
65.0%) and computer software packaging on lower new product releases (off
approximately $2,804,000 or 34.6%) between 2000 and 2001. The decrease in sales
generally reflects soft market conditions in virtually all product lines except
Video/DVD packaging which in part is due to the impact of sales to a major film
studio. This decline in commercial printing was primarily the result of the
Company's decision to eliminate low margin and unprofitable commercial sales by
abandoning the CCG Acquisition in an effort to concentrate our resources on more
profitable product lines. In 2001, the Company's top ten customers accounted for
32% of revenues for the year compared to 30% in 2000. The Company's focus on new
accounts and new markets as well as strengthening sales to current customers
continues to be a priority of the Company.

Gross Profit

The Company recognized gross profit of $10,594,000 (a 20.1% profit
margin) for the year ended December 31, 2001, compared to $11,732,000 (a 17.9%
profit margin) for the prior year representing a profit margin increase of 2.2
percentage points. The Company's gross profit declined only $1,138,000 or 9.7% on
a sales decline of $12,704,000 or 19.4% reflecting the implementation of several
cost containment initiatives. Faced with weakening sales in a soft economy, the
Company approved the closure of its Indiana facility during the first quarter of
2001 and implemented several cost containment initiatives, which included
headcount reductions in the Hauppauge facility, the renegotiation of more
favorable pricing arrangements with several of our main suppliers and the
reduction of outside processing costs through improved deployment of available
production resources. Despite the decline in sales, the Company's aggressive
cost containment has resulted in an improvement in gross profit margin.

Selling, Shipping, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the year
ended December 31, 2001 were $9,786,000 (18.6% of net sales) compared to
$13,883,000 (21.2% of net sales) for the prior year, a decrease of $4,097,000 or
29.5%. The decrease is primarily due to a reduction in several fixed cost areas
including all employee related costs on headcount reductions, communications,
and outside professional services. In addition, variable selling expenses such
as sales commissions have decreased on lower sales volume.

Equity in Loss of Joint Venture

For the year ended December 31, 2001, the Company recorded $377,000 as
its share of losses from its equity method investment in the GraphCorr joint
venture. The venture commenced operations during the fourth quarter of 2001.

Charge Related to the Impairment of Intangible Assets

In the fourth quarter of 2001, the Company recorded a charge related to
the impairment of intangible assets in connection with the CCG Acquisition of
$3,617,000. During the fourth quarter, the Company made the determination to
abandon the business acquired in the CCG Acquisition based on unprofitable
sales, the disposition of substantially all physical assets related thereto, and
the termination of employment of the previous officers of CCG.

Interest Expense

Net interest expense for the year ended December 31, 2001 was
$1,636,000 compared to $1,662,000 for the prior year. Interest expense includes
interest payable under the Company's revolving credit facility, its notes and
capital lease obligations on equipment, as well as its note, supplemental note
and debenture issues in connection with the CCG Acquisition. The slight decrease
in interest expense reflects a decrease in debt obligations partially offset by
higher effective interest rates on those debt obligations.

-13-

Income Taxes

As a result of the loss for the year ended December 31, 2001, the
Company recorded a tax benefit of $1,811,000 as compared with a tax benefit of
$2,543,000 for the year ended December 31, 2000, with a change in the effective
tax rate to 36.8% in 2001 from 35.0% in 2000. This rate reflects an estimated
tax benefit for the full year which considers the Company's estimated tax loss
for the full year subject to an assessment of the recoverability of the
resulting deferred tax asset considering its ability to carry such losses
forward for tax purposes and the anticipated reversal of existing temporary
differences.

Net (Loss) Income

The net loss for the year ended December 31, 2001 was $822,000 before the
nonrecurring write off of intangibles ($2,286,000, net of taxes) related to the
CCG Acquisition compared to a net loss of $2,481,000 for the year ended December
31, 2000 before asset impairment charges ($2,248,000, net of taxes). The
decrease in the net loss is primarily due to implementation of several cost
containment initiatives which have improved gross profit margins and have
reduced other SG&A expenses.

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

Net Sales

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

Gross Profit

The Company recognized gross profit of $11,732,000 (a 17.9% profit
margin) for the year ended December 31, 2000, as compared to $17,290,000 (a
25.4% profit margin) for the prior year, representing a decrease of $5,559,000,
or 32.1%. The Company's operating results were negatively affected by lower than
expected sales volume, an increased cost structure and production inefficiencies
associated with the expansion of our facilities and the acquisition of large
format equipment. See "Subsequent Events" for further discussion. Also
contributing to the reduction in gross profit was an increase in raw material
costs which can only be partially passed on to customers, as well as costs
associated with the closing of the Edgewood facility in 2000. The Company
expected to receive its ISO 9001 certification during fiscal 2000, but has
delayed the certification process until 2002. In the fourth quarter of 2000, the
Company implemented a cost containment initiative. As part of this initiative,
Disc negotiated more favorable pricing arrangements with several of its main
suppliers.

Selling, General and Administrative Expenses

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

-14-

Charge Related to Impairment of Long Lived Assets

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

Interest Expense

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

Income Taxes

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

Net (Loss) Income

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

Liquidity and Capital Resources

The SEC recently issued Financial Reporting Release No. 61, which sets
forth the views of the SEC regarding enhanced disclosures relating to liquidity
and capital resources. The information provided below about the Company's debt,
credit facilities and future commitments is included here to facilitate a review
of the Company's liquidity.

The Company's total debt was $15,094,000 and $21,967,000 at December
31, 2001 and 2000, respectively. As discussed in Note 7 to the consolidated
financial statements, the Company's total debt of $15,094,000 at December 31,
2001 is due to be repaid as follows: in 2002 $1,280,000, in 2003-2004
$9,944,000; in 2005-2006 $2,294,000; and thereafter, $1,576,000. Debt
obligations due to be repaid in 2002 will be satisfied with operating cash
flows.

The Company's debt consists of both fixed and variable-rate
instruments. At December 31, 2001 and 2000, fixed-rate debt constituted
approximately 46% and 32% of its total debt, respectively. The increase in the
percentage of fixed-rate debt was primarily due to repayment of revolving line
of credit borrowing during 2001. The average interest rate on the Company's debt
was approximately 7.2% and 9.0% at December 31, 2001 and 2000, respectively.

The primary source of cash for the Company's business has been cash
flow from operations and availability under the Company's revolving credit
facility. Cash as of December 31, 2001 was $53,000 compared to $59,000 as of
December 31, 2000. Net cash provided from operations for the year ended December
31, 2001 was $7,192,011 compared to $1,001,000 for the year ended December 31,
2000. The improvement in cash flows from operations is primarily attributable to
the Company's critical focus on cash management resulting in a reduction in
accounts receivable and inventory balances of $3,394,000 and improved use of
trade credit. As of December 31, 2001, the company had working capital of
$8,545,000 compared to $10,519,000 as of December 31, 2000.

-15-

On June 1, 2001, following adoption by the Company of a consolidation
plan, the Company amended its credit agreement with its primary lender (the
"Credit Agreement"). This amendment established revised covenants to reflect the
Company's 2001 projections and consolidation plan and had a maturity date of
April 15, 2002, which was subsequently extended to July 31, 2002.

On December 28, 2001 the Company and its primary lender signed an
amendment to the Credit Agreement. The amendment establishes revised covenants,
and includes the following changes to the Credit Agreement: (i) reduction in
maximum borrowing under the revolving credit facility to $11,000,000, subject to
a borrowing base formula based on eligible accounts receivable and inventory,
(ii) change of maturity to a three year term with a five and six year
amortization against machinery and real estate respectively, (iii) refinancing
of two term loans currently financed by the primary lender, one secured by
machinery and equipment and the other secured by real estate. As of December 31,
2001, the Company had $2,066,000 available under its revolving credit facility
and was in compliance with all covenants.

In connection with the Company's closure of its Indiana facility during
the second quarter 2001, the Company has sold virtually all of the related
machinery and equipment as of December 31, 2001. During 2001, the Company
realized gross proceeds from the sale of machinery and equipment of $559,000 and
used the proceeds primarily in paying down the related debt. As of December 31,
2001 the Indiana real estate remains unsold.

As part of the Company's consolidation plan adopted in 2001, the
Company planned to streamline operations by selling certain other equipment in
an effort to realign its capacity. In connection with this consolidation
initiative, the Company has written down the related equipment to net realizable
value and recorded a charge of approximately $3,458,000 during fiscal year 2000.
As of December 31, 2001 the equipment remains unsold and the Company is seeking
potential buyers. By selling the equipment and further consolidating operations,
the Company believes that it will achieve improved production efficiency,
profitability and asset utilization. However, there can be no assurance that the
Company's profit margins and competitive position will improve.

As a result of the modifications to the Credit Agreement, the Company's
realignment actions, and cost reduction initiatives, management believes that
its profit potential and cash flow will be improved. Further, cash provided by
operations and amounts available from its Credit Agreement are expected to be
sufficient to meet the Company's cash requirements through the next fiscal year.

As a result of the CCG Acquisition in 1999 and the purchase of
approximately $9.6 million of additional manufacturing equipment over the past
two years, the Company's total indebtedness and future debt service obligations
have increased significantly from prior levels. The Company intends to fund
these debt service obligations from operating cash flow in future periods, and
believes that it will have sufficient funds to do so. In addition, proceeds from
the sale of equipment and real estate discussed above will be utilized to pay
down borrowings under the Company's debt agreements.

The Company is obligated under capital leases for machinery and
equipment. At December 31, 2001 and 2000, capital lease obligations were
$132,000 and $1,127,000, respectively, and are scheduled to be fully paid in
2002.

The Company leases its main operating facility from an entity owned by
related parties of the Company. The lease is for a fifteen year term, expiring
in 2007 and requires annual rental payments aggregating $348,000, plus payments
for a share of maintenance, insurance and real estate taxes. The Company is also
obligated under non-cancelable operating leases. Future minimum lease payments
under these agreements is as follows: in 2002 $1,308,000; in 2003-2004
$1,899,000; in 2005-2006 $1,666,000; and thereafter $808,000.

-16-

Inflation and Seasonality

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

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

New Accounting Pronouncement

Effective January 1, 2000, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivative financial instruments be recorded on the consolidated
balance sheet at their fair value as either assets or liabilities. Changes in
the fair value of derivatives will be recorded each period in earnings or
accumulated other comprehensive income, depending upon whether a derivative is
designated and effective as part of a hedge transaction and, if it is, the type
of hedge transaction.

The Company has interest rate swaps to hedge a portion of its variable
rate debt which are accounted for as qualifying cash flow hedges. As a result,
during the year ended December 31, 2001, the Company recorded approximately
$30,000 in losses in other comprehensive loss relating to the change in fair
value of its cash flow hedges. At December 31, 2001, the fair value of such
instruments was a net liability of approximately $30,000.

In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the use of the purchase method of accounting for
all business combinations initiated after June 30, 2001, thereby eliminating the
pooling-of-interests methods of accounting. SFAS No. 141 also addresses the
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. The Company will adopt the provisions of SFAS No. 141 on
January 1, 2002. Management does not believe the adoption of SFAS No. 141 will
have a significant affect on the Company's consolidated financial position or
results of operations. Upon adoption of SFAS No. 142, goodwill and intangible
assets that have indefinite useful lives will not be amortized but rather will
be tested at least annually for impairment. Other intangible assets will
continue to be amortized over their estimated useful lives. The Company will
adopt the provisions of SFAS No. 142 on January 1, 2002. Based upon the
Company's current amount of goodwill and qualifying intangible assets,
management expects the adoption to reduce its fiscal 2002 annualized
amortization expense, which is not deductible for tax purposes, by approximately
$74,000.

In August 2001, the SFAS issued SFAS No. 143,  "Accounting for Asset  Retirement  Obligations,"  and SFAS No. 144,
"Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets."  SFAS No. 143  addresses  financial  accounting  and
reporting  for  obligations  associated  with the  retirement  of  tangible  long-lived  assets  and the  associated  asset
retirement  costs.  SFAS No. 144  supersedes  FASB  Statement No. 121 and the  accounting  and reporting  provisions of APB
Opinion No. 30,  "Reporting  the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and  Infrequently  Occurring  Events and  Transactions,"  and addresses  financial  accounting  and
reporting for the  impairment or disposal of  long-lived  assets.  The Company is required to adopt SFAS No. 143 on January
1, 2003 and  required  to adopt SFAS No. 144 on January 1, 2002 and does not expect SFAS No. 143 and 144 to have a material
impact on the Company's consolidated financial position or results of operations.

-17-

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. A significant
portion of the Company's long-term debt is its revolving line of credit under
the Credit Agreement, which is exposed to changes in interest rates. As of
December 31, 2001, the Company had approximately $5,994,000 of debt outstanding
on its revolving line of credit. The stated or implicit rates on the Company's
other borrowings, including capital leases, are generally fixed or in those
instances where rates are variable, the Company generally fixes the rates
through interest rate swap agreements. If current interest rates were to
increase by 10%, the effect on the Company would be an additional annual expense
of approximately $35,000.

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

-18-

ITEM 8.
      
Financial Statements and Supplementary Data

Page

|                                                                                                          |     
|--------------------------------------------------------------------------------------------------------- | ----
|Report of Independent Accountants (PricewaterhouseCoopers LLP)                                            | F-1 
|Independent Auditors' Report (KPMG LLP)                                                                   | F-2 
|Consolidated Balance Sheets as of December 31, 2001 
     and 2000                                        | F-3 
|Consolidated Statements of Operations for the years ended
     December 31, 2001, 2000 and 1999           | F-4 
|Consolidated Statements of Stockholders' Equity for
     the years ended December 31, 2001, 2000 and 1999 | F-5 
|Consolidated Statements of Cash Flows for the years ended
     December 31, 2001, 2000 and 1999           | F-6 
|Notes to Consolidated Financial Statements                                                                | F-7 
|Schedule II:
Valuation and Qualifying Accounts for the years ended
     December 31, 2001, 2000 and 1999  | F-23

-19-

#### DISC GRAPHICS, INC.
               AND SUBSIDIARIES
Consolidated Financial Statements
    December 31, 2001 and 2000

(With Independent Auditors' Report Thereon)

#### Report of Independent Accountants

To the Board of Directors
      and Stockholders
of Disc Graphics, Inc.:

In our opinion,  the consolidated  financial  statements  listed in the accompanying  index present fairly,  in all
material respects,  the financial position of Disc Graphics,  Inc. and its subsidiaries (the "Company") at December
31,  2001,  and the results of their  operations  and their cash flows for the year then ended in  conformity  with
accounting  principles  generally  accepted in the United  States of America.  In  addition,  in our  opinion,  the
financial  statement  schedule listed in the accompanying  index presents  fairly,  in all material  respects,  the
information set forth therein when read in conjunction with the related consolidated  financial  statements.  These
financial  statements and financial  statement  schedule are the  responsibility of the Company's  management;  our
responsibility  is to express an opinion on these financial  statements and financial  statement  schedule based on
our audit. We conducted our audit of these  statements in accordance  with auditing  standards  generally  accepted
in the United States of America,  which 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,  assessing the accounting
principles  used and  significant  estimates made by management,  and  evaluating the overall  financial  statement
presentation.  We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, New York
January 31, 2002

-F1-

#### Independent Auditors' Report

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

We have audited the accompanying consolidated balance sheet of Disc Graphics, Inc. and subsidiaries as of December 31,
2000, and the related statements of operations, stockholders' equity and cash flows for each of the years in the two-year
period then ended. These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Disc Graphics, Inc. and subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for each of the years in the two-year period then ended in conformity with accounting principles
generally accepted in the United States of America.

KPMG LLP
Melville, New York
February 2, 2001, except for
Notes 5 and 16, which are as of April 13, 2001

-F2-

DISC GRAPHICS, INC.AND SUBSIDIARIESConsolidated Balance Sheets
          December 31, 2001 and 2000

|                                                                       |                                                                          |            |                 |            |            |                 |   |  | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------ | ---------- | --------------- | ---------- | ---------- | --------------- | - |  | 
|                                                                       |                                                                          |           
|                                                                      
|                                                                      
|Current assets:                                                        |                                                                         
|                                                                       | Cash                                                                     | $          | 52,780          |            | $          | 59,489          |  
|                                                                       | Accounts receivable, net of allowance for doubtful accounts              |           
|                                                                       | of $1,280,000 and $1,498,000, respectively                               |            | 9,484,793       |            | 12,343,062 |                
|                                                                       | Inventories                                                              |            | 1,430,316       |            | 2,695,377  |                
|                                                                       | Prepaid expenses and other current assets                                |            | 341,850         |            | 355,626    |                
|                                                                       | Income taxes receivable                                                  |            | 1,072,551       |            | 1,281,284  |                
|                                                                       | Deferred income taxes                                                    |            | 2,990,000       |            | 2,037,000  |                
|                                                                       | Total current assets                                                     |            | 15,372,290      |            | 18,771,838 |                
|                                                                      
|Plant and equipment, net (including $5,025,000 of assets held          |                                                                         
|                                                                       | for sale at December 31, 2001)                                           |            | 14,380,367      |            | 16,782,729 |                
|Goodwill, net of amortization of $418,000                              |                                                                         
|                                                                       | and $867,000, respectively                                               |            | 695,431         |            | 5,293,688  |                
|Covenants not to compete, net of amortization
     of $364,000 in 2000 |                                                                          | ----       |                 | 736,236    |           
|Security deposits and other assets                                     |                                                                          | 324,806    |                 | 334,168    |           
|Investment in joint venture                                            |                                                                          | 472,947    |                 | 225,000    |           
|                                                                      
|                                                                       | Total assets                                                             | $          | 31,245,841 |            | $          | 42,143,659 |  
|                                                                      
|                                                                      
|                                                                      
|Current liabilities:                                                   |                                                                         
|                                                                       | Current maturities of long term debt                                     | $          | 1,279,761       |            | $          | 1,458,290       |  
|                                                                       | Current maturities of capitalized lease obligations payable              |            | 131,759         |            | 710,485    |                
|                                                                       | Accounts payable and accrued expenses                                    |            | 5,416,077       |            | 6,083,982  |                
|                                                                       | Total current liabilities                                                |            | 6,827,597       |            | 8,252,757  |                
|                                                                      
|Long term debt, less current maturities                                |                                                                          | 13,813,929 |                 | 20,509,060 |           
|Capitalized lease obligations payable, less current maturities         |                                                                          | ----       |                 | 416,634    |           
|Deferred income taxes                                                  |                                                                          | 2,024,595  |                 | 1,247,000  |           
|                                                                       | Total liabilities                                                        |            | 22,666,121      |            | 30,425,451 |                
|Commitments and Contingencies (Note 12)                                |                                                                         
|                                                                      
|Stockholders' equity:                                                  |                                                                         
|                                                                       | Preferred stock:                                                         |           
|                                                                       | $.01 par value;authorized 5,000 shares;
no shares issued and outstanding |            | ----            |            | ----       |                
|                                                                       | Common stock:                                                            |           
|                                                                       | $.01 par value; authorized 20,000,000 shares;
   issued 5,548,761 shares |            | 55,488          |            | 55,488     |                
|                                                                       | Additional paid-in capital                                               |            | 5,009,671       |            | 5,009,671  |                
|                                                                       | Retained earnings                                                        |            | 3,577,535       |            | 6,685,012  |                
|                                                                       | 8,642,694                                                                |            | 11,750,171      |           
|                                                                      
|Less:                                                                  |                                                                         
|                                                                       | Treasury stock, at cost, 30,519 shares                                   |            | (31,963         | )          |            | (31,963         | )
|                                                                       | Other comprehensive income                                               |            | (31,011         | )          |            | ----            |  
|                                                                       | Total stockholders' equity                                               |            | 8,579,720       |            | 11,718,208
|                                                                      
|                                                                       | Total liabilities and stockholders' equity                               | $          | 31,245,841 |            | $          | 42,143,659 |  

See accompanying notes to Consolidated Financial Statements

-F3-

#### DISC GRAPHICS, INC.AND SUBSDIARIESConsolidated Statements of Operations
    Years ended December 31, 2001, 2000 and 1999

|                                                |                                                      |            |            |            |            |            |            |            |           | 
|----------------------------------------------- | ---------------------------------------------------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | 
|                                                |                                                      |           
|                                               
|Net sales                                       | $                                                    | 52,672,074 |            | $          | 65,376,090 |            | $          | 67,987,941 |          
|Cost of sales                                   |                                                      | 42,078,495 |            | 53,644,234 |            | 50,697,468
|                                               
|                                                | Gross profit                                         |            | 10,593,579 |            | 11,731,856 |            | 17,290,473
|                                               
|Operating Expenses:                             |                                                     
|                                                | Selling and shipping                                 |            | 4,687,162  |            | 7,572,868  |            | 6,804,982 
|                                                | General and administrative                           |            | 5,098,388  |            | 6,310,521  |            | 5,555,369 
|                                                | Asset impairment charge                              |            | 3,616,855  |            | 3,458,000  |            | ----      
|                                                | Loss on disposal of equipment                        |            | 97,088     |            | ----       |            | ----      
|                                               
|                                                | Operating (loss) income                              |            | (2,905,914 | )          |            | (5,609,533 | )          |            | 4,930,122
|                                               
|Interest expense, net                           |                                                      | 1,635,724  |            | 1,661,956  |            | 747,202   
|Equity in loss of joint venture                 |                                                      | 377,053    |            | ----       |            | ----      
|                                               
|(Loss) Income before provision for income taxes |                                                      | (4,918,691 | )          |            | (7,271,489 | )          |            | 4,182,920 
|                                               
|(Benefit) provision for income taxes            |                                                      | (1,811,214 | )          |            | (2,543,000 | )          |            | 1,676,000 
|                                               
|                                                | Net (loss)Income                                     | $          | (3,107,477 | )          |            | (4,728,489 | )          |            | 2,506,920
|                                                |                                                 |            |       |            |      
|                                               
|                                                | Net (loss) Income per share:                         |           
|                                               
|                                                | Basic                                                | $          | (0.56      | )          |            | (0.86      | )          |            | 0.45     
|                                                |                                                 |            |       |            |      
|                                               
|                                                | Diluted                                              | $          | (0.56      | )          |            | (0.86      | )          |            | 0.45     
|                                                |                                                 |            |       |            |      
|                                               
|                                                | Weighted average number of shares
       outstanding |           
|                                               
|                                                | Basic                                                |            | 5,518,242  |            | 5,518,269  |            | 5,518,361 
|                                               
|                                                | Diluted                                              |            | 5,518,242  |            | 5,518,269  |            | 5,540,265 

See accompanying notes to Consolidated Financial Statements

-F4-

#### DISC GRAPHICS, INC.AND SUBSIDIARIESConsolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999

|                                                            |                 |         |              |              |         |                |          |            |          |                |               |                |       |            |         |         |              |           |            |                |  | 
|----------------------------------------------------------- | --------------- | ------- | ------------ | ------------ | ------- | -------------- | -------- | ---------- | -------- | -------------- | ------------- | -------------- | ----- | ---------- | ------- | ------- | ------------ | --------- | ---------- | -------------- |  | 
|                                                            | Additional      |         | Other        |             
|                                                            | Preferred Stock |         | Common Stock |              | paid in |                | Retained |            | Treasury |                | Comprehensive |               
|                                                            | Shares          |         | Amount       |              | Shares  |                | Amount   |            | capital  |                | earnings      |                | Stock |            | Income  |         | Total        |          
|                                                           
|Balance,December 31, 1998                                   |                 | ----    |              | $    ----    |         | 5,548,761      |          | $55,488    |          | 5,009,671      |               | 8,906,581      |       | (31,336    | )       |         | ----         |           | 13,940,404 |               
|                                                           
|Purchase of Treasury Stock                                  |                 | ----    |              | ----         |         | ----           |          | ----       |          | ----           |               | ----           |       | (270       | )       |         | ----         |           | (270       | )             
|                                                           
|Net Income                                                  |                 | ----    |              | ----         |         | ----           |          | ----       |          | ----           |               | 2,506,920      |       | ----       |         | ----    |              | 2,506,920 |           
|                                                           
|Balance, December 31, 1999                                  |                 | ----    |              | ----         |         | 5,548,761      |          | 55,488     |          | 5,009,671      |               | 11,413,501     |       | (31,606    | )       |         | ----         |           | 16,447,054 |               
|                                                           
|Purchase ofTreasury Stock                                   |                 | ----    |              | ----         |         | ----           |          | ----       |          | ----           |               | ----           |       | (357       | )       |         | ----         |           | (357       | )             
|                                                           
|Net Loss                                                    |                 | ----    |              | ----         |         | ----           |          | ----       |          | ----           |               | (4,728,489     | )     |            | ----    |         | ----         |           | (4,728,489 | )             
|                                                           
|Balance,December 31, 2000                                   |                 | ----    |              | ----         |         | 5,548,761      |          | 55,488     |          | 5,009,671      |               | 6,685,012      |       | (31,963    | )       |         | ----         |           | 11,718,208 |               
|                                                           
|Change in Fair Value of Derivatives Accounted for as Hedges | ----            |         | ----         |              | ----    |                | ----     |            | ----     |                | ----          |                | ----  |            | (31,011 | )       |              | (31,011   | )         
|                                                           
|Net Loss                                                    |                 | ----    |              | ----         |         | ----           |          | ----       |          | ----           |               | (3,107,477     | )     |            | ----    |         | ----         |           | (3,107,477 | )             
|                                                           
|Total Comprehensive Income 2001                             | ----            |         | ----         |              | ----    |                | ----     |            | ----     |                | (3,107,477    | )              |       | ----       |         | (31,011 | )            |           | (3,138,488 | )             
|                                                           
|Balance,December 31, 2001                                   |                 | ---- |              | $    ---- |         | 5,548,761 |          | $55,488 |          | 5,009,671 |               | 3,577,535 |       | (31,963 | )       |         | (31,011 | )         |            | 8,579,720 | 

See accompanying notes to consolidated financial statements.
-F5-

DISC GRAPHICS, INC.AND SUBSIDIARIES

Consolidated Statements of Cash Flows
          Years ended December 31, 2001, 2000 and 1999

|                                      |                                                                                           |        |            |         |            |            |            |            |            |   |  | 
|------------------------------------- | ----------------------------------------------------------------------------------------- | ------ | ---------- | ------- | ---------- | ---------- | ---------- | ---------- | ---------- | - |  | 
|                                      |                                                                                           |        |           
|                                     
|Cash flows from operating activities: |                                                                                          
|                                      | Net (loss) income                                                                         | $      | (3,107,477 | )       | $          | (4,728,489 | )          | $          | 2,506,920  |  
|                                      | Adjustments to reconcile net (loss) income to net
 cash provided by operating activities: |       
|                                      | Depreciation and amortization                                                             |        | 2,730,631  |         | 3,623,455  |            | 2,477,667  |           
|                                      | Deferred income tax (benefit) expense                                                     |        | (175,405   | )       |            | (1,277,000 | )          |            | 127,000    |  
|                                      | Provision for doubtful accounts                                                           |        | 729,089    |         | 940,324    |            | 422,721    |           
|                                      | Asset impairment charge                                                                   |        | 3,616,855  |         | 3,458,000  |            | ----       |           
|                                      | Loss on sale of assets related
to consolidation of Edgewood facility                      |        | ----       |         | 258,770    |            | ----       |           
|                                      | Equity in loss of equity investment                                                       |        | 377,053    |         | ----       |            | ----       |           
|                                      | Loss on disposal of equipment                                                             |        | 97,088     |         | ----       |            | ----       |           
|                                      | Changes in assets and liabilities, net of the
effect of business acquired:                |       
|                                      | Accounts receivable                                                                       |        | 2,129,180  |         | 296,278    |            | (210,400   | )         
|                                      | Inventory                                                                                 |        | 1,265,061  |         | 1,732,997  |            | (1,857,906 | )         
|                                      | Prepaid expenses and other current assets                                                 |        | 13,776     |         | (75,747    | )          |            | (46,677    | )         
|                                      | Accounts payable and accrued expenses                                                     |        | (698,918   | )       |            | (2,058,098 | )          |            | 1,641,772  |  
|                                      | Income taxes payable                                                                      |        | 208,733    |         | (1,871,388 | )          |            | (225,848   | )         
|                                      | Security deposits and other assets                                                        |        | 6,345      |         | 701,998    |            | (302,272   | )          |           
|                                      | Net cash provided by operating activities                                                 |        | 7,192,011  |         | 1,001,100  |            | 4,532,977  |           
|                                     
|Cash flows from investing activities: |                                                                                          
|                                      | Capital expenditures                                                                      |        | (396,420   | )       |            | (9,179,655 | )          |            | (5,722,182 | )
|                                      | Purchase of net assets of business acquired                                               |        | ----       |         | (7,500     | )          |            | (3,581,806 | )         
|                                      | Investment in joint venture                                                               |        | (625,000   | )       |            | (225,000   | )          |            | ----       |  
|                                      | Proceeds from sale of equipment                                                           |        | 558,500    |         | 596,340    |            | ----       |           
|                                      | Net cash used in investing activities                                                     |        | (462,920   | )       |            | (8,815,815 | )          |            | (9,303,988 | )
|                                     
|Cash flows from financing activities: |                                                                                          
|                                      | (Repayments) proceeds of long-term debt                                                   |        | (5,740,440 | )       |            | 10,497,250 |            | 6,356,356  |           
|                                      | Principal payments of capital lease obligations                                           |        | (995,360   | )       |            | (2,765,220 | )          |            | (1,485,857 | ) | 
|                                      | Purchase of treasury stock                                                                |        | ----       |         | (357       | )          |            | (270       | )         
|                                     
|                                      | Net cash (used in) provided by financing
                        activities               |        | (6,735,800 | )       |            | 7,731,673  |            | 4,870,229  |           
|                                     
|Net (decrease) increase in cash       |                                                                                           | (6,709 | )          |         | (83,042    | )          |            | 99,218     |           
|                                     
|Cash at beginning of year             |                                                                                           | 59,489 |            | 142,531 |            | 43,313     |           
|                                     
|Cash at end of year                   | $                                                                                         | 52,780 |            | $       | 59,489     |            | $          | 142,531    |           
|                                      |                                                                                      |        |       |         |       |           

See accompanying notes to Consolidated Financial Statements

-F6-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIESNotes to Consolidated Financial Statements

|    |  |                                           
|--- |  | ------------------------------------------
|(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
                  historically  been  moderately  seasonal.  This  seasonality has primarily been the result of the
                  music and home video products which are sold between August and October for the holiday season.
|
| | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | Principles of Consolidation  
|
| | The consolidated  financial  statements  include the financial  statements of the Company and its
                  wholly-owned  subsidiaries.  All significant  inter-company  balances and transactions  have been
                  eliminated in consolidation.                                                                                                                                                                                                                                                                                                           
|
| | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | Revenue Recognition          
|
| | The Company  recognizes  revenue from products  shipped when risk of loss and title  transfers to
                  its customers.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (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 2001, 2000 and 1999.                                                                                                                                                                                                                                                                   
|
| | (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

-F7-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                            
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------
| | Assets under capital  leases and  leasehold  improvements  are  amortized  over the lesser of the
                  term of the lease or the  estimated  life of the  asset,  depending  upon the  provisions  of the
                  lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | Goodwill                   
|
| | Goodwill,  which  represents the excess of purchase price over fair value of net assets acquired,
                  is  amortized  on a  straight-line  basis over a period of 15 years.  The  Company  assesses  the
                  recoverability  of this intangible asset by determining  whether the amortization of the goodwill
                  balance over its remaining  life can be recovered  through  undiscounted  future  operating  cash
                  flows of the acquired  operation.  The amount of goodwill  impairment,  if any, is measured based
                  on projected  discounted  future  operating cash flows. The assessment of the  recoverability  of
                  goodwill  will be  impacted  if  estimated  future  operating  cash  flows are not  achieved.  In
                  connection with the abandonment of the Contemporary  Color Graphics,  Inc.  ("CCG")  acquisition,
                  related goodwill and covenant not to compete of $3,616,855 was written off in 2001.                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | Income Taxes               
|
| | Income taxes are  accounted  for under the asset and  liability  method.  Deferred tax assets and
                  liabilities are recognized for the future tax  consequences  attributable to differences  between
                  the  financial   statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
                  respective tax bases.  Deferred tax assets and  liabilities  are measured using enacted tax rates
                  expected  to apply to  taxable  income  in the years in which  those  temporary  differences  are
                  expected  to be  realized or settled.  The effect on  deferred  tax assets and  liabilities  of a
                  change in tax rates is recognized in income in the period that includes the enactment date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | Net Income (Loss) Per Share
|
| | Basic  earnings per share are  computed by dividing  income  (loss)  available to common
                  stockholders  (which,  for the Company,  equals its net income  (loss)) by the  weighted  average
                  number of common shares  outstanding  during the period.  Diluted  earnings per share reflect the
                  potential  dilution  that  would  occur if all  securities  exercisable  or  exchangeable  for or
                  convertible  into shares of common stock that were outstanding  during the period,  such as stock
                  options,  and  convertible  debentures,  were exercised or converted into shares of common stock.
                  The  computation  of weighted  average  shares  outstanding  used in the  calculation  of diluted
                  earnings  per share does not  include  shares of common  stock that  would be  issuable  upon the
                  convertible  debenture,  because the conversion rate of such debentures exceeded the market price
                  of the Company's  common stock during the relevant  periods.  In 2001, the computation of diluted
                  earnings  per share does not  include  incremental  shares  issuable  upon the  exercise of stock
                  options  since the Company  experienced  a loss.  Total  options  outstanding  as of December 31,
                  2001 were 222,146.

-F8-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------
| | (j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Stock Option Plan                                                      
|
| | The Company  records  compensation  expense for employee stock options only if the current market
                  price of the underlying  stock exceeds the exercise  price on the date of the grant.  The Company
                  has elected not to implement the fair value based  accounting  method for employee stock options,
                  but has elected to  disclose  the pro forma net  earnings  and pro forma  earnings  per share for
                  employee  stock  option  grants  as if such  method  had been  used to  account  for  stock-based
                  compensation cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (k)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Impairment of Long Lived Assets and Long Lived Assets to Be Disposed Of
|
| | The  Company  reviews  long-lived  assets and certain  identifiable  intangibles  for  impairment
                  whenever  events or changes in  circumstances  indicate that the carrying  amount of an asset may
                  not be  recoverable.  Recoverability  of assets to be held and used is measured  by a  comparison
                  of the carrying  amount of an asset to undiscounted  estimated  future net cash flows expected to
                  be generated by the asset.  If such assets are  considered to be impaired,  the  impairment to be
                  recognized  is measured by the amount by which the carrying  amount of the assets exceed the fair
                  value of the assets.  Assets to be disposed of are reported at the lower of the  carrying  amount
                  or fair value less costs to sell.

                  Due to the closure of the Company's  Indiana  facility and the planned sale of certain  equipment
                  and a building  during fiscal 2001,  the Company has written down certain long lived assets based
                  on the  related  fair  values  less  costs to sell  (see  Note  16).  As of  December  31,  2001,
                  $5,025,000 of net property, plant and equipment is expected to be sold.
|
| | (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Comprehensive Income                                                   
|
| | Other  comprehensive  income  represents  the  change  in  stockholders'  equity  resulting  from
                  transactions other than stockholder  investments and distributions.  The Company's  comprehensive
                  income includes net income and changes in the fair value of derivative instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (m)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Use of Estimates                                                       
|
| | Management  of the  Company  has made a number  of  estimates  and  assumptions  relating  to the
                  reporting of assets and  liabilities  and the disclosure of contingent  assets and liabilities at
                  the date of the financial  statements  and the reported  amounts of revenues and expenses  during
                  the  reporting  period to  prepare  these  financial  statements  in  conformity  with  generally
                  accepted  accounting  principles,  including the estimated  proceeds upon sale of equipment and a
                  building  described  in Note 17, the amount of the  allowance  for doubtful  accounts,  projected
                  future  cash  flows  utilized  in  assessing  the  recoverability  of long  lived  assets and the
                  amortization period for goodwill.  Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                    

-F9-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                              
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
| | (n)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | New Accounting Pronouncements
|
| | Effective  January  1, 2000,  the  Company  adopted  SFAS No.  133,  "Accounting  for  Derivative
                  Instruments  and  Hedging   Activities."   This  standard   requires  all  derivative   financial
                  instruments  be recorded on the  consolidated  balance sheet at their fair value as either assets
                  or  liabilities.  Changes  in the fair  value of  derivatives  will be  recorded  each  period in
                  earnings or  accumulated  other  comprehensive  income,  depending  upon whether a derivative  is
                  designated  and  effective  as part of a hedge  transaction  and,  if it is,  the  type of  hedge
                  transaction.

                  The  Company  has  interest  rate  swaps to hedge a portion of its  variable  rate debt which are
                  accounted for as qualifying  cash flow hedges.  As a result,  during the year ended  December 31,
                  2001, the Company recorded  approximately  $30,000 in losses in other comprehensive loss relating
                  to the change in fair value of its cash flow  hedges.  At December  31,  2001,  the fair value of
                  such instruments was a net liability of approximately $30,000.

                  In  June  2001,  the  Financial  Accounting  Standards  Board  issued  SFAS  No.  141,  "Business
                  Combinations"  and SFAS No. 142,  "Goodwill and Other  Intangible  Assets." SFAS No. 141 requires
                  the use of the purchase method of accounting for all business  combinations  initiated after June
                  30, 2001, thereby eliminating the pooling-of-interests  methods of accounting.  SFAS No. 141 also
                  addresses the recognition and measurement of goodwill and other  intangible  assets acquired in a
                  business  combination.  The  Company  will  adopt the  provisions  of SFAS No.  141 on January 1,
                  2002.  Management  does not believe the adoption of SFAS No. 141 will have a  significant  affect
                  on the  Company's  consolidated  financial  position or results of  operations.  Upon adoption of
                  SFAS No. 142,  goodwill  and  intangible  assets that have  indefinite  useful  lives will not be
                  amortized but rather will be tested at least annually for  impairment.  Other  intangible  assets
                  will  continue to be amortized  over their  estimated  useful  lives.  The Company will adopt the
                  provisions  of SFAS No.  142 on  January 1, 2002.  Based  upon the  Company's  current  amount of
                  goodwill and qualifying  intangible assets,  management expects the adoption to reduce its fiscal
                  2002  annualized   amortization   expense,   which  is  not  deductible  for  tax  purposes,   by
                  approximately $74,000.

                  In August 2001,  the SFAS issued SFAS No. 143,  "Accounting  for Asset  Retirement  Obligations,"
                  and SFAS No. 144,  "Accounting  for the  Impairment or Disposal of  Long-Lived  Assets." SFAS No.
                  143 addresses financial  accounting and reporting for obligations  associated with the retirement
                  of  tangible  long-lived  assets  and  the  associated  asset  retirement  costs.  SFAS  No.  144
                  supersedes  FASB  Statement No. 121 and the  accounting  and reporting  provisions of APB Opinion
                  No. 30,  "Reporting  the Results of  Operations - Reporting  the Effects of Disposal of a Segment
                  of a Business,  and Extraordinary,  Unusual and Infrequently  Occurring Events and Transactions,"
                  and addresses  financial  accounting  and reporting for the  impairment or disposal of long-lived
                  assets.  The Company is  required to adopt SFAS No. 143 on January 1, 2003 and  required to adopt
                  SFAS No.  144 on  January  1, 2002 and does not  expect  SFAS No.  143 and 144 to have a material
                  impact on the Company's consolidated financial position or results of operations.

-F10-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Acquisition of Contemporary Color Graphics, Inc.

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

         The total purchase price,  including  transaction  costs of $89,000 and $185,000 relating to the valuation
         of certain net assets,  was allocated to the fair value of the assets  acquired and  liabilities  assumed.
         The  purchase  price  allocation  resulted in  goodwill  of  $5,451,300  and  covenants  not to compete of
         $1,000,000.  The  principal  amount due on the  promissory  note and  convertible  debentures on August 1,
         2000 and  2001 of  $320,000  and  $640,000,  respectively,  were not paid  because  minimum  sales  amount
         required  under the asset  purchase  agreement  were not  achieved  for the year's ended June 30, 2000 and
         2001,  respectively.  In  addition,  as a result of the sales  shortfall,  the  remaining  balances of the
         promissory  note and  convertible  debenture was reduced by an additional  $84,000 in 2000 and $493,220 in
         2001.  As a result of the downward  adjustment,  goodwill was also  reduced  accordingly  in the amount of
         $404,000  in 2000  and  $1,133,220  in  2001.  In the  fourth  quarter  of  2001,  the  Company  made  the
         determination to abandon the CCG Acquisition,  and accordingly  recorded a charge for the write off of all
         intangible assets in the amount of $3,617,000.

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

         In July 2001,  CCG and its former  owners  commenced  a lawsuit  against the  Company  for  principal  and
         interest  payments  allegedly  due on  August  1, 2000  under  the  terms of the $1  million  note and the
         $600,000  convertible  debentures.  The Company  believes that no payments are currently due to the former
         owners of CCG since the minimum  sales  levels  discussed  above were not  achieved.  Under the terms of a
         subordination  agreement  executed by CCG in favor of the Company's  lender,  CCG may not pursue its claim
         without the consent of the Company's lender, which consent has been refused.
|   
|(3) |  | Supplemental Cash Flow Information

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

| |                                |  |              |  |           |  |           |  | 
| | ------------------------------ |  | ------------ |  | --------- |  | --------- |  | 
| | 2001                           |  | 2000         |  | 1999      | 
|
| | Cash paid during the year for: | 
|
| | Interest                       |  | $1,452,796   |  | 1,562,496 |  | 737,073   | 
| | Income taxes                   |  | $     78,679 |  | 605,388   |  | 1,774,848 | 

-F11-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|    |                                       |               |         |               |           |  |  | 
|--- | ------------------------------------- | ------------- | ------- | ------------- | --------- |  |  | 
|(4) |                                       | Inventories   |        
|   
|    | Inventories consist of the following: |              
|    | 2001                                  |               | 2000    |              
|   
|    | Raw materials                         | $             | 922,331 |               | 1,517,370 | 
|    | Work-in-process                       |               | 270,249 |               | 844,808   | 
|    | Finished goods                        |               | 237,736 |               | 333,199   | 
|   
|    | $                                     | 1,430,316 |         | 2,695,377 |          

|    |                                                         |                                |            |                |            |  |  | 
|--- | ------------------------------------------------------- | ------------------------------ | ---------- | -------------- | ---------- |  |  | 
|(5) |                                                         | Property,  Plant and Equipment |           
|   
|    | Property, plant and equipment consist of the following:
|    | 2001                                                    |                                | 2000       |               
|   
|    | Land and building                                       | $                              | 550,000    |                | 550,000    | 
|    | Machinery and equipment                                 |                                | 24,944,779 |                | 27,637,361 | 
|    | Furniture and fixtures                                  |                                | 2,199,882  |                | 2,146,523  | 
|    | Leasehold improvements                                  |                                | 2,759,992  |                | 2,743,373  | 
|    | Automobiles and trucks                                  |                                | 196,353    |                | 268,450    | 
|    | 30,651,006                                              |                                | 33,345,707 |               
|    | Less accumulated depreciationand amortization           |                                | 13,919,956 |                | 13,399,978 | 
|   
|    | Reserve for loss on sale ofequipment and building       |                                | 2,350,683  |                | 3,163,000  | 
|   
|    | $                                                       | 14,380,367                 |            | 16,782,729 |           

Depreciation and amortization  expense of property,  plant, and equipment amounted to $2,730,631,
         $2,118,815 and $2,076,563 for the years ended December 31, 2001, 2000, and 1999, respectively.

-F12-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|    |                                                                                                    |                                          |           |               |           |  |  | 
|--- | -------------------------------------------------------------------------------------------------- | ---------------------------------------- | --------- | ------------- | --------- |  |  | 
|(6) |                                                                                                    | Accounts Payable and Accrued Liabilities |          
|   
|    | Accounts payable and accrued liabilities at December 31, 2001 and
2000 consisted of the following:
|   
|    | 2001                                                                                               |                                          | 2000      |              
|   
|    | Accounts payable and accrued accounts payable                                                      | $                                        | 2,291,057 |               | 2,297,973 | 
|    | Accrued payroll and other employee benefits                                                        |                                          | 1,854,540 |               | 2,399,112 | 
|    | Accrued vacation                                                                                   |                                          | 363,207   |               | 402,330  
|    | Accrued commissions                                                                                |                                          | 101,617   |               | 374,929   | 
|    | Accrued other                                                                                      |                                          | 805,656   |               | 609,638   | 
|   
|    | $                                                                                                  | 5,416,077                            |           | 6,083,982 |          

|    |                                          |                |            |                |            |  |  | 
|--- | ---------------------------------------- | -------------- | ---------- | -------------- | ---------- |  |  | 
|(7) |                                          | Long Term Debt |           
|   
|    | Long Term Debt is summarized as follows:
|   
|    | 2001                                     |                | 2000       |               
|   
|    | Revolving line of credit (a)             | $              | 5,994,413  | $              | 12,809,131 | 
|    | Wells Fargo Equipment Finance, Inc. (b)  |                | 2,722,235  |                | 2,989,600  | 
|    | Orix Financial Services, Inc. (c)        |                | 2,030,752  |                | ----       | 
|    | GE Capital Public Finance (d)            |                | 1,158,233  |                | 1,471,375  | 
|    | People's Capital and Leasing Corp. (e)   |                | 878,502    |                | 1,138,269  | 
|    | Promissory Note (f)                      |                | ----       |                | 716,000    | 
|    | Supplemental Note (g)                    |                | 1,208,250  |                | 1,124,950  | 
|    | Convertible Debenture (h)                |                | 62,780     |                | 480,000    | 
|    | Secured equipment financing note (i)     |                | 627,900    |                | 759,900    | 
|    | Mortgage payable (j)                     |                | 410,625    |                | 478,125    | 
|    | 15,093,690                               |                | 21,967,350 |               
|    | Less current maturities                  |                | 1,279,761  |                | 1,458,290  | 
|   
|    | $                                        | 13,813,929 |            | 20,509,060 |           

-F13-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In February,  1997,  the Company  entered into a financing  agreement  with Key Bank,  N.A.,  now
                  known as the Dime  Savings  Bank of New York,  FSB,  as amended on  December 1, 1998 and June 22,
                  2001 (the "Credit  Agreement").  On December 28, 2001 the Company and its primary  lender  signed
                  an  amendment  to  the  Credit  Agreement.  The  amendment  establishes  revised  covenants,  and
                  includes the  following  changes to the Credit  Agreement:  (i)  reduction  in maximum  borrowing
                  under the revolving  credit  facility to  $11,000,000,  subject to a borrowing base formula based
                  on  eligible  accounts  receivable  and  inventory,  (ii) change of maturity to a three year term
                  with a five and six year  amortization  against  machinery  and real  estate,  respectively,  and
                  (iii)  refinancing of two term loans  currently  financed by the primary  lender,  one secured by
                  machinery  and  equipment  and the other  secured  by real  estate.  The Credit  Agreement  bears
                  interest  at the  bank's  base  rate  plus 1%.  At  December  31,  2001 the base rate plus 1% was
                  5.75%. The Credit Agreement is secured by substantially all of the Company's unsecured assets.
|   
|(b) |  | Secured  equipment  financing note payable to Wells Fargo Equipment  Finance,  Inc. payable in 96
                  monthly installments of $43,799 including interest at a fixed rate of 9%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(c) |  | Secured  equipment  financing  note  payable  to Orix  Financial  Services,  Inc.  payable  in 84  monthly
                  installments of $36,430 including interest at a fixed rate of 9.2%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(d) |  | Secured  equipment  financing  note payable to GE Capital  Public  Finance  payable in 60 monthly
                  installments  of $34,273  including  interest.  Interest  is  variable,  calculated  at a rate of
                  1.50% plus  LIBOR.  The  dollar  amount of  payments  will not change  with  fluctuations  in the
                  interest  rate. An adjustment is made at the end of each  three-month  period and the  subsequent
                  installment payment is adjusted accordingly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(e) |  | Secured  equipment  financing  note payable to People's  Capital and Leasing Corp.  payable in 84
                  monthly installments of $18,134 including interest at a fixed rate of 9%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(f) |  | In connection  with the  acquisition  of CCG, the Company  issued a $1,000,000  promissory  note.
                  Principal on the promissory note must be paid in three annual  installments  commencing on August
                  1,  2000.  Interest  at a rate of 8.33% per annum on the note is paid  quarterly.  The  principal
                  amounts of this note and the debentures  referred to below are subject to downward  adjustment if
                  CCG does not meet certain minimum  revenue  levels.  In the event such levels are not met and the
                  principal amounts are reduced, goodwill will be adjusted accordingly.

                 The  principal  amount  due on the  promissory  note on August 1, 2000 and 2001 of  $200,000  and
                  $400,000,  respectively,  were not paid because  minimum  sales  amounts for the years ended June
                  30,  2000  and  2001,  respectively,  required  under  the  asset  purchase  agreement  were  not
                  achieved.  In  addition,  as a result  of the  sales  shortfall,  the  remaining  balance  of the
                  promissory note was reduced by an additional $84,000 in 2000 and $316,000 in 2001.                                                                                                                                                            

-F14-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                       | In connection  with the  acquisition of CCG, the Company issued a $1,000,000  supplemental  note.
                  Principal on the supplemental note must be paid in two annual  installments  commencing on August
                  1,  2003.  Interest  at a rate of 8.33%  per  annum on the  note  must be paid on each  principal
                  payment date.  Interest accrued on the supplemental note as of December 31, 2001 is $208,250.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                       | In  connection  with  the  acquisition  of  CCG,  the  Company  issued  a  $600,000   convertible
                  debenture.  The  convertible  debenture must be paid in three annual  installments  commencing on
                  August  1,  2000.  Interest  at a rate of 8.33%  per  annum on the  note is paid  quarterly.  The
                  former  shareholders  of CCG  have  the  right to  convert  the  debentures  into  shares  of the
                  Company's  common stock,  not less than 30 days before any principal or interest  payment date at
                  a rate of one share for every $5.50 of principal or interest.

                  The  principal  amount due on the  convertible  debentures on August 1, 2000 and 2001 of $120,000
                  and $240,000,  respectively,  were not paid because minimum sales amounts  required for the years
                  ended  June 30,  2000 and  2001,  respectively,  under  the  asset  purchase  agreement  were not
                  achieved.  In  addition,  as a result  of the  sales  shortfall,  the  remaining  balance  of the
                  convertible debenture was reduced by an additional $177,220.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                       | Secured  equipment  financing  note payable to a bank,  payable in monthly  installments  ranging
                  from $10,300 in 2000 to $13,500 in 2004,  plus  interest, with a final balloon payment of $200,100
                due December 1, 2004.  Interest is variable,  calculated at a
                  rate of 1.75%  points  below the bank's  current  index  rate,  which was 4.75% at  December  31,
                  2001.  The interest rate for this note was 3.00% at December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                       | In  connection  with the  acquisition  of Benham,  the  Company  obtained a  mortgage  loan with a
                  lending  institution in the amount of $675,000 for the building and land  acquired.  The mortgage
                  loan is  payable in monthly installments of $5,625 plus interest,
                with a final balloon payment of $219,375 due December 1, 2004.  Interest is
                calculated at the bank's base rate plus 1%.  This
                  mortgage  loan is secured by a first lien on the premises and an  assignment  of rents and leases
                  on the premises.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Proceeds  from the sale of  equipment  and a building,  as  discussed in Note 17, will be used to pay down
         long term debt.

         The  aggregate  maturities  of  long-term  debt  outstanding  as of December 31 for each of the five years
         subsequent to 2001, including amounts outstanding under the Credit Agreement,  are as follows:  $1,279,761
         in 2002;  $2,024,726 in 2003;  $7,918,956 in 2004;  $1,329,861 in 2005; $964,082 in 2006; and $1,576,304
         thereafter.

        As a result of the modifications to the Credit Agreement and the Company's
        cost reduction initiatives, management believes cash provided by operations
        and amounts available from its Credit Agreement are expected to be sufficient
        to meet the Company's cash requirements through the next fiscal year.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                       | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | The Company is obligated under several  capital leases for certain  machinery and equipment that expire at
         various  dates  during  the next  year.  At  December  31,  2001 and 2000,  the gross  amount of plant and
         equipment and related accumulated amortization recorded under capital leases were as follows:

-F15-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

| |                               |             |           |               |           | 
| | ----------------------------- | ----------- | --------- | ------------- | --------- | 
| | 2001                          |             | 2000      |              
|
| | Machinery and equipment       | $           | 1,156,263 |               | 3,627,339 | 
| | Less accumulated amortization |             | 535,857   |               | 1,571,474 | 
| | $                             | 620,406 |           | 2,055,865

The Company  occupies its premises  pursuant to a lease with a related party  expiring  December 31, 2007,
         with a five year  renewal  option  (see note 12).  The lease  provides  for annual  rentals,  as  defined,
         payable  monthly,  as well as payments for a share of maintenance,  insurance,  and real estate taxes. The
         Company is also obligated under various non-cancelable equipment leases.

Rent expense under  operating  leases for the years ended December 31, 2001, 2000 and 1999 was $1,629,354,
         $1,841,268, and $1,178,058, 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,
         2001 are:

| |                                                                                          |       |                 |   |               |  | 
| | ---------------------------------------------------------------------------------------- | ----- | --------------- | - | ------------- |  | 
| | CapitalLeases                                                                            |       | OperatingLeases |  
| | Year ending December 31:                                                                 |      
| | 2002                                                                                     | $     | 135,504         | $ | 1,307,858     | 
| | 2003                                                                                     |       | ----            |   | 1,019,352     | 
| | 2004                                                                                     |       | ----            |   | 879,800       | 
| | 2005                                                                                     |       | ----            |   | 839,439       | 
| | 2006                                                                                     |       | ----            |   | 872,016       | 
| | 2007 and thereafter                                                                      |       | ----            |   | 807,641       | 
|
| | Total minimum lease payments                                                             |       | 135,504         | $ | 5,681,106 | 
|
| | Less amount representing interest (at
                rates ranging from 7.25% to 8.75%) | 3,745 |                
| | Net principal portion                                                                    |       | 131,759         |  
| | Less portion due within one year                                                         |       | 131,759         |  
|
| | Long-term portion                                                                        | $     | 0           |  

-F16-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                      |               | 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------- | 
|(9) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Stockholders' Equity
|   
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                      | Stock Options
|   
|    | Pursuant to the  Company's  1995  Incentive  Stock  Option Plan (the  "Plan"),  an  aggregate  of
                  500,000  shares of the  Company's  Common Stock are  reserved  for issuance  upon the exercise of
                  options  granted  pursuant  to  the  Plan.  Officers,   key  employees,   directors  and  certain
                  consultants  and advisors to the Company are eligible to  participate  in the Plan.  The Plan may
                  issue  incentive  stock  options  and  nonqualified  stock  options.  Options  are granted at the
                  market  price on the date of grant and expire in five or ten years.  The  duration  of any option
                  granted  under  this Plan  must be fixed by the  Incentive  Stock  Option  Committee  in its sole
                  discretion  and no option may be  exercised  until at least six  months  after the date of grant.
                  At December 31, 2001, there were 277,854 additional shares available for grant under the Plan.
|   
|    | Changes in options outstanding are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                  |            |                                |      |         |      | 
| | -------------------------------- | ---------- | ------------------------------ | ---- | ------- | ---- | 
| | Shares                           |            | Weighted-averageexercise price |     
|
| | Outstanding December 31, 1998    | 301,429    |                                | $    | 3.96    |     
| | Granted                          |            | 2,000                          |      | 3.06    |     
| | Forfeited                        |            | (1,573                         | )    |         | 4.50 | 
|
| | Outstanding December 31, 1999    | 301,856    |                                | 3.97 |        
| | Granted                          |            | 2,000                          |      | 3.04    |     
| | Forfeited                        |            | (63,010                        | )    |         | 4.63 | 
|
| | Outstanding December 31, 2000    | 240,846    |                                | 3.78 |        
| | Granted                          |            | 2,000                          |      | 1.44    |     
| | Forfeited                        |            | (20,700                        | )    |         | 4.09 | 
|
| | Outstanding December 31, 2001    | 222,146 |                                | 3.73 |        
|
| | Exercisable at December 31, 2001 | 222,146 |                                | $    | 3.73 |     

The exercise price of options exercisable as of December 31, 2001 was from $1.44 to $4.50.

The weighted average remaining life of options outstanding as of December 31, 2001, was 4.84 years.

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

-F17-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

| |                             |   |       |   |       |      |       |  |      |   | 
| | --------------------------- | - | ----- | - | ----- | ---- | ----- |  | ---- | - | 
| | 2001                        |   | 2000  |   | 1999  |     
|
| | Weighted average fair value | $ | 1.44  |   | 3.04  |      | 3.06  | 
| | Divided yield               |   | ----  |   | ----  |      | ----  | 
| | Risk free interest rate     |   | 4.92  | % |       | 6.56 | %     |  | 4.70 | %
| | Stock volatility            |   | 222   | % |       | 179  | %     |  | 56   | %
| | Expected option life        |   | 10.00 |   | 10.00 |      | 10.00 | 

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:

| |                                |   |            |   |      |            |   |  |           |  | 
| | ------------------------------ | - | ---------- | - | ---- | ---------- | - |  | --------- |  | 
| | 2001                           |   | 2000       |   | 1999 |           
|
| | Net income (loss):             |  
| | As reported                    | $ | (3,107,477 | ) |      | (4,728,489 | ) |  | 2,506,920 | 
| | Pro forma                      | $ | (3,109,293 | ) |      | (4,781,476 | ) |  | 2,395,469 | 
|
| | Net income (loss) per share:   |  
| | As reported: basic and diluted | $ | (.56       | ) |      | (.86       | ) |  | .45       | 
| | Pro forma: basic and diluted   | $ | (.56       | ) |      | (.87       | ) |  | .43       | 

| |                                                                                                                                                                                                                                                                              |  |         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
| | (b)                                                                                                                                                                                                                                                                          |  | Warrants
|
| | In connection  with the Company's  merger with its  predecessor,  warrants to purchase  1,000,000
                  shares of Common  Stock were  issued at  exercise  prices  ranging  from  $7.00 to $10.00.  These
                  warrants expire on November 9, 2002.

|     |                                                                                                                                            |             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------
|(10) |                                                                                                                                            | Income Taxes
|    
|     | The  (benefit of)  provision  for income  taxes for the years ended  December 31, 2001,  2000 and
         1999 consists of the following:

| |            |   |            |            |      |          |           |  |           |  | 
| | ---------- | - | ---------- | ---------- | ---- | -------- | --------- |  | --------- |  | 
| | 2001       |   | 2000       |            | 1999 |         
|
| | Current    |  
| | Federal    | $ | (1,347,214 | )          |      | (990,000 | )         |  | 1,268,000 | 
| | State      |   | (290,000   | )          |      | (276,000 | )         |  | 281,000   | 
| | (1,637,214 | ) |            | (1,266,000 | )    |          | 1,549,000 | 

-F18-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

| |           |                |          |            |                |            |         |               |        |  | 
| | --------- | -------------- | -------- | ---------- | -------------- | ---------- | ------- | ------------- | ------ |  | 
| | Deferred: |               
| | Federal   |                | (156,000 | )          |                | (1,240,000 | )       |               | 82,000 | 
| | State     |                | (18,000  | )          |                | (37,000    | )       |               | 45,000 | 
| | (174,000  | )              |          | (1,277,000 | )              |            | 127,000 |              
| | $         | (1,811,214 | )        |            | (2,543,000 | )          |         | 1,676,000 |       

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | The  (benefit  of)  provision  for income taxes for the years ended  December  31,  2001,  2000,  and 1999
         differed  from the amounts  computed by applying the Federal  income tax rate of 34% primarily as a result
         of state and local income taxes, net of Federal income tax benefits.

         The tax effects of temporary  differences that give rise to a significant  portion of the net deferred tax
         asset (liability) at December 31, 2001 and 2000 are as follows:

| |                                                |            |             |           |             |   |  |  |  | 
| | ---------------------------------------------- | ---------- | ----------- | --------- | ----------- | - |  |  |  | 
| | 2001                                           |            | 2000        |          
|
| | Deferred tax assets:                           |           
| | Inventory valuation                            | $          | 54,000      |           | 47,000      |  
| | Allowance for doubtful accounts                | 487,000    |             | 509,000   |            
| | Uniform cost capitalization for inventory      | 25,000     |             | 47,000    |            
| | Accrued vacation                               | 87,000     |             | 110,000   |            
| | Accrued salaries and commissions               | 22,000     |             | 31,000    |            
| | Net operating loss carryforward                | 1,202,000  |             | ----      |            
| | Reserve for asset impairment                   | 1,176,000  |             | 1,176,000 |            
| | Investment tax credit carryforwards and others | 835,000    |             | 974,000   |            
| | Total deferred tax assets                      | 3,888,000  |             | 2,894,000 |            
|
| | Less valuation allowance                       | (898,000   | )           |           | (857,000    | )
| | Net deferred tax assets                        | 2,990,000  |             | 2,037,000 |            
|
| | Deferred tax liability:                        |           
| | Accelerated depreciation for tax purposes      | (2,024,595 | )           |           | (1,247,000  | ) | 
|
| | Net deferred tax asset                         | $          | 965,405 |           | 790,000

-F19-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                              
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------
|     | The  valuation  allowance  for  deferred  tax assets as of  December  31, 2001 and 2000 was  $898,000  and
         $857,000,  respectively.  The net change in the total valuation  allowance for the year ended December 31,
         2001 was an increase  of $41,000.  In  assessing  the  realizability  of deferred  tax assets,  management
         considers  whether it is more likely  than not that some  portion or all of the  deferred  tax assets will
         not be realized.  The ultimate  realization  of deferred tax assets is dependent  upon the  generation  of
         future  taxable  income  during the  periods  in which  those  temporary  differences  become  deductible.
         Management  considers  the  scheduled  reversal of deferred  tax  liabilities,  projected  future  taxable
         income,  and tax  planning  strategies  in making  this  assessment.  Based  upon the level of  historical
         taxable  income and  projections  for future taxable income over the periods which the deferred tax assets
         are deductible,  as well as the  availability  of carryback  claims,  management  believes that it is more
         likely than not the  Company  will  realize  the  benefits  of these  deductible  differences,  net of the
         existing valuation allowances at December 31, 2001.

         At December  31,  2001,  the Company has  available  New York State  investment  tax credit  carryforwards
         aggregating approximately $1,455,000 expiring through 2016.
|    
|(11) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 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,  2001,  2000 and 1999,  and a security  deposit of $115,000  paid on the
         lease is included in security deposits and other assets at December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|(12) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Commitments and Contingencies
|    
|     | The  Company was party to  consulting  agreements,  as amended,  to provide  three of its  shareholders  a
         minimum annual  consulting  fee of $37,333 which expired on August 31, 2001.  The aggregate  expense under
         these agreements was $74,665 in 2001 and $111,999 in each of the years ended December 31, 2000 and 1999.

         The  Company  has  entered  into a joint  venture  agreement  with two other  entities  for the purpose of
         acquiring and operating a facility to produce  reenforced  folding  cartons.  Initial  funding of $225,000
         is included in "Security Deposits and Other Assets" in the accompanying  consolidated  balance sheet as of
         December 31, 2001.  The Company was obligated to fund an additional $625,000 which was made in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

-F20-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                    
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------
|(13) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 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 the first day
         of the month  following  their  employment  commencement  date.  The plan  provides  for growth in savings
         through  contributions  and income  from  investments.  It is subject to the  provisions  of the  Employee
         Retirement  Income Security Act of 1974 (ERISA),  as amended.  Plan participants are allowed to contribute
         a specified  percentage of their base salary.  The Company had matched the participants'  contributions up
         to a  maximum  of 3% of  compensation.  As  of  July  1,  2001,  the  Company  discontinued  matching  the
         participants'  contributions.  The  costs  related  to  the  plan  approximated  $144,000,  $322,000,  and
         $224,000 for the years ended December 31, 2001, 2000 and 1999, respectively.                   
|    
|(14) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Fair Value of Financial Instruments
|    
|     | The fair value of a financial  instrument  is the amount at which the  instrument  could be exchanged in a
         current  transaction  between  willing  parties.   The  carrying  values  of  all  financial   instruments
         classified as current assets or current  liabilities  are deemed to approximate  fair value because of the
         short  maturity of these  investments.  In the opinion of  management,  the fair values of long-term  debt
         and capital leases are not materially  different from their carrying values based on the related  interest
         rates compared to rates currently available to the Company.                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(15) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Business and Credit Concentrations 
|    
|     | Most of the  Company's  customers  are located in the United  States.  No one customer  accounted for more
         than 10% of the  Company's  sales  for 2001,  2000,  and  1999.  At  December  31,  2001 and  2000,  three
         customers  (aggregating 18%) 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(16) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Asset Impairment Charge            
|    
|     | As a result of  weakening  sales in the fourth  quarter of 2000 and first  quarter  of 2001,  the  Company
         approved a plan to close its Indiana  facility  and sell  certain  manufacturing  equipment  during  March
         2001. In connection with this plan, the Company  reassessed the  recoverability of the related  long-lived
         assets.  This  reassessment  resulted  in the  recording  of a non-cash  charge of  $3,458,000  during the
         fourth quarter of 2000. The Company  wrote-off the remaining  goodwill  relating to the acquisition of the
         Indiana  facility of $295,000.  In addition,  the Company  estimated a loss of  $3,163,000  in  connection
         with the sale of certain  manufacturing  equipment  and a building.  The amount of the loss was  estimated
         based on information  received from equipment  manufacturers and brokers and is subject to change based on
         the proceeds the Company realizes upon the actual sale of the related equipment and a building.

-F21-

DISC GRAPHICS, INC.
                 AND SUBSIDIARIES

Notes to Consolidated Financial Statements(continued)

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                          
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------
|     | In the fourth  quarter of 2001,  the Company  recorded a charge  related to the  impairment  of intangible
         assets in connection  with the CCG  acquisition  of  $3,617,000.  During the fourth  quarter,  the Company
         made the  determination  to abandon the business  acquired in the CCG  Acquisition  based on  unprofitable
         sales,  the  disposition of  substantially  all physical  assets related  thereto,  and the termination of
         employment of the previous Officers of CCG.
|    
|(17) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Unaudited Quarterly Financial Information
|    
|     | The following is a summary of unaudited quarterly operating results for fiscal 2001 and 2000 (in
         thousands, except per share amounts):                                                                                                                                                                                                                                                                                                                                                                            

| |                              |         |               |       |              |       |               |         |        |         |   |  | 
| | ---------------------------- | ------- | ------------- | ----- | ------------ | ----- | ------------- | ------- | ------ | ------- | - |  | 
| | 2001                         |        
|
| | FirstQuarter                 |         | SecondQuarter |       | ThirdQuarter |       | FourthQuarter |        
|
| | Net sales                    | $       | 13,789        |       | 13,024       |       | 13,775        |         | 12,084 |        
| | Gross profit                 | 2,466   |               | 2,153 |              | 3,232 |               | 2,743   |       
| | Net (loss) income            | (744    | )             |       | (869         | )     |               | 322     |        | *(1,818 | )
| | Net (loss) income per share:
| | Basic and diluted            | (.13 | )             |       | (.16      | )     |               | .06  |        | (.33 | )
|
| | 2000                         |        
|
| | FirstQuarter                 |         | SecondQuarter |       | ThirdQuarter |       | FourthQuarter |        
|
| | Net sales                    | $       | 16,572        |       | 15,595       |       | 17,804        |         | 15,405 |        
| | Gross profit                 | 2,894   |               | 1,845 |              | 3,299 |               | 3,694   |       
| | Net (loss) income            | (545    | )             |       | (1,291       | )     |               | 360     |        | *(2,532 | )
| | Net (loss) income per share:
| | Basic and diluted            | (.10 | )             |       | (.23      | )     |               | (.07 | )      | (.46 | )

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

        Certain amounts from previous quarters have been reclassified to conform
        with the fourth quarter 2001 classifications.

         * Includes a $2,286,000 and $2,248,000 (net of tax) asset impairment charge for 2001 and 2000,
           respectively, (see Note 17).

-F22-

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

|                                                                                  |                                |                           |              |         |                         
|--------------------------------------------------------------------------------- | ------------------------------ | ------------------------- | ------------ | ------- | ------------------------
|Col. A.                                                                           | Col. B.                        | Col. C.                   | Col. D.      | Col. E. | Col. F.                 
|                                                                                 
|Classification                                                                    | Balance at Beginning of Period | Charged toCost andExpense | Deduction(1) | Other   | Balance at End of Period
|                                                                                 
|For the year ended December 31, 1999:
          Allowance for   doubtful accounts | $  1,332,000                   | $  423,000                | $  (337,000) |         | $  1,418,000            
|                                                                                 
|For the year ended December 31, 2000:
       Allowance for   doubtful accounts    | $  1,418,000                   | $  940,000                | $  (860,000) |         | $  1,498,000            
|                                                                                 
|For the year ended December 31, 2001:
  Allowance for   doubtful accounts         | $  1,498,000                   | $  729,000                | $  (947,000) |         | $  1,280,000            
|                                                                                 

____________________1Deductions relate to uncollectible accounts charged off to valuation accounts, net of recoveries.

-F23-

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                     
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------
|ITEM 9. |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
|       
|        | On October 12, 2001, the Company dismissed its independent
                  accountant KPMG LLP ("KPMG"), effective immediately. This
                  decision was approved by the Audit Committee Meeting of the
                  Company's Board of Directors. On October 12, 2001, the Company
                  engaged PricewaterhouseCoopers LLP ("PWC") as its new
                  independent accountant and auditor. This decision was approved
                  by the Audit Committee of the Board of Directors of the
                  Company.

                  The reports of KPMG on the Company's consolidated financial
                  statements as of December 31, 2000 and 1999 and for each of
                  the years then ended did not contain any adverse opinion or
                  disclaimer of opinion nor were they qualified or modified as
                  to uncertainty, audit scope or accounting principles.

                  During the Company's fiscal years ended December 31, 2000 and
                  1999 and subsequent interim periods to October 12, 2001, there
                  were no disagreements between the Company and KPMG on any
                  matter of accounting principles or practices, financial
                  statement disclosure, or auditing scope or procedure, which
                  disagreements, if not resolved to the satisfaction of KPMG,
                  would have caused them to make reference in connection with
                  their opinion to the subject matter of the
                  disagreement.

                  The Company requested KPMG to furnish it with a letter
                  addressed to the Securities and Exchange Commission stating
                  whether it agrees with the above statements made by the
                  Company in this Form 8-K. A copy of such letter, dated October
                  19, 2001, was filed as an Exhibit to the Company's Current
                  Report on Form 8-K filed with the Commission on October 19,
                  2001 and incorporated herein by reference.

PART III

In accordance with General Instruction G(3) to
Form 10-K, except as indicated in the following sentence, the information called
for by Items 10, 11, 12 and 13 is incorporated by reference to the Registrant's
definitive Proxy Statement pursuant to Regulation 14A for the Registrant's 2002
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, 2002.
|        
|         | (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)      |                                                                 | On October 19, 2001, the Company filed a Report on Form 8-K reporting
         the dismissal of its independent accountant, KPMG LLP, and the
         engagement of PricewaterhouseCoopers LLP as its new independent
         accountant.
|        
|(c)      |                                                                 | Exhibits.   See Exhibit Index included elsewhere in this Report.                                                                                                                                                                           
|        
|(d)      |                                                                 | Financial Statement Schedules.    See Items 8 and 14(a)(2) above.                                                                                                                                                                          

-21-

|        |               |            
|------- | ------------- | -----------
|        | EXHIBIT INDEX
|Exhibit |               | Description

| |     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2   |  | Agreement  and Plan of Merger  dated as of May 8, 1995  between  the  Registrant  and Old Disc  (filed as
             Exhibit  2.1 to the Form S-4  Registration  Statement,  Amendment  No. 1 dated  August 31, 1995 [File No.
             33-94068]).*                                                                                                                                                
|
| | 2.1 |  | Asset  Purchase  Agreement  dated as of July 1, 1999,  by and among the  Registrant,  Contemporary  Color
    Graphics,  Inc.  ("CCG")  and  the  shareholders  of CCG  named  therein  (filed  as  Exhibit  2.1 to the
    Registrant's Form 8-K dated July 1, 1999 and incorporated herein by reference).*                                                                                              
|
| | 2.2 |  | Promissory  Note dated July 1, 1999,  made by the  Registrant to CCG in the principal sum of $1.0 million
    (filed as  Exhibit  2.2 to the  Registrant's  Form 8-K  dated  July 1,  1999 and  incorporated  herein by
    reference).*                                                                                                                                                                  
|
| | 2.3 |  | Supplemental  Note dated July 1, 1999, made by the Registrant to CCG in the principal sum of $1.0 million
    (filed as  Exhibit  2.3 to the  Registrant's  Form 8-K  dated  July 1,  1999 and  incorporated  herein by
    reference).*                                                                                                                                                                  
|
| | 2.4 |  | Security  Agreement  dated July 1, 1999  between  the  Registrant  and CCG  (filed as Exhibit  2.4 to the
                  Registrant's Form 8-K dated July 1, 1999 and incorporated herein by reference).*                                                                                                                                                                                              
|
| | 2.5 |  | Agreement of Amendment  dated July 1, 1999,  between  KeyBank  National  Association  and the  Registrant
                  (filed as  Exhibit  2.5 to the  Registrant's  Form 8-K  dated  July 1,  1999 and  incorporated  herein by
                  reference).                                                                                                                                       
|
| | 3.1 |  | Restated  Certificate of Incorporation  of the Registrant  (filed as Exhibit 4.a to the Current Report on
                  Form 8-K dated October 27,1995, as amended by the Form 8-K/A Amendment No. 1 thereto).*                                                                                                                                                                                       
|
| | 3.2 |  | Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to Form 8-A, filed June 21, 1996).*                                                                                                                                                                                                                                                                                                  
|
| | 4.1 |  | Redeemable Warrant Agreement between the Registrant and
                  American Stock Transfer & Trust Company, as warrant agent,
                  including the form of Certificates representing the Class A
                  Warrants (filed as Exhibit 4.3 to the Form S-1 Registration
                  Statement, declared effective November 9, 1993 [File No.
                  33-62980]).*
|
| | 4.2 |  | Form of Merger Warrants,  with Schedule  indicating  particular  terms of each of 60 individual  warrants
                  (filed as Exhibit 4.f to the Current  Report on Form 8-K dated  October 27, 1995,  as amended by the Form
                  8-K/A Amendment No. 1 thereto).*                                                                                                                  
|
| | 4.3 |  | 1995 Incentive Stock Option Plan (filed as Exhibit 4.5 to the Form S-4 Registration Statement,  Amendment
                  No. 1 dated August 31, 1995 [File No. 33-94068]).*                                                                                                                                                                                                                            
|
| | 4.4 |  | Agreement  dated as of October  27, 1995  between  certain  stockholders  of the  Registrant  and certain
                  stockholders of Old Disc, a New York corporation  (filed as Exhibit 4.h to the Current Report on Form 8-K
                  dated October 27, 1995, as amended by the Form 8-K/A Amendment No. 1 thereto).*                                                                   

-22-

| |      |  |                                                                                                                                                                                                                                                                                                                                 
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.5  |  | Form of certificate  evidencing shares of Common Stock (filed as an Exhibit to the Registration Statement
                  on Form S-1, File No. 33-62980 declared effective on November 9, 1993).*                                                                                                                            
|
| | 4.6  |  | Option to  purchase  50,000  shares in favor of Jeffrey J. Bowe,  dated  October  24,  1997  (filed as an
                  Exhibit to the Registrant's Form 10-K for the fiscal year ended December 31, 1997).*                                                                                                                
|
| | 4.7  |  | Convertible  Debenture  due  July 1,  2002,  issued  by the  Registrant  to CCG on July 1,  1999,  in the
                  principal  amount of $600,000 (filed as Exhibit 4.1 to the  Registrant's  Form 8-K dated July 1, 1999 and
                  incorporated herein by reference).*                                     
| | 9.1  |  | Voting  and  Registration  Rights  Agreement  dated  October  30,  1995  among  the  Registrant  and  its
                  shareholders  listed in Exhibit 1 thereto  (filed as Exhibit 4.b to the Current  Report on Form 8-K dated
                  October 27, 1995, as amended by the Form 8-K/A Amendment No.1 thereto).*
|
| | 10.1 |  | Security Agreement dated February 26, 1997 between the Registrant and
                  KeyBank National Association (filed as Exhibit 10.a to
                  Registrant's Form 10-K for the fiscal year ended December 31,
                  1996).*                                                                        
|
| | 10.2 |  | Purchase Agreement dated as of May 17, 1996, by and among
                  Registrant, Pointille, Inc. and the shareholders of Pointille
                  (filed as Exhibit 2 to the Current Report on Form 8-K dated
                  May 18, 1996).*                                                                       
|
| | 10.3 |  | Form of Indemnification Agreement between RCL and the directors and
                  officers of the Registrant (filed as an Exhibit to the
                  Registration Statement on Form S-1, File No. 33-62980,
                  declared effective on November 9, 1993).*                                               
|
| | 10.4 |  | Management  Agreement between RCL and RCL Capital Partners,  Inc., formerly RCL Management Corp., dated October 1,
                  1992  (filed as an  Exhibit  to the  Registration  Statement  on Form S-1,  File No.  33-62980,  declared
                  effective on November 9, 1993).*                               
|
| | 10.5 |  | Agreement of Lease, dated as of December 1, 1992 between Registrant and
                  Horizon Equity Partners, LP (filed as an Exhibit to the
                  Registration Statement on Form S-4, File No. 33-94068 declared
                  effective on October 30, 1995).*                                           
|
| | 10.6 |  | Agreement  of Lease,  dated as of September  15, 1993  between  Registrant  and Everis  Realty Corp.  (filed as an
                  Exhibit to the Registration  Statement on Form S-4, File No. 33-94068  declared  effective on October 30,
                  1995).*                                                        
|
| | 10.7 |  | 7Agreement of Lease,  dated as of June 14, 1995 between Disc Graphics  Label Group,  Inc. and Kertzner  Associates,
                  Ltd.  (filed as an  Exhibit  to the  Registration  Statement  on Form S-4,  File No.  33-94068,  declared
                  effective on October 30, 1995).*                              
|
| | 10.8 |  | Form of Employment Agreement, dated June 28, 1995, between
                  Registrant and Donald Sinkin (filed as an Exhibit to the
                  Registration Statement on Form S-4, File No. 33-94068 declared
                  effective on October 30, 1995).*                                                       

-23-

| |       |  |                                                                                                                                                                                                                                                                                         
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.9  |  | Form  of Employment Agreement, dated June 28, 1995, between
                  Registrant and John A. Rebecchi (filed as an Exhibit to the
                  Registration Statement on Form S-4, File No. 33-94068 declared
                  effective on October 30, 1995).*           
|
| | 10.10 |  | Form of Employment Agreement, dated June 28, 1995, between
                  Registrant and Stephen Frey (filed as Exhibit to the
                  Registration Statement on Form S-4, File No. 33-94068 declared
                  effective October 30, 1995).*                      
|
| | 10.11 |  | Asset Purchase  Agreement between Registrant and Benham Press, Inc. dated as of September 19, 1997 (filed
                  as an Exhibit to the Registrant's Form 10-K for the fiscal year ended December 31, 1997).*                                                                  
|
| | 10.12 |  | Employment  Agreement  between  Registrant  and Jeffrey J. Bowe dated as of October 24, 1997 (filed as an
                  Exhibit to the Registrant's Form 10-K for the fiscal year ended December 31, 1997).*                                                                        
|
| | 10.13 |  | $675,000 Mortgage and Security Agreement between Registrant
                  and KeyBank National Association dated January 16, 1998 (filed
                  as Exhibit "10.M" to the Registrant's Form 10-K for the fiscal
                  year ended December 31, 1997).*         
|
| | 10.14 |  | Amended and Restated Credit Agreement dated December 1, 1998
                  between the Registrant and KeyBank National Association (filed
                  as Exhibit "10.N" to the Registrant's Form 10-K for the fiscal
                  year ended December 31, 1998).*        
|
| | 10.15 |  | Borrower's Confirmation of Security Agreement dated December
                  1, 1998 between the Registrant and KeyBank National
                  Association (filed as Exhibit "10.O" to the Registrant's Form
                  10-K for the fiscal year ended December 31, 1998).*
|
| | 10.16 |  | Assignment  and  Assumption,  dated as of January 1, 2000  between  Allied  Digital  Technologies  Corp.,
                  Registrant and Lee Halpern and Larry Halpern.*                                                                                                              
|
| | 10.17 |  | Second  Amendment to Commercial  Lease,  dated as of February 16, 2000 between  Registrant and William S.
                  Pine and Lisa Pine Trust u/d/t.*                                                                                                                            
|
| | 10.18 |  | Extension and Expansion  Agreement  Lease,  dated as of February 17, 2000 between  Registrant and Kerzner
                  Associates Limited.*                                                                                                                                        
|
| | 10.19 |  | Sublease, dated as of January 1, 2000 between Registrant and Banco Union, New York Agency.*                                                                                                                                                                                             
|
| | 10.20 |  | Amendment  No. 2 to  Amended  and  Restated  Credit  Agreement,  dated  December  1,  1998,  between  the
                  Registrant and the Dime Savings Bank of New York, FSB f/k/a KeyBank National Association.*                                                                  
|
| | 10.21 |  | Borrower's Confirmation of Security Agreement dated February
                  25, 2000, between the Registrant and The Dime Savings Bank of
                  New York, FSB, f/k/a KeyBank National Association.*                                                                      
|
| | 10.22 |  | Supplemental Revolving Credit Note dated July 10, 2000,
                  between the Registrant and The Dime Savings Bank of New York,
                  FSB, f/k/a KeyBank National Association.*                                                                                     
|
| | 10.23 |  | Installment  Promissory  Note and Security  Agreement  dated December 29, 2000 between the Registrant and
                  Pinnacle Capital Corporation ("PCC").*                                                                                                                      

-24-

| |       |  |                                                                                                                                                                                                
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.24 |  | Installment  Promissory  Note and Security  Agreement  dated December 29, 2000 between the Registrant and
                  Peoples Capital and Leasing Corp. ("People's").*                   
|
| | 10.25 |  | Installment  Promissory  Note and Security  Agreement  dated January 9, 2001 between the  Registrant  and
                  Pinnacle Capital Corporation ("PCC").*                             
|
| | 10.26 |  | Amendment No. 4 and waiver to Credit  Agreement  dated June 1, 2001 between the  Registrant  and the Dime
                  Savings Bank of New York, FSB f/k/a KeyBank National Association.* 
|
| | 10.27 |  | Amendment  No. 6 to the Credit  Agreement  dated  December 28, 2001 between the  Registrant  and the Dime
                  Savings Bank of New York, FSB f/k/a KeyBank National Association.**
|
| | 16.1  |  | Letter of KPMG LLP, dated October 19, 2001 to the U.S. Securities and Exchange Commission.*                                                                                                    
|
| | 21.1  |  | Subsidiaries of the Company.*                                                                                                                                                                  
|
| | 23.1  |  | Consent of Independent Accountants (PricewaterhouseCoopers LLP).**                                                                                                                             
|
| | 23.2  |  | Consent of Independent Accountants (KPMG LLP).**                                                                                                                                               
|
| | 25.1  |  | Power of Attorney (included in the signature page of this Report).**                                                                                                                           

_________________________

*Document previously filed and incorporated herein by reference.

**Document filed herewith.

-25-

## Signatures and Power of Attorney

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

|              |                                                                                                                                                         
|------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|              | DISC GRAPHICS, INC.                                                                                                                                     
|March 1, 2002 | 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 and Margaret M.
Krumholz or any of them, with full power to act, his or her
attorney-in-fact, with the power of substitution for him or her in any and all
capacities, to sign any or all amendments to this report, and to file the same
with the Securities and Exchange Commission, hereby ratifying and confirming
that each of said attorneys-in-fact, or his or her substitute or substitutes,
may do or cause to be done by virtue hereof.

-26-

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

|                                       |  |                                                                                                                   |  |              
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | -------------
|                                       |  |                                                                                                                   |  |              
|Signature                              |  | Title                                                                                                             |  | Date         
|/s/ Donald SinkinDonald Sinkin         |  | Chairman of the Board, Chief
Executive Officer and President
(Principal Executive Officer)                        |  | March 1, 2002
|/s/ Stephen FreyStephen Frey           |  | Senior Vice President of Operations
Secretary and Director
(Principal Operating Officer)                          |  | March 1, 2002
|/s/ Margaret KrumholzMargaret Krumholz |  | Chief Financial Officer and Senior
Vice President of Finance
(Financial Officer and Principal
Accounting Officer) |  | March 1, 2002
|/s/ John RebecchiJohn Rebecchi         |  | Senior Vice President Marketing 
and New Business Development                                                     |  | March 1, 2002
|/s/ Daniel LevinsonDaniel Levinson     |  | Director                                                                                                          |  | March 1, 2002
|/s/ Seymour W. ZisesSeymour W. Zises   |  | Director                                                                                                          |  | March 1, 2002
|/s/ Mark L. FriedmanMark L. Friedman   |  | Director                                                                                                          |  | March 1, 2002