<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   FORM 10-K

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

(Mark
One)

  [X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1997

                                      OR
  [_]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                      For the transition period from  to

                          COMMISSION FILE NO. 0-21525

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

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

               DELAWARE                               13-316071
    (STATE OR OTHER JURISDICTION OF     (I.R.S. EMPLOYER IDENTIFICATION NO.)
    INCORPORATION OR ORGANIZATION)

             161 NORTH CLARK STREET, SUITE 2400, CHICAGO, IL 60601
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

                                (312) 419-7600
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

  Securities registered pursuant to Section 12(b) of the Act: None

  Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share

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

  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]

  The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 16, 1998 was $25,918,750 based upon the closing price
on March 16, 1998.

  The number of shares of the registrant's common stock outstanding as of
March 16, 1998 was 5,005,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 is incorporated into Part III hereof.

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<PAGE>

                                    PART I

ITEM 1. BUSINESS

GENERAL

  Donnelley Enterprise Solutions Incorporated (the "Company" or "DESI") is a
single-source provider of integrated information management services to
professional service organizations, primarily large law firms, investment
banks and accounting firms. DESI offers its clients the opportunity to focus
on their core businesses by outsourcing a variety of functions, including
business services, integration services, and systems management. The Company
has experienced growth by expanding its service offerings, adding new clients,
increasing business with existing clients and capitalizing on the growing
trend toward outsourcing. In 1997, the Company's total revenues were $110.8
million, with business services outsourcing, integration services and systems
management outsourcing contributing $68.8 million, $35.1 million and $6.9
million, respectively.

BACKGROUND

  R.R. Donnelley & Sons Company ("R.R. Donnelley") began offering reprographic
services in 1988 through a division known as Donnelley Business Services
("DBS") and expanded its service offerings to include networked and electronic
color printing, mailroom and facsimile services, word processing, desktop
publishing and imaging. In June 1995, DBS broadened its capabilities from
managing paper-based information to include the management of electronic
information through the acquisition of LANSystems, Inc. ("LANSystems") which
has provided integration services since 1983, including systems integration,
consulting, technical training and software development. As of January 1,
1996, R.R. Donnelley contributed the assets of DBS to LANSystems and changed
LANSystems' corporate name to Donnelley Enterprise Solutions Incorporated.
Beginning in February 1996, DESI began providing systems management
outsourcing services, which include system administration, desktop maintenance
and operation of the help-desk function. On November 5, 1996, DESI completed
an initial public offering of 2,860,000 shares of its common stock (the
"IPO"), resulting in the reduction of R.R. Donnelley's ownership in the
Company to approximately 42.8%.

SERVICES

  Corporations are focusing their resources on their core businesses and
outsourcing their auxiliary support functions to third party specialists.
Additionally, the highly competitive labor market has increased outsourcing
demand for both technical and labor intensive processes. The Company
capitalizes on this opportunity by offering the following services:

 Business Services Outsourcing

  The Company's outsourcing portfolio encompasses a comprehensive array of
business services, including document services, desktop publishing and imaging
services.

  Document Services. The Company provides reprographic, networked and
electronic color printing, mailroom and facsimile services through sites
located at the client's offices. Operations are up to 24-hours a day on
weekdays with scheduled weekend services. The reprographic operations
typically encompass black and white copying, color copying, networked printing
and binding services. The critical documents produced include legal briefs,
contracts, investment banking pitch books, presentations, tax filings and
litigation documents. The Company's average client site includes 15 document-
production employees, for whom a typical job may entail the reproduction of a
50 page document with five color inserts, spiral binding and turn-around time
of less than two hours. Monthly volumes per client site range from 50,000 to
10,000,000 pages. Reprographic services are billed monthly on a unit basis,
typically with monthly minimum volume requirements.

  Mailroom services include sorting and delivery, overnight express and
messenger support. Facsimile services include both manual and electronic fax
transmission and receipt. Mail services are billed monthly to the client as a
fixed management fee plus overtime expenses. Facsimile services are billed to
the client as a fixed management fee plus overtime expenses or on a per unit
basis.
<PAGE>

  Desktop Publishing. The Company provides on-site word processing,
proofreading, desktop publishing and graphics design services. Documents range
from high-volume text, complex numerical tables and regulatory-compliance
documents to client newsletters, presentations and marketing brochures.
Operations are typically multi-shift, employing between 10 and 20 operators
who produce client documentation within a turnaround period of less than 24
hours. Word processing services are priced on a per page, per hour or per
project basis with a minimum monthly management fee.

  Imaging. The Company provides on-site imaging services and production
support such as scanning, document indexing, storage and retrieval. The
Company provides a complete turnkey service, including integration, database
development, project management and system administration. The Company's
services enable clients to process information more efficiently, store
documents electronically and retrieve information at the desktop or remotely.
A typical operation includes a cross-trained staff of five employees
performing each of the imaging tasks, which scan and index 50,000 pages per
month. Due to the project nature of this work, temporary employees are used to
staff peak volume periods. The Company supplies and networks multiple servers
located at the client's offices as well as at other offices, such as that of a
client's co-counsel. Imaging services are billed monthly on a per unit basis,
with monthly volume requirements.

  Contracts and Pricing. Client engagements typically involve contracts
ranging from three to five years in duration, although the Company has entered
into a limited number of shorter-term contracts at the request of its clients.
The majority of DESI's contracts are cancelable only for cause, but the
Company generally is willing to renegotiate contracts that no longer meet the
needs of its clients. The Company believes that this policy is beneficial in
that it improves client relationships and promotes the efficient use of the
Company's resources. Substantially all of the Company's outsourcing contracts
are priced on a per unit basis for each service provided. Furthermore,
substantially all of the Company's current outsourcing contracts include a
minimum amount of services the client agrees to use, with the minimum
generally related to the historical volumes of the client. In the vast
majority of contracts the Company is able to increase or decrease the unit
pricing for each of the outsourcing services provided pursuant to a particular
contract on the anniversary date of such contract in order to reflect changes
in the actual costs of labor and supplies. The typical outsourcing contract
also provides that DESI will supply all of the equipment necessary for the
delivery of its services, the bulk of which the Company leases from third-
party vendors.

 Integration Services

  The Company's integration services include systems integration, software
development and technical training services.

  Systems Integration. The Company provides network design, installation,
configuration and on-going maintenance for distributed computing environments.
The project range includes networks with 250 to 5,000 users, often in multiple
offices connected by a wide-area network. Projects vary in scope and duration.
Projects involving a single office typically are completed in three to six
months while large projects involving major infrastructure, operating system
upgrades and multiple applications in multiple locations, some of which may be
located outside of the United States, typically span 12 to 18 months. More
than half of integration services revenues come from engineering services
projects while the remaining revenues come from the resale of hardware or
software products. The Company also offers design and implementation of
electronic document management systems ("EDMS"). EDMS allows for fast and
efficient access to information held within a company's enterprise-wide
networks. The Company also enters into maintenance contracts on network
equipment and servers with a number of clients for which the Company has
completed a major systems integration project. Many of those clients have
elected coverage for 24 hours per day, seven days per week.

  Software Development. The Company offers software development services that
include custom utilities, application and data integration and rapid
application development. Custom utilities developed in the C and C++

                                       2
<PAGE>

programming languages are designed to take advantage of system-level features
and enhance program functionality. In the area of application and data
integration, the Company specializes in developing solutions for moving data
from different computing platforms as well as in and out of various
applications. The Company's software development team uses a variety of
programming languages, such as Microsoft Visual Basic and Borland's Delphi, to
facilitate rapid application development in client/server database
environments. In addition, Lotus Notes, Microsoft Exchange Server and Novell
lnc.'s GroupWise are used to create workflow and groupware solutions.

  Technical Training. The Company offers technical training services that
include application training customized to the specific end user business
environment. The training services group provides project management,
documentation development and production and on-site training and support.

  Contracts and Pricing. The Company's systems integration services are priced
on a fixed-fee basis or a time and materials basis. Cost-based pricing is used
for computer and network hardware. Contracts typically include a scope of work
and acceptance criteria for identifying project completion. Payment terms
include a downpayment, and invoices are submitted in accordance with the
achievement of negotiated milestones or dates during the projects. The
Company's maintenance contracts are priced on an annual basis with payments
usually made in advance.

 Systems Management Outsourcing

  The Company's information technology outsourcing services include systems
and network management, help desk and telecommunications.

  Systems and Network Management. The Company typically provides on-site
technical staff to monitor and manage the client's local and wide area network
services including implementing network and systems management tools and
reporting on capacity, utilization and performance.

  Help Desk. The Company provides on-site help desk services which typically
include 5-20 technical staff responding to as many as 3000 calls per month 7
days per week, 24 hours per day weekdays with scheduled weekend hours. The
Company supplies call tracking and reporting tools and utilizes a proprietary
Lotus Notes knowledge system nationally in all its operations. Information
regarding problem resolution is accumulated daily and then replicated system-
wide for use at all sites. Help desk professionals are certified on the
client's complete application suite.

  Telecommunications. The Company offers on-site telecommunications support to
manage the voice and data networks at the client site. The service includes
moves, adds, and changes to the client voice network and vendor evaluation and
management.

  Contracts and Pricing. Client engagements typically involve contracts
ranging from three to five years in duration. The majority of DESI's contracts
are cancelable only for cause, but the Company generally is willing to
renegotiate contracts that no longer meet the needs of its clients due to
changing client needs or service levels. The Company believes that this policy
is beneficial in that it improves client relationships and promotes the
efficient use of the Company's resources. Substantially all of the Company's
systems management outsourcing contracts are priced on a monthly management
fee basis for services provided. The management fees are priced based on
service levels, which are mutually agreed upon with the customer.

CLIENTS

  The Company has been successful in establishing strong relationships with a
significant number of the leading firms in its target markets. In 1997, the
Company provided services to 37 of the 100 largest law firms as ranked by the
American Lawyer for 1996 and 8 of the 10 largest investment banks ranked by
dollar volume of public debt and equity issuances for 1997 as reported by
Securities Data Company. The Company is marketing desktop publishing and
electronic document management systems within the broader commercial market.
The Company believes that these markets, because they consist of sophisticated
professional service organizations for which document and computer processing
are critical, can benefit from the knowledge that the Company has

                                       3
<PAGE>

accumulated in its current markets and will therefore provide an opportunity
to expand DESI's potential client base without compromising its ability to
maintain its high-quality standards and utilize its proven processes and
experience.

  In 1997, approximately 10.2% of the Company's revenues came from business,
integration and systems management services provided to firms other than law
firms, investment banks and accounting firms. In 1996, approximately 23.1% of
the Company's revenues came from business, integration and systems management
services provided to firms other than law firms, investment banks and
accounting firms. The decrease in this percentage has occurred as a result of
the Company's focus on its target markets.

  As of December 31, 1997, the Company provided business services outsourcing
under approximately 48 contracts, at over 54 client office locations, most of
which are located in New York, San Francisco, Chicago, Los Angeles,
Washington, D.C., Dallas and certain other major cities in the United States.
In 1997, the Company has expanded its business services offerings at an
investment banking client in Hong Kong and began a new investment banking
business services operation in Singapore. In 1997, the Company provided
integration services to nearly 200 clients. The Company has implemented
projects in offices located in many major European and Asian financial
centers. In 1997, the Company provided systems management outsourcing under
six contracts, at eleven client office locations, located in New York, San
Francisco, Chicago, Dallas, Washington, D.C. and Los Angeles.

SALES AND MARKETING

  The Company markets its services primarily through 23 account executives and
sales managers who are responsible for existing clients as well as future
client development. In addition, DESI's senior management plays an active and
ongoing role in the sales process.

  The Company targets high-level decision makers within a particular
professional service organization who share a commitment to the delivery of
quality service. The typical contract for business services outsourcing and
systems management outsourcing is signed between six and nine months after
discussions begin with a potential client. The sales cycle with regard to
integration services is typically between three and six months. The Company
believes that it is important to involve seasoned account executives, as well
as its executive officers, in the sales process.

  The Company also employs a variety of business development and direct
marketing techniques in order to augment the work done by its own sales force,
increase industry awareness and generate interest in its services. Regular
direct mail initiatives and regular participation in industry trade shows and
conferences in its target markets have been effective historically. The
Company also co-sponsors executive business briefings and cooperative
marketing programs with vendor partners, such as Microsoft Corporation and PC
Docs Inc. Finally, several of the Company's senior executives serve as
industry spokespersons and frequently author articles on industry trends,
service issues and emerging technologies, as well as contributing to DESI's'
Research technical publication.

STRATEGY

  DESI's principal growth strategy is to leverage its industry knowledge of
law and investment banking services and its service record in order to expand
into new services and markets. Key elements of the Company's strategy include
(i) increasing penetration in its target markets; (ii) leveraging its
outsourcing expertise to expand to new services such as desktop publishing and
systems management outsourcing; (iii) cross-selling its services to existing
clients; and (iv) attracting and retaining outstanding employees.

  The Company believes its competitive strengths are as follows:

  . Established Premier Client Base in Target Markets--DESI has well-
    established relationships with a significant number of industry leaders
    in its target markets. These relationships with high-quality professional
    service organizations have been an important factor in enabling the
    Company to add new clients.

                                       4
<PAGE>

  . Accumulated Knowledge and Expertise in Target Markets--DESI has
    accumulated knowledge of the best practices to address the unique needs
    of the professional service organizations in its target markets.

  . Ability to Identify and Meet Client Demand for Expanded Services--DESI
    has expanded to new services in response to client needs. Its in-depth
    customer knowledge translates to business opportunity. Examples of
    expanded services include desktop publishing, systems management
    outsourcing, records management and technical training.

  . Expansion into Markets Outside our Target Markets--DESI is expanding into
    markets other than our target market in the services of desktop
    publishing and in the integration of electronic document management
    systems. The Company's desktop publishing operations have opportunities
    in Fortune 1000 businesses that utilize desktop publishing services to
    market their core business. The Company expects similar opportunities for
    growth in the EDMS market, where the Company has significant depth and
    experience in delivering electronic document management solutions to
    clients.

  . Proven Quality Driven Processes--DESI has developed proven, cost-
    effective processes for the delivery of business services outsourcing and
    information technology services, including a copyrighted production
    management system which permits the Company to monitor the quality of
    services provided by tracking use, service levels, turnaround and
    efficiency. The Company utilizes a Lotus Notes based knowledge system,
    which provides for accumulating information and leveraging the Company's
    experience in problem resolution.

  . Depth, Experience and Expertise of Service Delivery Personnel--The
    Company has been successful in attracting and retaining talented,
    motivated employees in critical positions which involve extensive client
    interaction, including the client managers who oversee the performance of
    the Company's business services and the technical staff providing help
    desk and network support services.

COMPETITION

  The Company believes that the primary competitive factors in the business
services outsourcing and information technology services markets include
reputation, a proven track record in industries served, an in-depth knowledge
of clients' businesses, strong technical expertise, project management
experience and an ability to streamline business processes. Although price is
a competitive factor within the Company's markets, it is not the principal
basis on which the Company competes because the Company's strategy is to be a
premier provider of business services outsourcing and information technology
services to firms in its target markets, which depend on high-quality, timely
work product and technical expertise.

  The Company competes with the in-house capabilities of those firms in the
Company's target markets that perform their own business services, integration
and systems management functions of the types offered by the Company.

  The Company's business services compete with numerous national and regional
companies. The Company's document services compete with several large national
companies, including Pitney Bowes Management Services and Xerox Business
Services, as well as several smaller regional companies, some of whom provide
only certain of such services or focus on a particular geographic region of
the United States. Competition in the Company's target markets for other
business services provided by the Company, such as word processing and desktop
publishing, is fragmented with few competitors. The competition in these areas
is limited to Tascor Incorporated. The competitors for the business service of
imaging include Quorum Corp., Aspen Systems Corp., Litigation Information
Technologies, Lason Inc. and Arthur Andersen LLP.

  The market for the Company's integration services is subject to rapid change
and is highly competitive. Within this market, the Company competes with a
large number of participants, with no single organization having a dominant
market share of the Company's target markets. Competition for integration
services comes from a large number of market participants, including
management consulting firms, big six accounting firms, systems integrators,
facilities management companies and the professional service groups of large
computer manufacturers such as International Business Machines Corp. ("IBM")
and Hewlett Packard Co. Within the systems integration arena, the Company
competes primarily with national firms with legal-industry focus, including
Systems Research and Application Corp. and TechLaw Automation Partners.

                                       5
<PAGE>

  The Company's systems management outsourcing competes primarily in the legal
market. This market is relatively new and not competitive. The demand in this
market is growing as law firms are realizing the advantage to outsourcing
their systems management function.

  Many participants in the business services outsourcing and integration
services markets have significantly greater financial, technical and marketing
resources; greater name recognition; and generate greater integration services
and outsourcing revenues than does DESI. The Company believes, however, that
its competitive strengths, including its reputation as a high-quality provider
of business services outsourcing, integration services and systems management
outsourcing and its knowledge and expertise in the markets that it serves,
have enabled it to be successful in persuading firms in its target markets to
use certain services offered by the Company to compete with its current
competitors.

HUMAN RESOURCES

  The Company's business involves the delivery of professional services and is
labor intensive. The Company's performance depends, to a large extent, on the
continued service of its key technical personnel and client management
personnel and its ability to continue to attract, retain and motivate such
personnel. The Company provides its employees a motivational and interactive
work environment that features continuous and extensive professional
development opportunities and bonuses based on client satisfaction and company
performance, as well as a flat organizational structure that emphasizes
decision-making at the client manager level.

  The Company has a comprehensive recruitment program in place to attract
highly qualified employees for business services outsourcing, integration
services and systems management outsourcing. To strengthen its expertise in
its target markets, the Company often recruits individuals with hands-on
experience and proven industry knowledge in the legal, investment banking and
accounting industries. The Company augments ongoing advertisements in national
newspapers and industry-trade publications with a company-wide employee
referral program and regular participation in job fairs and legal-specific
trade shows and conferences. The Company is a member of the On-line Career
Center and uses this vehicle to post jobs and receives resumes via the
Internet. The Company engages in selective recruiting at colleges with strong
engineering programs. In addition, the Company belongs to the Technical
Recruiter's Association in New York and employs the assistance of outside
recruitment firms on a limited basis.

  The Company has a diversified training program that includes vendor-specific
certification, review of best practices and an extensive mentor program. In
1997, employees received 89 engineering certifications from computer and
hardware vendors including Microsoft Corporation, Novell Inc. and PC Docs Inc.
As part of the Company's rigorous in-house training, new employees participate
in a variety of courses such as Customized Workflow Training, Understanding a
Law Firm, Quality Assurance, Problem Resolution and Team Building. In
addition, employees attend mandatory human resources training seminars,
including seminars concerning diversity, sexual harassment and performance
leadership. In 1997, the Company started a training program for integration
services employees called Boot Camp. This training program is designed to give
every employee a comprehensive understanding of the integration services
project lifecycle, from sales through fulfillment, and the importance of their
role in it.

  As of December 31, 1997, the Company had 1,192 employees, of which 1,147
were full-time employees. Approximately 852 persons were dedicated to
providing business services, including approximately 778 engaged in providing
on-site services to clients, of whom approximately 711 were hourly employees.
Approximately 215 persons were dedicated to providing integration services,
including approximately 155 technical employees. Approximately 95 persons were
dedicated to systems management outsourcing, including approximately 86
technical employees. Approximately 30 persons were dedicated to corporate
staff functions. None of the Company's personnel is covered by a collective
bargaining agreement. The Company believes that its relations with its
employees are good.

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<PAGE>

ITEM 2. PROPERTIES

  The principal executive offices of the Company are located in Chicago,
Illinois, where the Company leases a 20,000 square foot facility pursuant to a
lease expiring in May 2002. The Company provides its outsourcing services
primarily through locations at its clients' offices. Such locations are
generally provided by the client without a lease and at no cost to the
Company. The Company leases an 11,400 square foot facility in New York, New
York pursuant to a lease expiring in April 2002. The Company has 6 regional
sales offices, most of which are subject to short-term leases of not more than
three years. The Company believes that its existing facilities are adequate
for its current needs. The Company anticipates that additional space may be
required as business expands and believes that it will be able to obtain such
additional space as needed.

ITEM 3. LEGAL PROCEEDINGS

  The Company is subject to various claims and legal actions which arise in
the ordinary course of business. The Company believes such claims and legal
actions, individually and in the aggregate, will not have a material adverse
effect on the business or financial condition of the Company. A former client
filed suit against the Company in 1996 and the Company filed a counter claim
in 1997. The Company is of the opinion that the claim and related counterclaim
will not have a material impact on the results of operations of the Company in
the period in which resolved.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY

  Information with respect to those individuals who currently serve as
executive officers of the Company is set forth below. Executive officers of
the Company are appointed annually by the Board of Directors and serve until
their successors have been duly elected and qualified.

<TABLE>
<CAPTION>
               NAME           AGE                   POSITION
               ----           --- -------------------------------------------
      <C>                     <C> <S>
      Rhonda I. Kochlefl ....  39 Chairman, President and Chief Executive
                                  Officer and Director
      Thomas A. Munro .......  36 Vice President, Chief Financial Officer and
                                  Assistant Secretary
      Nestor P. Holynskyj ...  35 Chief Technology Officer
      Linda A. Finkel........  38 President, Donnelley Business Services
      Robert A. Lento........  36 President, LANSystems
      David J. Shea..........  42 President, Systems Management Group
      Kenneth M. Goldstein ..  51 Vice President, Human Resources
</TABLE>

  Rhonda I. Kochlefl has been the Chairman, President and Chief Executive
Officer of the Company since February 1996. From January 1995 to February
1996, she was the President of DBS, and, from June 1995 to February 1996, she
was the Chairman of LANSystems. From 1992 to 1995, she was Vice President,
Division Director of DBS. From 1988 to 1991, she was General Manager for the
eastern region of DBS, for which she was responsible for all sales and
operations. Ms. Kochlefl has been a director of the Company since February
1996.

  Thomas A. Munro has been Vice President, Chief Financial Officer since
January 1998 and Vice President, Corporate Controller and Assistant Secretary
since March 1997. From 1995 to February 1997, he served as Controller of DBS.
From 1993 to 1995, he was Financial and Operations Manager of DBS. He joined
R.R Donnelley in 1987 and held various financial positions with R.R.
Donnelley.

                                       7
<PAGE>

  Nestor P. Holynskyj has been Chief Technology Officer of the Company since
January 1998. He served as Vice President, Consulting Services Group of
LANSystems and Vice President/General Manager, Eastern region of LANSystems
from 1990 to 1998. From 1980 to 1990, he held two Vice President positions at
J.P. Morgan.

  Linda A. Finkel has been President of the DBS division of DESI since
February 1996. From 1994 to 1996, she served as the Vice President/General
Manager for the central region of DBS. She joined R.R. Donnelley in 1982 and
held various positions with R.R. Donnelley, including that of information
services account executive.

  David J. Shea has been the President of the Systems Management division of
DESI since February 1997. Prior to becoming the President, he served as the
Senior Vice President and General Manager of the Systems Management division
from July 1996 to February 1997. Mr. Shea was the Vice President and General
Manager of the eastern region of DBS and eastern region General Manager of DBS
from November 1993 to June 1996. From 1990 to 1993, he was Client Solutions
Executive and Consulting Practice Manager of Integrated Systems Solutions
Corporation, a systems outsourcing subsidiary of IBM.

  Robert A. Lento has been the President of the LANSystems division since
January 1997. From January 1995 to 1997, he was the Senior Vice President of
Operations for Entex Information Services, Inc. ("Entex"), an integration
services firm. From 1992 to 1995, Mr. Lento was a Regional Director of Entex.
From 1990 to 1992, he was a General Manager of Entex. Prior to joining Entex,
Mr. Lento was the owner of Computer Professionals, Inc., which was acquired by
Entex in 1990.

  Kenneth M. Goldstein has been Vice President, Human Resources since June of
1996. Prior to this position, from 1982 to 1996, he held various positions
with R.R. Donnelley, including Director of Human Resource Planning, Director
of Human Resources for the commercial print sector, Director of Organizational
Development, Manager of Supervisory and Management Development and Training
Administrator of R.R. Donnelley's Los Angeles manufacturing division. Mr.
Goldstein also taught for the Los Angeles Unified School District.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  The Company's Common Stock is listed on the Nasdaq National Market (NASDAQ
symbol: DEZI). The Company's Common Stock began trading on October 31, 1996 in
connection with the IPO. Prior to such time, R.R. Donnelley was the sole
stockholder of the Company.

  As of March 16, 1998, there were 943 beneficial holders of the Company's
Common Stock.

  The following table sets forth the high and low bid prices of the Company's
Common Stock as reported by the Nasdaq National Market for the period
beginning October 31, 1996 and ending December 31, 1997.

<TABLE>
<CAPTION>
      FISCAL YEAR 1996                                              HIGH   LOW
      ----------------                                             ------ ------
      <S>                                                          <C>    <C>
      Fourth Quarter
       (October 31 to December 31)................................ 26 1/4 19 1/4
<CAPTION>
      FISCAL YEAR 1997
      ----------------
      <S>                                                          <C>    <C>
      First Quarter
       (January 1 to March 31) ...................................   25    9 1/8
      Second Quarter
       (April 1 to June 30)....................................... 11 3/8  9 1/2
      Third Quarter
       (July 1 to September 30) .................................. 14 1/8  8 1/8
      Fourth Quarter
       (October 1 to December 31) ................................ 10 7/8  7 3/8
</TABLE>

                                       8
<PAGE>

  The Company declared and paid a cash dividend of $622,000 as of June 30,
1996, and, in July 1996, declared a dividend of $8.0 million paid in the form
of the Dividend Note that was paid in full with proceeds from the IPO. The
Company currently intends to retain future earnings for use in its business
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. Payment of any cash dividends in the future will depend on
the Company's results of operations, financial condition, cash requirements
and other factors deemed relevant by the Board of Directors of the Company. In
addition, the Company's credit facility contains restrictions on the Company's
payment of cash dividends.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

  The following table sets forth selected historical consolidated financial
data of DESI. Income statement data for each of the three years in the period
ended December 31, 1997 and balance sheet data as of December 31, 1996 and
1997 have been derived from the audited consolidated financial statements of
DESI contained herein. Income statement data for the years ended December 31,
1993 and 1994 and balance sheet data as of December 31, 1994 and 1995 have
been derived from audited consolidated financial statements not contained in
this Form 10-K. Balance sheet data as of December 31, 1993 has been derived
from unaudited information of DESI. The unaudited financial data includes all
adjustments that the Company considers necessary for a fair presentation of
the consolidated financial position as of December 31, 1993. The information
set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and
Consolidated Financial Statements of DESI and notes thereto included elsewhere
in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                     ----------------------------------------
                                      1993    1994   1995(1) 1996(1) 1997(1)
                                     ------- ------- ------- ------- --------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>     <C>     <C>     <C>     <C>
INCOME STATEMENT:
Revenues............................ $23,527 $34,745 $65,944 $96,464 $110,844
Cost of revenues....................  18,800  27,800  52,858  75,537   88,545
                                     ------- ------- ------- ------- --------
  Gross profit......................   4,727   6,945  13,086  20,927   22,299
Selling expenses....................   1,665   2,110   5,563   9,929    8,973
General and administrative
 expenses...........................   1,333   1,540   5,908   7,812   16,381
Amortization of goodwill............     --      --      295     804    1,072
Special charge......................     --      --      --      300      --
                                     ------- ------- ------- ------- --------
  Earnings (loss) from operations...   1,729   3,295   1,320   2,082   (4,127)
Interest expense, net...............     184     283     522     384      553
                                     ------- ------- ------- ------- --------
  Earnings (loss) before income
   taxes............................   1,545   3,012     798   1,698   (4,680)
Income tax expense (benefit)........     684   1,277     495   1,073   (1,400)
                                     ------- ------- ------- ------- --------
  Net income (loss)................. $   861 $ 1,735 $   303 $   625 $ (3,280)
                                     ======= ======= ======= ======= ========
Basic and diluted earnings (loss)
 per share (2)......................                                 $   (.66)
                                                                     ========
Pro forma earnings per share
 (3)(4).............................                         $   .12
                                                             =======
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                     ----------------------------------------
                                      1993    1994    1995    1996     1997
                                     ------- ------- ------- ------- --------
<S>                                  <C>     <C>     <C>     <C>     <C>
BALANCE SHEET DATA (AT END OF
 PERIOD):
Total assets........................ $ 6,826 $ 9,813 $39,696 $76,176  $77,073
Advances due to related party.......   2,181     191   4,672   6,455      510
Debt, including capital lease
 obligations........................   2,672   3,845   3,125   2,467    8,296
Total shareholders' equity (4)......     --      --   15,757  49,452   46,016
</TABLE>
--------
(1) Income statement data for the years ended December 31, 1995, 1996 and 1997
    includes the results of operations of LANSystems, which the Company
    acquired in June 1995, beginning July 1, 1995.

                                       9
<PAGE>

(2) Basic and diluted earnings per share is based upon implementation of
    Statement of Financial Accounting Standards No. 128, "Earnings per Share".
(3) Pro forma earnings per share is computed by dividing net income for the
    year ended December 31, 1996 by the total shares outstanding subsequent to
    the IPO of 5,005,000.
(4) No shareholders' equity is shown as of the periods ended December 31, 1993
    through 1994 because the Company was operated as a division of R.R.
    Donnelley during such periods.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

GENERAL

 Overview

  The Company is a single-source provider of integrated information management
services to professional service organizations, primarily large law firms,
investment banks and accounting firms. DESI offers its clients the opportunity
to focus on their core businesses by outsourcing a variety of functions,
including business services outsourcing and systems management outsourcing.
Through the integration services group, the Company also offers integration
services to the professional services market. The Company has experienced
growth by expanding its service offerings, adding new clients, increasing
business with its existing clients, and capitalizing on the growing trend
toward outsourcing. In 1997, the Company's total revenues were $110.8 million,
with business services outsourcing, integration services and systems
management outsourcing contributing $68.8 million, $35.1 million and $6.9
million, respectively. In 1996, the Company's total revenues were $96.5
million, with business services outsourcing, integration services and systems
management outsourcing contributing $57.1 million, $38.4 million and $1.0
million, respectively.

  DESI commenced its outsourcing operations in 1988 as a provider of
reprographic services and has expanded its service offerings to include
networked and electronic color printing, mailroom and facsimile services,
desktop publishing and imaging. In June 1995, the Company broadened its
capabilities from managing paper-based information to include the management
of electronic information through the acquisition of LANSystems, which has
provided integration services, including systems integration, software
development, consulting and technical training, since 1983. In February 1996,
the Company began providing systems management outsourcing services.

  For the year ended December 31, 1995, revenues from the Company's top 20
clients accounted for 70.4% of revenues, with revenues from the top two
clients accounting for 8.9% and 7.3%, respectively. For the year ended
December 31, 1996, the Company's top 20 clients accounted for approximately
61.0% of the Company's revenues, with the top two clients accounting for
approximately 10.6% and 6.0% of such revenues, respectively. For the year
ended December 31, 1997, the Company's top 20 clients accounted for
approximately 69.4% of the Company's revenues, with the top two clients
accounting for approximately 12.6% and 7.0% of such revenues, respectively.
Eleven of the contracts with business outsourcing clients and one contract
with a systems management client expire prior to December 31, 1998. Although
most of the Company's business outsourcing and systems management outsourcing
contracts are cancelable only for cause, DESI is generally willing to
renegotiate contracts that no longer meet the needs of its clients.

  The Company's revenues are derived primarily from (i) monthly fees under its
business services outsourcing contracts, (ii) fees relating to integration
projects, (iii) the resale of hardware or software products, (iv) monthly fees
under its system management outsourcing contracts, (v) monthly fees under
integration services maintenance contracts and (vi) technical training
projects. The Company typically enters into contracts with its business
services clients that have terms ranging from three to five years. These
contracts generally provide for monthly minimum payments based on the client's
historical volumes. Substantially all of the Company's business services
outsourcing contracts are priced on a per unit basis for each service provided
and allow for annual increases or decreases of the unit pricing for each of
the outsourcing services provided in order to reflect actual costs of

                                      10
<PAGE>

equipment, labor and supplies. The Company typically enters into systems
management outsourcing contracts with terms that average three years. System
management contracts are priced on a monthly fixed fee basis, plus a fee for
overtime and additional services. Integration services contracts are priced on
a fixed-fee basis or a time-and-materials basis. Contracts for integration
projects typically include scope of work and acceptance criteria for
identifying project completion. The Company typically seeks to obtain an
increase in its fees if a client makes any significant change to the original
scope of a project. Payment terms for these contracts include a down payment,
and invoices are submitted in accordance with the achievement of negotiated
milestones or dates during the projects.

  Increased penetration in the Company's target markets is a key element in
its growth strategy. The Company's business services outsourcing group
increased its presence in the legal and investment banking markets with five
new clients in 1997 and six client service expansions to new locations,
partially offset by the loss of four clients. The company's systems management
group increased its client base in the legal and investment banking markets by
adding six new clients in 1997. Integration services revenue included several
large scale implementations of Windows NT in both the legal and investment
banking markets. The Company expects to continue to capitalize on the
marketplaces' migration from Netware to Windows NT.

  The strategy to focus on higher margin technology related services continues
to drive a change in the Company's product mix, resulting in an increase in
desktop publishing service, systems management outsourcing and integration
service related revenues which typically generate a higher margin. The
revenues associated with the resale of hardware or software products,
generally associated with a typical integration project, were 41.7% of total
integration services revenues for 1997, as compared to 48.6% in 1996. The
Company provides products to its clients only as an accommodation and
generally as required for particular projects. The Company's maintenance
contracts are priced on an annual basis with payments made generally in
advance.

  DESI's cost of revenues associated with business services outsourcing are
comprised of wages, supplies, equipment and start-up costs; its cost of
revenues associated with systems management revenues are comprised of wages,
start-up costs and depreciation on fixed assets; and its cost of revenues
associated with its integration services are comprised of computer equipment
and software and labor costs. The Company's margins on resold products within
integration services are lower than those for business service outsourcing and
systems management outsourcing. Integration services margins tend to fluctuate
more than business services outsourcing margins and systems management
outsourcing margins.

  DESI's selling expenses are comprised of sales and support salaries,
commissions and travel and entertainment. Selling expenses as a percentage of
revenues for integration services are significantly higher than for business
outsourcing services due to the long-term annuity nature of DESI's business
outsourcing contracts.

  DESI's research and development activities, the costs of which are included
in general and administrative expenses, consist of software and hardware
product evaluation, trial integration of purchased hardware and software, user
productivity benchmarking and the development of custom integration software.

  The Company's results of operations are sensitive to the state of the U.S.
professional service economy, particularly as it affects the Company's target
markets. The volume of services provided by the Company generally are lower in
periods in which activities of the Company's clients are reduced by economic
or other factors. The resulting decline in the Company's revenues from a
particular client affects the Company's net income because a large percentage
of the Company's costs are fixed. In addition, clients have imposed pricing
pressures on the Company during periods in which their activities are reduced
because of their own reduced levels of profitability, thereby adversely
affecting the Company's gross margins and results of operations. Again, these
pricing pressures have been offset by a growth in revenues and the Company's
ability to attract new clients who desire to reduce their expenses by
outsourcing certain services to the Company.

                                      11
<PAGE>

 Initial Public Offering

  On November 5, 1996, the Company completed an initial public offering of
2,860,000 shares of Common Stock (the "IPO" or "Offering"), 1,855,000 of which
were sold by the Company, and 1,005,000 of which were sold by R.R. Donnelley.
Prior to the IPO, the Company was a wholly-owned subsidiary of R.R. Donnelley.
Of the $41.7 million of net proceeds to the Company from the IPO, (1)
approximately $8.7 million was used in final payment for certain contingent
obligations arising from the acquisition of LANSystems, (2) $20.3 million was
used in repayment of advances owed R.R. Donnelley, and (3) approximately $8.1
million was used in repayment of the $8.0 million Dividend Note and accrued
interest. The remaining $4.6 million was used for general corporate purposes.

  As a result of the IPO, the number of shares of common stock outstanding
increased to 5,005,000 shares (including 5,000 of restricted shares granted to
a key executive) from the 3,145,000 shares outstanding prior to the IPO and
total equity increased to approximately $50 million.

 Relationship with R.R. Donnelley

  Prior to the Offering, DESI operated as a separate business within R.R.
Donnelley. It had relied on R.R. Donnelley for its financing needs and for a
number of support services, including legal, tax, insurance, benefits
administration, data processing and payroll. As of December 31, 1997, the
Company had advances payable to R.R. Donnelley totaling approximately
$510,000, which is disputed. As of December 31, 1996, the Company had advances
payable to R.R. Donnelley totaling approximately $6.5 million, which includes
both the fees related to the Transition Services Agreement and Benefit
Administration Services Agreement, as well as amounts funded by R.R. Donnelley
on behalf of the Company as specified in the Transition Services Agreement.
See Note 4 of Notes to the Consolidated Financial Statements of DESI.

  The 1995 consolidated financial statements reflect the results of
operations, financial position and cash flows of the Company on a carve-out
basis; that is, the financial statements have been adjusted to reflect certain
expenses and liabilities incurred by R.R. Donnelley on behalf of the Company.
The 1996 consolidated financial statements through the closing of the IPO are
also on a carve-out basis. The Company believes that the assumptions
underlying all such adjustments are reasonable; however, such consolidated
financial statements do not necessarily reflect the results of operations,
financial position and cash flows of the Company had the Company operated as a
separate entity during the periods presented. Income taxes reflected in such
consolidated financial statements through the closing of the IPO were
determined as if the Company had filed a separate return.

  The Company entered into certain agreements (the Transition Services
Agreement and the Benefit Administration Services Agreement) pursuant to which
R.R. Donnelley or its affiliates had agreed to perform certain legal, tax,
data processing, risk management, employee benefit, credit and collection,
cash management and banking and accounts payable services for the Company. The
Company was charged fees and expenses for these services and retained the
right to terminate services provided under the agreements upon 30 days notice.
The Benefit Administration Services Agreement was terminated as of December
31, 1996. The Transition Services Agreement was terminated throughout 1997
with the last service terminated as of November 30, 1997. Fees related to the
Transition Services Agreement in 1997 were $219,000 while fees related to the
Transition Services Agreement and Benefit Administration Services Agreement in
1996 were $66,000 and $544,000, respectively.

 Acquisition of LANSystems

  LANSystems was acquired on June 21, 1995 for cash of approximately $16.6
million and certain contingent payment obligations. The acquisition was
accounted for as a purchase, with the excess of the purchase price over the
fair market value of net assets acquired being allocated to goodwill in the
amount of approximately $11.8 million. The goodwill is being amortized over
its estimated useful life of 20 years. LANSystems was acquired by R.R.
Donnelley and, as such, the Company was not required to provide cash for the
acquisition. The earnout

                                      12
<PAGE>

provisions resulted in contingent payments of $9.5 million to former
LANSystems shareholders and management participants. Payments made to the
recipients of the contingent payments have been treated as additional purchase
price for LANSystems, resulting in an increase in goodwill of approximately
$9.5 million, which is being amortized over the remaining useful life
(approximately 19 years).

  The consolidated financial statements for the year ended December 31, 1995
reflect the results of operations of LANSystems commencing on July 1, 1995.

RESULTS OF OPERATIONS

  The following table sets forth certain items from the Company's consolidated
statements of income as a percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER
                                                                  31,
                                                          --------------------
                                                          1995(1) 1996   1997
                                                          ------- -----  -----
<S>                                                       <C>     <C>    <C>
  Business services outsourcing revenues.................   69.3%  59.1%  62.1%
  Integration services revenues..........................   30.7   39.9   31.7
  Systems management outsourcing revenues................    --     1.0    6.2
                                                           -----  -----  -----
    Total revenues.......................................  100.0  100.0  100.0
  Business services outsourcing cost of revenues.........   84.0   82.0   78.9
  Integration services cost of revenues..................   71.4   73.6   83.3
  Systems management outsourcing cost of revenues........    --    49.8   72.8
                                                           -----  -----  -----
    Total cost of revenues...............................   80.2   78.3   79.9
  Business services outsourcing gross profit.............   16.0   18.0   21.1
  Integration services gross profit......................   28.6   26.4   16.8
  Systems management outsourcing gross profit............    --    50.2   27.2
                                                           -----  -----  -----
    Total gross profit...................................   19.9   21.7   20.1
  Selling expenses.......................................    8.4   10.3    8.1
  General and administrative expenses....................    9.0    8.1   14.8
  Amortization of goodwill...............................     .5    0.8    1.0
  Special charge.........................................    --     0.3    --
                                                           -----  -----  -----
    Earnings (loss) from operations......................    2.0    2.2   (3.8)
  Interest expense, net..................................    0.8    0.4    0.5
                                                           -----  -----  -----
    Earnings (loss) before income taxes..................    1.2    1.8   (4.3)
  Income tax expense (benefit)...........................    0.7    1.1   (1.3)
                                                           -----  -----  -----
    Net income (loss)....................................    0.5%   0.6%  (3.0)%
                                                           =====  =====  =====
</TABLE>
--------
(1) The results of operations of LANSystems are included in DESI's
    consolidated statements of income since July 1, 1995.

 Year ended December 31, 1997 compared to year ended December 31, 1996

  Revenues for the year ended December 31, 1997 totaled $110.8 million, a
14.8% increase over 1996 revenues of $96.5 million. This $14.3 million
increase was comprised of a $11.8 million, or 20.7%, increase in business
services outsourcing revenues, a $3.3 million decrease attributable to
integration services and a $5.9 million increase attributable to systems
management outsourcing. Business services outsourcing growth was due to a $9.0
million increase in revenues from new clients and a $2.8 million increase in
revenues from existing clients. The integration services revenue decrease of
$3.3 million was primarily due to a $3.3 million change in estimate resulting
from the reduction in scope on certain integration projects, operating
performance issues and an increase in the estimated hours required to complete
certain other projects. Revenues from integration services were comprised of
$14.6 million from the resale of hardware and software products and $20.5
million from services. Systems management outsourcing growth of $5.9 million
was due to five new outsourcing contracts.

                                      13
<PAGE>

  Cost of revenues of $88.5 million increased as a percentage of revenues to
79.9% from 78.3% in 1996 because of a decrease in the integration services
margins, offset by an increase in the business services outsourcing margins.
Business services outsourcing margins increased as a result of increased
revenues in higher margin services, a decrease in start-up costs and higher
productivity at client sites. Integration services margins decreased primarily
as a result of a $2.3 million change in estimate resulting from the reduction
in scope on certain integration projects, operating performance issues and an
increase in the estimated hours required to complete certain other projects.

  Selling expenses decreased $1.0 million, or 10%, from 1996, and as a
percentage of revenues, decreased to 8.1% in 1997 from 10.3% in 1996. Selling
expenses as a percentage of revenues decreased primarily due to turnover of
integration services sales staff and delays in hiring new staff.

  General and administrative expenses increased $8.6 million, or 110%, from
1996, and as a percentage of revenues, increased to 14.8% in 1997 from 8.1% in
1996. General and administrative expenses as a percentage of revenues
increased primarily due to an increase in the allowance for doubtful accounts
of $3.6 million recorded in the third quarter of 1997, the start up of systems
management outsourcing services, additional expenses necessary to operate as a
public company and the increased investment in administrative systems. These
investments, which are substantially complete, include a new financial system
and a common technology platform.

  Amortization of goodwill was $1.1 million, compared to $0.8 million in 1996.
The increase was due to a full year of amortization in 1997, as goodwill
increased during the third quarter of 1996 due to earnout payments related to
the LANSystems acquisition.

  A special charge of $300,000 was recorded in 1996 to reflect the severance
agreement related to the departure, effective October 4, 1996, of Thomas P.
Bradbury who served as President of the LANSystems division.

  Interest expense increased to $0.6 million from $0.4 million in 1996
primarily due to interest expense related to borrowings on the line of credit.

  In 1997, the Company's effective income tax rate was a benefit of 29.9%,
primarily due to a taxable loss in 1997. The Company's effective income tax
rate was 63.2% in 1996. The 1996 effective rate exceeded the U.S. federal
statutory rate due to the effect of nondeductible goodwill and state taxes.

  Net income decreased $3.9 million to a net loss of $3.3 million in 1997 as a
result of the foregoing factors.

 Year ended December 31, 1996 compared to year ended December 31, 1995

  Revenues for the year ended December 31, 1996 totaled $96.5 million, a 46.3%
increase over 1995 revenues of $65.9 million. This $30.5 million increase was
comprised of a $11.4 million, or 24.9%, increase in business services
outsourcing revenues and a $19.1 million increase attributable to integration
services. Business services outsourcing growth was due to a $3.7 million
increase in revenues from new clients and a $7.5 million increase in revenues
from existing clients. Integration services growth resulted from the inclusion
of LANSystems for all of 1996. Revenues from integration services were
comprised of $19.1 million from the resale of hardware and software products
and $20.3 million from services.

  Cost of revenues of $75.5 million decreased as a percentage of revenues to
78.3% from 80.2% in 1995 because of an increase in the business services
outsourcing margins, offset by a decrease in the integration services margin.
Business services outsourcing margins increased as a result of increased
revenues in higher margin services, a decrease in start-up costs, higher
productivity at client sites and a reduction in equipment expense due to
vendor renegotiations. Integration services margins decreased as a result of a
less than expected LANSystems revenue growth, increased subcontracted labor
and lower productivity from new hires.

                                      14
<PAGE>

  Selling expenses increased $4.4 million, or 78.5%, from 1995, and as a
percentage of revenues, increased to 10.3% in 1996 from 8.4% in 1995. Selling
expenses as a percentage of revenues increased primarily due to the LANSystems
acquisition being included for a full year ($3.3 million) and the start up of
systems management outsourcing services.

  General and administrative expenses increased $1.9 million, or 32.2%, from
1995 and as a percentage of revenues, decreased to 8.1% in 1996 from 9.0% in
1995. General and administrative expense increased primarily due to the
inclusion of LANSystems for the full year ($1.0 million), the closing of the
LANSystems' San Diego office ($0.3 million) and an investment in personnel to
support revenue growth.

  Amortization of goodwill was $0.8 million, compared to $0.3 million in 1995.
The increase was due to the inclusion of the LANSystems acquisition for the
entire 1996 year.

  A special charge of $300,000 was recorded in 1996 to reflect the severance
agreement related to the departure, effective October 4, 1996, of Thomas P.
Bradbury who served as President of the LANSystems division.

  Interest expense, which primarily related to capital leases and the $8.0
million dividend note to R. R. Donnelley, was offset by interest income earned
on the proceeds from the Offering and decreased by $0.1 million.

  The Company's effective income tax rate increased to 63.2% in 1996 from
62.0% in 1995. The effective tax rate exceeds the U.S. federal statutory rate
due to the effect of nondeductible goodwill amortization and state taxes.

  Net income increased $0.3 million, or 106.3%, to $0.6 million in 1996 as a
result of the foregoing factors.

LIQUIDITY AND CAPITAL RESOURCES

  Prior to the completion of the IPO, the Company funded its operations,
capital expenditures and acquisitions through cash flows from operations,
amounts advanced interest-free from R.R. Donnelley and the sale of its
business services outsourcing accounts receivable to a subsidiary of R.R.
Donnelley. These receivables were sold without recourse and the Company was
not charged any factoring cost. During the years ended December 31, 1995 and
1996, the Company factored $44.8 million and $45.1 million of receivables,
respectively. Factored receivables that remain uncollected were $14.6 million,
$3.5 million, and $.6 million at December 31, 1995, 1996 and 1997,
respectively, and are excluded from DESI's consolidated balance sheets. The
arrangement pursuant to which the Company sold such receivables to a
subsidiary of R.R. Donnelley was terminated on December 16, 1996.

  On October 30, 1996, the Company entered into a credit agreement with Harris
Trust and Savings Bank (the "Bank") (the "Credit Agreement") under which it is
entitled to borrow up to $22.0 million on a revolving credit basis. Borrowings
under the Credit Agreement mature in November 1999, and bear interest (i) at
the prime rate announced by the Bank or (ii) at the applicable LIBOR rate
plus, depending on the Company's fixed charge coverage ratio, up to 125 basis
points per annum. In addition, the Company pays a commitment fee of 20 to 30
basis points per annum, depending on its fixed charge coverage ratio, on the
unused portion of the credit facility. The credit facility contains customary
financial and other covenants, including requirements to maintain a minimum
consolidated net worth, a minimum fixed charge coverage ratio and a maximum
leverage ratio, and restrictions on liens, investments, dividends,
indebtedness, acquisitions and transactions with affiliates. The Company has
historically not paid interest with respect to the advances it received from
R.R. Donnelley. The Company paid $658,000 in interest expense in 1997, of
which $334,000 is interest expense related to borrowings on the credit
facility, $314,000 relates to interest expense on capital leases and $10,000
relates to interest expense on notes payable. At December 31, 1997, the
Company was in compliance with all debt covenants and there were $5.6 million
in borrowings outstanding under the Credit Agreement.

                                      15
<PAGE>

  The Company had net cash provided by operations of $3.0 million for the year
ended December 31, 1997, as compared to net cash used by operations of $8.4
million in 1996. This increase of $11.4 million was primarily due to improved
collection and more timely invoicing of integration services clients in 1997
compared to 1996. Capital expenditures were $7.5 million in 1997, $7.3 million
in 1996 and $4.1 million in 1995. Capital expenditures have increased in 1996
and 1997 over 1995 due to the implementation of a common technology platform
and financial system. The Company expects to spend $3.9 million in 1998 on
capital projects mainly for new client start-ups. Net cash used for financing
activities was $1.6 million in 1997. Of the $1.6 million usage, $5.9 million
was used to pay advances due to a related party and $1.3 million was used for
payments on capital leases. This usage was partially funded by $5.6 million
provided by the Company's Credit Agreement.

  For the year ended December 31, 1997, operating cash flow (net income plus
depreciation and amortization) was $3.1 million, down from $5.9 million in the
prior year. This decrease occurred primarily due to the changes in estimate
adjustments recorded in the third quarter of 1997. The Company believes cash
flows from operations and the credit facility will be sufficient to fund,
during the term of the credit facility, its ongoing operations and continued
growth and investment, including acquisitions.

CAUTIONARY STATEMENTS REGARDING FUTURE-LOOKING STATEMENTS

  This Annual Report on Form 10-K is among certain communications by the
Company that contain forward-looking statements, including statements
regarding the Company's financial position, results of operations and market
position. These forward-looking statements are based on the Company's
estimates, assumptions, projections and current expectations. The Company
hereby notes several important factors that could cause the Company's actual
results and other matters to differ materially from the results, projections
and expectations expressed in the forward-looking statements.

  Dependence on Key Clients. The loss of any one of the Company's major
clients could have a material adverse effect on the Company's business,
operating results or financial condition, in part because recommendations from
satisfied clients are critical to the Company's success in attracting new
clients.

  Dependence on Ability to Manage Growth. The Company's future performance and
profitability will depend, in large part, on its ability to manage its growth,
particularly with respect to its decentralized workforce, which will require
DESI to continue to improve its operational, financial and other internal
systems and the training, motivation and management of its employees.

  Sensitivity to Fluctuations in Professional Service Economy. The Company's
business and results of operations are sensitive to the state of the U.S.
professional service economy, particularly as it affects the Company's target
markets. The volume of services provided by the Company generally are lower in
periods in which activities of the Company's clients are reduced by economic
or other factors.

  Risks Associated with Performance of Integration Projects. Most of DESI's
engagements to provide integration services involve projects that are critical
to the operations of its clients' businesses and that provide benefits that
may be difficult to quantify. The Company's failure or inability to meet a
client's expectations in the performance of a particular project by the
Company or due to a software or hardware defect could result in the incurrence
by the Company of a financial loss and could damage the Company's reputation
and adversely affect its ability to attract new business. The Company's
integration projects are priced on a fixed-fee basis or a time and materials
basis and contain scope of work and acceptance criteria for identifying
project completion.

  Focus on Limited Target Markets. The Company focuses the marketing of its
services primarily on large law firms, investment banks and accounting firms,
and, therefore, the number of potential clients within the Company's target
markets is limited. Within these markets the Company faces several barriers to
its ability to increase revenues. Because of the limited number of
organizations in the Company's target markets, the need to overcome these
barriers with respect to any one potential client is greater than it would be
if the Company's target markets were larger.


                                      16
<PAGE>

  Ability to Grow through Introduction of New Services. The Company's business
strategies include growth through the introduction of new services, including
systems management outsourcing, that expand on the Company's expertise in
business services outsourcing and integration services. There can be no
assurance that DESI will be able to market successfully or operate profitably
any new services, or that the failure to perform such new services
satisfactorily would not adversely affect the Company's reputation as a
premier provider of information management services.

  Dependence on Ability to Anticipate Technological Advances. The success of
DESI's integration services will depend, to a large extent, on its ability to
anticipate and develop solutions that keep pace with changes in information
processing technology, evolving industry standards and changing client
preferences. In addition, there can be no assurance that products or
technologies developed by third parties will not render the integration
services of the Company noncompetitive or obsolete.

  Year 2000 Compliance. The Company is evaluating the impact, if any, of the
Year 2000 compliance issue. The Company has taken steps to correct any
potential problems that may occur. However, the Company could be impacted by
external companies and systems that interact with those of the Company.

  Risks Associated with Integration of LANSystems and Growth through Future
Acquisitions. The Company's business strategies include growth through
acquisitions of businesses that meet client and market demands for an expanded
geographic presence, new services or enhanced skills. The Company's experience
of acquiring and integrating businesses is limited to its acquisition of
LANSystems in June 1995. The integration of LANSystems into the Company's
operations is not complete and there can be no assurance that the integration
of LANSystems' business will be completed successfully or that DESI's
management will be successful in managing the combined operations. There can
be no assurance that the Company will be successful in identifying potential
acquisitions or that, if identified, the acquisitions will be consummated on
acceptable terms or that any acquired assets or business will be integrated
successfully into the Company's operations.

  Variability of Quarterly Results. The Company's quarterly operating results
will continue to be subject to variation, depending upon factors such as the
mix of business among the Company's services; the cost of materials, labor and
technology, particularly in connection with the delivery of business services;
the costs associated with initiating new outsourcing contracts or opening new
offices; the economic condition of the Company's target markets; and the costs
of acquiring and integrating new businesses.

  Need to Attract and Retain Key Personnel in Highly Competitive Marketplace.
The Company's performance depends, to a large extent, on the continued service
of its key technical employees and client managers and its ability to continue
to attract, retain and motivate such personnel. The inability to attract,
retain and motivate such personnel could have a material adverse effect upon
the Company's business, operating results or financial condition.

  Dependence on Senior Management. The Company's success depends, in part, on
its ability to retain its key executive officers and the effective performance
of such executive officers. The loss of one or more of the Company's key
executive officers could have a material adverse effect on the Company and its
prospects.

  Lack of Operating History as a Stand-Alone Entity. Prior to the IPO, the
Company operated as a separate business within R.R. Donnelley. In addition,
prior to the Offering, the Company did not have its own stand-alone capital
structure, including levels of indebtedness typically associated with a stand-
alone entity in the Company's industry, and, therefore, did not manage its own
working capital borrowings. Although the Company has established new policies
and procedures applicable to the operation of a public company, there can be
no assurance that the Company will be able to manage successfully the
additional obligations of being a public company.

  Financial Statement Presentation. Certain of the Company's consolidated
financial statements and other financial data appearing in this Annual Report
on Form 10-K reflect the results of operations, financial position and cash
flows of the Company on a carve-out basis and are derived from the historical
financial statements and

                                      17
<PAGE>

financial data of the Company. The financial statements have been adjusted to
reflect certain expenses and liabilities incurred by R.R. Donnelley on behalf
of the Company. The Company believes that the assumptions underlying all such
adjustments are reasonable; however, the consolidated financial statements do
not necessarily reflect the expenses and liabilities that would have been
incurred by the Company operating as a stand-alone entity.

  Principal Stockholder; Potential Conflicts of Interest; Possible Future
Sales of Common Stock by R.R. Donnelley. R.R. Donnelley holds 42.8% of the
outstanding Common of the Company. Consequently, R.R. Donnelley is able to
significantly influence such actions as the election of directors of the
Company, the approval of matters submitted for stockholder approval or
preventing a potential takeover (even if advantageous to the other
stockholders). Currently, two of the five members of the Board of Directors of
the Company are officers of R.R. Donnelley. Any officer of R.R. Donnelley who
serves as a director of the Company may have conflicts of interest in
addressing business opportunities and strategies with respect to which the
Company's and R.R. Donnelley's interests differ. Except with respect to
agreements and transactions between the Company and R.R. Donnelley, the
Company and R.R. Donnelley have not adopted any formal procedures designed to
assure that conflicts of interest will not occur or to resolve any such
conflicts that do occur.

  Subject to certain restrictions, R.R. Donnelley may sell any and all of the
shares of Common Stock currently owned by it. No prediction can be made as to
the effect, if any, that future sales of Common Stock, or the availability of
Common Stock for future sale, will have on the market price of the Common
Stock prevailing from time to time.

  Reference is also made to the Company's Registration Statement (No. 333-
10127) under "Risk Factors" for a more detailed discussion of the foregoing
and other factors that may affect the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  See Part IV, Item 14(a) of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

  None.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

  The information required by Item 10 of this Annual Report on Form 10-K
regarding directors is incorporated by reference to the section entitled
"Election of Directors" in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders. The information required by Item 10 of this Annual
Report on Form 10-K regarding officers is included at the end of Part I of
this Annual Report on Form 10-K. Other information required by Item 10 of this
Annual Report on Form 10-K regarding both directors and officers is
incorporated by reference to the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for its 1998
Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

  The information required by Item 11 of this Annual Report on Form 10-K is
incorporated by reference to the section entitled "Compensation and Other
Information Concerning Directors and Executive Officers" in the Company's
Proxy Statement for its 1998 Annual Meeting of Stockholders.

                                      18
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required for by Item 12 of this Annual Report on Form 10-K
is incorporated by reference to the section entitled "Ownership of Capital
Stock" in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required for by Item 13 of this Annual Report on Form 10-K
is incorporated by reference to the section entitled "Certain Transactions" in
the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders.

                                      19
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements
  See "Financial Statements" set forth below.

 2. Financial Statement Schedules:

  The following financial statement schedule is included as part of this
  Annual Report on Form 10-K immediately following the signature page:

  Schedule II--Valuation and Qualifying Accounts

  All other schedules for which provision is made in the applicable
  accounting regulation of the Securities and Exchange Commission are not
  required under the related instructions or are inapplicable, and therefore
  have been omitted.

 3. Exhibits:

<TABLE>
     <C>       <S>                                                          <C>
      3.1      First Amended and Restated Certificate of Incorporation of
               the Company.(1)
      3.2      By-laws of the Company.(1)
     10.4      Employment Agreement between Rhonda I. Kochlefl and the
               Company.(1)(3)
     10.7      Employment Agreement between Linda A. Finkel and the Com-
               pany.(2)(3)
     10.8      Severance Agreement between Thomas P. Bradbury and the
               Company.(1)(3)
     10.9      1996 Broad-Based Employee Stock Plan.(1)(3)
     10.10     Agreement of Merger among R.R. Donnelley & Sons Company,
               Donnelley DBS, Inc. and LAN Systems, Inc.(1)
     10.11     Form of Credit Agreement among the Company, as Borrower,
               and the Banks named therein.(1)
     10.12     1997 Non-Employee Director Stock Plan.(2)(3)
     10.13     Amended and Restated 1996 Stock Incentive Plan.(2)(3)
     10.14     1997 Employee Stock Purchase Plan.(2)(3)
     10.15     Employment Agreement between Robert A. Lento and the Com-
               pany.(3)
     10.16     Employment Agreement between David J. Shea and the Compa-
               ny.(3)
     23.1      Consent of Arthur Andersen LLP.
     24.1      Powers of Attorney of Thomas A. Munro, Leo S. Spiegel,
               Gregory A. Stoklosa, Charles F. Moran and W. Ed Tyler.
     27.1      Financial Data Schedule.
     99.1      Transition Services Agreement between the Company and R.R.
               Donnelley.(1)
     99.2      Benefit Administration Services Agreement between the Com-
               pany and R.R. Donnelley.(1)
     99.3      Tax Allocation and Indemnification Agreement between the
               Company and R.R. Donnelley.(1)
</TABLE>
--------
(1) Incorporated herein by reference to the Company's Registration Statement
    on Form S-1 (No. 333-10127), declared effective on October 30, 1996.

(2) Incorporated herein by reference to the Company's Registration Statement
    on Form 10-K for the year ended December 31, 1996, filed on March 28,
    1997.
(3) Indicates a management contract or compensatory plan or agreement.
(b) Reports on Form 8-K

  The following reports on Form 8-K were filed by the Company during the
  fourth quarter of the year ended December 31, 1997:

    October 31, 1997--Item 5, Other Events-- third quarter loss.

(c) Exhibits

 See Item 14(a)3 above.

                                      20
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
  Report of Independent Public Accountants................................ F-2
  Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-3
  Consolidated Income Statements for the Years Ended December 31, 1995,
   1996, and 1997......................................................... F-4
  Consolidated Statements of Changes in Shareholders' Equity for the Years
   Ended December 31, 1995, 1996, and 1997................................ F-5
  Consolidated Statements of Cash Flows for the Years Ended December 31,
   1995, 1996, and 1997................................................... F-6
  Notes to Consolidated Financial Statements.............................. F-7
</TABLE>

                                      F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Donnelley Enterprise Solutions Incorporated:

  We have audited the accompanying consolidated balance sheets of DONNELLEY
ENTERPRISE SOLUTIONS INCORPORATED (a Delaware corporation) AND SUBSIDIARIES as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Donnelley
Enterprise Solutions Incorporated and Subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

                                          Arthur Andersen LLP

Chicago, Illinois,
February 3, 1998

                                      F-2
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                               ---------------
                            ASSETS                              1996    1997
                            ------                             ------- -------
<S>                                                            <C>     <C>
Current Assets:
  Cash and equivalents........................................ $ 8,910 $ 3,231
  Accounts receivable, less allowances for doubtful accounts
   of $460 in 1996 and $3,944 in 1997.........................  21,228  22,611
  Unbilled receivables........................................   4,847   5,874
  Inventories.................................................   4,144   3,550
  Prepaid expenses and other current assets...................   1,728   1,499
  Income tax receivable.......................................   1,533   2,418
  Deferred income taxes.......................................     867   2,689
                                                               ------- -------
    Total current assets......................................  43,257  41,872
Property and equipment, net...................................  12,646  15,999
Goodwill, net.................................................  20,213  19,158
Other noncurrent assets.......................................      60      44
                                                               ------- -------
    Total assets.............................................. $76,176 $77,073
                                                               ======= =======
<CAPTION>
             LIABILITIES AND SHAREHOLDERS' EQUITY
             ------------------------------------
<S>                                                            <C>     <C>
Current liabilities:
  Line of credit.............................................. $   --  $ 5,600
  Capital lease obligations, current portion..................   1,162     959
  Notes payable...............................................     --      111
  Advances due to related party...............................   6,455     510
  Accounts payable............................................   7,633   8,585
  Accrued salary and benefits.................................   2,280   3,340
  Accrued other expenses......................................   2,010   1,632
  Customer prepayments........................................   4,434   5,577
  Deferred revenues...........................................   1,134   2,572
                                                               ------- -------
    Total current liabilities.................................  25,108  28,886
                                                               ------- -------
Noncurrent Liabilities:
  Capital lease obligations...................................   1,305   1,552
  Deferred income taxes.......................................     311     545
  Notes payable...............................................     --       74
                                                               ------- -------
    Total noncurrent liabilities..............................   1,616   2,171
                                                               ------- -------
Shareholders' equity:
  Common stock--$.01 par value, 15,000,000 authorized Shares;
   5,005,000 issued and outstanding at December 31, 1996 and
   1997.......................................................      50      50
  Preferred stock--$.01 par value, 1,000,000 authorized
   Shares; none issued and outstanding........................     --      --
  Additional paid-in capital..................................  49,399  49,245
  Cumulative translation adjustment...........................     --       (2)
  Retained earnings...........................................       3  (3,277)
                                                               ------- -------
    Total shareholders' equity................................  49,452  46,016
                                                               ------- -------
    Total liabilities and shareholders' equity................ $76,176 $77,073
                                                               ======= =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

                         CONSOLIDATED INCOME STATEMENTS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                      ------------------------
                                                       1995    1996     1997
                                                      ------- ------- --------
<S>                                                   <C>     <C>     <C>
Business services outsourcing revenues............... $45,684 $57,048 $ 68,848
Integration services revenues........................  20,260  38,450   35,145
Systems management outsourcing revenues..............      --     966    6,851
                                                      ------- ------- --------
    Total revenues...................................  65,944  96,464  110,844
                                                      ------- ------- --------
Business services outsourcing cost of revenues.......  38,387  46,756   54,301
Integration services cost of revenues................  14,471  28,300   29,258
Systems management outsourcing cost of revenues......      --     481    4,986
                                                      ------- ------- --------
    Total cost of revenues...........................  52,858  75,537   88,545
                                                      ------- ------- --------
Business services outsourcing gross profit...........   7,297  10,292   14,547
Integration services gross profit....................   5,789  10,150    5,887
Systems management outsourcing gross profit..........      --     485    1,865
                                                      ------- ------- --------
    Total gross profit...............................  13,086  20,927   22,299
                                                      ------- ------- --------
Selling expenses.....................................   5,563   9,929    8,973
General and administrative expenses..................   5,908   7,812   16,381
Amortization of goodwill.............................     295     804    1,072
Special charge.......................................      --     300       --
                                                      ------- ------- --------
    Earnings (loss) from operations..................   1,320   2,082   (4,127)
Interest expense, net................................     522     384      553
                                                      ------- ------- --------
    Earnings (loss) before income taxes..............     798   1,698   (4,680)
Income tax expense (benefit).........................     495   1,073   (1,400)
                                                      ------- ------- --------
    Net income (loss)................................ $   303 $   625 $ (3,280)
                                                      ------- ------- --------
  Basic and diluted earnings (loss) per share........                 $   (.66)
                                                                      ========
  Basic and diluted common shares outstanding........                    5,005
                                                                      ========
  Pro forma earnings per share.......................         $   .12
                                                              =======
  Pro forma common shares outstanding................           5,005
                                                              =======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                  ADDITIONAL CUMULATIVE                TOTAL
                           COMMON  PAID-IN   TRANSLATION RETAINED  SHAREHOLDERS'
                           STOCK   CAPITAL   ADJUSTMENT  EARNINGS     EQUITY
                           ------ ---------- ----------- --------  -------------
<S>                        <C>    <C>        <C>         <C>       <C>
Balance at December 31,
 1994 ....................  $--    $   --       $--      $   --       $   --
  Net income .............   --        --        --          303          303
  Contribution of
   LANSystems from
   related party .........    31    15,726       --          --        15,757
  Repayments to related
   party .................   --        --        --         (303)        (303)
                            ----   -------      ----     -------      -------
Balance at December 31,
 1995 ....................    31    15,726       --          --        15,757
  Net income .............   --        --        --          625          625
  Initial public offering
   proceeds,
   net of expenses .......    19    41,673       --          --        41,692
  Dividend to related
   party .................          (8,000)      --         (622)      (8,622)
                            ----   -------      ----     -------      -------
Balance at December 31,
 1996 ....................    50    49,399       --            3       49,452
  Net loss ...............   --        --        --       (3,280)      (3,280)
  Initial public offering
   expenses ..............   --       (154)      --          --          (154)
  Cumulative translation
   adjustment ............   --        --         (2)        --            (2)
                            ----   -------      ----     -------      -------
Balance at December 31,
 1997 ....................  $ 50   $49,245      $ (2)    $(3,277)     $46,016
                            ----   -------      ----     -------      -------
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   ---------------------------
                                                     1995      1996     1997
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
Cash flows provided by (used in) operating
 activities:
  Net income.....................................  $    303  $    625  $(3,280)
  Depreciation and amortization..................     3,446     4,492    5,314
  Amortization of goodwill.......................       295       804    1,072
  Gain on sale of equipment......................       --        --      (227)
  Net changes in assets and liabilities..........      (109)  (14,289)     154
                                                   --------  --------  -------
      Net cash provided by (used in) operating
       activities................................     3,935    (8,368)   3,033
                                                   --------  --------  -------
Cash flows provided by (used in) investing
 activities:
  Capital expenditures...........................    (4,084)   (7,347)  (7,548)
  Net proceeds on sale of equipment..............       --        --       414
  Acquisition of LANSystems by related party.....   (16,633)      --       --
  LANSystems contingent payments.................       --     (9,506)     --
                                                   --------  --------  -------
      Net cash used in investing activities......   (20,717)  (16,853)  (7,134)
                                                   --------  --------  -------
Cash flows provided by (used for) financing
 activities:
  Advances from (to) related parties, net........     4,481     1,783   (5,945)
  Line of credit.................................       --        --     5,600
  Notes payable..................................       --        --       185
  Repayments/dividend to related party...........      (303)   (8,622)     --
  Contribution of LANSystems from related party..    15,757       --       --
  Net proceeds from the initial public offering..       --     41,692     (154)
  Principal payments on capital leases...........    (1,301)   (1,374)  (1,262)
  Principal payments on borrowings...............    (1,200)      --       --
  Other..........................................       --        --        (2)
                                                   --------  --------  -------
      Net cash provided by (used for) financing
       activities................................    17,434    33,479   (1,578)
                                                   --------  --------  -------
Net increase (decrease) in cash and equivalents..  $    652  $  8,258  $(5,679)
Cash and equivalents, at beginning of period.....       --        652    8,910
                                                   --------  --------  -------
Cash and equivalents, at end of period...........  $    652  $  8,910  $ 3,231
                                                   ========  ========  =======
The changes in assets and liabilities, net of
 balances assumed through acquisitions, were as
 follows:
  Decrease (increase) in assets--
    Receivables, net.............................  $ (1,667) $(14,928) $(2,410)
    Inventories..................................       543      (570)     594
    Prepaid expenses and other...................       (24)   (1,240)     229
    Income tax receivable........................      (196)     (345)    (885)
    Deferred income taxes........................      (496)    1,135   (1,822)
    Other noncurrent assets......................        (3)       (1)      (1)
  Increase (decrease) in liabilities--
    Accounts payable.............................       671     1,312      952
    Accrued salary and benefits..................     1,081      (766)   1,060
    Accrued other expenses.......................     1,214       358     (378)
    Customer prepayments.........................       444       896    1,143
    Deferred revenues............................    (1,917)     (198)   1,438
    Deferred income taxes........................       --        311      234
    Other noncurrent liabilities.................       241      (253)     --
                                                   --------  --------  -------
      Net change in assets and liabilities.......  $   (109) $(14,289) $   154
                                                   ========  ========  =======
Cash paid during the period for:
  Interest.......................................  $    522  $    427  $   658
  Income taxes...................................        86       --     1,337
                                                   ========  ========  =======
Supplemental non-cash investing and financing
 activities:
  Capital leases.................................  $    581  $    716  $ 1,306
                                                   ========  ========  =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS:

  Donnelley Business Services ("DBS") was an unincorporated business unit of
R.R. Donnelley & Sons Company ("R.R. Donnelley") from its organization in 1988
through December 31, 1995. On June 21, 1995, R.R. Donnelley acquired LAN
Systems, Inc. ("LANSystems") in a business combination accounted for as a
purchase (see Note 14 for further discussion). Following the acquisition,
LANSystems was a wholly owned subsidiary of R.R. Donnelley and was operated
together with DBS. Effective January 1, 1996, R.R. Donnelley contributed the
assets and liabilities of DBS to LANSystems and LANSystems changed its name to
Donnelley Enterprise Solutions Incorporated ("DESI"). The 1995 consolidated
financial statements have been restated to reflect the consolidation of
entities under common control by R.R. Donnelley since the date of acquisition
of LANSystems. LANSystems is included in the results of operations in the
accompanying financial statements since July 1, 1995. DESI and its wholly
owned subsidiaries are collectively referred to herein as the "Company."

  On November 5, 1996, the Company completed an initial public offering of
2,860,000 shares of Common Stock (the "IPO" or "Offering"), 1,855,000 of which
were sold by the Company, and 1,005,000 of which were sold by R.R. Donnelley.
Of the $41.7 million of net proceeds to the Company from the IPO, (1)
approximately $8.7 million was used in final payment for certain contingent
obligations arising from the acquisition of LANSystems, (2) $20.3 million was
used in repayment of advances owed R.R. Donnelley, and (3) approximately $8.1
million was used in repayment of the $8.0 million Dividend Note and accrued
interest. The remaining $4.6 million was used for general corporate purposes.

  The Company is a single-source provider of integrated information management
services to professional service providers, primarily large law firms,
investment banking firms and accounting firms. The Company operates entirely
within the information management services segment. Within this segment, the
Company offers three general categories of services: business services
outsourcing, integration services and systems management outsourcing. The
Company's business services outsourcing offerings include document services,
such as reprographic, networked and color printing, mailroom and facsimile
services; word processing and desktop publishing; and imaging. The Company's
integration services ("LANSystems") include systems integration, consulting,
software development and technical training. The Company's systems management
outsourcing offerings include on-site management and administration of servers
and desktops, including the operation of client help desk functions.

2. SIGNIFICANT ACCOUNTING POLICIES:

 Basis of Consolidation

  The consolidated financial statements include all accounts of the Company.
All material intercompany balances and transactions are eliminated in
consolidation.

 Revenue Recognition and Deferred Revenues

  Business Services Outsourcing--The Company recognizes revenues related to
its business services outsourcing upon rendering of service. All outsourcing
contracts are billed on a monthly basis. At December 31, 1996 and 1997,
unbilled revenues amounted to $71,000 and $42,000, respectively.

  Integration Services--For material integration projects with a duration of
three months or longer that require installation, system design and
integration, the Company recognizes revenue under the percentage-of-completion
method, using labor efforts incurred to date in relation to estimated total
labor costs of the contracts to measure stage of completion. The cumulative
effects of revisions of estimated total labor costs and revenues are recorded

                                      F-7
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

in the period in which the facts requiring the revision become known. When a
loss is anticipated on a contract, the full amount thereof is provided
currently. Claims, including change orders, are reflected at estimated
recoverable amounts. At December 31, 1996 and 1997, estimated revenue in
excess of billings on contracts amounted to $4,776,000 and $5,841,000,
respectively.

  For all other integration projects, the Company recognizes revenue upon
substantial completion of the project.

  Amounts billed for systems maintenance contracts are recorded as deferred
revenue and recognized in revenue over the term of the contract on a straight-
line basis.

  Systems Management Outsourcing--The Company recognizes revenues related to
its systems management outsourcing upon rendering of service. All outsourcing
contracts are billed on a monthly basis.

 Cash Equivalents

  The company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the consolidated balance sheets and consolidated statements
of cash flows. Cash equivalents are stated at cost, which approximates market
value.

 Inventories

  Inventories consist of materials and supplies and are carried at the lower
of weighted average cost or market.

 Property and Equipment--Capitalization and Depreciation

  Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on useful lives of 2 to 7 years. Maintenance
and repair costs are charged to expense as incurred. When properties are
retired or disposed, the costs and related depreciation reserves are
eliminated and the resulting profit or loss is recognized in income.

  Leasehold improvements are amortized over the life of the related lease.
Leased capitalized assets are depreciated over the life of the related lease
or the normal useful life of the asset, whichever is shorter.

 Goodwill--Capitalization and Amortization

  Goodwill consists of the excess of purchase price over the fair market value
of net assets acquired as a result of the acquisition of LANSystems on June
21, 1995. The goodwill is amortized over its estimated useful life of 20
years. Accumulated amortization at December 31, 1996 and 1997, was $1,099,000
and $2,171,000, respectively.

 Impairment of Long-Lived Assets

  The Company adopted Statement of Financial Accounting Standards No. 121
("FAS 121")--"Accounting for the Impairment of Long-Lived Assets" effective
January 1, 1995. In accordance with the requirements of FAS 121, the Company
periodically assesses whether events or circumstances have occurred that may
indicate the carrying value of its long-lived assets may not be recoverable.
When such events or circumstances indicate the carrying value of an asset may
be impaired, the Company uses an estimate based on the future undiscounted
cash flows to be derived from the asset over the remaining useful life of the
asset to assess whether or not the asset is recoverable. If the future
undiscounted cash flows to be derived over the life of the asset do not exceed

                                      F-8
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

the asset's net book value, the Company recognizes an impairment loss for the
amount by which the net book value of the asset exceeds its estimated fair
market value. The Company has not recognized any material impairment losses
for the years ended December 31, 1995, 1996 and 1997.

 Research and Development

  Research and development expenditures are charged to earnings as incurred
and amounted to $1,274,000, $1,206,000, and $1,942,000 for the years ended
December 31, 1995, 1996, and 1997, respectively. These costs are reflected in
the Company's consolidated statements of income as general and administrative
expenses.

 Reclassifications

  Certain prior year amounts have been reclassified to conform to fiscal year
1997 presentation. These changes had no impact on previously reported results
of operations or shareholders' equity.

 Income Taxes

  For the year ended December 31, 1995, and for the period beginning January
1, 1996 and ending November 4, 1996, the Company is included in the
consolidated federal income tax return of R.R. Donnelley. The Company filed a
short period return for the period beginning November 5, 1996 and ending
December 31, 1996 on a stand alone basis. The consolidated tax provision for
the years ended December 31, 1995 and 1996 is presented as if the Company
filed a separate tax return for the full years. Deferred taxes are provided
when tax laws and financial accounting standards differ with respect to the
amount of income calculated in a given year and the bases of assets and
liabilities, in accordance with Statement of Financial Accounting Standards
No. 109--"Accounting for Income Taxes." Income taxes through the completion of
the IPO were paid by R.R. Donnelley on behalf of the Company.

 Fair Value of Financial Instruments

  In accordance with the reporting requirements of Statement of Financial
Accounting Standard No. 107, "Disclosures about Fair Value of Financial
Instruments," the Company calculates the fair value of its financial
instruments and includes this additional information in the notes to the
consolidated financial statements when the fair value is different than the
carrying value of those financial instruments. When the fair value reasonably
approximates the carrying value, no additional disclosure is made.

 Reporting Comprehensive Income

  In June 1997 Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"), was issued, effective for fiscal years
beginning after December 15, 1997, which requires a different format for
presentation of information already included in the Company's financial
statements. The Company believes the impact of FAS 130 will not have a
material effect on the Company's financial statements.

 Disclosures about Segments of an Enterprise and Related Information

  In June 1997 Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"), was issued, effective for fiscal years beginning after December 15,
1997, which requires that public business enterprises report certain
information about operating segments and certain information about their
products and services, the geographic areas in which they operate and their
major customers. FAS 131 does not affect accounting principles and,
accordingly, will not require any change to reported financial position,
results of operations or cash flows. The Company is currently evaluating the
impact of FAS 131 on its segment reporting.

                                      F-9
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


 Foreign Currency Translation Adjustment

  The balance sheet accounts of the Company's foreign subsidiary and division
have been translated at the exchange rate in effect at the end of the year.
Income and expense accounts have been translated at the weighted average rates
in effect during the year.

 Use of Estimates and Assumptions

  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, 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. Significant estimates inherent in the
preparation of the accompanying consolidated financial statements include
management's estimate related to, among other things, allowances for doubtful
accounts, future cash flows associated with long-lived assets, valuation
allowances for deferred tax assets and contract revenues and expenses related
to integration services projects recognized using the percentage of completion
method. Actual results could differ from those estimates.

3. SIGNIFICANT CLIENTS:

  A majority of the Company's revenues are attributable to clients operating
in the professional services industry. For the year ended December 31, 1995,
no clients accounted for greater than 10% of the Company's revenues. For the
years ended December 31, 1996 and 1997, one client accounted for approximately
11% and 13% of the Company's revenues, respectively.

4. TRANSACTIONS WITH R. R. DONNELLEY & SONS COMPANY:

  Substantially all transactions with R.R. Donnelley & Sons Company were
terminated in 1996, with the exception of certain services provided under the
Transition Services Agreement, which were terminated in 1997, commissions paid
to R.R. Donnelley salesmen and integration services sales made to
R.R. Donnelley. Related-party transactions with R.R. Donnelley not disclosed
elsewhere in the financial statements are as follows:

 Accounts Receivable Sold Without Recourse

  The Company sold certain accounts receivable, without recourse, to R.R.
Donnelley Receivables, Inc. ("DRI"), a wholly owned subsidiary of R.R.
Donnelley. The amount of the receivables sold was directly offset against the
advances due to related party. The Company was not charged for any factoring
costs related to these receivables and, therefore, the financial statements do
not include any charge for factoring costs. During the year ended December 31,
1996 the Company factored $45.1 million of receivables to DRI. Factored
receivables that remain uncollected by DRI were $3.5 million and $565,000 at
December 31, 1996 and 1997, and are excluded from the accompanying
consolidated balance sheets.

  As of December 16, 1996 the Company terminated the factoring agreement and
no longer factors any of its receivables.

 Employee Benefit Programs

  The Company's employees participated in various employee benefit programs
that were sponsored by R.R. Donnelley, including those employees acquired in
connection with the acquisition of LANSystems who began participating in all
such programs other than the defined benefit pension plan as of January 1,
1996 and,

                                     F-10
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

with respect to the defined benefit pension plan, as of June 21, 1995. The
employee benefit programs sponsored by R.R. Donnelley included medical, dental
and life insurance, workers' compensation and a defined benefit pension plan.
The Company reimbursed R.R. Donnelley for its proportionate cost of these
programs based on historical experience and relative headcount. The Company
recorded expense related to the reimbursement of these costs of approximately
$1.9 million and $2.4 million in the years ended December 31, 1995 and 1996,
respectively. The costs were charged to cost of revenues, selling expense and
general and administrative expense based on the number of employees in each of
these categories. The Company believes its allocation of the proportionate
cost is reasonable. R.R. Donnelley is liable for all payments under these
programs and, thus, no liability for these benefits has been reflected on the
accompanying consolidated balance sheet.

  The weighted average discount rate used in determining the actuarial present
value of the benefit obligation for the defined benefit pension plan was 7.25%
and 7.5% for the years ended December 31, 1995 and 1996, respectively. The
rate of increase in future compensation levels assumed was 4% for 1995 and
1996. The expected long-term rate of return on plan assets was 9.5% for both
years.

  On May 1, 1996, the Company terminated its participation in the R.R.
Donnelley defined benefit pension plan. R.R. Donnelley has retained all assets
and liabilities related to the plan. All other benefit programs offered by
R.R. Donnelley were terminated on December 31, 1996.

 Corporate Services

  Prior to the completion of the IPO, R.R. Donnelley provided certain support
services to the Company including legal, tax, benefits administration, data
processing, internal audit and payroll services. These charges were allocated
by R.R. Donnelley to the Company based on various formulas which reasonably
approximate the actual costs incurred. The corporate assessments recorded by
the Company for these allocations in the accompanying consolidated income
statements were approximately $650,000 and $863,000 for the years ended
December 31, 1995, and 1996, respectively. The amounts allocated by R.R.
Donnelley are not necessarily indicative of the actual costs which may have
been incurred had the Company operated as an entity unaffiliated with R.R.
Donnelley. However, the Company believes that the allocation is reasonable and
in accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 55.

 Sales Through R.R. Donnelley

  The Company sold services to clients who are also clients of R.R. Donnelley.
For some of these sales, an R.R. Donnelley salesman would assist the Company
in making the initial client contact and executing the transaction. To
compensate for these services, the Company paid a commission fee to the
respective R.R. Donnelley salesman. Management believes these commission fees
approximated the actual costs which may have been incurred had the Company
operated as an entity unaffiliated with R.R. Donnelley. Total commissions
expense related to these sales approximated $65,000, $43,000 and $82,000 for
the years ended December 31, 1995, 1996 and 1997, respectively. The sales to
which these commissions relate approximated, $6,027,000, $3,936,000 and
$10,556,000, respectively. The Company sold integration services and products
to R.R. Donnelley. These sales approximated $955,000, $2,038,000 and $411,000
for the period July 1, 1995 through December 31, 1995 and the years ended
December 31, 1996 and 1997, respectively. The receivables from R.R. Donnelley
related to these sales are reflected in accounts receivable or in the advances
due to related party discussed below.

 Impact of Operating as a Stand-Alone Entity

  For the year ended December 31, 1995 and for the period beginning January 1,
1996 through November 4, 1996, the accompanying financial statements reflect
the Company's costs of doing business, including expenses

                                     F-11
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

incurred by R.R. Donnelley on the Company's behalf in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 55. However,
the Company estimates it would have incurred increased expenses as a stand-
alone company, as well as other incremental public company expenses.

 Advances Due to Related Party

  Prior to the IPO, advances due to related party represent advances from R.R.
Donnelley to fund operating and investing activities, net of cash advanced to
R.R. Donnelley from operating cash flows generated by the Company. Advances
owed to R.R. Donnelley are non-interest bearing. The advances outstanding upon
the completion of the IPO were paid in full at November 4, 1996 with proceeds
from the offering.

  Advances due to related party as of December 31, 1996 relate to services
provided to the Company by R.R. Donnelley under the Transition Services
Agreement and the Benefit Administration Agreement. Under these agreements,
R.R. Donnelley or its affiliates agreed to perform certain legal, tax, data
processing, risk management, employee benefit, credit and collection, cash
management and banking and accounts payable services for the Company. Of the
approximately $6.5 million due to R.R. Donnelley as of December 31, 1996,
approximately $66,000 and $544,000 relate to fees under the Transition
Services Agreement and Benefit Administration Agreement, respectively. The
remaining balance reflects cash fundings made on behalf of the Company by R.R.
Donnelley under the Transition Services Agreement. The $510,000 due to R.R.
Donnelley as of December 31, 1997 is disputed.

  The Benefit Administration Agreement terminated on December 31, 1996. The
Transition Services Agreement was terminated at the Company's request on
November 30, 1997.

5. PRO FORMA AND BASIC AND DILUTED EARNINGS PER SHARE

  The pro forma earnings per share calculation set forth below does not
reflect the actual weighted average shares outstanding during the years ended
December 31, 1995 and 1996, but assumes the 5,000,000 common shares
outstanding upon the completion of the Offering and the 5,000 restricted
common shares issued to a key executive were outstanding for these years.

<TABLE>
<CAPTION>
                                                              1995      1996
                                                            --------- ---------
      <S>                                                   <C>       <C>
      Net income........................................... $ 303,000 $ 625,000
      Pro forma earnings per share......................... $    0.06 $    0.12
      Pro forma common shares outstanding.................. 5,005,000 5,005,000
</TABLE>

  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"),
which became effective in the fourth quarter of 1997. FAS 128 replaces the
presentation of earnings per share reflected on the income statement with a
dual presentation of basic earnings per share and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average numbers of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that could
occur if stock options and other commitments to issue common stock were
exercised resulting in the issuance of common stock that then shared in the
earnings of the Company. Basic and diluted earnings per share for the year
ended 1997 were the same. The effect of outstanding stock options was not
included in the computation of diluted earnings per share because to do so
would have been antidilutive. These options could potentially dilute earnings
per share in the future.

                                     F-12
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


6. PROPERTY AND EQUIPMENT:

  Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           --------------------
                                                             1996       1997
                                                           ---------  ---------
      <S>                                                  <C>        <C>
      Machinery and equipment............................. $  18,211  $  21,817
      Capital leases......................................     7,089      8,239
      Leasehold improvements..............................       541        867
                                                           ---------  ---------
          Total property and equipment....................    25,841     30,923
      Accumulated depreciation and amortization...........   (13,195)   (14,924)
                                                           ---------  ---------
          Net property and equipment...................... $  12,646  $  15,999
                                                           =========  =========
</TABLE>

  Depreciation and amortization expense of property and equipment included in
the accompanying consolidated income statements was $3,446,000, $4,492,000,
and $5,314,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.

7. LEASE OBLIGATIONS:

  The Company leases office space and various office equipment. These leases
are mainly accounted for as operating leases. Rental costs under operating
lease agreements including variable charges approximated $6,065,000,
$8,157,000 and $8,370,000 for the years ended December 31, 1995, 1996 and
1997, respectively.

  The Company leases a significant amount of equipment used at its business
services outsourcing sites. Some leases are accounted for as capital leases.
The gross amounts of property and equipment representing capital leases in the
accompanying consolidated balance sheets at December 31, 1996 and 1997 were
approximately $7,089,000 and $8,239,000, respectively. Similar amounts for
accumulated amortization were $4,818,000 and $5,888,000, respectively.
Amortization of capital lease assets is included in depreciation and
amortization expense of property and equipment.

Minimum future lease obligations at December 31, 1997, are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                              OPERATING CAPITAL
                                                               LEASES   LEASES
                                                              --------- -------
      <S>                                                     <C>       <C>
      Period ending December 31--
        1998.................................................  $2,762   $1,288
        1999.................................................   2,358      981
        2000.................................................   1,714      605
        2001.................................................   1,055      211
        2002 and thereafter..................................     828      118
                                                               ------   ------
          Total minimum payments.............................  $8,717   $3,203
                                                               ======
      Less: Amount representing interest.....................             (692)
                                                                        ------
      Present value of minimum lease payments................           $2,511
                                                                        ======
</TABLE>

8. SPECIAL CHARGE:

  The Company recorded a charge of $300,000 in the year ended December 31,
1996 to reflect the departure, effective October 4, 1996, of Thomas P.
Bradbury who served as President of the LANSystems division. The Company and
Mr. Bradbury entered into a severance agreement pursuant to which the Company
agreed to

                                     F-13
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

continue paying Mr. Bradbury his salary through June 21, 1997, pay him a pro-
rated bonus for 1996 and permit him to participate in the Company's employee
benefit plans through such date.

9. CREDIT AGREEMENT:

  The Company entered into a $22.0 million credit agreement with Harris Trust
and Savings Bank on October 30, 1996. The credit agreement will be used in
conjunction with cash flows from operations to fund ongoing operations,
seasonal cash needs, and for continued growth and investment. Amounts
available under the facility will not exceed a percentage of the Company's
billed and unbilled accounts receivable, and borrowings will mature in
November 1999 and bear interest (i) at the prime rate announced by the bank
acting as agent under the facility or (ii) at the applicable LIBOR rate plus,
depending on the Company's fixed charge coverage ratio, up to 125 basis points
per annum. In addition, the Company will pay a commitment fee of 20 to 30
basis points per annum, depending on its fixed charge coverage ratio, on the
unused portion of the credit agreement. The commitment fees for the years
ended December 31, 1996 and 1997 were $7,700 and $33,400, respectively. $5.6
million in borrowings at a weighted average rate of 6.94% were outstanding at
December 31, 1997.

  The facility contains customary financial and other covenants, including
requirements to (i) maintain a minimum consolidated net worth of not less than
80% of consolidated net worth on November 6, 1996 plus 50% of consolidated
positive net income for each fiscal quarter; (ii) a minimum fixed charge
coverage ratio specified quarterly; and (iii) a funded debt to cash flow ratio
of not more than 2.5 to 1, and restrictions on liens, investments, dividends,
indebtedness, acquisitions and transactions with affiliates. The Company was
in compliance with all debt covenants as of December 31, 1997. The facility
may be extended an additional year upon receipt of notice by the
Administrative Agent before the second, third and fourth anniversary dates of
the Agreement and terminates in full on November 5, 1999.

10. COMMITMENTS AND CONTINGENCIES:

  The Company is party to certain litigation arising in the ordinary course of
business which, in the opinion of management, will not have a material adverse
effect on the operations or financial position of the Company. A former client
filed suit against the Company in 1996 and the Company filed a counter claim
in 1997. The Company is of the opinion that the claim and the related
counterclaim will not have a material impact on the results of operations of
the Company in the period in which resolved.

11. INCOME TAXES:

  The components of the provision for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER
                                                                 31,
                                                         ----------------------
                                                         1995    1996    1997
                                                         -----  ------  -------
      <S>                                                <C>    <C>     <C>
      Federal--
        Current......................................... $ 884  $ (306) $   178
        Deferred........................................  (478)    963   (1,266)
      State--
        Current.........................................   107     (67)      10
        Deferred........................................   (18)    483     (322)
                                                         -----  ------  -------
          Total provision............................... $ 495  $1,073  $(1,400)
                                                         =====  ======  =======
</TABLE>

                                     F-14
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


  A reconciliation of the effective tax rate from the statutory U.S. federal
income tax rate of 34% is as follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                             -----------------
                                                             1995  1996  1997
                                                             ----  ----  -----
      <S>                                                    <C>   <C>   <C>
      Federal rate.......................................... 34.0% 34.0% (34.0)%
      State taxes........................................... 11.2  11.4   (7.3)
      Goodwill amortization................................. 11.3  13.8    6.5
      Meals and entertainment...............................  5.4   4.1    1.7
      Other.................................................  0.1  (0.1)   3.2
                                                             ----  ----  -----
        Effective tax rate.................................. 62.0% 63.2% (29.9)%
                                                             ====  ====  =====
</TABLE>

  The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax asset,
which is classified between current and long-term in the accompanying
consolidated balance sheets (in thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  -------------
                                                                  1996    1997
                                                                  -----  ------
      <S>                                                         <C>    <C>
      Vacation liability......................................... $ 162  $  231
      Payroll and related liabilities............................   136     --
      Allowance for doubtful accounts............................   140   1,680
      Inventory..................................................   328     457
      Revenue recognition........................................   (42)   (256)
      Miscellaneous, other.......................................   143     210
      Net operating loss carryforwards...........................   --      367
                                                                  -----  ------
          Total net current deferred tax asset...................   867   2,689
                                                                  -----  ------
      Accumulated depreciation...................................   593     391
      LANSystems contingent payments.............................  (926)   (947)
      Miscellaneous, other.......................................    22      11
                                                                  -----  ------
          Total net noncurrent deferred tax liability............  (311)   (545)
                                                                  -----  ------
          Total.................................................. $ 556  $2,144
                                                                  =====  ======
</TABLE>

  The Company has not provided a valuation allowance for deferred tax assets
because, although realization is not assured, the Company believes it is more
likely than not that such tax assets will be recognized through reversals of
taxable timing differences and taxable income in future periods. The current
net operating loss carryforwards expire between the years ended December 31,
2000 and 2010.

12. EMPLOYEE BENEFIT PLANS

  Effective January 1, 1997, the Company offered employees a 401(k) savings
plan with the Company matching a portion of the amounts contributed by
employees. An employee is eligible to receive the employer match after being
employed by the Company for one year, if that employee was not hired by
January 1, 1997. The Company matches 50% of the first 5% of the employee's
contribution. Vesting on the employer match occurs over five years. For the
year ended December 31, 1997, the Company contributed $441,000 to the 401(k)
savings plan.

  The Company instituted a stock purchase plan in 1997 that begins effective
January 1, 1998. Under the plan, the Company allows employees with at least
one year of service with the Company to participate. Each employee

                                     F-15
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

may invest up to 10% of their base compensation at a discount of 15% off the
fair market value of the stock price on the last day of the offering periods,
which are January 1, April 1, July 1 and October 1. The Company has not
incurred any expense related to the plan in 1997 as it is not effective until
January 1, 1998.

13. STOCK-BASED COMPENSATION PLANS

  The Company has three stock option plans, the 1996 Stock Incentive Plan
("Incentive Plan"), the 1996 Broad-Based Employee Stock Plan ("Broad-Based
Plan") and the 1997 Non-Employee Director Plan, as well as the 1997 Employee
Stock Purchase Plan. See Note 12. The Company accounts for these plans under
APB Opinion No. 25, under which no compensation cost has been recognized.

  Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                             1996      1997
                                                           -------- -----------
      <S>                                                  <C>      <C>
      Net Income (Loss):
        As Reported....................................... $625,000 $(3,280,000)
        Pro Forma.........................................  538,000  (4,099,000)
      Basic and diluted EPS:
        As Reported....................................... $   0.12 $     (0.66)
        Pro Forma.........................................     0.11       (0.82)
</TABLE>

  The Company may grant options for up to 400,000 shares of Common Stock under
both the Incentive Plan and the Broad-Based Plan. Under both Plans, the option
price equals the stock's market price on date of grant. These options vest
over periods of two to four years and expire after ten years. Upon completion
of the IPO, a total of 313,950 options were awarded under these plans to
employees of the Company at an exercise price of $25.00 per share.
Additionally, 5,000 shares of restricted Common Stock were granted to a key
executive upon completion of the IPO. No other options were outstanding at
December 31, 1996. For the year ended December 31, 1997, a total of 332,375
options were outstanding. A summary of the status of the Company's stock
option plans at December 31, 1996 and 1997 is presented below:

<TABLE>
<CAPTION>
                                                 1996              1997
                                           ----------------- -----------------
                                                    WEIGHTED          WEIGHTED
                                                    AVERAGE           AVERAGE
                                                    EXERCISE          EXERCISE
                                           SHARES    PRICE   SHARES    PRICE
                                           -------  -------- -------  --------
      <S>                                  <C>      <C>      <C>      <C>
      Outstanding at beginning of year....     --    $  --   300,625   $25.00
      Granted............................. 313,950    25.00  107,750    12.55
      Exercised...........................       0      --         0      --
      Forfeited........................... (13,325)   25.00  (76,000)   23.54
      Expired.............................       0      --         0      --
                                           -------   ------  -------   ------
      Outstanding at end of year.......... 300,625   $25.00  332,375   $21.30
                                           =======   ======  =======   ======
      Exercisable at end of year..........       0   $  --    62,045   $25.00
                                           =======   ======  =======   ======
      Weighted average fair value of
       options............................           $15.46            $ 8.13
                                                     ======            ======
</TABLE>

  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The assumptions used to estimate the
fair value of these grants in 1996 and 1997 were, respectively: risk-free
interest rate of 6.2% and 6.4%, an expected dividend yield of 0% and 0%, an
expected volatility of 53.0% and 78.4% and a grant life of seven years and
five years, respectively.

                                     F-16
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


14. ACQUISITION OF LANSYSTEMS:

  As discussed in Note 1, LANSystems was acquired on June 21, 1995 for cash of
approximately $16.6 million and certain contingent payment obligations
("earnout"). The acquisition was accounted for as a purchase, with the excess
of the purchase price over the fair market value of net assets acquired being
allocated to goodwill in the amount of approximately $11.8 million. The
goodwill is being amortized over its estimated useful life of 20 years.

  The earnout provisions provided for contingent payments of up to $12.9
million payable to former LANSystems shareholders and management participants
based on the achievement of specified financial targets for the years ended
December 31, 1995 through 1998. In the year ended December 31, 1996, the
earnout was renegotiated and a final payment was made. In this regard, $9.5
million was recorded as additional goodwill related to the earnout.

  The following unaudited pro forma income statement was prepared to
illustrate the estimated effects of the acquisition as if it had occurred on
January 1, 1995. The pro forma adjustments are based on the available
information and upon certain assumptions the Company believes are reasonable.
The pro forma income statement does not purport to represent what the
Company's income statements would actually have been if such transaction in
fact had occurred on January 1, 1995, or to project the Company's income
statements for any future period. The information below reflects an adjustment
for the amortization of goodwill based on the new cost basis of the Company,
as well as an adjustment to the income tax provision to reflect the tax effect
of the aforementioned adjustment.

<TABLE>
<CAPTION>
                                                                       1995
                                                                  --------------
                                                                  (IN THOUSANDS)
      <S>                                                         <C>
      Revenues...................................................    $79,545
      Cost of revenues ..........................................     64,336
                                                                     -------
          Gross profit...........................................     15,209
      Selling expenses...........................................      7,918
      General and administrative expenses........................      7,096
      Amortization of goodwill...................................      1,065
                                                                     -------
          Earnings (loss) from operations........................       (870)
      Interest expense, net......................................        543
                                                                     -------
          Earnings (loss) before income taxes....................     (1,413)
      Income taxes...............................................        (63)
                                                                     -------
          Net income (loss)......................................    $(1,350)
                                                                     =======
</TABLE>
15. QUARTERLY DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                      FIRST   SECOND   THIRD   FOURTH     FULL
     FOR THE FISCAL YEARS ENDED      QUARTER  QUARTER QUARTER  QUARTER    YEAR
     --------------------------      -------  ------- -------  -------  --------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>      <C>     <C>      <C>      <C>
December 31, 1996
  Revenues ......................... $20,451  $24,792 $25,780  $25,441  $ 96,464
  Gross profit .....................   4,371    5,562   5,509    4,668    20,110
  Net income (loss) ................     (69)     691     474     (471)      625
  Pro forma earnings (loss) per
   share ........................... $ (0.01) $  0.13 $  0.09  $ (0.09) $   0.12
                                     =======  ======= =======  =======  ========
December 31, 1997
  Revenues ......................... $27,038  $28,727 $25,509  $29,570  $110,844
  Gross profit .....................   5,901    7,064   3,590    5,744    22,299
  Net income (loss) ................     236      578  (4,222)     128    (3,280)
  Basic and diluted earnings (loss)
   per share........................ $   .05  $  0.12 $ (0.84) $   .03  $  (0.66)
                                     =======  ======= =======  =======  ========
</TABLE>

                                     F-17
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


  The pro forma earnings per share calculation does not reflect the actual
weighted average shares outstanding during the year ended December 31, 1996,
but assumes the 5,000,000 common shares outstanding upon the completion of the
Offering and the 5,000 restricted common shares issued to a key executive were
outstanding for this year.

16. CHANGES IN ESTIMATE:

  In the third quarter of 1997, the Company recorded two adjustments resulting
from changes in estimate. One adjustment affected revenue and gross profit by
$3.3 million and $2.3 million, respectively, for a change in estimate in
integration and consulting services at LANSystems resulting from the
reductions in scope on certain integration projects, operating performance
issues and an increase in the estimated number of hours required to complete
certain other projects. The second adjustment resulted primarily from a change
in estimate in the allowance for doubtful accounts in the amount of $3.6
million, which was primarily due to the increased age of the receivables at
LANSystems which lessens the likelihood of collection.


                                     F-18
<PAGE>

                                  SIGNATURES

    PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THE REGISTRANT
HAS DULY CAUSED THIS ANNUAL REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN CHICAGO, ILLINOIS ON MARCH 26,
1998.

                                          Donnelley Enterprise Solutions
                                           Incorporated

                                                /s/ Rhonda I. Kochlefl
                                          By___________________________________
                                                 Name: Rhonda I. Kochlefl
                                              Title: Chairman, President and
                                                  Chief Executive Officer

    PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS ANNUAL
REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES
AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----


<S>                                  <C>                           <C>
     /s/ Rhonda I. Kochlefl          Chairman, President and         March 26, 1998
____________________________________  Chief Executive Officer and
         Rhonda I. Kochlefl           Director (principal
                                      executive officer)

                 *                   Senior Vice President and       March 26, 1998
____________________________________  Chief Financial Officer
           Thomas A Munro             (principal financial and
                                      accounting officer)

                 *                   Director                        March 26, 1998
____________________________________
           Leo S. Spiegel

                 *                   Director                        March 26, 1998
____________________________________
        Gregory A. Stolkosa

                 *                   Director                        March 26, 1998
____________________________________
          Charles F. Moran

                 *                   Director                        March 26, 1998
____________________________________
</TABLE>    W. Ed tyler


  /s/ Rhonda I. Kochlefl
*By: __________________________
      Rhonda I. Kochlefl
       Attorney-in-Fact

                                     F-19
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

  We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Donnelley Enterprise Solutions
Incorporated included in this Form 10-K and have issued our report thereon
dated February 3, 1998. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule
listed on page S-2 is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.

                                          ARTHUR ANDERSEN LLP

Chicago, Illinois
February 3, 1998

                                      S-1
<PAGE>

                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            DEDUCTIONS
                                          ADDITIONS         WRITE-OFFS
                          BALANCE  -----------------------   OF TRADE
                          AT THE               CHARGES TO  RECEIVABLES,  BALANCE
ALLOWANCES FOR DOUBTFUL  BEGINNING CHARGES TO     OTHER       NET OF     AT END
ACCOUNTS                 OF PERIOD EXPENSES(1) ACCOUNTS(2)  RECOVERIES  OF PERIOD
-----------------------  --------- ----------- ----------- ------------ ---------
<S>                      <C>       <C>         <C>         <C>          <C>
For the Year Ended
 December 31, 1995......    --       $  413       $217        $ (23)     $  607
For the Year Ended
 December 31, 1996......   $607      $  248        --         $(395)     $  460
For the Year Ended
 December 31, 1997......   $460      $3,700        --         $(216)     $3,944
</TABLE>
--------
(1) These amounts represent provisions for doubtful accounts that are included
    in both sales and general and administrative expenses.
(2) These amounts represent additions to the reserve resulting from the
    purchase of LAN Systems, Inc. by R. R. Donnelley & Sons Company in 1995.

                                      S-2
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                    SEQUENTIAL
 EXHIBIT                                                               PAGE
 NUMBER                    DOCUMENT DESCRIPTION                       NUMBER
 ------- --------------------------------------------------------   ----------
 <C>     <S>                                                        <C>
         First Amended and Restated Certificate of Incorporation
  3.1    of the Company.(1)
  3.2    By-laws of the Company.(1)
         Employment Agreement between Rhonda I. Kochlefl and the
 10.4    Company.(1)(3)
         Employment Agreement between Linda A. Finkel and the
 10.7    Company.(2)(3)
         Severance Agreement between Thomas P. Bradbury and the
 10.8    Company.(1)(3)
 10.9    1996 Broad-Based Employee Stock Plan.(1)(3)
 10.10   Agreement of Merger among R.R. Donnelley & Sons Company,
         Donnelley DBS, Inc. and LAN Systems, Inc.(1)
 10.11   Form of Credit Agreement among the Company, as Borrower,
         and the Banks named therein.(1)
 10.12   1997 Non-Employee Director Stock Plan.(2)(3)
 10.13   Amended and Restated 1996 Stock Incentive Plan.(2)(3)
 10.14   1997 Employee Stock Purchase Plan.(2)(3)
         Employment Agreement between Robert A. Lento and the
 10.15   Company.(3)
         Employment Agreement between David J. Shea and the
 10.16   Company.(3)
 23.1    Consent of Arthur Andersen LLP.
 24.1    Powers of Attorney of Thomas A. Munro, Leo S. Spiegel,
         Gregory A. Stoklosa,
         Charles F. Moran and W. Ed Tyler.
 27.1    Financial Data Schedule.
         Transition Services Agreement between the Company and
 99.1    R.R. Donnelley.(1)
         Benefit Administration Services Agreement between the
 99.2    Company and R.R. Donnelley.(1)
 99.3    Tax Allocation and Indemnification Agreement between the
         Company and
         R.R. Donnelley.(1)
</TABLE>
--------
(1) Incorporated herein by reference to the Company's Registration Statement
    on Form S-1 (No. 333-10127), declared effective on October 30, 1996.
(2) Incorporated herein by reference to the Company's Registration Statement
    on Form 10-K for the year ended December 31, 1996, filed on March 28,
    1997.
(3) Indicates a management contract or compensatory plan or agreement.