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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, 1996
 
                                      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. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1997 was $29,366,250 based upon the closing price
on March 20, 1997.
 
  The number of shares of the registrant's common stock outstanding as of
March 20, 1997 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 and information technology services. The Company has
experienced substantial growth by expanding its service offerings, adding new
clients, increasing business with existing clients and capitalizing on the
growing trend toward outsourcing. In 1996, the Company's revenues from
business outsourcing services and information technology services were $57.1
million and $39.4 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 information technology services since 1983, including systems
integration, consulting 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 on-site management and administration of servers and desktops
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
 
  The challenges posed by the application of distributed networking strategies
to manual, labor-intensive business processes are driving forces in both the
business services outsourcing and information technology services arenas.
Increasing amounts of paper-based information are available in a variety of
electronic formats for sharing and delivery over distributed networks making
it crucial for businesses to manage their flow of documents and electronic
information in an integrated and efficient manner. There is a growing trend
for businesses to establish relationships with outside experts for both
business services and information technology functions in order to address the
changing business environment. The Company meets these demands by offering the
following services:
 
 Business Services Outsourcing
 
  The Company's outsourcing portfolio encompasses a comprehensive array of
business services, including document services, word processing and 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 typically 24-hours a day on
weekdays with scheduled weekend services. The reprographic operations
typically encompass black and white copying, electronic print, color print and
binding services. The critical documents produced include legal briefs, wills,
contracts, investment bank 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
 
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<PAGE>
 
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, with periodic
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. The Company implements and administers the client's
fax server environment and integrates this capability with the client's
network. Both mail services and facsimile services typically are billed
monthly to the client as a fixed management fee plus overtime expenses.
 
  Word Processing and 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.
 
  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. 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.
 
 Information Technology Services
 
  The Company provides systems integration, consulting, systems management
outsourcing and software development services.
 
  Systems Integration. The Company provides network design, installation,
configuration and on-going maintenance for distributed computing environments.
The project range includes networks consisting of between 250 and 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. Revenues from many projects are derived approximately one-half
from engineering services and one-half from the resale of hardware or software
products and subcontracted labor. The Company also enters into maintenance
contracts on network
 
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<PAGE>
 
equipment and servers with a majority of clients for which the Company has
completed a major systems integration project. Many clients have elected
coverage for 24 hours per day, seven days per week.
 
  Consulting. DESI provides consulting services which assist its clients in
making technology decisions ranging from strategic to tactical. Most
engagements lead to follow-on business from implementation projects.
Engagements range from three weeks to one year, with a typical engagement
being completed in eight weeks. Primary areas of expertise include information
systems architecture, network audits, relocation planning, project management
and disaster recovery planning.
 
  Systems Management Outsourcing. The Company offers a complete range of
systems management services, including help-desk support, network management,
server administration, end-user training, personal computer repair and
telephone switch administration. The functions are performed at the client's
offices. DESI uses proactive monitoring and the best industry practices in
providing a reliable computing environment and responsive end-user assistance.
The Company offers its systems management services pursuant to multi-year
contracts, which may include hardware and software upgrades at the beginning
or throughout the contract to reflect product cycles of computing equipment.
The Company began providing systems management outsourcing services in
February 1996 to combine its business services outsourcing and information
technology services expertise. The Company's systems management outsourcing
services have generated minimal revenues to date primarily from contracts that
are limited in duration and scope.
 
  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++
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.
 
  Contracts and Pricing. The majority of the Company's systems integration
projects are priced on a fixed-fee basis, although some work is contracted on
a time and materials basis. Cost-based pricing is developed using pre-
negotiated purchase prices 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 made in advance. Systems management outsourcing
contracts generally will have multi-year terms and will be invoiced monthly.
 
CLIENTS
 
  The Company has been successful in establishing strong relationships with a
significant number of the leading firms in its target markets, including the
law firms of Shearman & Sterling and Sidley & Austin, the investment banks of
Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated and the accounting
firm of Ernst & Young LLP. Revenues from these five clients accounted for
approximately 28.9% of the Company's 1995 revenues and approximately 26.6% of
the Company's 1996. In 1996, the Company provided services to 32 of the 100
largest law firms as ranked by the American Lawyer for 1995 and 9 of the 10
largest investment banks ranked by dollar volume of public debt and equity
issuances for 1996 as reported by Securities Data Corporation. The Company
also anticipates targeting firms within the commercial banking and asset
management industries. 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 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.
 
 
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<PAGE>
 
  In 1996, approximately 23.1% of the Company's revenues came from business
and information technology services provided to firms other than law firms,
investment banks and accounting firms. As a result of its focus on its target
markets, the Company expects this percentage to decrease in the future.
 
  As of December 31, 1996, the Company provided business services outsourcing
under approximately 50 contracts, at over 40 client office locations, most of
which are located in New York, San Francisco, Chicago, Los Angeles,
Washington, D.C. and certain other major cities in the United States. In 1996,
the Company provided information technology services to approximately 245
clients. The Company has implemented projects in offices located in many major
European and Asian financial centers.
 
SALES AND MARKETING
 
  The Company markets its services primarily through 28 account executives,
special account managers 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 is
signed between six and nine months after discussions begin with a potential
client. The sales cycle with regard to information technology 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. Targeted
telemarketing, an automated prospect database, 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, Novell, Inc. 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 LANSystems'
Research technical publication.
 
STRATEGY
 
  DESI's principal growth strategy is to become the single-source provider of
integrated information management services to the leading firms in its target
markets. Key elements of the Company's strategy include (i) increasing
penetration in its target markets; (ii) cross-selling its services to existing
clients; (iii) attracting and retaining outstanding employees; (iv) enhancing
its expertise in information management technology; and (v) selectively
acquiring businesses that strengthen service offerings or expand geographic
presence.
 
  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.
 
  .  Comprehensive Array of Service Offerings--The Company is capable of
     satisfying a client's needs for information management services for both
     paper-based and electronic information by providing staff trained to
     perform multiple functions, integrating technical and business processes
     and providing consistency across the enterprise.
 
  .  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.
 
  .  Proven Quality Driven Processes--DESI has developed proven, cost-
     effective processes for the delivery of business and information
     technology services, including a copyrighted production
 
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     management system which permits the Company to monitor the client's
     needs and the quality of services provided by tracking use, service
     levels, turnaround and efficiency.
 
  .  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 employees who
     design, implement and support computer networks and provide other
     information technology services. The Company has well-established client
     relationships with a significant number of leaders in its target
     markets. See "--Clients." The Company's record in retaining outsourcing
     clients has been excellent. The Company's information technology
     services are contracted for primarily on a project basis and generally
     result in follow-on projects and on-going support.
 
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 and
information technology 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, desktop
publishing and imaging, is fragmented with numerous competitors providing only
certain of the services. Competitors in these areas include Tascor
Incorporated in word processing and desktop publishing and Quorum Corp., Aspen
Systems Corp., Litigation Information Technologies, Lason Inc. and Arthur
Andersen LLP in imaging.
 
  The market for the Company's information technology 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 information technology 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; other national firms that do not focus on the legal market, such as
Entex Information Services, Inc., Cambridge Technology Partners, Alternative
Resources Corp., and Vanstar Corp.; and numerous regional firms, many of which
serve only their respective local markets. The Company's systems management
outsourcing services face competition from traditional mainframe outsourcing
firms such as Electronic Data Systems Corp., Computer Sciences Corp., IBM's
Integrated Systems Solutions Corporation, AT&T Solutions and MCI Systemhouse.
 
  Many participants in the business services outsourcing and information
technology services markets have significantly greater financial, technical
and marketing resources; greater name recognition; and generate greater
information technology services and outsourcing revenues than does DESI. The
Company believes, however, that
 
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its competitive strengths, including its reputation as a high-quality provider
of business services outsourcing and information technology services 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. Competition for such personnel is intense, particularly for highly
skilled and experienced technical personnel who perform the Company's
information technology services. 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, 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 both business services outsourcing and
information technology services. 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 receive 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. 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.
 
  As of December 31, 1996, the Company had approximately 935 employees.
Approximately 710 persons were dedicated to providing business services,
including approximately 655 engaged in providing on-site services to clients,
of whom approximately 600 were hourly employees. Approximately 225 persons were
dedicated to providing information technology services, including approximately
134 technical employees. Approximately 10 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.
 
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 12 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.
 
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<PAGE>
 
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.
 
  On October 1, 1996, the sole stockholder of the Company approved the
Company's 1996 Stock Incentive Plan.
 
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
                      ----                 ---              --------
      <S>                                  <C> <C>
      Rhonda I. Kochlefl..................  38 Chairman, President and Chief
                                                Executive Officer and Director
      Luke F. Botica......................  46 Senior Vice President and Chief
                                                Financial Officer
      Leo S. Spiegel......................  35 Senior Vice President and Chief
                                                Technology Officer and Director
      Linda A. Finkel.....................  37 President, Donnelley Business
                                                Services division
      Robert A. Lento.....................  35 President, LANSystems division
      David J. Shea.......................  41 President, Systems Management
                                                division
</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 1993 to January 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.
 
  Leo S. Spiegel has served as the Senior Vice President and Chief Technology
Officer of the Company since February 1996. He served as a director and the
co-founder, Chief Technology Officer and Executive Vice President of
LANSystems from May 1991 until its acquisition by R.R. Donnelley in June 1995.
From June 1989 until May 1991, he was a director and the co-founder and
Executive Vice President of Sales and Marketing of LANSystems. Prior to June
1989 he was the founder, Chairman and President of Integrated Analysis, Inc.,
which merged with LANSystems in 1989. Mr. Spiegel has been a director of the
Company since February 1996.
 
  Luke F. Botica has been Senior Vice President and Chief Financial Officer of
the Company since April 1996. From July 1995 to March 1996, he served as
Executive Vice President, Chief Financial Officer, Treasurer and Secretary of
Dames & Moore, Inc., an international engineering and professional services
company. From June 1993 to January 1995, he served as the Senior Vice
President--Finance, Chief Financial Officer, Treasurer and Secretary for
Allied Waste Industries, Inc., a solid waste management company. From
September 1990 to
 
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April 1993, he served as the Vice President--Finance, Corporate Development
and Planning for Chemical Waste Management, Inc., a hazardous waste management
company. Mr. Botica has also been a Board member of Forrest Holdings Inc., a
nonpublic company, since July 1994, and Recycling Industries, Inc., a
publically traded company, since January 1997.
 
  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 January 1995. 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 information
technology 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.
 
                                    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 17, 1997, there were approximately 18 holders of record 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, 1996.
 
<TABLE>
<CAPTION>
        FISCAL YEAR 1996                               HIGH   LOW
        ----------------                              ------ ------
        <S>                                           <C>    <C>
        Fourth Quarter
         (October 31 to December 31)................. 26 1/4 19 1/4
</TABLE>
 
  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, 1996 and balance sheet data as of December 31, 1995 and
1996 have been derived from the audited consolidated financial statements of
DESI contained herein.
 
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<PAGE>
 
Income statement data for the year ended December 31, 1993 and balance sheet
data as of December 31, 1994 have been derived from audited consolidated
financial statements not contained in this Form 10-K. Income statement data
for the year ended December 31, 1992, and balance sheet data as of December
31, 1992 and 1993 have 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 and
results of operations for the periods reflected therein. 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,
                                        ---------------------------------------
                                         1992    1993    1994   1995(1) 1996(1)
                                        ------- ------- ------- ------- -------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>     <C>     <C>     <C>     <C>
INCOME STATEMENT:
Revenues..............................  $17,985 $23,527 $34,745 $65,944 $96,464
Cost of revenues......................   14,075  18,800  27,800  53,900  76,354
                                        ------- ------- ------- ------- -------
  Gross profit........................    3,910   4,727   6,945  12,044  20,110
Selling expenses......................    1,657   1,665   2,110   5,563   9,929
General and administrative expenses...    1,648   1,333   1,540   4,866   6,995
Amortization of goodwill..............      --      --      --      295     804
Special charge........................      --      --      --      --      300
                                        ------- ------- ------- ------- -------
  Earnings from operations............      605   1,729   3,295   1,320   2,082
Interest expense......................       87     184     283     522     384
                                        ------- ------- ------- ------- -------
  Earnings before income taxes........      518   1,545   3,012     798   1,698
Income taxes..........................      248     684   1,277     495   1,073
                                        ------- ------- ------- ------- -------
  Net income .........................  $   270 $   861 $ 1,735 $   303 $   625
                                        ======= ======= ======= ======= =======
Pro forma earnings per share(2)(3)....                                  $   .12
                                                                        =======
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                        ---------------------------------------
                                         1992    1993    1994    1995    1996
                                        ------- ------- ------- ------- -------
<S>                                     <C>     <C>     <C>     <C>     <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets..........................  $ 4,758 $ 6,826 $ 9,813 $39,696 $76,176
Debt and advances due to R.R.
 Donnelley............................    1,450   2,181     191   4,672   6,455
Capital lease obligations.............    1,203   2,672   3,845   3,125   2,467
Total shareholders' equity(3).........      --      --      --   15,757  49,452
</TABLE>
--------
(1) Income statement data for the years ended December 31, 1995 and 1996
    includes the results of operations of LANSystems, which the Company
    acquired in June 1995, beginning July 1, 1995.
(2) 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.
(3) No shareholders' equity is shown as of the periods ended December 31, 1992
    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
 
                                       9
<PAGE>
 
services and information technology services. The Company has experienced
substantial growth by expanding its service offerings, adding new clients,
increasing business with its existing clients, and capitalizing on the growing
trend toward outsourcing. In 1996, the Company's revenues from business
services outsourcing and information technology services were $57.1 million
and $39.4 million, respectively. In 1995, the Company had revenues of $45.7
million from business services outsourcing and $20.3 million from information
technology services, representing six months of operations since the June 1995
acquisition of LANSystems.
 
  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, word
processing, 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 information technology services, including
systems integration, consulting and software development, since 1983. In
February 1996, the Company began providing systems management outsourcing
services.
 
  For the year ended December 31, 1994, one client accounted for approximately
15.0% of DESI's revenues. 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.
Thirteen of the contracts with business outsourcing clients expire prior to
December 31, 1997. Although most of the Company's business 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 information
technology projects, (iii) the resale of hardware or software products, (iv)
monthly fees under its system management outsourcing contracts, and (v)
monthly fees under information technology maintenance contracts. 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 labor and supplies.
System management contracts are priced on a monthly fixed fee basis, plus a
fee for overtime and additional services. The majority of the Company's other
information technology projects are priced on a fixed-fee basis, although some
work is contracted on a time-and-materials basis. Contracts for information
technology 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 client base in the investment and commercial banking markets
with four new clients in 1996. Two client service expansions combined with
increased volumes in 1996 accounted for a $7.5 million increase in revenue
during 1996 within the business services outsourcing group. Cross-selling
within the Company's existing client base resulted in two new systems
management outsourcing engagements in 1996. Information technology services
revenue growth is due in part to 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
information technology service related revenues which
 
                                      10
<PAGE>
 
typically generate a higher margin. The revenues associated with the resale of
hardware or software products, generally associated with a typical information
technology project, were 48.6% of total information technology revenues for
1996, as compared to 66.0% in 1995. The Company provides other 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. The Company's systems management
contracts are provided over multi-year terms, invoiced on a monthly basis.
 
  DESI's cost of revenues associated with business services outsourcing are
comprised of wages, supplies, equipment, research and development and start-up
costs; its cost of revenues associated with systems managements revenues are
comprised of wages, start-up costs and depreciation on fixed assets; and its
cost of revenues associated with its information technology services are
comprised of computer equipment and software, labor costs, an overhead
allocation and purchasing expenses. The Company's gross profit margins on its
information technology services are higher than those associated with its
business services outsourcing. The Company's margins on resold products are
lower than those for business and information technology services.
 
  DESI's selling expenses are comprised of sales and support salaries,
commissions, travel and entertainment and an overhead allocation related to
branch sales offices. Selling expenses as a percentage of revenues for
information technology services are significantly higher than for business
outsourcing services due to the long-term nature of DESI's business
outsourcing contracts.
 
  DESI's research and development activities, the costs of which are included
in cost of revenues and 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, although this effect historically has been
more than offset by a growth in revenues from other clients. 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.
 
 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 LAN Systems, Inc. ("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.
 
                                      11
<PAGE>
 
 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, 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 Notes 4 and 11 of Notes to the Consolidated
Financial Statements of DESI.
 
  The consolidated 1994 and 1995 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 consolidated 1996 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 has entered into certain agreements pursuant to which R.R.
Donnelley or its affiliates have 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 is charged fees and expenses for these services, but retains the right
to terminate certain services provided under the agreements upon 30 days
notice. 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 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 will be 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.
 
                                      12
<PAGE>
 
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,
                                                     --------------------------
                                                      1994     1995(1)   1996
                                                     -------  --------- -------
<S>                                                  <C>      <C>       <C>
Revenues
  Business services outsourcing.....................   100.0%     69.3%    59.1%
  Information technology............................     --       30.7     40.9
                                                     -------   -------  -------
    Total revenues..................................   100.0     100.0    100.0
Cost of revenues....................................    80.0      81.7     79.2
                                                     -------   -------  -------
    Gross profit....................................    20.0      18.3     20.8
Selling expenses....................................     6.1       8.4     10.3
General and administrative expenses.................     4.4       7.4      7.3
Amortization of goodwill............................     --        .05      0.8
Special charge......................................     --        --       0.3
                                                     -------   -------  -------
    Earnings from operations........................     9.5       2.0      2.1
Interest expense....................................     0.8       0.8      0.4
                                                     -------   -------  -------
    Earnings before income taxes....................     8.7       1.2      1.7
Income taxes........................................     3.7       0.7      1.1
                                                     -------   -------  -------
    Net income......................................     5.0%      0.5%     0.6%
                                                     =======   =======  =======
</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, 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 information
technology 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. Information technology growth resulted from
the inclusion of LANSystems for all of 1996. Revenues from information
technology 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 $76.4 million decreased as a percentage of revenues to
79.2% from 81.7% in 1995 because of an increase in the business services
outsourcing margins, offset by a decrease in the information technology
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. Information technology services margins decreased as
a result of a less than expected LANSystems revenue growth, increased
subcontracted labor and lower productivity from new hires.
 
  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 $2.1 million, or 43.8%, from
1995 and as a percentage of revenues, decreased to 7.3% in 1996 from 7.4% 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.
 
                                      13
<PAGE>
 
  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, 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.
 
 Year ended December 31, 1995 compared to year ended December 31, 1994
 
  Revenues for the year ended December 31, 1995 totaled $66.0 million, an
89.8% increase over 1994 revenues of $34.7 million. This $31.3 million
increase was comprised of a $11.0 million, or 31.5%, increase in business
services outsourcing revenues and $20.2 million in information technology
services revenues attributable to the June 1995 acquisition of LANSystems.
Business services outsourcing growth was due to a $7.6 million increase in
revenues from new clients and a $3.4 million increase in revenues from
existing clients. Revenues from information technology services were comprised
of $13.4 million from the resale of hardware and software products and $6.9
million from services.
 
  Cost of revenues of $53.9 million increased as a percentage of revenues to
81.7% from 80.0% in 1994 because of a reduction in color print volumes,
competitive pressures, start-up costs associated with new business services
outsourcing clients, geographical expansion to the western region of the
United States and higher paper prices in 1995, offset in part by the inclusion
of LANSystems.
 
  Selling expenses increased $3.5 million, or 163.7%, from 1994 and as a
percentage of revenues increased to 8.4% in 1995 from 6.1% in 1994. Selling
expenses as a percentage of revenues increased primarily due to the LANSystems
acquisition ($2.8 million), the annualization of a new office opened in 1994
and the hiring of additional sales personnel to support future revenues
growth.
 
  General and administrative expenses grew $3.3 million, or 216.0%, from 1994
and as a percentage of revenues grew to 7.4% in 1995 from 4.4% in 1994. This
increase was primarily due to the LANSystems acquisition ($2.5 million) and an
investment in personnel to support revenue growth.
 
  Amortization of goodwill was $0.3 million, compared to no such expense in
1994. The increase was due to the LANSystems acquisition.
 
  Interest expense, all of which related to capital leases, increased by $0.2
million because the Company had higher average outstanding levels of capital
lease obligations in 1995, which resulted from additional client sites.
 
  The Company's effective income tax rate increased to 62.0% in 1995 from
42.4% in 1994. The effective tax rate exceeds the U.S. federal statutory rate
due to the effect of nondeductible goodwill amortization and state taxes. The
increase in the effective tax rate in 1995 reflects the effect of
nondeductible goodwill amortization and the decrease in pretax income.
 
  Net income decreased $1.4 million, or 81.4%, to $0.3 million in 1995 as a
result of the foregoing factors.
 
                                      14
<PAGE>
 
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, 1994, 1995
and 1996, the Company factored $33.9 million, $44.8 million and $45.1 million
of receivables, respectively. Factored receivables that remain uncollected
were $14.6 million and $3.5 million at December 31, 1995 and 1996,
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 will mature in three years and will 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 will pay a commitment fee of
20 to 30 basis points per annum, depending on its fixed charge coverage ratio.
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's interest
expense will increase as the Company borrows under the Credit Facility. At
December 31, 1996, the Company was in compliance with all debt covenants and
there were no borrowings outstanding under the Credit Agreement.
 
  The Company had net usage of cash from operations of $8.4 million during the
year ended December 31, 1996, as compared to cash provided by operations of
$3.9 million in 1995. The usage in 1996 was primarily due to an increase in
receivables of $14.9 million. This increase is due to revenue growth and
because information technology clients were not invoiced for October and
November services until late December. Capital expenditures increased $3.2
million to $7.3 million in 1996 from $4.1 million in 1995, primarily due to
new client site start-ups and investment in the Company's financial and
operating management system that is being implemented. Cash was also used to
pay $9.5 million of LANSystems contingent payments. For the year ended
December 31, 1996, the Company had $33.5 million of cash provided by financing
activities, primarily from the net proceeds from the Offering, net of payments
to related party.
 
  For the year ended December 31, 1996, operating cash flow (net income plus
depreciation and amortization of $4.5 million) was $5.1 million, up from $3.8
million the prior year. 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, 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.
 
                                      15
<PAGE>
 
  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 Information Technology Projects. Most
of DESI's engagements to provide information technology 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 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 majority of the Company's information
technology projects are priced on a fixed-fee 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.
 
  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 information technology 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 information technology 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 information
technology services of the Company noncompetitive or obsolete.
 
  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.
 
                                      16
<PAGE>
 
  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, including Rhonda I.
Kochlefl, Chief Executive Officer, and Leo S. Spiegel, Chief Technology
Officer, 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 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 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.
 
                                      17
<PAGE>
 
                                   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 1997 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 1997
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 1997 Annual Meeting of Stockholders.
 
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 1997 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 1997 Annual Meeting of Stockholders.
 
                                      18
<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>
      3.1      First Amended and Restated Certificate of Incorporation of the
                Company.(1)
      3.2      By-laws of the Company.(1)
     10.1      Transition Services Agreement between the Company and R.R.
                Donnelley.(1)
     10.2      Benefit Administration Services Agreement between the Company
                and R.R. Donnelley.(1)
     10.3      Tax Allocation and Indemnification Agreement between the Company
                and R.R. Donnelley.(1)
     10.4      Employment Agreement between Rhonda I. Kochlefl and the
                Company.(1)(2)
     10.5      Employment Agreement between Leo S. Spiegel and the
                Company.(1)(2)
     10.6      Employment Agreement between Luke F. Botica and the Company.(2)
     10.7      Employment Agreement between Linda A. Finkel and the Company.(2)
     10.8      Severance Agreement between Thomas P. Bradbury and the
                Company.(1)(2)
     10.9      1996 Broad-Based Employee Stock Plan.(1)(2)
     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)
     10.13     Amended and Restated 1996 Stock Incentive Plan.(2)
     10.14     1997 Employee Stock Purchase Plan.
     11.1      Computation of Earnings Per Share of Common Stock.
     23.1      Consent of Arthur Andersen LLP.
     24.1      Powers of Attorney of Luke F. Botica, Leo S. Spiegel, Daniel I.
                Malina, Charles F. Moran and W. Ed Tyler.
     27.1      Financial Data Schedule.
</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) Indicates a management contract or compensatory plan or agreement.
(b) Reports on Form 8-K
  No Current Report on Form 8-K was filed by the Company during the fourth
  quarter of 1996.
 
(c) Exhibits
 
  See Item 14(a)3 above.
 
                                      19
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Consolidated Financial Statements of Donnelley Enterprise Solutions
 Incorporated:
  Report of Independent Public Accountants................................ F-2
  Consolidated Balance Sheets as of December 31, 1995 and 1996............ F-3
  Consolidated Income Statements for the Years Ended December 31, 1994,
   1995, and 1996......................................................... F-4
  Consolidated Statements of Changes in Shareholders' Equity for the Years
   Ended December 31, 1994, 1995, and 1996................................ F-5
  Consolidated Statements of Cash Flows for the Years Ended December 31,
   1994, 1995, and 1996................................................... 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, 1996 and 1995, 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, 1996. 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 as of December 31, 1996 and 1995, and the
results of operations and cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
 
                                          Arthur Andersen LLP
 
Chicago, Illinois,
February 21, 1997
 
                                      F-2
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1995    1996
                                                                ------- -------
<S>                                                             <C>     <C>
                            ASSETS
Current Assets:
  Cash and equivalents......................................... $   652 $ 8,910
  Accounts receivable, less allowances for doubtful accounts of
   $607 in 1995 and $460 in 1996...............................   9,674  21,228
  Unbilled receivables.........................................   1,473   4,847
  Inventories..................................................   3,574   4,144
  Prepaid expenses and other current assets....................     488   1,728
  Income tax receivable........................................   1,188   1,533
  Deferred income taxes........................................   1,222     867
                                                                ------- -------
    Total current assets.......................................  18,271  43,257
Property and equipment, net, at cost...........................   9,075  12,646
Deferred income taxes..........................................     780     --
Goodwill, net..................................................  11,511  20,213
Other noncurrent assets........................................      59      60
                                                                ------- -------
    Total assets............................................... $39,696 $76,176
                                                                ======= =======
             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Line of credit............................................... $   --  $   --
  Capital lease obligations, current portion...................   1,347   1,162
  Advances due to related party................................   4,672   6,455
  Accounts payable.............................................   6,321   7,633
  Accrued salary and benefits..................................   3,046   2,280
  Accrued other expenses.......................................   1,652   2,010
  Customer prepayments.........................................   3,538   4,434
  Deferred revenues............................................   1,332   1,134
                                                                ------- -------
    Total current liabilities..................................  21,908  25,108
                                                                ------- -------
Noncurrent Liabilities:
  Capital lease obligations....................................   1,778   1,305
  Deferred taxes...............................................     --      311
  Other noncurrent liabilities.................................     253     --
                                                                ------- -------
    Total noncurrent liabilities...............................   2,031   1,616
                                                                ------- -------
Shareholders' equity:
  Common stock--$.01 par value, 15,000,000 authorized Shares;
   3,145,000 and 5,005,000 issued and outstanding at December
   31, 1995
   and 1996, respectively......................................      31      50
  Preferred stock--$.01 par value, 1,000,000 authorized Shares;
   none issued and outstanding.................................     --      --
  Additional paid-in capital...................................  15,726  49,399
  Retained earnings............................................     --        3
                                                                ------- -------
    Total shareholders' equity.................................  15,757  49,452
                                                                ------- -------
    Total liabilities and shareholders' equity................. $39,696 $76,176
                                                                ======= =======
</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,
                                                        -----------------------
                                                         1994    1995    1996
                                                        ------- ------- -------
<S>                                                     <C>     <C>     <C>
Business services outsourcing revenues................. $34,745 $45,684 $57,048
Information technology revenues........................     --   20,260  39,416
                                                        ------- ------- -------
    Total revenues.....................................  34,745  65,944  96,464
Cost of revenues.......................................  27,800  53,900  76,354
                                                        ------- ------- -------
    Gross profit.......................................   6,945  12,044  20,110
Selling expenses.......................................   2,110   5,563   9,929
General and administrative expenses....................   1,540   4,866   6,995
Amortization of goodwill...............................     --      295     804
Special charge.........................................     --      --      300
                                                        ------- ------- -------
    Earnings from operations...........................   3,295   1,320   2,082
Interest expense, net..................................     283     522     384
                                                        ------- ------- -------
    Earnings before income taxes.......................   3,012     798   1,698
Income taxes...........................................   1,277     495   1,073
                                                        ------- ------- -------
    Net income......................................... $ 1,735 $   303 $   625
                                                        ======= ======= =======
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               TOTAL
                                       COMMON  PAID-IN   RETAINED  SHAREHOLDERS'
                                       STOCK   CAPITAL   EARNINGS     EQUITY
                                       ------ ---------- --------  -------------
<S>                                    <C>    <C>        <C>       <C>
Balance at December 31, 1993..........   --        --        --           --
  Net income..........................   --        --      1,735        1,735
  Repayments to related party.........   --        --     (1,735)      (1,735)
                                        ----   -------   -------      -------
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
                                        ====   =======   =======      =======
</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,
                                                  ---------------------------
                                                   1994      1995      1996
                                                  -------  --------  --------
<S>                                               <C>      <C>       <C>
Cash flows provided by (used in) operating
 activities:
  Net income..................................... $ 1,735  $    303  $    625
  Depreciation and amortization..................   2,297     3,446     4,492
  Amortization of goodwill.......................     --        295       804
  Net changes in assets and liabilities..........   2,653      (109)  (14,289)
                                                  -------  --------  --------
      Net cash provided by (used in) operating
       activities................................   6,685     3,935    (8,368)
                                                  -------  --------  --------
Cash flows used in investing activities:
  Capital expenditures...........................  (2,081)   (4,084)   (7,347)
  Acquisition of LANSystems by related party.....           (16,633)      --
  LANSystems contingent payments.................     --        --     (9,506)
                                                  -------  --------  --------
      Net cash used in investing activities......  (2,081)  (20,717)  (16,853)
                                                  -------  --------  --------
Cash flows (used for) provided by financing
 activities:
  Advances (to) from related parties, net........  (1,990)    4,481     1,783
  Repayments/dividend to related party...........  (1,735)     (303)   (8,622)
  Contribution of LANSystems from related party..     --     15,757       --
  Net proceeds from the initial public offering..     --        --     41,692
  Principal payments on capital leases...........    (879)   (1,301)   (1,374)
  Principal payments on borrowings...............     --     (1,200)      --
                                                  -------  --------  --------
      Net cash (used for) provided by financing
       activities................................  (4,604)   17,434    33,479
                                                  -------  --------  --------
Net increase in cash and equivalents............. $   --   $    652  $  8,258
Cash and equivalents, at beginning of period.....     --        --        652
                                                  -------  --------  --------
Cash and equivalents, at end of period........... $   --   $    652  $  8,910
                                                  =======  ========  ========
The changes in assets and liabilities, net of
 balances assumed through acquisitions, were as
 follows:
  Decrease (increase) in assets--
    Receivables, net............................. $  (964) $ (1,667) $(14,928)
    Inventories..................................     (62)      543      (570)
    Prepaid expenses and other...................      (5)      (24)   (1,240)
    Income tax receivable........................     --       (196)     (345)
    Deferred income taxes........................    (120)     (496)    1,135
    Other noncurrent assets......................     --         (3)       (1)
  Increase (decrease) in liabilities--
    Accounts payable.............................     385       671     1,312
    Accrued salary and benefits..................     368     1,081      (766)
    Accrued other expenses.......................     (43)    1,214       358
    Customer prepayments.........................   3,094       444       896
    Deferred revenues............................     --     (1,917)     (198)
    Deferred taxes...............................     --        --        311
    Other noncurrent liabilities.................     --        241      (253)
                                                  -------  --------  --------
      Net change in assets and liabilities....... $ 2,653  $   (109) $(14,289)
                                                  =======  ========  ========
Cash paid during the period for:
  Interest....................................... $   283  $    522  $    427
  Income taxes...................................     --         86       --
                                                  =======  ========  ========
Supplemental non-cash investing and financing
 activities:
  Capital leases................................. $ 2,052  $    581  $    716
                                                  =======  ========  ========
</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 accompanying
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 of 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 two general categories of services: business services
outsourcing and information technology services. 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 information
technology services include systems integration, consulting, systems
management outsourcing and software development.
 
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 outsourcing business upon rendering of service. All outsourcing contracts
are billed on a monthly basis. At December 31, 1995 and 1996, unbilled
revenues amounted to $150,000 and $71,000, respectively.
 
  Information Technology Services--For system management contracts revenues
are recognized upon rendering the services. For material information
technology 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
 
                                      F-7
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
are recorded 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, 1995 and 1996, estimated
revenue in excess of billings on uncompleted contracts amounted to $1,323,000
and $4,776,000, respectively.
 
  For all other information technology 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.
 
 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 8 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 lower.
 
 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, 1995 and 1996, was $295,000
and $1,099,000, respectively.
 
 Impairment of Long-Lived Assets
 
  The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121--"Accounting for the Impairment of Long-Lived Assets" effective January 1,
1995. In accordance with the requirements of SFAS No. 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 of 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 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 and 1996.
 
 Research and Development
 
  Research and development expenditures are charged to earnings as incurred
and amounted to $895,000, $1,274,000, and $1,206,000 for the years ended
December 31, 1994, 1995, and 1996, respectively. These costs are reflected in
the Company's consolidated statements of income as cost of revenues and
general and administrative expenses.
 
                                      F-8
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Income Taxes
 
  For the years ended December 31, 1994 and 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 will
file 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 is presented as if the Company filed a separate tax return for the
full year. 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 SFAS 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.
 
 Use of Estimates and Assumptions
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that 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. Actual results could differ from those estimates.
 
  The Company's contract revenues related to information technology projects
are recognized using the percentage of completion method. Under this method,
estimated contract revenues are recorded based on management's estimates and
assumptions (see Note 2--Information Technology Services for further
discussion). 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, 1994,
one client accounted for approximately 15% of the Company's revenues. For the
years ended December 31, 1995, no clients accounted for greater than 10% of
the Company's revenues. For the year ended December 31, 1996, one client
accounted for approximately 11% of the Company's revenues.
 
4. TRANSACTIONS WITH R. R. DONNELLEY & SONS COMPANY:
 
  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 years ended December
31, 1994, 1995 and 1996 the Company factored $33.9 million, $44.8 million and
$45.1 million of receivables to DRI, respectively. Factored receivables that
remain uncollected by DRI were $14.6 million and $3.5 million at December 31,
1995 and 1996, and are excluded from the accompanying consolidated balance
sheets.
 
                                      F-9
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  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, 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 $0.9 million, $1.9 million and $2.4 million in
the years ended December 31, 1994, 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 8.5%,
7.25% and 7.5% for the years ended December 31, 1994, 1995 and 1996,
respectively. The rate of increase in future compensation levels assumed was
4% for 1994, 1995 and 1996. The expected long-term rate of return on plan
assets was 9.5% for all three 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.
 
  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.
 
 Postretirement Medical and Life Insurance Benefits
 
  The Company's employees participated in a postretirement benefit program
sponsored by R.R. Donnelley, including those employees acquired in connection
with the acquisition of LANSystems, who began participating as of January 1,
1996. This plan provided certain postretirement medical and life insurance
benefits. The Company reimbursed R.R. Donnelley for its proportionate cost of
these programs based on an estimation of the proportionate costs attributable
to its employees. The Company recorded expense related to the reimbursement of
these costs of approximately $67,000, $101,000 and $36,000 in the years ended
December 31, 1994, 1995 and 1996, respectively. 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.
 
  On May 1, 1996, the Company terminated its participation in the R.R.
Donnelley postretirement medical and life insurance benefits plan. R.R.
Donnelley has retained all liabilities related to the plan.
 
 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 $500,000, $650,000 and $863,000 for the
 
                                     F-10
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
years ended December 31, 1994, 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 $77,000, $65,000 and $43,000 for
the years ended December 31, 1994, 1995 and 1996 respectively. The sales to
which these commissions relate approximated $5,653,000, $6,027,000, and
$3,936,000, respectively. The Company sold information technology services and
products to R.R. Donnelley. These sales approximated $955,000 and $2,038,000
for the period July 1, 1995 through December 31, 1995 and the twelve-month
period ended December 31, 1996, respectively. The receivables from R.R.
Donnelley related to these sales are reflected in the advances due to related
party discussed in Note 11.
 
 Stock Purchase Plan
 
  The Company participated in a stock purchase plan for selected managers and
key staff employees which was sponsored by R.R. Donnelley. Under the plan, the
Company was required to contribute an amount equal to 70% of participants'
contributions, of which 50% was applied to the purchase of R.R. Donnelley
common stock and 20% is paid in cash. Amounts charged to expense by the
Company for this plan were $28,600 and $135,000 for the years ended December
31, 1994 and 1995, respectively. Effective July 1, 1995, employees acquired in
connection with the acquisition of LANSystems participated in these stock
purchase plan benefits. Due to the fact that the plan terminated upon the
completion of the initial public offering, no expense was recorded for the
year ended December 31, 1996.
 
 Impact of Operating as a Stand-Alone Entity
 
  The accompanying financial statements reflect the Company's costs of doing
business, including expenses 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.
 
5. PRO FORMA 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 (in
thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                                   1995   1996
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Net income.................................................... $  303 $  625
   Pro forma earnings per share..................................   0.06   0.12
   Pro forma common shares outstanding...........................  5,005  5,005
</TABLE>
 
                                     F-11
<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,
                                                              -----------------
                                                               1995      1996
                                                              -------  --------
   <S>                                                        <C>      <C>
   Machinery and equipment................................... $10,722  $ 18,211
   Capital leases............................................   6,715     7,089
   Leasehold improvements....................................     757       541
                                                              -------  --------
     Total property and equipment............................  18,194    25,841
   Accumulated depreciation and amortization.................  (9,119)  (13,195)
                                                              -------  --------
     Net property and equipment.............................. $ 9,075  $ 12,646
                                                              =======  ========
</TABLE>
 
  Depreciation and amortization expense of property and equipment included in
the accompanying consolidated income statements was $2,297,000, $3,446,000,
and $4,492,000 for the years ended December 31, 1994, 1995, and 1996,
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 approximated $3,928,000, $6,065,000 and $8,157,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
 
  The Company leases a significant amount of equipment used at its business
services outsourcing sites. The leases are mainly accounted for as capital
leases. The gross amounts of property and equipment representing capital
leases in the accompanying consolidated balance sheets at December 31, 1995
and 1996 were approximately $6,715,000 and $7,089,000, respectively. Similar
amounts for accumulated amortization were $3,831,000 and $4,818,000,
respectively. Amortization of capital lease assets is included in depreciation
and amortization expense of property and equipment.
 
  Minimum future lease obligations at December 31, 1996, are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                              OPERATING CAPITAL
                                                               LEASES   LEASES
                                                              --------- -------
     <S>                                                      <C>       <C>
     Period ending December 31--
       1997..................................................  $1,238   $1,312
       1998..................................................   1,187      830
       1999..................................................     797      513
       2000..................................................     497      216
       2001 and thereafter...................................     536       28
                                                               ------   ------
         Total minimum payments..............................  $4,255   $2,899
                                                               ======
     Less: Amount representing interest......................             (432)
                                                                        ------
     Present value of minimum lease payments.................           $2,467
                                                                        ======
</TABLE>
 
                                     F-12
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
8. SPECIAL CHARGE:
 
  The Company recorded a charge of $300,000 in the twelve months 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 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 three
years 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. The commitment
fee for the year ended December 31, 1996 was $7,700. No borrowings were
outstanding at December 31, 1996.
 
  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 net
income for each fiscal quarter; (ii) a minimum fixed charge coverage ratio of
not less than 1.5 to 1; (iii) and 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, 1996. 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.  ADVANCES DUE TO A RELATED PARTY:
 
  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 have 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 is charged fees and expenses for these services, but retains the right
to terminate certain services provided under the agreements upon 30 days
notice. Of the approximately $6.5 million
 
                                     F-13
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
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 Transition Services Agreement terminates on December 31, 1997 for all
services other than cash management and tax. The Company has retained the
right to request an extension of the agreement beyond the termination date
provided it notifies R.R. Donnelley forty-five days in advance. The Benefit
Administration Agreement terminated on December 31, 1996.
 
12. INCOME TAXES:
 
  The components of the provision for income taxes are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    ---------------------------
                                                      1994     1995      1996
                                                    --------  -------  --------
   <S>                                              <C>       <C>      <C>
   Federal--
     Current....................................... $  1,133  $   884  $   (306)
     Deferred......................................      (87)    (478)      963
   State--
     Current.......................................      264      107       (67)
     Deferred......................................      (33)     (18)      483
                                                    --------  -------  --------
       Total provision............................. $  1,277  $   495  $  1,073
                                                    ========  =======  ========
</TABLE>
 
  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,
                                                      -------------------------
                                                       1994     1995     1996
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Federal rate......................................    34.0%    34.0%    34.0%
   State taxes.......................................     7.7     11.2     11.4
   Goodwill amortization.............................     --      11.3     13.8
   Meals and entertainment...........................     0.7      5.4      4.1
   Other.............................................     --       0.1     (0.1)
                                                      -------  -------  -------
     Effective tax rate..............................    42.4%    62.0%    63.2%
                                                      =======  =======  =======
</TABLE>
 
                                     F-14
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  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,
                                                                 ---------------
                                                                  1995    1996
                                                                 -------  ------
   <S>                                                           <C>      <C>
   Vacation liability........................................... $    50  $ 162
   Payroll and related liabilities..............................     442    136
   Allowance for doubtful accounts..............................     252    140
   Inventory....................................................     396    328
   Revenue recognition..........................................     (33)   (42)
   Miscellaneous, other.........................................     115    143
                                                                 -------  -----
     Total net current deferred tax asset.......................   1,222    867
                                                                 -------  -----
   Accumulated depreciation.....................................     573    593
   Reserves and accruals not deductible until paid..............     213     35
   LANSystems contingent payments...............................     --    (926)
   Miscellaneous, other.........................................      (6)   (13)
                                                                 -------  -----
     Total net noncurrent deferred tax asset (liability)........     780   (311)
                                                                 -------  -----
     Total...................................................... $ 2,002  $ 556
                                                                 =======  =====
</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.
 
  Taxes payable through November 4, 1996 were included in advances due to R.R.
Donnelley.
 
13. STOCK-BASED COMPENSATION PLANS
 
  The Company has two stock option plans, the 1996 Stock Incentive Plan
("Incentive Plan") and the 1996 Broad-Based Employee Stock Plan ("Broad-Based
Plan"). 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
                                                                        --------
     <S>                                                                <C>
     Net Income:
       As Reported..................................................... $625,000
       Pro Forma.......................................................  388,000
     Primary EPS:
       As Reported.....................................................    $0.12
       Pro Forma.......................................................     0.08
</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 313,550 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.
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The fair value of the options granted
upon completion of the IPO was $15.46. The assumptions used to estimate the
fair value of these grants included a risk-free interest rate of 6.2%, an
expected dividend yield of 0%, an expected life of 7 years and an expected
volatility of 53.0%.
 
                                     F-15
<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 statements were prepared to
illustrate the estimated effects of the acquisition as if it had occurred on
January 1, 1994. The pro forma adjustments are based on the available
information and upon certain assumptions the Company believes are reasonable.
The pro forma income statements do not purport to represent what the Company's
income statements would actually have been if such transaction in fact had
occurred on January 1, 1994, 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>
                                                                1994    1995
                                                               ------- -------
                                                               (IN THOUSANDS)
   <S>                                                         <C>     <C>
   Revenues................................................... $65,326 $79,545
   Cost of revenues...........................................  48,799  64,336
                                                               ------- -------
     Gross profit.............................................  16,527  15,209
   Selling expenses...........................................   6,501   7,918
   General and administrative expenses........................   4,728   7,096
   Amortization of goodwill...................................   1,065   1,065
                                                               ------- -------
     Earnings (loss) from operations..........................   4,233    (870)
   Interest expense...........................................     335     543
                                                               ------- -------
     Earnings (loss) before income taxes......................   3,898  (1,413)
   Income taxes...............................................   2,139     (63)
                                                               ------- -------
     Net income (loss)........................................ $ 1,759 $(1,350)
                                                               ======= =======
</TABLE>
 
                                     F-16
<PAGE>
 
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, 1995
  Revenues............................ $10,883  $10,225 $21,080  $23,756  $65,944
  Gross profit........................   1,480    1,551   4,200    4,813   12,044
  Net income (loss)...................      97      165    (161)     202      303
  Pro forma net income (loss) per
   share.............................. $  0.02  $  0.03 $ (0.03) $  0.04  $  0.06
                                       =======  ======= =======  =======  =======
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 net income (loss) per
   share.............................. $ (0.01) $  0.13 $  0.09  $ (0.09) $  0.12
                                       =======  ======= =======  =======  =======
</TABLE>
 
  The pro forma earnings per share calculation 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.
 
                                     F-17
<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 27,
1997.
 
                                    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(S)                   DATE
             ---------                         --------                   ----
<S>                                  <C>                           <C>
     /s/ Rhonda I. Kochlefl          Chairman, President and         March 27, 1997
____________________________________   Chief Executive Officer
         Rhonda I. Kochlefl            and Director (principal
                                       executive officer)
 
                 *                   Senior Vice President and       March 27, 1997
____________________________________   Chief Financial Officer
           Luke F. Botica              (principal financial and
                                       accounting officer)
 
                 *                   Senior Vice President and       March 27, 1997
____________________________________   Chief Technology Officer
           Leo S. Spiegel              and Director
 
                 *                   Director                        March 27, 1997
____________________________________
          Daniel I. Malina
 
                 *                   Director                        March 27, 1997
____________________________________
          Charles F. Moran
 
                 *                   Director                        March 27, 1997
____________________________________
            W. Ed Tyler
</TABLE>
 
   /s/ Rhonda I. Kochlefl
*By: __________________________
       Rhonda I. Kochlefl
        Attorney-in-Fact
<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 21, 1997. Our audit was 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 audit 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 21, 1997
 
                                      S-1
<PAGE>
 
                  DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                             DEDUCTIONS--
                                            ADDITIONS         WRITE-OFFS
                            BALANCE  -----------------------   OF TRADE   BALANCE
                            AT THE               CHARGES TO  RECEIVABLES, AT END
 ALLOWANCES FOR DOUBTFUL   BEGINNING                OTHER       NET OF      OF
         ACCOUNTS          OF PERIOD CHARGES TO  ACCOUNTS(2)  RECOVERIES  PERIOD
 -----------------------   --------- EXPENSES(1) ----------- ------------ -------
 <S>                       <C>       <C>         <C>         <C>          <C>
 For the Year Ended
  December 31, 1994......     --         --          --           --        --
 For the Year Ended
  December 31, 1995......     --        $413        $217        $ (23)     $607
 For the Year Ended
  December 31, 1996......    $607       $248         --         $(395)     $460
</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>
  3.1    First Amended and Restated Certificate of Incorporation
          of the Company.(1)
  3.2    By-laws of the Company.(1)
 10.1    Transition Services Agreement between the Company and
          R.R. Donnelley.(1)
 10.2    Benefit Administration Services Agreement between the
          Company and R.R. Donnelley.(1)
 10.3    Tax Allocation and Indemnification Agreement between the
          Company and R.R. Donnelley.(1)
 10.4    Employment Agreement between Rhonda I. Kochlefl and the
          Company.(1)(2)
 10.5    Employment Agreement between Leo S. Spiegel and the
          Company.(1)(2)
 10.6    Employment Agreement between Luke F. Botica and the
          Company.(2)
 10.7    Employment Agreement between Linda A. Finkel and the
          Company.(2)
 10.8    Severance Agreement between Thomas P. Bradbury and the
          Company.(1)(2)
 10.9    1996 Broad-Based Employee Stock Plan.(1)(2)
 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)
 10.13   Amended and Restated 1996 Stock Incentive Plan.(2)
 10.14   1997 Employee Stock Purchase Plan.
 11.1    Computation of Earnings Per Share of Common Stock.
 23.1    Consent of Arthur Andersen LLP.
 24.1    Powers of Attorney of Luke F. Botica, Leo S. Spiegel,
          Daniel I. Malina, Charles F. Moran and W. Ed Tyler.
 27.1    Financial Data Schedule.
</TABLE>
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(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) Indicates a management contract or compensatory plan or agreement.