SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-KSB

                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended August 31, 1998
                           Commission File No. 0-27664

                                 UNIDIGITAL INC.
              -----------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

          Delaware                                     13-3856672
----------------------------------      --------------------------------------
(State or Other Jurisdiction of          (I.R.S. Employer Identification No.)
 Incorporation or Organization)

229 West 28th Street, New York, New York                                 10001
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                              (Zip Code)

                                 (212) 244-7820
                          -----------------------------
                           (Issuer's Telephone Number,
                              Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                                 Name of Each Exchange
   Title of Each class                            on Which Registered
   -------------------                            -------------------

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

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


         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.01 par value

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

                                (Title of Class)


<PAGE>


     Check  whether  the Issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the Issuer was required to file such  reports),  and (2) has
been subject to such filing requirements for the past 90 days.

          Yes:        X                              No:
                   --------                             --------

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of the  Issuer's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

     Issuer's  revenues  for  its  fiscal  year  ended  August  31,  1998  were:
$47,389,000.

     The aggregate  market value of the voting and non-voting  Common Stock held
by non-affiliates of the Issuer was: $7,906,342 at October 31, 1998 based on the
last sales price on that date.

     State the number of shares  outstanding of each of the Issuer's  classes of
Common Stock, as of October 31, 1998:

Class                                                    Number of Shares
-----                                                    ----------------

Common Stock, $.01 par value                                 5,089,858


     The  following  documents  are  incorporated  by reference  into the Annual
Report on Form 10-KSB:  Portions of the Issuer's  definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders  are incorporated by reference into Part
III of this Report.

<PAGE>


                                TABLE OF CONTENTS
                                -----------------

          Item                                                              Page
          ----                                                              ----

PART I    1.   Business.................................................     1

          2.   Properties...............................................    10

          3.   Legal Proceedings........................................    10

          4.   Submission of Matters to a Vote of Security Holders......    10

PART II   5.   Market for the Company's Common Equity and Related
               Stockholder Matters......................................    11

          6.   Selected Financial Data..................................    13

          7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operation.......................    15

          7A.  Quantitative and Qualitative Disclosures About Market
               Risk.....................................................    24

          8.   Financial Statements and Supplementary Data..............    24

          9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure......................    24

PART III 10.  Directors and Executive Officers of the Company...........    25

         11.  Executive Compensation....................................    25

         12.  Security Ownership of Certain Beneficial Owners
              and Management............................................    25

         13.  Certain Relationships and Related Transactions............    25

PART IV  14.  Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K...............................................    26

SIGNATURES..............................................................    27

EXHIBIT INDEX...........................................................    29

FINANCIAL STATEMENTS....................................................    F-1



                                      -i-
<PAGE>

                                     PART I

ITEM 1.   BUSINESS.

GENERAL

     Unidigital Inc., together with its wholly-owned subsidiaries (collectively,
the "Company"),  is a leading service  business within the graphic arts industry
that provides  imaging,  reproduction and integrated media solution  services to
advertising agencies, retailers,  corporations,  marketing/communications firms,
publishers, government agencies and financial institutions in the New York City,
Boston, San Francisco and London markets. Through active cross-selling among its
four divisions,  Unison, KWIK, Elements and the Regent Group (collectively,  the
"Unidigital  Enterprise"),  the  Company,  provides  imaging,  reproductive  and
integrated  media  solutions to each of the large format,  digital  prepress and
digital printing  segments of the industry.  Cross-selling  among the Unidigital
Enterprise  offers a total solution for customers,  which the Company  believes,
creates a distinct advantage over competitors  within the marketplace.  Overall,
the Company serves a diverse client base, with the largest client accounting for
less than 4% of the Company's fiscal 1998 net sales.

ACQUISITION STRATEGY

     The Company  continues to review  opportunities  to expand its business and
markets in the large format, digital prepress and digital printing markets.

     The Company  seeks to acquire  leading  companies  in its market while also
identifying  and measuring the impact of  operational  synergies,  cross-selling
potential,  improved  efficiencies and cost savings that any future  acquisition
may have on the Company's operations as a whole. Implementing this strategy, the
Company has added new products and services and expanded  existing  ones to keep
pace with  customer  needs that are  identified  in its  business  segments.  In
addition to the Company's  continuous focus on its existing  business  segments,
the Company may seek to pursue  future  acquisitions  and  development  in other
segments of the market.

THE DIVISIONAL BRANDING STRATEGY

     The Company has implemented a divisional branding strategy to better market
the Company's  diverse  product and service  offerings.  This branding  strategy
allows for the marketing of each  division to the  respective  business  segment
that the division primarily serves, thus building brand identity and loyalty for
each  division.  Each company within a division has at their  disposal,  and are
encouraged  to sell,  any  product or  service  offered  within  the  Unidigital
Enterprise.  The broad range of  products  and  services  offered by the Company
enables  each  individual  company  to  provide  integrated  graphic  and  media
solutions  for  their   customers  while  still  keeping  each  division's  core
capabilities at the forefront.

<PAGE>

     The Company currently utilizes four divisions:

Division             Locations                         Primary Business Segments
--------             ---------                         -------------------------

Unison               New York City, Boston and         Large Format
                     San Francisco       
KWIK                 New York City                     High-End Digital Prepress
Elements             New York City, San Francisco      Digital Prepress/Digital
                     and London                        Printing

The Regent Group     London                            Digital Printing and
                                                       Financial Printing

UNISON

     Unison companies  service media companies,  corporate  clients,  retailers,
advertising  agencies  and  marketing/communications  professionals  with a wide
range of large format  printing  solutions.  Sales are  consultative  in nature,
largely project driven and are priced generally on a per project basis.

KWIK

     KWIK companies provide creative retouching and digital prepress services to
firms in the advertising,  health care and beauty industries,  including several
Fortune 500  companies.  Sales are  consultative  in nature and largely  project
driven.

ELEMENTS

     Elements  companies  provide digital prepress and digital printing products
and services primarily to graphic artists and marketing professionals who design
and prepare files for reproduction. Elements is typically open 24 hours a day, 6
days a week. Projects are priced from a published price list.

THE REGENT GROUP

     The Regent Group supplies digital printing and financial  printing services
to a diversified client base consisting of corporations,  financial institutions
and government agencies. Sales are consultative in nature and project based.

MARKETS SERVED BY THE COMPANY

     The  Company,  through its four  divisions,  currently  services  the large
format,  digital  prepress  and digital  printing  segments of the graphic  arts
industry.

LARGE FORMAT

     Large  format  services  consist of the  printing  of large  graphics  from
digital  files.  Various  technologies  and substrates are used to produce large
format  images for retail  point of purchase


                                      -2-
<PAGE>


displays,  posters,  environmental graphics,  wall murals and signage.  Industry
analysts expect this business segment to exceed $10 billion in the United States
in the year 2000.

DIGITAL PREPRESS

     The digital  prepress  segment of the  graphics  art  industry is generally
defined as the  necessary  steps  between  the  creative  process and the actual
printing of a graphic design.  Digital prepress services involve the preparation
of  images  and text  for  reproduction  by any of  several  input,  retouching,
proofing and output processes. Industry analysts expect this business segment to
exceed $5.2 billion in the United States in the year 2000.

DIGITAL PRINTING

     Digital  printing,  also  known as  "on-demand"  or  "short-run"  printing,
involves translating  computer-generated graphic design and content into a color
or black and white printed image on a digital printing press. The key advantages
of the  digital  printing  process  is  realized  in time  and cost  savings  by
replacing  traditional  color  separations,  metal  printing  plates and graphic
processes with digital technology. Industry analysts estimate that this business
segment will  generate  over $20 billion in revenues in the United States by the
year 2001.

SERVICES PROVIDED BY BUSINESS SEGMENT

LARGE FORMAT

     The Company,  primarily through the Unison division,  produces large format
graphics from digital files that are printed to various  substrates for specific
applications utilizing the latest in inkjet, electrostatic,  dye sublimation and
laser  technologies.  The  Company  believes it has  invested  in the  necessary
hardware devices and software  programs to solve the most demanding large format
graphic display demands.  Each of these devices has been specifically  chosen to
satisfy application demands in the marketplace.

     Large format graphics are produced for great advertising  impact.  They are
used for retail point of purchase displays, posters, signage, back-lit displays,
environmental  graphics  and  grand  wall  scapes  that  hang  on the  sides  of
buildings.  Very large graphics are sometimes referred to as grand format. Grand
format  sizes can be produced  to over  30,000  square feet in size by sewing or
welding together pieces of the image that are output in sections. Unison engages
technology  in pursuit of projects such as vehicle  graphics,  indoor or outdoor
large banners or event graphics.

     The  large/grand  format  business  segment is one of the  fastest  growing
business  segments in the graphic arts  industry.  The Company  believes it will
continue to acquire  businesses  and add services to its existing  facilities in
response to the increasing market demand of this business segment.

     Customers
     ---------

     Unison customers consist of media companies,  corporate clients, retailers,
advertising  agencies  and  marketing/communications  professionals,  as well as
businesses in a variety of industries

                                      -3-
<PAGE>

requiring  large  display  graphics.  Unison  receives  individual  orders  from
customers  on a  project-by-project  basis rather than under  long-term  service
contracts.  Continued  engagements for successive  jobs are dependent  primarily
upon a customer's satisfaction with the quality of previous services provided by
the division.

     Unison draws customers for its large format product from a local, regional,
national and international client base.  Customers of Unison may require:  point
of purchase  posters  printed on paper stock;  event  banners  printed on vinyl;
graphics printed on scrim material for theater productions; or images printed on
mesh installed on to the facades of buildings. Unison employees receive training
to advance their  understanding of technical devices,  and how to better service
and recognize customer needs.

     Sales and Marketing
     -------------------

     Unison  directly  sells  its  large  format  services  through  a  team  of
salespersons  lead by a  director  of  sales  in each of its  locations.  In its
operations, Unison has employed a consultative sales strategy and individualized
customer  service  that has  resulted in  long-standing  relationships  with its
customers. Unison uses various methods to market its services,  including direct
mail,  product samples,  trade shows,  promotions and internet sites.  Extensive
collateral  material on products and services offered,  testimonials of previous
projects  and "how to" sheets for file  preparation  are readily  available  for
distribution  to  customers.  The  Unison  internet  site  is a  repository  for
information on products and services, employment opportunities,  press releases,
up-coming events and industry news.

     Competition
     -----------

     Unison competes in a large format marketplace that is rapidly growing. This
industry  segment is  characterized  by many smaller  companies  often servicing
narrow market  channels such as small design firms,  local retailers and general
display markets.  The Company enjoys a competitive  advantage in the marketplace
through its ability to invest in output devices,  software and intercompany high
speed  networks  resulting  in  cost  efficiencies  to its  customers.  Unison's
expertise,  output  devices,  software and network enable the Company to produce
and  manage  large  projects  that  are  difficult  for  smaller   companies  to
administer.  Customers seek out the Company's  services and products  offered by
its  Unison  division  because  of its vast  array of  technologically  advanced
equipment,  technical  expertise,  service  orientation  and capability to solve
unique challenges associated with large format graphics.

HIGH-END DIGITAL PREPRESS AND DIGITAL PREPRESS

     The Company's Elements and KWIK divisions provide digital prepress services
to their  respective  customer bases.  While they produce similar  end-products,
Elements and KWIK each have distinct customer bases, sales methods and marketing
schemes.  Each division also faces unique competitive  forces. Both Elements and
KWIK provide a comprehensive  array of digital prepress services,  including the
input or scanning of photographic transparencies,  negatives, prints or artwork,
retouching,  imagesetting,  the production of electronic color separations,  the
production and finishing


                                      -4-
<PAGE>

of high resolution color proofs and the production of plate-ready  films.  These
services  are  the  necessary  steps  between  the  creative   process  and  the
traditional printing of a graphic design.

     The Company believes that its relationships  with customers,  many of which
are  long-standing,  and its  reputation  for quality of service are  excellent.
Continued  engagements for successive jobs are dependent primarily upon customer
satisfaction with the quality of previous services.

     The digital prepress business segment is extremely  fragmented and serviced
by numerous local and regional providers.  The Company faces competition in this
segment from digital prepress firms whose primary function is to provide digital
prepress services,  companies who provide digital prepress services along with a
variety of other digital  output  products and services and larger  corporations
who produce digital prepress  services  in-house using common desktop  equipment
and software.

     ELEMENTS

     Customers
     ---------

     Elements services  primarily  graphic artists and  marketing/communications
professionals who design and prepare files for reproduction. Customers generally
refer to a published  price list for the cost of  products  and  services.  This
price list enables clients to  cross-reference  various  turn-around  times to a
corresponding  cost  allowing  them to best  satisfy  their  budget or  deadline
requirements.

     Sales and Marketing
     -------------------

     Elements  actively markets its digital prepress services to its client base
by direct sales methods aimed at existing and potential customers.  Salespersons
and a  director  of sales  are  utilized  in each of the  division's  locations.
Various marketing methods including,  direct mail, product samples, trade shows,
promotions and internet sites, are employed to attract new customers.  Extensive
collateral  material  on  products  and  services  and "how to"  sheets for file
preparation  are  distributed  via direct mail. The Elements  internet site is a
repository  for  information  on products and services as well as its  published
price list.

     Competition
     -----------

     Elements  competes for customers by offering an extensive  array of devices
that are not generally available to design studios or in-house corporate graphic
departments.  Typical  digital  prepress  customers  prepare their own files and
generally choose a vendor for turn-around  time, price and quality  consistency.
Expertise  and  capacity in  preparing  complicated  or large  projects are also
contributing  factors  to  this  segment's  competitive  landscape.  Value-added
services,  however, are not significant in a customer's  decision-making process
when choosing a provider of digital prepress services.


                                      -5-
<PAGE>

     KWIK

     Customers
     ---------

     KWIK provides digital prepress services to firms in the advertising, health
care and beauty  industries,  including  Fortune 500  companies.  KWIK  attracts
customers by offering them creative digital retouching capabilities, an industry
reputation  for quality  digital  prepress  services and  personalized  customer
service that caters to its customers' needs.  Pricing is determined on a project
by project basis.

     Sales and Marketing
     -------------------

     KWIK   has   built   an   expansive   customer   list  by   emphasizing   a
relationship-based  sales  strategy  which  attracts  new and  retains  existing
customers.  Specifically,   customers   are   assigned   a   dedicated   account
representative  who becomes familiar with the customers  preferences,  technical
requirements and graphic standards. Public relations,  product collateral and an
internet presence fulfill KWIK's marketing objectives.

     Competition
     -----------

     KWIK and its  competitors are  consultative  in their sales  methodologies,
supply a high level of technical expertise and provide many value-added services
such as premium retouching, color correction and creative input. Competitors vie
for  many  of the  same  high  profile  clients  and  projects.  Some  of  these
competitors  are larger and have greater  financial  resources  than KWIK.  When
determining a suitable digital prepress provider to suit their needs,  customers
that  KWIK  may  service  generally  tend  to  weigh  the  following   criteria:
reputation,   capacity,   creative   expertise,   turn-around  time  and  budget
considerations.

DIGITAL PRINTING

     Digital  printing,  also  known as  "on-demand"  or  "short-run"  printing,
involves translating  computer-generated graphic design and content into a color
or black and white printed image on a digital  printing press.  The advantage of
the four color digital  printing process is realized in time and cost savings to
clients by replacing  traditional color  separations,  metal printing plates and
graphic processes with digital  technology.  The growth in this business segment
is also  fueled by demands  in the  marketplace.  Marketers  and  designers  are
becoming  increasingly  aware of the advantages that short-run  digital printing
brings them in speed to market, personalization and price values.

     The Company,  primarily  through its  Elements and Regent Group  divisions,
supplies to the marketplace a comprehensive array of digital printing devices to
the  marketplace.  Each digital  printing  press fills a particular  need in the
marketplace  and  several of the  presses  utilize  the  value-added  benefit of
personalization   software  to  address   sophisticated   marketing  challenges.
Personalization  software allows for each page of a document to be personalized,
employing  variable text or image data base  information  of known buying habits
and relevant  demographic  information to the printed page. This personalization
or targeting results in higher success and response rates for brochures,  direct
mail offers, as well as more effective presentation materials.

                                      -6-
<PAGE>

     Customers
     ---------

     While  digital  printing  is sold  across the  Unidigital  Enterprise,  the
Elements and Regent Group  consider  digital  printing a key  component to their
product and  services  mix.  Elements'  customers  primarily  consist of graphic
design  firms,  marketing  communications  departments,   advertising  agencies,
pharmaceutical  companies and individual  graphic artists.  The Company believes
that these customers,  drawn from the on-going digital prepress customer base of
Elements,  are likely to become users of digital printing  services.  The Regent
Group's client base primarily consists of corporations,  financial institutions,
insurance  companies and investment  banks. The Regent Group sells digital black
and white and four color digital  printing to its established  client roster who
often require traditional offset printing and financial typesetting services.

     Sales and Marketing
     -------------------

     Both Elements and the Regent Group sell their services through salespersons
that are led by a director of sales in each of their  respective  locations.  In
developing their digital printing businesses, Elements and the Regent Group both
market to buyers of conventional  color and black and white printing that may be
able to utilize  digital  printing to save money and time,  or realize a digital
printing benefit. Elements uses various marketing methods including direct mail,
product samples, trade shows, promotions and the internet. In addition, Elements
mails out  extensive  collateral  material on products and  services  offerings,
testimonials of previous projects and "how to" sheets for file preparation.  The
Regent Group sales,  however,  are predominantly  consultative and relationship-
based.  The Regent Group promotes new client contacts by publishing  descriptive
brochures  that  highlight  its  digital  printing  capabilities.  In  addition,
traditional  methods  of  marketing,  such as  personalized  correspondence  and
telephone  consultation,  are used to attract new clients and maintain  existing
ones.

     Competition
     -----------

     Elements and the Regent Group both confront  digital  printing  competition
from  conventional  printers which have added, or plan to add,  digital presses.
Elements  and the  Regent  Group  have  differing  customer  profiles,  which is
reflected in the varied nature of their competitors.  Elements faces competition
from digital prepress competitors and conventional  printers that have purchased
digital presses.  Elements believes that it has several  competitive  advantages
over  conventional  printers  and digital  prepress  service  providers.  First,
Elements  currently  handles a large number of relatively small jobs and has the
capability to process such small jobs on a volume basis with the proper  service
approach.  Second,  Elements has existing customers which it believes are likely
to become users of digital presses.  Lastly,  unlike certain of its competitors,
Elements presently  possesses the computer  hardware,  software and expertise to
support digital printing.

     The Regent Group faces competition from conventional and financial printers
that are  investing in digital  printing  presses.  Some of these  companies are
larger, have greater financial  resources and offer more comprehensive  services
than the Regent Group. The Regent Group,  however, uses its smaller size to more
effectively  react to customer  needs to provide  better  service to


                                      -7-
<PAGE>

this  market  than its  competitors.  The Regent  Group  also  offers the latest
digital advancements available to its growing customer base.

ANCILLARY PRODUCTS AND SERVICES

     The Company also provides ancillary  products and services  associated with
its core  services  such as  photographic  printing  and  processing,  financial
printing, interlinks and outsourcing.

PHOTOGRAPHIC PRINTING AND PROCESSING

     The   Company,   through  its  Unison   division,   operates  a  commercial
photographic  lab that  produces  traditional  photographic  printing  and photo
processing.

FINANCIAL PRINTING

     The  Regent  Group in London  provides  financial  printing  services  that
include  the  production,  formatting  and  printing  of  corporate  finance and
research documents for corporate clients.

INTERLINKS

     As a value-added  service, the Company offers a remote output service via a
high  speed  telecommunications  link  between  its New York City,  Boston,  San
Francisco and London offices,  whereby a client with computer-generated files in
one location can have  immediate  access to output at the other  location  while
maintaining consistent quality control and customer service at stable prices.

OUTSOURCING

     As many  prospective  customers  progressively  seek to preserve capital to
expand their core competencies,  and accordingly,  reduce their digital printing
requirements, increasingly they recognize the value of having a vendor that is a
single  source for printing,  finishing  and  integrated  media  solutions.  The
Company  attempts to provide these  solutions for customers by using the various
capabilities of its divisions or by partnering with outside vendors.

     The Company  believes that to remain  competitive  in each of the foregoing
business  segments  it  must  maintain   existing  customer   relationships  and
recognize,  develop and leverage new technologies and additional  services which
meet the evolving  needs of its client base.  There can be no assurance that the
Company will be able to continue to compete  successfully  with existing and new
competitors in any of the Company's markets.

NEW PRODUCT DEVELOPMENT

     The  Company  also   believes  that  it  must  develop  and  implement  new
technologies  and  additional  services  which  meet the  evolving  needs of its
customer base. The Company continually invests in technology designed to provide
media solutions  within the large format,  digital prepress and digital printing
business segments.  The Company focuses on understanding systems and the methods
available  in the  market  to create  solutions  using  off-the-shelf  products,
customized to meet a variety of customer needs.


                                      -8-
<PAGE>

GOVERNMENT REGULATION

     The industry,  while not heavily regulated,  is subject to federal,  state,
and local laws, regulations and ordinances governing the removal and handling of
hazardous  waste.  The Company  believes  it is in  compliance  in all  material
respects  with  such  laws,  regulations  and  ordinances  and  maintains  these
standards  through  internal  control  and  disposal  methods at each  location.
Hazardous  substances  resulting  from digital  prepress,  digital  printing and
photographic  processes  are  disposed of by third party  vendors in each of the
local markets in which the Company conducts its operations. To date, the cost of
compliance with such laws,  regulations and ordinances has not been material. In
the event the Company  expands its  operations,  it may be subject to additional
environmental laws, regulations or ordinances,  including requirements to obtain
certain  environmental  permits.  The Company cannot  predict the  environmental
legislation or regulations  that may be enacted in the future or how existing or
future laws or regulations  will be administered  or  interpreted.  Developments
such as additional  requirements  imposed by more stringent laws or regulations,
as well as  vigorous  enforcement  policies of  regulatory  agencies or stricter
interpretation  of existing  laws may  require  additional  expenditures  by the
Company, some or all of which may be material.

EMPLOYEES

     As of October 31, 1998, the Company employed 391 persons, approximately 381
of whom are  full-time  employees.  Of such  employees,  276 are employed in the
United  States and 115 are  employed  in the United  Kingdom.  Forty-six  of the
Company's  employees at KWIK are covered by a collective  bargaining  agreement.
The Company considers its employee relations to be satisfactory.

                                       -9-
<PAGE>


ITEM 2.  PROPERTIES.

     At August 31,  1998,  the Company  leased the office space set forth in the
following table:

                                        SQUARE       EXPIRATION
      LOCATION                          FOOTAGE         DATE           DIVISION
--------------------------------------------------------------------------------

20 West 20th Street - New York          21,800        2/28/03          Elements

Battery Park City - New York             1,500        6/30/99          Elements

229 West 28th Street - New York         43,200        2/28/09          KWIK
                                         2,800        5/31/08          KWIK

577 Second Street - San Francisco        2,900     Month to Month      Elements

451 D Street - Boston                   37,500       12/31/98          Unison

48 Margaret Street - London UK          10,300       12/31/04          Elements

Truscott House 32-42 East Road - 
London UK                                8,900        3/31/08          Regent

Pegasus House  116-120  Golden 
Lane - London UK                         3,765     Month to Month      Elements

     Additionally,  at August 31, 1998, the Company owned  approximately  34,000
square feet of office space in New York City,  which is utilized by Unison (NY).
Subsequent  to the end of the fiscal  year,  the Company  sold a portion of such
property  for  $800,000.  Subsequent  to August 31,  1998,  in  connection  with
acquisitions  of Hy Zazula  Associates,  Inc.  and Mega Art Corp.,  the  Company
acquired leased space of 9,500 square feet and 11,000 square feet, respectively,
in New York City. In connection  with the acquisition of  SuperGraphics  Holding
Company,  Inc., which was consummated subsequent to August 31, 1998, the Company
acquired  leased  space of 13,700  square  feet in  Sunnyvale,  California.  The
Company's interests in each of such leased and owned properties are subject to a
first  priority lien held by Canadian  Imperial Bank of Commerce as security for
the Company's borrowings under its credit facilities.  The Company believes that
its current  facilities are suitable and adequate for its current operations and
short-term  foreseeable needs, and that it will be able to renew these leases or
obtain  alternative space for such facilities upon the expiration of the current
leases.  Additional facilities will be required to support growth as the Company
expands into new geographic areas.

ITEM 3.  LEGAL PROCEEDINGS.

     There is no material  litigation pending to which the Company is a party or
to which any of its properties is subject.

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

     Not applicable.

                                      -10-
<PAGE>

                                     PART II

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

     Prior  to  February  1,  1996,  there  was no  established  market  for the
Company's Common Stock.  Since February 1, 1996 the Common Stock has been quoted
on the Nasdaq National Market under the symbol "UNDG."

     In the fourth quarter of fiscal 1998, the Company  received notice from The
Nasdaq  Stock  Market,  Inc.  ("Nasdaq"),  that the Company did not meet the net
tangible asset requirement  under Maintenance  Standard 1 or the market value of
public float requirement  under Maintenance  Standard 2 for continued listing on
the Nasdaq  National  Market.  The Company has made  application to the American
Stock Exchange  ("AMEX") for listing of the Common Stock on AMEX and the Company
has received verbal approval from AMEX for such listing. To date, Nasdaq has not
delisted the Common Stock. There can be no assurance,  however,  that the Common
Stock will not be delisted from the Nasdaq  National  Market or that the Company
will receive  written  approval for listing of the Common Stock on AMEX. 

     The  following  table  sets  forth  the high and low sales  prices  for the
Company's  Common  Stock for the  quarters  indicated  since  August 31, 1996 as
reported by the Nasdaq National Market. The quotes represent inter-dealer prices
without adjustments or mark-ups, mark-downs or commissions and may not represent
actual transactions.

                                                      Common Stock
     Quarter ended                                   High        Low
                                                     ----        ----

     November 30, 1996........................       $6 3/4      $4 1/8
     February 28, 1997........................       $6 1/8      $4 1/2
     May 31, 1997.............................       $5 7/8      $4 13/16
     August 31, 1997..........................       $8          $5 3/8

     November 30, 1997........................       $10 1/8     $7
     February 28, 1998........................       $8 1/2      $4 1/2
     May 31, 1998.............................       $10 3/8     $5 1/2
     August 31, 1998..........................       $9          $5 3/4

     As of October 31, 1998 the  approximate  number of holders of record of the
Common  Stock was 42 and the  approximate  number of  beneficial  holders of the
Common Stock was 400.


                                      -11-
<PAGE>

     The Company has not paid or declared  cash  dividends  on its Common  Stock
since its inception. The Company currently intends to retain any future earnings
to finance the growth of the business and, therefore, does not anticipate paying
any cash dividends in the foreseeable future. Furthermore,  the Company's credit
facility  contains a covenant which prohibits the Company from paying  dividends
or making other distributions.


                                      -12-
<PAGE>
 
     Item 6. Selected Financial Data.

     The following table sets forth selected  consolidated  historical financial
data of the Company as of the dates and for the periods indicated.  The selected
financial  data set forth  below for the  Company as of August 31, 1997 and 1998
and for each of the three  years  ended  August 31,  1998 are  derived  from the
audited financial  statements  included elsewhere herein. The selected financial
data set forth  below for the Company as of August 31,  1994,  1995 and 1996 and
for each of the  years  ended  August  31,  1994 and 1995 are  derived  from the
financial  statements  not included  elsewhere  herein.  The selected  financial
information  should  be read in  conjunction  with  the  Consolidated  Financial
Statements  and the  Notes  thereto  appearing  elsewhere  herein.  See "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations," which are included elsewhere herein.

<TABLE>
<CAPTION>
                                                                      Fiscal Year Ended August 31,
                                                          1994        1995        1996        1997        1998
                                                          ----        ----        ----        ----        ----
                                                                  (In Thousands, Except Per Share Data)

<S>                                                    <C>         <C>         <C>         <C>         <C>     
Statement of Operations Data:
Revenue:
  Net Sales                                            $  4,111    $  8,542    $ 11,660    $ 27,262    $ 47,389
Expenses:
  Cost of sales                                           1,740       3,901       5,622      14,450      25,305
  Selling, general and administrative  expenses           1,687       2,946       4,049       9,673      15,925
  Expenses incurred due to restructuring                   --          --          --          --           771
                                                       --------    --------    --------    --------    --------
  Total operating expenses                                3,427       6,847       9,671      24,123      42,001
                                                       --------    --------    --------    --------    --------
     Income from operations                                 684       1,695       1,989       3,139       5,388

Interest expense                                            (36)       (195)       (327)     (1,095)     (1,913)
Interest expense-deferred financing costs                  --          --          --          (138)     (1,143)
Interest and other income                                  --          --           232          28         (75)
                                                       --------    --------    --------    --------    --------
Income before income taxes                                  648       1,500       1,894       1,934       2,257
                                                       --------    --------    --------    --------    --------
Provision for income taxes
     (including nonrecurring  provision relating
      to termination of subchapter S status in 1996)         62         356        1064         593         978
                                                       --------    --------    --------    --------    --------
Net  income before  extraordinary item                      586       1,144         830       1,341       1,279

Extraordinary item-loss on early retirement of
      debt (net of income tax benefit of $137,000)         --          --          --          --          (143)
                                                       --------    --------    --------    --------    --------
 Net income                                            $    586    $  1,144    $    830    $  1,341    $  1,136
                                                       ========    ========    ========    ========    ========
 Basic earnings (loss) per common share(1):
    Earnings before extraordinary item                             $   0.54    $   0.31    $   0.42    $   0.36
    Extraordinary item                                     --          --          --                     (0.04)
                                                                   --------    --------    --------    --------
    Net income                                                     $   0.54    $   0.31    $   0.42    $   0.32
                                                                   ========    ========    ========    ========
 Diluted earnings (loss) per common share(1):
    Earnings before extraordinary item                             $   0.54    $   0.31    $   0.41    $   0.34
    Extraordinary item                                     --          --          --                     (0.04)
                                                                   --------    --------    --------    --------
    Net income                                                     $   0.54    $   0.31    $   0.41    $   0.30
                                                                   ========    ========    ========    ========
  Shares used to compute net income per share:
    Basic                                                             2,000       2,644       3,212       3,531
                                                                   ========    ========    ========    ========
    Diluted                                                           2,000       2,663       3,283       3,779
                                                                   ========    ========    ========    ========
Balance Sheet Data (at period end):
Working capital (deficit)                              $    517    $     22    $  2,319    $ (2,189)   $  8,897
Total assets                                              2,065       6,550      17,623      33,033      67,315
Stockholders' equity                                      1,310       2,605       7,365       9,473      14,393
</TABLE>

(1) The 1995 and 1996 net  income  per  share are pro  forma  amounts  that give
effect to the  historical  combined  results of operations  adjusted for (i) the
reduced  level of salaries  paid to the  principal  stockholder/officer  and the
former  partner  ($319,000  (1995) and  $73,000  (1996)) and (ii) the income tax
effect of Elements  (NY)  changing  from  Subchapter  S status,  as if these had
occurred effective September 1, 1995 ($741,000 (1995) and $795,000 (1996)).


                                      -14-
<PAGE>

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

GENERAL

     The Company is a leading  provider of imaging,  reproduction and integrated
media  solution  services  to  advertising  agencies,  retailers,  corporations,
marketing/communications  firms,  publishers,  government agencies and financial
institutions  in the New York City,  Boston,  San Francisco and London  markets.
Through  active  cross-selling  among the  Unidigital  Enterprise,  the  Company
provides  imaging,  reproductive  and integrated  media solutions to each of the
large format,  digital prepress and digital  printing  segments of the industry.
Cross-selling among the Unidigital  Enterprise offers a total media solution for
customers,  which the  Company  believes,  creates  a  distinct  advantage  over
competitors within the marketplace.

     The statements  contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking  statements (as such term is defined in the
Private  Securities  Litigation  Reform  Act of 1995)  that  involve  risks  and
uncertainties. Such forward-looking statements may be identified by, among other
things,  the use of forward-looking  terminology such as "believes,"  "expects,"
"may,"  "will,"  "should"  or  "anticipates"  or the  negative  thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve  risks  and  uncertainties.  From  time  to  time,  the  Company  or its
representatives have made or may make forward-looking  statements,  orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission (the "SEC"), or press
releases  or oral  statements  made by or with  the  approval  of an  authorized
executive  officer of the Company.  These  forward-looking  statements,  such as
statements regarding  anticipated future revenues,  capital  expenditures,  Year
2000 compliance and other statements  regarding  matters that are not historical
facts,  involve  predictions.  The  Company's  actual  results,  performance  or
achievements  could differ  materially from the results expressed in, or implied
by, these  forward-looking  statements.  Potential risks and uncertainties  that
could affect the Company's future operating results include, but are not limited
to:  (i)  economic  conditions,  including  economic  conditions  related to the
digital print  industry;  (ii) the  availability of equipment from the Company's
vendors at current  prices and  levels;  (iii) the  intense  competition  in the
markets for the Company's  products and services;  (iv) the Company's ability to
integrate acquired companies and businesses in a cost-effective  manner; (v) the
Company's ability to effectively  implement its branding strategy;  and (vi) the
Company's ability to develop,  market, provide, and achieve market acceptance of
new service offerings to new and existing clients.

RESULTS OF OPERATIONS

     The consolidated  financial  information includes both the Company's United
States  operations  and its United  Kingdom  operations.  On August 9, 1996, the
Company  acquired  substantially  all of the assets of  Cardinal  Communications
Group,  Inc.  and its  affiliate  C-Max  Graphics,  Inc.,  a New York City based
company  which  provides  digital  prepress,  digital  printing and large format
services in the New York  metropolitan area (the "Cardinal  Acquisition").  As a
result of such  acquisition,  the  Company  expanded  its digital  prepress  and
digital print operations


                                      -15-
<PAGE>

in the New York  City and  surrounding  area.  On April  4,  1997,  the  Company
acquired  substantially all of the assets of Boris Image Group,  Inc., a Boston,
Massachusetts  based  company  which  principally  engaged  in the  business  of
photographic, large format and digital imaging (the "Boris Acquisition"). On May
22, 1997, the Company  acquired all of the capital stock of Libra City Corporate
Printing Limited,  a London-based  financial  printer (the "Libra  Acquisition")
and, as a result,  currently  provides financial printing services to the London
financial community.  On March 25, 1998, the Company acquired  substantially all
of the assets of Kwik International Color, Ltd. (the "Kwik  Acquisition").  As a
result of such  acquisition  the Company has expanded its color  separation  and
large format printing  services in the New York City and surrounding  area. Such
acquisitions  have been  accounted  for under the purchase  method of accounting
and, therefore, results of operations from such acquisitions are included in the
Company's  consolidated  financial  statements  from the date of the  respective
acquisition.

     For a discussion of the operating  performance  of the Company by segments,
see  Note 14 of the  Notes to the  Consolidated  Financial  Statements  included
elsewhere in this Form 10-KSB.

     COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997

     Net sales. Net sales for the fiscal year ended August 31, 1998 increased by
74%, or $20,127,000, to $47,389,000  from $27,262,000  for the fiscal year ended
August 31, 1997. Net sales for the Company's United States operations  increased
by 93%, or  $15,233,000,  from  $16,293,000  in the fiscal year ended August 31,
1997 to $31,526,000 in the fiscal year ended August 31, 1998.  This increase was
attributable  primarily  to an  increase  in net sales  resulting  from the Kwik
Acquisition  and, to a lesser extent,  an increase in net sales in the Company's
other United States  subsidiaries  and the inclusion of net sales resulting from
the Boris  Acquisition  for a full  year.  Net sales  for the  Company's  United
Kingdom  operations  increased by 45%, or  $4,894,000,  from  $10,969,000 in the
fiscal year ended August 31, 1997 to $15,863,000 in the fiscal year ended August
31, 1998.  This  increase was  attributable  primarily to inclusion of net sales
resulting from the Libra  Acquisition for a full year and internal growth in the
Company's UK operations.

     COST OF SALES.  Cost of sales for the  fiscal  year ended  August 31,  1998
increased by 75%, or $10,855,000, to $25,305,000 from $14,450,000 for the fiscal
year ended August 31, 1997 and 1998. As a percentage of net sales, cost of sales
remained  constant at 53% for the fiscal  years ended  August 31, 1997 and 1998.
Cost  of  sales  for the  Company's  United  States  operations  decreased  as a
percentage  of net sales from 48% for the fiscal  year ended  August 31, 1997 to
43% for the fiscal year ended August 31, 1998.  Such  decrease was  attributable
primarily to the change in product mix in the Company's United States operations
to include  more digital  prepress  services.  Costs of sales for the  Company's
United  Kingdom  operations  increased as a percentage of net sales from 61% for
the fiscal year ended  August 31,  1997 to 63% for the fiscal year ended  August
31, 1998. Such increase was attributable  primarily to the change in product mix
in the  Company's  United  Kingdom  operations to include more digital print and
financial print services. Digital print and financial print services have higher
costs of sales compared to digital prepress services.


                                      -16-
<PAGE>

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses ("SG&A") increased 65%, or $6,252,000,  from $9,673,000
for the fiscal  year ended  August 31, 1997 to  $15,925,000  for the fiscal year
ended August 31, 1998. Such increase was attributable primarily to the increased
level of operations  resulting from the Kwik Acquisition,  the Boris Acquisition
and the Libra  Acquisition  and, to a lesser  extent,  the hiring of  additional
management and  administrative  personnel and costs  associated with the Company
acquisitions. As a percentage of net sales, SG&A decreased slightly from 35% for
the fiscal year ended  August 31,  1997 to 34% for the fiscal year ended  August
31, 1998.

     RESTRUCTURING  EXPENSES.  In  connection  with  the Kwik  Acquisition,  the
Company has  consolidated  its New York  operations.  In  addition,  the Company
reduced the staff providing  financial  printing  services in its United Kingdom
operations.  As a result of such consolidation and staff reduction,  the Company
incurred  restructuring  expenses  of  $771,000,   consisting  of  approximately
$305,000 of  termination  benefits  relating to the  termination of 35 employees
providing  similar services and  approximately  $466,000 of facility exit costs,
including  $90,000 related to write-downs of leasehold  improvements.  At August
31, 1998, all termination  benefits have been paid and approximately  $78,000 of
accrued facility exit costs remain in accounts payable.

     INCOME FROM  OPERATIONS.  Income from  operations for the fiscal year ended
August 31, 1998  increased by 72%, or $2,249,000,  to $5,388,00 from  $3,139,000
for the fiscal  year ended  August 31,  1997.  Of this  amount,  $4,514,000  was
contributed  by the  Company's  United  States  operations  and  $874,000 by the
Company's  United  Kingdom  operations.  This increase  resulted from higher net
sales offset,  in part, by higher  production costs associated with the changing
product  mix of the  Company's  operations  to include  more  digital  print and
financial print services.

     NET INTEREST EXPENSE. Net interest expense for the fiscal year ended August
31, 1998 increased by 60%, or $1,926,000,  to $3,131,000 from $1,205,000 for the
fiscal  year ended  August 31,  1997.  This  increase  resulted  from  increased
borrowings  under the  Company's  credit  facilities  primarily  relating to its
acquisitions.

     INCOME  TAXES.  Income  taxes for the  fiscal  year ended  August 31,  1998
increased by 65%, or  $385,000,  to $978,000  from  $593,000 for the fiscal year
ended August 31, 1997.

    EXTRAORDINARY  ITEM.  In  connection  with the  prepayment of $4,000,000 of
loans from private  investors,  the Company  recorded an  extraordinary  loss of
$143,000,  net of income tax benefit of  $137,000  related to the  write-off  of
deferred financing costs.

     NET INCOME.  As a result of the factors described above, net income for the
fiscal year ended August 31, 1998  decreased by 15%, or $205,000,  to $1,136,000
from $1,341,000 for the fiscal year ended August 31, 1997.

     COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 1997 AND AUGUST 31, 1996

     NET SALES. Net sales for the fiscal year ended August 31, 1997 increased by
134%, or $15,602,000,  to $27,262,000 from $11,660,000 for the fiscal year ended
August 31, 1996. Net sales for the Company's United States operations  increased
by 193%,  or  $10,732,000,  from  $5,561,000 in the fiscal year ended August 31,
1996 to $16,293,000 in the fiscal year ended August 31, 1997.  This increase was
attributable  primarily to an increase in net sales  resulting from the Cardinal
Acquisition, the Boris Acquisition and, to a lesser extent, the inclusion of net

                                      -17-
<PAGE>

sales from the San  Francisco  operations  for the fiscal year ended  August 31,
1997. Net sales for the Company's United Kingdom operations increased by 80%, or
$4,870,000,  from  $6,099,000  in the  fiscal  year  ended  August  31,  1996 to
$10,969,000  in the  fiscal  year ended  August  31,  1997.  This  increase  was
attributable primarily to increases in the Company's short-run digital print and
prepress  operations  and,  to a  lesser  extent,  the  inclusion  of net  sales
resulting from the Libra Acquisition.

     COST OF SALES.  Cost of sales for the  fiscal  year ended  August 31,  1997
increased by 157%, or $8,828,000,  to $14,450,000 from $5,622,000 for the fiscal
year  ended  August  31,  1996.  As a  percentage  of net  sales,  cost of sales
increased  from 48% for the  fiscal  year ended  August 31,  1996 to 53% for the
fiscal year ended August 31, 1997. Cost of sales for the Company's United States
operations  increased as a percentage  of net sales from 44% for the fiscal year
ended  August 31, 1996 to 48% for the fiscal year ended  August 31,  1997.  Such
increase was  attributable  primarily to higher costs  associated with increased
digital print and large format services  provided by the Company's United States
operations. Costs of sales for the Company's United Kingdom operations increased
as a percentage  of net sales from 52% for the fiscal year ended August 31, 1996
to 61% for the fiscal year ended August 31, 1997. Such increase was attributable
primarily  to  the  change  in  product  mix  in the  Company's  United  Kingdom
operations to include more digital print and financial print  services.  Digital
print and  financial  print  services  have  higher  costs  compared  to digital
prepress services.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative expenses ("SG&A") increased 139%, or $5,624,000,  from $4,049,000
for the fiscal  year ended  August 31,  1996 to  $9,673,000  for the fiscal year
ended August 31, 1997. Such increase was attributable primarily to the increased
level of  operations  which  resulted from the Cardinal  Acquisition,  the Boris
Acquisition and the Libra Acquisition,  the hiring of additional  management and
administrative  personnel,  costs associated with the Company's acquisitions and
the Company's  status as a publicly held company.  As a percentage of net sales,
SG&A  remained  constant at 35% for the fiscal  years ended  August 31, 1996 and
1997.

     INCOME FROM  OPERATIONS.  Income from  operations for the fiscal year ended
August 31, 1997 increased 58%, or $1,150,000,  to $3,139,000  from 1,989,000 for
the  fiscal  year  ended  August  31,  1996.  Of  this  amount,  $1,200,000  was
contributed  by the Company's  United States  operations  and  $1,939,000 by the
Company's  United  Kingdom  operations.  This increase  resulted from higher net
sales offset by higher production costs associated with the changing product mix
of the Company's  operations  to include more digital print and financial  print
services.

     NET INTEREST EXPENSE. Net interest expense for the fiscal year ended August
31, 1997 increased by $1,110,000, to $1,205,000 from $95,000 for the fiscal year
ended August 31, 1996. This increase  resulted from increased  borrowings  under
the Company's  credit  facilities  and capital  leases assumed by the Company as
part  of  the  Cardinal  Acquisition,   the  Boris  Acquisition  and  the  Libra
Acquisition.

     INCOME  TAXES.  Income  taxes for the  fiscal  year ended  August 31,  1997
decreased by 44%, or $471,000,  to $593,000 from  $1,064,000 for the fiscal year
ended August 31, 1996. The

                                      -18-
<PAGE>

Company currently pays Federal, state and local income tax for its United States
operations  where it previously paid only local  corporate  income tax on United
States  operations  through  January  1996  as a  result  of  its  Subchapter  S
corporation status. As a result of the termination of the Company's Subchapter S
corporation status in February 1996, the Company recorded a nonrecurring  charge
to operations  and  liability of $367,000 for  additional  deferred  Federal and
state income taxes on temporary  differences in the  recognition of revenues and
expenses  for income tax and  financial  reporting  purposes  in the fiscal year
ended August 31, 1996.

     NET INCOME.  As a result of the factors described above, net income for the
fiscal year ended August 31, 1997  increased by 62%, or $511,000,  to $1,341,000
from $830,000 for the fiscal year ended August 31, 1996.

LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS

     CASH FLOW.  Net cash used in operations  was $1,498,000 for the fiscal year
ended  August 31,  1998.  Net cash  provided  by  operations  was  $489,000  and
$1,488,000  for the fiscal years ended  August 31, 1997 and 1996,  respectively.
Net cash used in investing  activities  was  $23,363,000  and $6,897,000 for the
fiscal  years ended  August 31, 1998 and 1997,  respectively.  The Company  used
$1,571,000 and $1,368,000 for the  acquisition of property and equipment  during
such  respective  periods.  For the fiscal years ended August 31, 1998 and 1997,
the  Company   acquired   equipment  under  capital  leases  of  $1,797,000  and
$1,711,000,  respectively,  and made payments under capital leases of $2,691,000
and $1,761,000,  respectively. Net bank borrowings provided funds of $24,620,000
and   $7,443,000   for  the  fiscal  years  ended  August  31,  1998  and  1997,
respectively.  Subsequent  to the end of the fiscal  year,  the  Company  sold a
portion of real property owned by it for $800,000.

     BANK  CREDIT  FACILITIES.  The  Company  has  borrowing  arrangements  with
commercial  banks in both New York and London.  On March 24,  1998,  the Company
terminated  its financing  facilities  with its former New York bank and entered
into borrowing  arrangements  with its current New York bank (the "Bank") in the
aggregate amount of $40,000,000,  which consist of a: (i) $25,000,000 term loan;
(ii)  $10,000,000  revolving  line of credit  facility  which is  available  for
working  capital  purposes;  and  (iii)  $5,000,000  credit  facility  which  is
available for corporate acquisition purposes.  Such borrowings are guaranteed by
the Company's United States subsidiaries, including subsidiaries currently owned
and subsequently  acquired.  In addition,  the Company pledged all of its equity
interests in its United States subsidiaries,  including  subsidiaries  currently
owned and  subsequently  acquired, and two-thirds of its equity interests in its
wholly-owned United Kingdom subsidiary as collateral for such credit facilities.
Interest under such credit  facilities is, at the Company's  option, at the Base
Rate or at the  Eurodollar  Rate,  as defined,  plus an  Applicable  Margin,  as
defined, ranging from 0.75% to 3.0% depending on the Company's consolidated debt
to earnings  ratio and the type of loan. As of August 31, 1998,  the Company had
an outstanding  balance of $25,000,000  under the term loan and $8,435,000 under
the revolving credit facility.  A portion of the proceeds of such loans was used
to repay in full promissory  notes  previously  issued by the Company in 1997 to
certain private  investors in the aggregate  principal amount of $4,000,000.  In
connection  therewith,  the Company recorded an extraordinary  loss of $143,000,
net of income tax  benefit of  $137,000  related to the  write-off  of  deferred
financing costs.

     The credit  facilities  contain  covenants  which  require  the  Company to
maintain certain earnings and debt to earnings ratio  requirements  based on the
combined  operations of the Company and its subsidiaries.  The credit facilities
are secured by a first priority lien on all of the

                                      -19-
<PAGE>


assets of the Company and its  subsidiaries,  including  subsidiaries  currently
owned and  subsequently  acquired.  The Company,  the Bank and Richard J. Sirota
("Sirota"),  the  sole  shareholder  of  Kwik,  entered  into  an  intercreditor
subordination  agreement  with  respect  to the  Bank's  and  Sirota's  relative
interests in the Company.  The Company's  agreement  with the Bank restricts the
Company's ability to pay dividends.

     Subsequent to August 31, 1998, in order to consummate the acquisition  (the
"Zazula  Acquisition")  of Hy Zazula  Associates,  Inc., a New York  corporation
("Zazula"),  the Company  amended its credit  facility with the Bank to increase
its  revolving  line of credit from  $10,000,000  to  $15,000,000.  In addition,
subsequent  to August 31, 1998,  in order to  consummate  the  acquisition  (the
"SuperGraphics  Acquisition") of SuperGraphics Holding Company, Inc., a Delaware
corporation  ("SuperGraphics"),  the Company further amended its credit facility
with the Bank to increase its term loan from  $25,000,000 to  $32,000,000.  As a
result of the foregoing  amendments,  the Company's  aggregate credit facilities
with the Bank increased from $40,000,000 to $52,000,000.

    Subsequent  to the end of the fiscal year,  in November  1998,  the Company
borrowed a principal amount of $10,000,000 pursuant to a subordinated  unsecured
loan (the "Subordinated  Loan"). The Subordinated Loan matures on March 31, 2004
and bears  interest at a rate per annum equal to the sum of (i) 12.50% plus (ii)
an additional  percentage  amount equal to 0.25% commencing on November 30, 1999
and increasing by 0.25% following the last day of each 90-day period thereafter.
Until  November  30, 1999,  at the option of the lender,  interest is payable in
additional  notes,  Common  Stock of the Company or warrants to purchase  Common
Stock of the Company. Thereafter, interest is payable in either additional notes
or cash,  depending on certain coverage ratios and, in the case of cash interest
payments, the approval of the Bank. The Company will incur an additional premium
of 5.0% on any prepayments of the  Subordinated  Loan made prior to November 30,
1999. Such additional premium will be reduced by 100 basis points on December 1,
1999 and shall be reduced by such amount on each December 1st  thereafter  until
December 1, 2003. In connection with the  Subordinated  Loan, the Company issued
ten-year  warrants to the lender to  purchase  440,000  shares of the  Company's
Common Stock at an exercise  price not to exceed  $5.00 per share.  In the event
the  Company  has not paid

                                      -20-
<PAGE>

the  loan in full  by  November  30,  1999  (subject  to  extension  in  certain
instances),  the Company will issue ten-year  warrants to the lender to purchase
an additional  200,000 shares of the Company's Common Stock at an exercise price
not to exceed $5.00 per share. In the event the  Subordinated  Loan has not been
paid in full by May 31,  2001,  the  exercise  price of such  warrants  shall be
reduced by $1.00 per share and, on each  anniversary of such date, such exercise
price shall be reduced by an additional $1.00 per share. In addition, subject to
certain limitations, the Company granted registration rights, including "demand"
registration rights, to such lender.

     The  Company's  credit  facility with its London bank provides for combined
lines of credit  of  (pound)2,300,000  (approximately  $3,800,000)  for  working
capital for its United Kingdom  operations.  Such credit  facility was increased
from (pound)1,400,000 (approximately $2,338,000) on May 13, 1998. These lines of
credit renew  annually and bear  interest at 2.0% over the bank's Base Rate,  as
defined.  In addition,  the Company is required to pay a service charge equal to
0.2% of invoice value. These lines of credit contain covenants which require the
Company's  United  Kingdom  subsidiaries  to  maintain  a  minimum  net worth of
(pound)500,000,  limit borrowings up to specified amounts of accounts receivable
aged 120 days or less and are guaranteed by the Company for the principal amount
of up to (pound)500,000. Amounts outstanding are collateralized by substantially
all of the Company's  United Kingdom assets.  As of August 31, 1998, the Company
had an outstanding balance of (pound)1,275,000  (approximately $2,129,000) under
its United Kingdom credit facility.

    In connection with its acquisition of certain of the assets (the "Five Star
Acquisition") of Five Star Finishers,  Ltd., a United Kingdom corporation ("Five
Star"),  the  Company  entered  into a  three-year  term loan of  (pound)400,000
(approximately  $668,000) with its London bank. Such term loan bears interest at
2.4% over the bank's Base Rate, as defined, and contains covenants which require
the Company to maintain certain debt to earnings ratios and Net Tangible Assets,
as defined,  and limits borrowings to 75% of Net Tangible Assets.  The Company's
obligations   under  the  term  loan  are   guaranteed  by  its  United  Kingdom
subsidiaries.  As of August 31, 1998, the Company had an outstanding  balance of
(pound)389,000 (approximately $650,000) under the term loan.

     As of August 31, 1998, the Company was not in compliance  with one covenant
relating to capital  expenditures  under its credit facilities with its New York
bank, but received a waiver from such bank for such noncompliance.

     The Company  expects that cash flow from  operations  will be sufficient to
fund its capital lease obligations,  debt service payments, potential earn-outs,
capital  expenditures  and  operations  for at least 12 months.  The Company may
require additional  financing to consummate future  acquisitions or to repay its
bank loans.  There can be no  assurance  that the Company will be able to secure
such additional financing on terms favorable to the Company.

     WORKING  CAPITAL.  The  Company's  working  capital at August 31,  1998 was
$8,897,000  compared to a working  capital  deficit of  $2,189,000 at August 31,
1997.

                                       21
<PAGE>

     ACQUISITIONS.   In  March  1998,  the  Company,  through  its  wholly-owned
subsidiary,  Unison (NY),  consummated the Kwik Acquisition.  The purchase price
included  cash  payments  of  $20,590,000,   issuance  of  a  5.7%  subordinated
promissory  note in the  principal  amount of  $750,000  (payable  in 36 monthly
installments   commencing  April  15,  1998),  issuance  of  649,841  shares  of
restricted  Common  Stock of the Company  and the  assumption  of certain  trade
obligations  of Kwik.  Of the  purchase  price,  $1,000,000  in cash and 190,589
shares of  restricted  Common Stock of the Company is being held in escrow for a
period of two years to satisfy any  indemnification  claims.  The Company funded
the cash portion of the purchase price from proceeds of a $25,000,000  term loan
and a portion of a $10,000,000 revolving credit loan from the Bank.

     In July 1998, the Company  consummated the Five Star Acquisition in London,
England.  The  purchase  price  exclusively  consisted  of  a  cash  payment  of
(pound)325,000  (approximately $543,000). The Company funded the cash payment of
the purchase price from proceeds of a  (pound)400,000  term note from its United
Kingdom bank.

     Subsequent  to the end of the fiscal year, in September  1998,  the Company
acquired all of the issued and outstanding  capital stock of Mega Art located in
New York City.  As a result,  Mega Art became a  wholly-owned  subsidiary of the
Company.  The purchase  price included an initial cash payment of $5,800,000 and
the  issuance  of  754,148  shares of  restricted  Common  Stock of the  Company
($5,000,000).  In addition,  the purchase price includes a deferred cash payment
of  $1,200,000  (the  "Deferred  Payment"),  payable 180 calendar days after the
closing date, and an earn-out payment of up to $1,200,000 in cash and $1,200,000
in Common Stock of the Company (the  "Earn-Out  Payment"),  payable on or before
November 29, 1999.  Each of the  Deferred  Payment and the Earn-Out  Payment are
subject  to  adjustment  based on the  financial  performance  of Mega  Art.  In
addition,  the  Deferred  Payment and the  Earn-Out  Payment may also be used to
satisfy any  indemnification  claims. The Company funded the cash portion of the
purchase price from proceeds of a $5,000,000 acquisition loan and a portion of a
$10,000,000 revolving credit loan from the Bank.

     Subsequent  to the end of the fiscal  year,  in October  1998,  the Company
consummated  the Zazula  Acquisition.  The purchase  price included an aggregate
cash  payment of  $2,275,000  and the issuance of 433,076  shares of  restricted
Common Stock of the Company  ($2,275,000).  Of the purchase  price,  $150,000 in
cash and 28,552 shares of  restricted  Common Stock of the Company is being held
in escrow for a period of two years to satisfy any  indemnification  claims. The
Company funded the cash portion of the purchase price from proceeds of a portion
of a $15,000,000 revolving credit loan from the Bank.

    Subsequent  to the end of the fiscal year,  in November  1998,  the Company
consummated the  SuperGraphics  Acquisition.  The purchase price included a cash
payment  of  approximately  $15,900,000,  the  issuance  of  135,393  shares  of
restricted Common Stock of the Company (approximately $600,000) and the issuance
of five-year  warrants to purchase  225,000 shares of the Company's Common Stock
at an exercise  price of $5.64 per share.  The  purchase  price also  includes a
deferred cash payment equal to the  difference  between (i) EBITDA,  as defined,
multiplied by six and (ii) $16,500,000.  Such deferred cash payment,  if any, is
payable  no  later  

                                      -22-
<PAGE>

than March 15, 1999. In addition,  subject to certain  limitations,  the Company
granted "piggyback" registration rights to the sellers of SuperGraphics.  Of the
purchase price,  approximately $233,000 in cash and 135,393 shares of restricted
Common  Stock of the Company is being held in escrow for a period of one year to
satisfy any  indemnification  claims. The Company funded the cash portion of the
purchase  price from proceeds of (i) a portion of a  $32,000,000  term loan from
the Bank and (ii) the Subordinated Loan.

     INFLATION,   FOREIGN  CURRENCY  FLUCTUATIONS  AND  INTEREST  RATE  CHANGES.
Although the Company cannot  accurately  determine the precise effect thereof on
its operations, it does not believe inflation, currency fluctuations or interest
rate  changes have  historically  had a material  effect on  revenues,  sales or
results of operations.  Inflation, currency fluctuations and changes in interest
rates have,  however, at various times, had significant effects on the economies
of the United  States  and the United  Kingdom  and could  adversely  impact the
Company's revenues, sales and results of operations in the future. If there is a
material adverse change in the  relationship  between the Pound Sterling and the
United  States  Dollar,  such change could  adversely  affect the results of the
Company's  United  Kingdom  operations as reflected in the  Company's  financial
statements.  The  Company  has not  hedged  its  exposure  with  respect to this
currency  risk,  and does not expect to do so in the  future,  since it does not
believe that it is practicable for it to do so at a reasonable cost.

YEAR 2000 COMPLIANCE

     The  Company  believes  that it has  sufficiently  assessed  its  state  of
readiness with respect to its Year 2000 compliance. The Company has developed or
is  developing  a program to address  on a timely  basis the risk that  computer
applications developed,  marketed, sold and delivered or used by the Company may
be unable to recognize and properly perform  date-sensitive  functions involving
dates  prior to and after  December  31,  1999 (the  "Year 2000  Problem").  The
Company  does not  believe  that Year 2000  compliance  will  result in material
investments by the Company,  nor does the Company  anticipate that the Year 2000
Problem will have any adverse  effects on the business  operations  or financial
performance  of the  Company.  The  Company  does  not  believe  that it has any
material  exposure to the Year 2000 Problem with respect to its own  information
systems. There can be no assurance, however, that the Year 2000 Problem will not
adversely  affect  the  Company's  business,  operating  results  and  financial
condition.

     The Company  believes  that each of its  products  is Year 2000  compliant,
however,  it has no control over  whether  software  modification  made by third
parties or the combination of its products with the software  developed by third
parties and combined  with the Company's  products will be Year 2000  compliant.
Additionally,  there  can be no  assurance  that  such  potential  instances  of
non-compliance  will not  adversely  affect the  Company's  business,  operating
results and  financial  condition.  The Company has  established  no reserve for
auditing its software  products or for correcting  Year 2000  compliance  issues
with such products.

     Although the Company  believes its  products are Year 2000  compliant,  the
purchasing  patterns of customers  and  potential  customers  may be affected by
issues  associated with the Year 2000 Problem.  As companies expend  significant
resources to correct their current data storage

                                      -23-
<PAGE>

solutions,  these  expenditures may result in reduced funds to purchase products
as those  offered by the Company.  There can be no assurance  that the Year 2000
Problem will not adversely affect the Company's business,  operating results and
financial condition. Conversely, the Year 2000 Problem may cause other companies
to accelerate purchases,  thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for the Company's products.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The financial  statements  required to be filed pursuant to this Item 8 are
included  in  this  Annual  Report  on  Form  10-KSB.  A list  of the  financial
statements  filed herewith is found at "Item 14. Exhibits,  Financial  Statement
Schedules, and Reports on Form 8-K."

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

     Not applicable.

                                      -24-
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The information relating to the Company's directors,  nominees for election
as directors and executive  officers under the headings  "Election of Directors"
and "Executive  Officers" in the Company's  definitive  proxy  statement for the
1999 Annual Meeting of Stockholders is incorporated  herein by reference to such
proxy statement.

ITEM 11. EXECUTIVE COMPENSATION.

     The discussion under the heading "Executive  Compensation" in the Company's
definitive  proxy  statement  for the 1999  Annual  Meeting of  Stockholders  is
incorporated herein by reference to such proxy statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and Management" in the Company's  definitive proxy statement for the 1999
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  discussion  under  the  heading  "Certain  Relationships  and  Related
Transactions"  in the Company's  definitive  proxy statement for the 1999 Annual
Meeting  of  Stockholders  is  incorporated  herein by  reference  to such proxy
statement.


                                      -25-
<PAGE>

                                     PART IV

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

     (a)  (1) Financial Statements.

          Reference is made to the Index to Financial Statements on Page F-1.

     (a)  (2) Financial Statement Schedules.

          Valuation And Qualifying Accounts

     (a)  (3) Exhibits.

          Reference is made to the Exhibit Index on Page 29.

     (b)  Reports on Form 8-K.

          On April 8, 1998,  the Company filed a Current Report on Form 8-K with
          the SEC relating to the Kwik Acquisition. Such Form 8-K also disclosed
          the terms of certain loans made to the Company,  the proceeds of which
          the Company used to fund the purchase price of the Kwik Acquisition.

          On June 8,  1998,  the  Company  filed a Current  Report on Form 8-K/A
          containing  required  financial  statements  and pro  forma  financial
          information relating to the Kwik Acquisition  disclosed in its Current
          Report on Form 8-K filed on April 8, 1998.

          Subsequent to the end of the fiscal year,  on September 14, 1998,  the
          Company  filed a Current  Report on Form 8-K with the SEC  relating to
          the Mega Art  Acquisition.  Such Form 8-K also  disclosed the terms of
          certain  loans made to the Company,  the proceeds of which the Company
          used to fund the purchase price of the Mega Art Acquisition.

          Subsequent  to the end of the fiscal year,  on November 16, 1998,  the
          Company filed a Current  Report on Form 8-K/A with the SEC relating to
          the Mega Art Acquisition containing financial statements and pro forma
          financial  information relating to the Mega Art Acquisition  disclosed
          in its Current Report on Form 8-K filed on September 14, 1998.

          Subsequent  to the end of the fiscal year,  on November 16, 1998,  the
          Company  filed a Current  Report on Form 8-K  relating  to the  Zazula
          Acquisition.  Such Form 8-K also  disclosed the terms of certain loans
          made to the  Company,  the  proceeds of which the Company used to fund
          the purchase price of the Zazula Acquisition.

                                      -26-
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its  behalf  by the  undersigned,  thereunto  duly  authorized  this  7th day of
December, 1998.

                                                  UNIDIGITAL INC.


                                                  By:/s/William E. Dye
                                                     --------------------
                                                     William E. Dye, 
                                                     Chief Executive Officer


                                      -27-
<PAGE>

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

Signature                  Title                              Date
---------                  -----                              ----

/s/William E. Dye          Chief Executive                    December   7, 1998
----------------------
William E. Dye             Officer and Chairman of the
                           Board of Directors (principal
                           executive, financial and
                           accounting officer)

/s/Peter Saad              President and Director             December   7, 1998
----------------------
Peter Saad

/s/Richard J. Sirota       Senior Vice President,             December   7, 1998
----------------------
Richard J. Sirota          Chief Operating Officer
                           and Director

/s/Anthony Manser          Vice President and Director        December   7, 1998
----------------------
Anthony Manser

/s/Harvey Silverman        Director                           December   7, 1998
----------------------
Harvey Silverman

/s/David Wachsman          Director                           December   7, 1998
----------------------
David Wachsman


                                      -28-
<PAGE>

                                  EXHIBIT INDEX

Exhibit
No.                                 Description of Exhibit
-------                             ----------------------

     3.1  Certificate of Incorporation. Incorporated by reference to Exhibit 3.1
          to  the  Company's   Registration  Statement  which  became  effective
          February 1, 1996 (File number 33-99656).

     3.2  By-Laws.  Incorporated  by reference  to Exhibit 3.2 to the  Company's
          Registration  Statement which became effective  February 1, 1996 (File
          number 33-99656).

     3.3  Certificate of Amendment of Certificate of Incorporation. Incorporated
          by reference to Exhibit 3.3 to the  Company's  Registration  Statement
          which became effective February 1, 1996 (File number 33-99656).

     4.1  Form  of   Representative's   Warrant  Agreement   including  form  of
          Representative's  Warrant, between the Company and the Representative.
          Incorporated by reference to Exhibit 4.2 to the Company's Registration
          Statement  which  became  effective  February  1,  1996  (File  number
          33-99656).

     4.2  Form of Warrant,  together with Schedule of Holders.  Incorporated  by
          reference to Exhibit 4.2 to the Company's  Current  Report on Form 8-K
          dated June 6, 1997.

     4.3  Form of Warrant,  together with Schedule of Holders.  Incorporated  by
          reference  to Exhibit 4.2 to the  Company's  Quarterly  Report on Form
          10-QSB for the quarter ended May 31, 1997.

     4.4  Form of  Registration  Rights  Agreement,  together  with  Schedule of
          Holders.  Incorporated  by reference  to Exhibit 4.3 to the  Company's
          Current Report on Form 8-K dated June 6, 1997.

     4.5  Form of  Registration  Rights  Agreement,  together  with  Schedule of
          Holders.  Incorporated  by reference  to Exhibit 4.3 to the  Company's
          Quarterly Report on Form 10-QSB for the quarter ended May 31, 1997.

     4.6  Warrant  dated  November  26,  1997  issued  by the  Company  to  CIBC
          Oppenheimer. Incorporated by reference to Exhibit 4.1 to the Company's
          Quarterly  Report on Form 10-QSB for the quarter  ended  February  28,
          1998.

     4.7  Stockholders'  Agreement  dated  as of  March  25,  1998 by and  among
          Unidigital Inc., William E. Dye and Richard J. Sirota. Incorporated by
          reference to Exhibit 4.1 to the Company's  Current  Report on Form 8-K
          dated April 8, 1998.


                                      -29-
<PAGE>

Exhibit
No.                                 Description of Exhibit
-------                             ----------------------

   4.8    Stockholders'  Agreement  dated as of September 2, 1998 by and between
          Unidigital  Inc. and Ehud Aloni.  Incorporated by reference to Exhibit
          4.1 the Current Report on Form 8-K dated September 14, 1998.

   9.1    Voting Trust Agreement dated as of November 3, 1995 between William E.
          Dye and Jeffrey W. Leiderman. Incorporated by reference to Exhibit 9.1
          to  the  Company's   Registration  Statement  which  became  effective
          February 1, 1996 (File number 33-99656).

   10.1*  Employment  Agreement  dated as of November 2, 1995 between William E.
          Dye and the Company.  Incorporated by reference to Exhibit 10.1 to the
          Company's  Registration  Statement which became effective  February 1,
          1996 (File number 33-99656).

   l0.2*  Employment  Agreement  dated March l, 1997 between  Anthony Manser and
          Elements (UK).

   10.3*  Employment  Agreement  dated  as of  March  1,  1997  by  and  between
          Unidigital  Inc. and Peter Saad.  Incorporated by reference to Exhibit
          10.1 to the Company's  Quarterly Report on Form 10-QSB for the quarter
          ended May 31, 1997.

   10.4*  Employment  Agreement  dated  as of  March  25,  1998  by and  between
          Unidigital  Inc. and Richard J. Sirota.  Incorporated  by reference to
          Exhibit 10.3 to the Company's  Current  Report on Form 8-K dated April
          8, 1998.

   10.5*  Employment  Agreement  dated as of  September  2, 1998 by and  between
          Mega Art Corp.  and Ehud Aloni.  Incorporated  by reference to Exhibit
          10.3 to the Company's  Current Report on Form 8-K dated  September 14,
          1998.

   10.6   Lease  Agreement  dated  March  1994  between  Dezer   Properties  and
          LinoGraphics for Suite 1004. Incorporated by reference to Exhibit 10.7
          to  the  Company's   Registration  Statement  which  became  effective
          February 1, 1996 (File number 33-99656).

   10.7   Lease  Agreement  dated  August  1995  between  Dezer  Properties  and
          LinoGraphics for Suite 504.  Incorporated by reference to Exhibit 10.8
          to  the  Company's   Registration  Statement  which  became  effective
          February 1, 1996 (File number 33-99656).

   10.8   Lease  Agreement dated as of April 20, 1995 between The Stock Exchange
          (Holdings)   Limited  and  Lyledale  Limited  for  69  Wilson  Street.
          Incorporated   by  reference   to  Exhibit   10.9  to  the   Company's
          Registration  Statement which became effective  February 1, 1996 (File
          number 33-99656).


                                      -30-
<PAGE>

Exhibit
No.                                 Description of Exhibit
-------                             ----------------------

   10.9   Lease  Agreement  dated as of December 25, 1994 between Collin Estates
          Limited and Lyledale Limited for 48 Margaret  Street.  Incorporated by
          reference to Exhibit  10.10 to the  Company's  Registration  Statement
          which became effective February 1, 1996 (File number 33-99656).

   10.10  Loft  Lease  dated  March  1,  1997  between  S.N.Y.,  Inc.  and  Kwik
          International  Color,  Ltd.  for the  property  located at 229 W. 28th
          Street,  New  York,  New  York,  on the  fourth  floor,  known as Room
          401-405.  Incorporated  by reference to Exhibit 10.4 to the  Company's
          Current Report on Form 8-K dated April 8, 1998.

   10.11  Loft  Lease  dated  March  1,  1997  between  S.N.Y.,  Inc.  and  Kwik
          International  Color,  Ltd.  for the  property  located at 229 W. 28th
          Street,  New  York,  New York,  on the  seventh  floor,  known as Room
          706-714 and 707-713.  Incorporated by reference to Exhibit 10.5 to the
          Company's Current Report on Form 8-K dated April 8, 1998.

   10.12  Loft  Lease  dated  March  1,  1997  between  S.N.Y.,  Inc.  and  Kwik
          International  Color,  Ltd.  for the  property  located at 229 W. 28th
          Street,  New York,  New York,  on the eighth  floor.  Incorporated  by
          reference to Exhibit 10.6 to the Company's  Current Report on Form 8-K
          dated April 8, 1998.

   10.13  Loft  Lease  dated  March  1,  1997  between  S.N.Y.,  Inc.  and  Kwik
          International  Color,  Ltd.  for the  property  located at 229 W. 28th
          Street,  New York,  New  York,  on the ninth  floor.  Incorporated  by
          reference to Exhibit 10.7 to the Company's  Current Report on Form 8-K
          dated April 8, 1998.

   10.14* 1995 Unidigital Inc. Long-Term Stock Investment Plan.  Incorporated by
          reference to Exhibit  10.11 to the  Company's  Registration  Statement
          which became effective February 1, 1996 (File number 33-99656).

   10.15* 1995 Directors Stock Option Plan. Incorporated by reference to Exhibit
          10.12 to the Company's  Registration  Statement which became effective
          February 1, 1996 (File number 33-99656).

   10.16* 1997 Equity Incentive Plan.  Incorporated by reference to Exhibit 10.2
          to the Company's Quarterly Report on Form 10-QSB for the quarter ended
          February 28, 1997.

   10.17* 1997  Non-Employee   Director  Stock  Option  Plan.   Incorporated  by
          reference to Exhibit 10.3 to the  Company's  Quarterly  Report on Form
          10-QSB for the quarter ended February 28, 1997.

                                      -31-
<PAGE>

Exhibit
No.                                 Description of Exhibit
-------                             ----------------------

   10.18  Asset Purchase Agreement dated November 22, 1995 between  LinoGraphics
          and TX Unlimited,  Inc.  Incorporated by reference to Exhibit 10.13 to
          the Company's  Registration  Statement which became effective February
          1, 1996 (File number 33-99656).

   10.19  Stock Purchase  Agreement  dated as of August 9, 1995 among Jeffrey W.
          Leiderman,  William E. Dye and Stephen J.  McErlain.  Incorporated  by
          reference to Exhibit  10.14 to the  Company's  Registration  Statement
          which became effective February 1, 1996 (File number 33-99656).

   10.20  Share  Purchase  Agreement  By Way of Deed  dated as of August 9, 1995
          among Jeffrey W.  Leiderman,  William E. Dye,  Stephen J. McErlain and
          Anthony  Manser.  Incorporated  by reference  to Exhibit  10.15 to the
          Company's  Registration  Statement which became effective  February 1,
          1996 (File number 33-99656).

   10.21  Asset  Purchase  Agreement  dated as of  August  2,  1996 by and among
          Unidigital    Inc.,    Unidigital/Cardinal    Corporation,    Cardinal
          Communications Group Inc., C-Max Graphics,  Inc., and each of Mark and
          Sheldon  Darlow.  Incorporated  by  reference  to Exhibit  10.1 to the
          Company's Current Report on Form 8-K dated August 19, 1996.

   10.22  Asset  Purchase  Agreement  dated  as of April  4,  1997 by and  among
          Unidigital  Inc.,  Unidigital/Boris  Corporation,  Boris Image  Group,
          Inc.,  Leslie W.  Brewer,  II and Michael  Hartnett.  Incorporated  by
          reference to Exhibit 10.1 to the  Company's  Quarterly  Report on Form
          10-QSB for the quarter ended February 28, 1997.

   10.23  Share  Purchase  Agreement  by Way of Deed  dated May 22,  1997 by and
          among  Unidigital  Inc.,  Elements (UK) Limited,  Libra City Corporate
          Printing Limited,  Francis Allen, Robin Bishop, Kenneth Dellow, Edward
          Tylee,   Invesco  English  and  International  Trust,  and  Baronsmead
          Investment  Trust.  Incorporated  by  reference to Exhibit 10.1 to the
          Company's Current Report on Form 8-K dated June 6, 1997.

   10.24  Asset  Purchase  Agreement  dated as of March  25,  1998 by and  among
          Unidigital Inc., Unison (NY), Inc., Kwik International Color, Ltd. and
          Richard J.  Sirota.  Incorporated  by reference to Exhibit 10.1 to the
          Company's Current Report on Form 8-K dated April 8, 1998.

   10.25  Agreement  of  Purchase  and Sale  dated as of  August  3, 1998 by and
          among  Unidigital  Inc.,  Mega Art Corp.,  Ehud  Aloni,  Amit  Primor,
          Jeffrey E. Rothman and Seligson,  Rothman & Rothman.  Incorporated  by
          reference  to  Exhibit  10.1 to the  Current  Report on Form 8-K dated
          September 14, 1998.


                                      -32-
<PAGE>
Exhibit
No.                                 Description of Exhibit
-------                             ----------------------

   10.26  Agreement  of and Plan of Merger  dated as of October  30, 1998 by and
          among Unidigital Inc., Unison (NY), Inc., Hy Zazula Associates,  Inc.,
          Hyman  Zazula,  Steven  Zazula,  David  Zazula  and  Gary  Feigenbaum.
          Incorporated  by reference  to Exhibit  10.1 to the Current  Report on
          Form 8-K dated November 16, 1998.

   10.27  Sales Ledger Financing  Agreement between Barclays  Commercial Service
          Limited and Elements (UK) Ltd.

   10.28  Barclays  Treasury Loan dated June 26, 1998 between  Barclays Bank PLC
          and the Regent Group Ltd.

   10.29  Subordinated  Promissory  Note dated March 25, 1998 of Unidigital Inc.
          payable to Kwik  International  Color, Ltd. in the principal amount of
          $750,000.  Incorporated  by reference to Exhibit 10.2 to the Company's
          Current Report on Form 8-K dated April 8, 1998.

   10.30  Credit  Agreement  dated as of March 24, 1998 by and among  Unidigital
          Inc.,  the lenders  from time to time  parties  thereto  and  Canadian
          Imperial Bank of Commerce.  Incorporated  by reference to Exhibit 10.8
          to the Company's Current Report on Form 8-K dated April 8, 1998.

   10.31  Amendment  No. 2 to Credit  Agreement  dated as of October 30, 1998 by
          and among  Unidigital  Inc.,  and  several  lenders  from time to time
          parties thereto and Canadian  Imperial Bank of Commerce.  Incorporated
          by reference to Exhibit 10.2 to the Company's  Current  Report on Form
          8-K dated November 16, 1998.

   10.32  Term Note dated March 24, 1998 of Unidigital Inc.  payable to Canadian
          Imperial  Bank of Commerce  in the  principal  amount of  $25,000,000.
          Incorporated  by reference to Exhibit  10.9 to the  Company's  Current
          Report on Form 8-K dated April 8, 1998.

   10.33  Acquisition  Note dated March 24, 1998 of Unidigital  Inc.  payable to
          Canadian  Imperial  Bank  of  Commerce  in  the  principal  amount  of
          $5,000,000.   Incorporated  by  reference  to  Exhibit  10.10  to  the
          Company's Current Report on Form 8-K dated April 8, 1998.

   10.34  Revolving  Credit Note dated March 24, 1998 of Unidigital Inc. payable
          to  Canadian  Imperial  Bank of Commerce  in the  principal  amount of
          $10,000,000.  Incorporated  by  reference  to  Exhibit  10.11  to  the
          Company's Current Report on Form 8-K dated April 8, 1998.

   10.35  Stock  Pledge  Agreement  (U.S.)  dated as of March  24,  1998 made by
          Unidigital  Inc.  in  favor of  Canadian  Imperial  Bank of  Commerce.
          Incorporated  by reference to Exhibit 10.12 to the  Company's  Current
          Report on Form 8-K dated April 8, 1998.

   10.36  Mortgage  dated as of March 24, 1998 made by Unidigital  Inc. in favor
          of Canadian  Imperial Bank of Commerce.  Incorporated  by reference to
          Exhibit 10.13 to the Company's  Current Report on Form 8-K dated April
          8, 1998.


                                      -33-
<PAGE>

Exhibit
No.                                 Description of Exhibit
-------                             ----------------------


   10.37  Security  Agreement dated as of March 24, 1998 made by Unidigital Inc.
          in  favor of  Canadian  Imperial  Bank of  Commerce.  Incorporated  by
          reference to Exhibit 10.14 to the Company's Current Report on Form 8-K
          dated April 8, 1998.

   10.38  Amendment to Security  Agreement  dated as of October 30, 1998 made by
          Unidigital  Inc.  in  favor of  Canadian  Imperial  Bank of  Commerce.
          Incorporated  by reference to Exhibit  10.3 to the  Company's  Current
          Report on Form 8-K dated November 16, 1998.

   10.39  Subsidiaries  Guarantee  dated as of March  24,  1998  made by each of
          Unidigital Elements (NY), Inc., Unidigital Elements (SF), Inc., Unison
          (NY), Inc. and Unison (MA),  Inc., in favor of Canadian  Imperial Bank
          of  Commerce.  Incorporated  by  reference  to  Exhibit  10.15  to the
          Company's Current Report on Form 8-K dated April 8, 1998.

   10.40  Intercreditor and  Subordination  Agreement dated as of March 25, 1998
          by and among Kwik  International  Color,  Ltd.,  Unidigital  Inc.  and
          Canadian  Imperial  Bank of  Commerce.  Incorporated  by  reference to
          Exhibit 10.16 to the Company's  Current Report on Form 8-K dated April
          8, 1998.

   10.41  Mortgage,  Assignment of Leases and Rents and Security Agreement dated
          as of March 24, 1998 between  Unidigital  Inc.  and Canadian  Imperial
          Bank of Commerce.  Incorporated  by reference to Exhibit  10.17 to the
          Company's Current Report on Form 8-K dated April 8, 1998.

      21  Subsidiaries of the Company.

      23  Consent of Ernst & Young LLP.

      27  Financial Data Schedule.

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

*    A management  contract or compensatory  plan or arrangement  required to be
     filed as an exhibit pursuant to Item 13(a) of Form 10-KSB.


                                      -34-
<PAGE>

                                UNIDIGITAL, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page

Report of Independent Auditors..............................................F-2

Consolidated Balance Sheets as of
  August 31, 1998 and 1997..................................................F-3

Consolidated Income Statements for the
  years ended August 31, 1998, 1997 and 1996................................F-4

Consolidated Statements of Cash Flows for the
  years ended August 31, 1998, 1997 and 1996................................F-5

Consolidated Statements of Stockholders' Equity
  for the years ended August 31, 1998, 1997 and 1996........................F-6

Notes to Consolidated Financial Statements..................................F-7


                                      F-1
<PAGE>


                         Report of Independent Auditors

The Board of Directors and Stockholders
Unidigital Inc.

     We have audited the  consolidated  balance sheets of Unidigital  Inc. as of
August 31, 1998 and 1997 and the consolidated  statements of income,  cash flows
and stockholders'  equity for each of the three years in the period ended August
31, 1998.  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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe 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 consolidated financial position of
Unidigital  Inc.  at August 31,  1998 and 1997 and the  consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended  August  31,  1998  in  conformity  with  generally  accepted   accounting
principles.



November 19, 1998                                         Ernst & Young LLP
New York, New York



                                      F-2
<PAGE>

                                 Unidigital Inc.
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                        AUGUST 31,
                                                              -------------------------------
                                                                   1998            1997
                                                              -------------------------------
ASSETS
<S>                                                           <C>              <C>
Cash and cash equivalents                                     $    287,000    $  3,203,000
Accounts receivable, net of allowance of $331,000
  in 1998 and $266,000 in 1997                                  16,917,000       9,753,000
Deferred financing costs, net                                    1,013,000         464,000
Prepaid expenses                                                 2,727,000       1,529,000
Other current assets                                             3,360,000         766,000
                                                              -------------------------------
Total current assets                                            24,304,000      15,715,000
Property and equipment, net                                     14,591,000      11,899,000
Intangible assets, net                                          28,107,000       5,331,000
Other assets                                                       313,000          88,000
                                                              -------------------------------
Total assets                                                  $ 67,315,000    $ 33,033,000
                                                              ===============================

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses                         $  8,571,000    $  5,182,000
Current portion of capital lease obligations                     1,935,000       1,998,000
Current portion of long-term debt                                3,610,000      10,018,000
Income taxes payable                                               887,000         551,000
Deferred income taxes                                              249,000               -
Loans and notes payable to stockholders                            155,000         155,000
                                                              -------------------------------
Total current liabilities                                       15,407,000      17,904,000

Capital lease obligations, net of current portion                2,830,000       2,876,000
Long-term debt, net of current portion                          33,978,000       2,128,000
Deferred income taxes                                              500,000         445,000
Loans and notes payable to stockholders, net of current
  portion                                                          207,000         207,000
                                                              -------------------------------
Total liabilities                                               52,922,000      23,560,000

Stockholders' equity:
  Preferred stock, par value $.01; 5,000,000 shares
    authorized; none issued and outstanding                              -               -
  Common stock, par value $.01; 10,000,000 shares
    authorized; 3,902,634 shares and 3,243,243 shares
    issued and outstanding in 1998 and 1997, respectively           39,000          32,000
  Additional paid-in capital                                     9,865,000       6,292,000
  Retained earnings                                              4,374,000       3,238,000
  Cumulative foreign translation adjustment                        115,000        (89,000)
                                                              -------------------------------
Total stockholders' equity                                      14,393,000       9,473,000
                                                              -------------------------------
Total liabilities and stockholders' equity                    $ 67,315,000    $ 33,033,000
                                                              ===============================
</TABLE>




See notes to consolidated financial statements.

                                      F-3
<PAGE>
                                 Unidigital Inc.
                         Consolidated Income Statements
<TABLE>
<CAPTION>
                                                                    YEAR ENDED AUGUST 31,
                                                      ---------------------------------------------------
                                                           1998              1997              1996
                                                      ---------------------------------------------------

<S>                                                    <C>                <C>               <C>
REVENUES
Net sales                                              $ 47,389,000       $ 27,262,000      $ 11,660,000

EXPENSES
Cost of sales                                            25,305,000         14,450,000         5,622,000
Selling, general and administrative expenses             15,925,000          9,673,000         4,049,000
Expenses incurred due to restructuring                      771,000                 -                 -
                                                      ---------------------------------------------------
Total operating expenses                                 42,001,000         24,123,000         9,671,000
                                                      ---------------------------------------------------

Income from operations                                    5,388,000          3,139,000         1,989,000

Interest expense                                         (1,913,000)        (1,095,000)         (327,000)
Interest expense-deferred financing costs                (1,143,000)          (138,000)               -
Interest and other (expenses) income - net                  (75,000)            28,000           232,000
                                                      ---------------------------------------------------
Income before income taxes                                2,257,000          1,934,000         1,894,000

Provision for income taxes (including
   nonrecurring provision relating to
   termination of subchapter S status in 1996)              978,000            593,000         1,064,000
                                                      ---------------------------------------------------
Net income before extraordinary item                      1,279,000          1,341,000           830,000

  Extraordinary item - loss on early retirement of
    debt (net of income tax benefit of $137,000)           (143,000)                --                --
                                                      ---------------------------------------------------
  Net income                                           $  1,136,000       $  1,341,000      $    830,000
                                                       ==================================================

Basic earnings (loss) per common share:
  Earnings before extraordinary item                   $       0.36       $       0.42      $       0.31
  Extraordinary item                                          (0.04)                 -                 -
                                                       -------------------------------------------------
  Net income                                           $       0.32       $       0.42      $       0.31
                                                      ====================================================

Basic earnings (loss) per common share:
  Earnings before extraordinary item                   $       0.34       $       0.41      $       0.31
  Extraordinary item                                          (0.04)                --                --
  Net income                                           $       0.30       $       0.41      $       0.31
                                                      ====================================================

Shares used to compute net income per share:
  Basic                                                   3,530,836          3,212,098         2,643,828
                                                      ===================================================
  Diluted                                                 3,779,438          3,283,279         2,662,908
                                                      ===================================================

<S>                                                                                         <C>
Pro forma income data (Notes 2 and 10):
  Historical income before income taxes                                                     $  1,894,000
  Pro forma adjustment for principal
    stockholder/officers' compensation                                                            73,000
                                                                                          ---------------
  Pro forma income before income taxes                                                         1,967,000
  Pro forma income taxes                                                                         795,000
                                                                                          ---------------
  Pro forma net income                                                                      $  1,172,000
                                                                                          ===============
  Pro forma net income per common share:
    Basic                                                                                   $       0.44
                                                                                          ===============
    Diluted                                                                                 $       0.44
                                                                                          ===============
</TABLE>

See notes to consolidated financial statements.
                                       F-4
<PAGE>

                                 Unidigital Inc.

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                   YEAR ENDED AUGUST 31,
                                                       --------------------------------------------------
                                                            1998               1997              1996
                                                       --------------------------------------------------
<S>                                                    <C>                <C>               <C>         
OPERATING ACTIVITIES
Net income                                             $  1,136,000       $  1,341,000      $    830,000
Adjustments to reconcile net income to net cash
  (used in) provided by operating activities:
    Depreciation and amortization                         3,954,000          2,194,000         1,057,000
    Loss on sale of property and equipment                   11,000                  -                 -
    Provision for deferred income taxes                     300,000             24,000           415,000
    Provision for bad debts                                 115,000            102,000           104,000
    Stock compensation                                       50,000             50,000                 -
Changes in assets and liabilities net of effects
 of businesses acquired:
  Accounts receivable                                    (5,680,000)        (3,242,000)         (964,000)
  Prepaid expenses and other current assets              (2,393,000)        (5,046,000)         (566,000)
  Other assets                                           (1,354,000)          (171,000)          (22,000)
  Accounts payable and accrued expenses                   2,053,000          5,008,000           730,000
  Income taxes payable                                      310,000            229,000           (96,000)
                                                       --------------------------------------------------
Net cash (used in) provided by operating activities       (1,498,000)          489,000         1,488,000
                                                       --------------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment                      (1,571,000)        (1,368,000)       (1,279,000)
Proceeds from sale of property and equipment                 10,000                  -                 -
Business acquisitions                                   (21,802,000)        (5,529,000)       (1,777,000)
                                                       --------------------------------------------------
Net cash used in investing activities                   (23,363,000)        (6,897,000)       (3,056,000)
                                                       --------------------------------------------------
FINANCING ACTIVITIES
Payments of capital lease obligations                    (2,691,000)        (1,761,000)         (692,000)
Payments for cancellation of options                              -           (213,000)         (356,000)
Proceeds from long-term debt                             37,186,000          7,521,000         2,636,000
Payments of long-term debt                              (12,566,000)           (78,000)         (178,000)
Stockholder repayments                                            -                  -          (328,000)
Dividends paid                                                    -                  -          (750,000)
Proceeds from sale of common stock, net of
  issuance costs                                             20,000            (36,000)        5,224,000
                                                       --------------------------------------------------
Net cash provided by financing activities                21,949,000          5,433,000         5,556,000
                                                       --------------------------------------------------

Effect of foreign exchange rates on cash                     (4,000)            32,000           (29,000)
                                                       --------------------------------------------------
Net (decrease) increase in cash and cash equivalents     (2,916,000)          (943,000)        3,959,000
Cash and cash equivalents at beginning of year            3,203,000          4,146,000           187,000
                                                       --------------------------------------------------
Cash and cash equivalents at end of year               $    287,000       $  3,203,000      $  4,146,000
                                                       ==================================================
SUPPLEMENTAL DISCLOSURES
Interest paid                                          $  1,614,000       $  1,261,000      $    258,000
                                                       ==================================================
Income taxes paid                                      $    232,000       $    726,000      $    890,000
                                                       ==================================================
Non-cash transactions
Equipment acquired under capital lease obligations     $  1,797,000       $  1,711,000      $  1,014,000
                                                       ==================================================
Dividends payable as note                              $          -       $          -      $    498,000
                                                       ==================================================
</TABLE>

See notes to consolidated financial statements.



                                       F-5
<PAGE>


                                 Unidigital Inc.
                 Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>

                                                  ADDITIONAL                  FOREIGN         TOTAL
                                        COMMON      PAID-IN     RETAINED    TRANSLATION    STOCKHOLDERS'
                                        STOCK       CAPITAL     EARNINGS    ADJUSTMENT        EQUITY
--------------------------------------------------------------------------------------------------------

<S>                                      <C>       <C>           <C>          <C>            <C>        
Balance at August 31, 1995
  (combined predecessors)              $ 3,000     $  163,000    $2,451,000   $ (12,000)     $ 2,605,000
Cost of cancellation of options to
  purchase an additional interest
  in Elements                                        (163,000)     (119,000)                    (282,000)
Exchange of S corporation stock         (3,000)                     (17,000)                     (20,000)
Formation (including merger of
  Elements (NY), Elements (UK) and
  Elements (SF))                        20,000                                                    20,000
Issuance of 1,150,000 shares of
  common stock in connection with
  the Initial Public Offering           12,000      5,213,000                                  5,225,000
Issuance of 39,216 shares of
  common stock in connection with
  the Unison (NY) asset acquisition                   250,000                                    250,000
Dividends paid                                                   (1,248,000)                  (1,248,000)
Net income                                                          830,000                      830,000
Foreign currency translation
  adjustment                                                                    (15,000)         (15,000)
                                     -------------------------------------------------------------------
Balance at August 31, 1996              32,000      5,463,000     1,897,000     (27,000)       7,365,000
Issuance of 45,480 shares of
  common stock in connection with
  the Unison (MA) asset acquisition                   249,000                                    249,000
Additional Initial Public Offering
  costs                                               (72,000)                                   (72,000)
Issuance of 400,000 warrants in
  connection with financing                           602,000                                    602,000
Issuance of 8,547 shares of common
  stock as employee compensation                       50,000                                     50,000
Net income                                                        1,341,000                    1,341,000
Foreign currency translation
  adjustment                                                                    (62,000)         (62,000)
                                     -------------------------------------------------------------------
Balance at August 31, 1997              32,000      6,292,000     3,238,000     (89,000)       9,473,000
                                                                          
Issuance of 649,841 shares of
  common stock in connection with
  the Kwik International Color
  asset acquisition                      7,000      3,403,000                                  3,410,000
Issuance of 6,051 shares of common
  stock as employee compensation                       50,000                                     50,000
Issuance  of 25,000 warrants in
  connection with investment
  banking services                                    100,000                                    100,000
Issuance of 3,499 shares of common
  stock in connection with
  exercise of stock options                            20,000                                     20,000
Net income                                                        1,136,000                    1,136,000
Foreign currency translation
  adjustment                                                                    204,000          204,000
                                     -------------------------------------------------------------------
Balance at August 31, 1998           $  39,000     $9,865,000    $4,374,000   $ 115,000     $ 14,393,000
                                     ====================================================================
</TABLE>

See notes to consolidated financial statements.

                                      F-6
<PAGE>


                                 Unidigital Inc.

                   Notes to Consolida ted Financial Statements

                                 August 31, 1998

1. ORGANIZATION

Unidigital  Inc., a Delaware  corporation,  is the parent holding company of six
wholly-owned operating subsidiaries,  Unidigital Elements (NY), Inc., ("Elements
(NY)"), Elements (UK) Limited ("Elements (UK)"), Unidigital Elements (SF), Inc.,
("Elements  (SF)"),  Unison (NY),  Inc.,  ("Unison  (NY)"),  Unison (MA),  Inc.,
("Unison (MA)"),  and Mega Art Corp. ("Mega Art") which was acquired  subsequent
to August 31, 1998.  Elements  (NY) engages in the  on-demand  print and digital
prepress business in New York City. Elements (UK) engages in the on-demand print
and digital prepress business and, through its wholly-owned  subsidiary,  Regent
Communications  (UK)  Limited  ("Regent"),  operates a financial  digital  print
business in London.  Elements (UK) also provides printing services to the London
financial community. Elements (SF) owns and operates the San Francisco on-demand
prepress  business  and  retouching  studio.  Unison (NY) engages in the digital
prepress and digital  printing  business  services to  advertising  agencies and
corporations  in the New York City area.  Unison (MA) engages in the business of
digital imaging and photographic processing in the Boston area.

In February 1996,  Unidigital completed an Initial Public Offering (the "PI") of
1,150,000  shares of its Common  Stock at a price of $6.00 per share,  realizing
aggregate net proceeds of approximately  $5,200,000.  The Company used a portion
of the net proceeds of the PI to repay certain  indebtedness under the Company's
credit facilities.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

CASH AND CASH EQUIVALENTS

Highly liquid investments with a maturity of three months or less when purchased
are considered to be cash equivalents.


                                      F-7
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

2. BASIS  OF  PRESENTATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES
    (CONTINUED)

RISKS AND UNCERTAINTIES

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  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.

Credit  is  extended  based  on  an  evaluation  of  the  customer's   financial
conditions,  and generally advance payment is not required.  Anticipated  credit
losses  are  provided  for  in  the   consolidated   financial   statements  and
consistently have been within management's expectations.

PROPERTY AND EQUIPMENT

Property  and  equipment  are  stated at cost,  less  accumulated  depreciation.
Depreciation is provided on the  straight-line  method over the estimated useful
lives  ranging  from:  three years for vehicles and computer  software,  five to
seven years for machinery and  equipment,  furniture  and office  equipment,  40
years  for  real  property   including   related   improvements   and  leasehold
improvements  over the  lesser of the  estimated  useful  life of the  leasehold
improvement or the term of the related lease.

INTANGIBLE ASSETS

Intangible  assets represent the excess of purchase price over the fair value of
the net tangible assets acquired, ("goodwill"), which is being amortized over 15
to 25 years.  Amortization of approximately  $797,000,  $269,000 and $67,000 was
recorded  for the years  ended  August 31,  1998,  1997 and 1996,  respectively.
Accumulated   amortization  at  August  31,  1998  and  1997  was  approximately
$1,133,000 and $336,000, respectively.

It is the Company's policy to account for goodwill at amortized cost. As part of
an ongoing  review of the  valuation  and  amortization  of  intangible  assets,
management  assesses the carrying  value of the Company's  intangible  assets if
facts  and  circumstances  suggest  that  it may be  impaired.  If  this  review
indicates  that the  intangibles  will not be  recoverable  as  determined  by a
non-discounted cash flow analysis of the Company over the remaining amortization
period, the carrying value of the Company's  intangibles would be reduced to its
estimated realizable value.

DEFERRED FINANCING COSTS

Deferred  financing  costs  relate to costs  incurred  in  connection  with debt
financing which are amortized over the term of the related debt.

                                      F-8
<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    (CONTINUED)

STOCK OPTIONS

In accordance with Accounting  Principles Board Opinion No. 25,  "Accounting for
Stock  Issued  to  Employees,"  ("APB  25")  compensation  costs  for  stock  is
recognized in income based on the excess,  if any, of the quoted market price of
the stock at the  grant  date of the  award or other  measurement  date over the
amount an employee must pay to acquire that stock.

In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123,  "Accounting for Stock Based  Compensation,"  ("FAS 123") which establishes
financial   accounting   and  reporting   standards  for  stock  based  employee
compensation  plans and the  issuance of warrants and similar  instruments.  The
Company has elected the  disclosure  only  provisions of FAS 123 and to continue
accounting for the stock based compensation under the provisions of APB 25.

RECLASSIFICATION OF CERTAIN FINANCIAL INFORMATION

Certain  amounts  have  been  reclassified  to  conform  with the  current  year
presentation.

FOREIGN CURRENCY TRANSLATION

The portion of the Company's financial statements relating to the United Kingdom
operations  are  translated  into  U.S.  dollars  using  period  exchange  rates
((pound)1=  $1.67 and  $1.62 at August  31,  1998 and  1997,  respectively,  for
balance sheet accounts) and average exchange rates ((pound)1=  $1.66,  $1.64 and
$1.55 for the years ended August 31, 1998, 1997 and 1996, respectively,  for the
income  statement  accounts).  The  translation  difference  is  reflected  as a
separate component of stockholders' equity.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of financial  instruments  approximate  their estimated fair
value as a result of  variable  market  interest  rates  and/or  the short  term
maturity of these instruments.

INCOME STATEMENT--PRO FORMA INFORMATION

The 1996 pro forma  information  on the  income  statement  gives  effect to the
historical  combined results of operations adjusted for (i) the reduced level of
salaries paid to the principal  stockholder/officer  and the former  partner and
(ii) the income tax effect of Elements (NY)  changing from  Subchapter S status,
as if these had  occurred  effective  September 1, 1995 (see Note 10). Pro forma
net income per  common  share is based on pro forma net income and the  weighted
average number of common shares outstanding.


                                      F-9
<PAGE>
                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    (CONTINUED)

INCOME TAXES

The Company  accounts for income taxes under the liability method as required by
Statement of Financial Accounting Standards Board Statement No. 109 ("FAS 109"),
"Accounting for Income Taxes." FAS 109 requires an asset and liability  approach
to financial  accounting  and reporting for income taxes.  Under this  approach,
differences  between financial statement and tax bases of assets and liabilities
are determined,  and deferred income tax assets and liabilities are recorded for
those  differences that have future tax consequences.  Valuation  allowances are
established,  if  necessary,  to reduce any  deferred  tax asset  recorded to an
amount that will more likely than not be realized in future periods.  Income tax
expense is composed of the current tax payable or refundable for the period plus
or minus the net change in deferred tax assets and liabilities.

EARNINGS PER SHARE

In 1997, the Financial  Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128").  Statement
128 replaced the  calculation  of primary and fully  diluted  earnings per share
with basic and diluted  earnings per share.  Unlike primary  earnings per share,
basic earnings per share excludes any dilutive effects of options,  warrants and
convertible  securities.  Diluted  earnings  per  share is very  similar  to the
previously  reported  fully diluted  earnings per share.  All earnings per share
amounts for all periods have been presented,  and where appropriately,  restated
to conform to the Statement 128 requirements.

SEGMENT INFORMATION

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  about  Segments of an
Enterprise and Related Information"  ("Statement 131"). Statement 131 superseded
FASB Statement 14, "Financial Reporting for Segments of a Business  Enterprise."
Statement 131 establishes standards for the way that public business enterprises
report information about operating  segments in annual financial  statements and
requires that these  enterprises  report  selected  information  about operating
segments in interim financial reports.  Statement 131 also establishes standards
for related disclosures about product and services,  geographic areas, and major
customers.  Effective  August 31, 1998, the Company adopted  Statement 131 which
did not affect results of operations or financial  position,  but did effect the
disclosure of segment information. See Note 14.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities."  SFAS No. 133
must first be applied in

                                      F-10
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
   (CONTINUED)
   NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

the first  quarter  of fiscal  years  that begin  after  June 15,  1999,  and in
general,  requires that entities recognize all derivative financial  instruments
as assets or  liabilities,  measured at fair value,  and include in earnings the
changes in the fair value of such assets and liabilities. SFAS 133 also provides
that  changes  in the fair  value of assets or  liabilities  being  hedged  with
recognized  derivative  instruments  be  recognized  and  included in  earnings.
Management  has not completed its review of SFAS No. 133 but does not anticipate
that it will have a  material  affect on the  Company's  consolidated  financial
statements.

3. ACQUISITIONS

As part of the purchase of Regent in March 1995, two of its former  stockholders
were each granted an option to acquire for  (pound)50,000  an additional  6-1/2%
share interest in Elements exercisable upon a public floatation of its stock. In
November  1995,  the options  were  canceled in  consideration  for  payments of
approximately (pound)180,000 (approximately $282,000).

In March 1996,  the Company  purchased  certain  assets for $170,000 and assumed
certain liabilities  aggregating $140,500 of TX Unlimited Inc., a San Francisco,
California  based graphics arts company.  The purchase price included an $85,000
payment at closing and a $85,000 note.

In August 1996, the Company acquired  certain assets of Cardinal  Communications
Group,  Inc. and C-Max Graphics,  Inc. The purchase price included cash payments
of  $1,450,000,  issuance of $250,000 of restricted  Common Stock of the Company
(39,216  shares) and the  assumption of certain  liabilities.  During 1997,  the
final determination of the fair value of the net assets acquired were completed.
The final  purchase  price of  $2,040,000,  which  includes  costs  incurred  in
connection with the acquisition  approximated the fair value of the net tangible
assets acquired.  The purchase agreement requires  additional  payments based on
the future five year  performance.  The  potential  earn-out will be recorded as
additional purchase price when earned.

In April  1997,  the  Company  purchased  certain  assets  and  assumed  certain
liabilities of Boris Image Group, Inc. The aggregate purchase price consisted of
the following: (i) cash payments of $1,725,000; (ii) an aggregate of $300,000 in
guaranteed  future payments of Boris Image Group and its management  team; (iii)
$250,000 in  restricted  common Stock of the Company  (45,480  shares);  (iv) an
earn-out  payment  of up to  $500,000  payable  90  days  after  the  end of the
Company's  1998 fiscal year;  and (v) options to purchase  50,000  shares of the
Company's  common  stock at fair  market  value.  The  total  purchase  price of
$2,511,000,  which includes costs incurred in connection  with the  acquisition,
exceeded the net tangible net assets

                                      F-11
<PAGE>
                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

3. ACQUISITIONS (CONTINUED)

acquired by approximately  $2,601,000,  which has been recorded as goodwill. The
potential earn-out will be recorded as additional purchase price when earned.

In May 1997,  the Company  acquired  all of the issued and  outstanding  capital
stock of Libra City Corporate Printing Limited ("Libra"). The aggregate purchase
price consisted of cash payments of (pound)1,823,750  (approximately $2,972,000)
and an earn-out payment of up to (pound)500,000  (approximately  $815,000).  The
total   purchase   price  of   approximately   (pound)2,208,000   (approximately
$3,577,000),  which includes costs incurred in connection with the  acquisition,
exceeded  the  tangible net assets  acquired by  approximately  (pound)1,280,000
(approximately  $2,074,000),  which  has  been  recorded  as  goodwill.  Libra's
operations subsequently were consolidated with the operations of Regent.

In March  1998,  the  Company  purchased  certain  assets  and  assumed  certain
liabilities  of Kwik  International  Color,  Ltd. The aggregate  purchase  price
consisted of the following: (i) cash payments of $20,590,000;  (ii) note payable
in the principal amount of $750,000;  and (iii) $3,410,000 in restricted  common
stock of the Company (649,841 shares).  The total purchase price of $25,458,000,
which includes costs incurred in connection with the  acquisition,  exceeded the
net  tangible  assets  acquired  by  approximately  $22,107,000,  which has been
recorded as goodwill.  Of the  purchase  price,  $1,000,000  in cash and 190,589
shares of  restricted  Common Stock of the Company is being held in escrow for a
period of two years to satisfy any indemnification claims.

In July 1998, Regent purchased  certain assets of Five Star Finishers,  Ltd. The
total   purchase   price   consisted  of  a  cash   payment  of   (pound)325,000
(approximately  $543,000). The purchase price approximated the fair value of the
tangible assets acquired.

During  the year  ended  August  31,  1998 the  Company  recorded  approximately
$1,249,000 of additional goodwill relating to earn-outs achieved.  At August 31,
1998 the maximum remaining  potential earn-out relates to the Cardinal Group and
C-Max Graphics, Inc., aggregating $600,000.

The aforementioned  acquisitions were accounted for using the purchase method of
accounting and the results of operations have been included in the  accompanying
financial statements from their respective dates of acquisitions.


                                      F-12
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

3. ACQUISITIONS (CONTINUED)

The following unaudited pro forma information is presented as if the Company had
completed the  aforementioned  acquisitions,  and the related  borrowings at the
beginning of the respective periods.

                                                          AUGUST 31,
                                                   1998              1997
                                             ----------------------------------

Net sales                                    $  54,615,000      $  48,837,000
Net income (loss)                            $     691,000      $    (39,000)
Net income per share:
     Basic                                   $        0.17      $      (0.01)
     Diluted                                 $        0.16      $      (0.01)

4. RESTRUCTURING CHARGES

During the third and fourth  quarter of fiscal 1998,  management  authorized and
committed  the  Company  to:  (i)  consolidate  Elements  (NY) and  Unison  (NY)
operations in connection with the acquisition of Kwik international Color, Ltd.;
and (ii)  reduce the staff  providing  financial  printing  services  at Regent,
respectively.  In connection with the  consolidation  and reduction of a service
line  the  Company  incurred  approximately  $305,000  of  termination  benefits
relating to the  termination  of 35  employees  providing  similar  services and
incurred  facility  exit  costs of  approximately  $466,000,  including  $90,000
related  to  write-downs  of  leasehold  improvements.  At August  31,  1998 all
termination  benefits  have  been  paid and  included  in  accounts  payable  is
approximately $78,000 of facility exit costs.


                                      F-13
<PAGE>

                                Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                         AUGUST 31,
                                                  1998             1997
                                             ---------------------------------

Buildings                                        $ 2,252,000      $ 2,173,000
Machinery and equipment                           15,133,000       10,163,000
Furniture and office equipment                     1,187,000        1,694,000
Computer software                                  1,438,000        1,219,000
Leasehold improvements                             1,565,000          719,000
Vehicles                                             163,000          192,000
                                             ----------------------------------
Total                                             21,738,000       16,160,000
Less accumulated depreciation and
  amortization                                    (7,147,000)      (4,261,000)
                                             ----------------------------------
                                                 $14,591,000      $11,899,000
                                             ==================================


                                      F-14
<PAGE>

                                 Unidigital Inc.
             Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                           FACILITY
                                                            AMOUNT             AMOUNT OUTSTANDING
                                                          AUGUST 31,                AUGUST 31,
                                                             1998              1998          1997
                                                         ---------------------------------------------
<S>                                                        <C>             <C>            <C> 
Credit facilities in the United Kingdom; interest at
  the bank's overdraft rate plus 3%; facility amount
  was approximately (pound)1,145,000 ($1,969,400)                                          $ 1,784,000
Credit facilities in the United Kingdom; interest at
  the bank's overdraft rate plus 2%; facility amount
  is approximately (pound)2,300,000 ($3,840,000)           $ 3,840,000         $  2,135,000
Revolving line of credit; interest at Alternate Base
  Rate or Adjusted LIBO Rate, as defined, plus  1/4%
  in the United States plus 2.25% in the United
  Kingdom                                                                                    1,725,000
Term loan, matures September 1997; monthly interest
  at prime                                                                                  1,400,000
Lines of credit; interest at Alternate Base Rate or
  Adjusted LIBO Rate, as defined, plus 1/4% in the
  United States, plus 2.25% in the United Kingdom                                           2,710,000
Term loan, matures in March 2003; payable in sixteen
  quarterly installments ranging from $750,000 to
  $1,500,000, commencing in June  1999, with a 
  balloon payment of $7,000,000 in March 2003, plus
  interest at the Base Rate or at the Eurodollar Rate,
  as defined, plus an Applicable Margin, as defined,
  ranging from 0.75% to 3.0%                                25,000,000      25,000,000
Revolving line of credit; matures in March 2003,
  interest at the Base Rate or at the Eurodollar Rate,
  as defined, plus an Applicable Margin, as defined,
  ranging from 0.75% to 3.0%                                10,000,000       8,435,000
Acquisition line of credit; matures in March 2003,
  payable in eleven quarterly installments of 5.0%
  of the outstanding balance in March 2000 commencing
  in June 2000 and one installment of 45.0% of the
  outstanding balance in March 2000, plus interest at
  the Base Rate or at the Eurodollar Rate, as defined,
  plus an Applicable  Margin, as defined,  ranging from
  0.75% to 3.0%                                              5,000,000
SBA loan; monthly payments of $3,665, interest at prime
  rate plus 2.74%                                                                             334,000
Installment note due seller of Elements (SF); payable
  in eight quarterly installments of $11,600 including
  interest at 6%                                                                11,000         43,000
Loans from private investors, beginning in May 1997,
  originally maturing between May 2002 and August 2002;
  interest at 10% for first six months, 11% for second
  six months and 12% thereafter                                                             4,000,000
Installment note due seller of Unison (MA), matures in
  January 1999, payable in two annual installments of
  $75,000 including interest at 8.0%                                            75,000        150,000

                                      F-15
<PAGE>

Notes payable for certain equipment, maturing on dates
  between October, 1998 and September, 2003, payable
  in monthly installments of $22,000 until October
  1998 and $14,000 thereafter, including interest at
  8.54% and 8.4%, respectively.                                                618,000
Treasury loan facility in United Kingdom, Matures in
  July 2001, payable in monthly installments of
  $19,000 plus interest of LIBOR, as defined, plus the
  Banks Margin of 2.4%                                                         651,000
Note payable, payable in monthly installments of
  approximately $1000 including interest at 10.35%                              17,000
Installment note due seller of Kwik International;
  matures in April 2001, payable in thirty-six monthly
  installments of approximately $21,000 including
  interest at 5.7%                                                             646,000
                                                                           --------------------------
                                                                            37,588,000     12,146,000
Less current portion                                                         3,610,000     10,018,000
                                                                           --------------------------
                                                                           $33,978,000    $ 2,128,000
                                                                           ==========================
</TABLE>

In March 1998, the Company terminated its existing bank financing facilities and
entered into  borrowing  arrangements  with  Canadian  Imperial Bank of Commerce
("CIBC")  in  the  aggregate  amount  of  $40,000,000,   consisting  of  a:  (i)
$25,000,000 term loan; (ii) $10,000,000  revolving line of credit facility which
is available for working capital purposes;  and (iii) $5,000,000 credit facility
which is available for corporate  acquisition  purposes.  Such credit facilities
are guaranteed by the Company's  United States  subsidiaries.  In addition,  the
Company  pledged all of its equity  interests in its United States  subsidiaries
and  two-thirds  of its equity  interests  in its  wholly-owned  United  Kingdom
subsidiary  as  collateral  for such credit  facilities.  The credit  facilities
contain  covenants  which require the Company to maintain  certain  earnings and
debt to earnings  ratio  requirements  based on the combined  operations  of the
Company and its  subsidiaries.  The Company's  agreement with CIBC restricts the
Company's ability to pay dividends. The credit facilities are secured by a first
priority lien on all of the assets of the Company and its subsidiaries.

The  Company  utilized  proceeds  of the  borrowings  from  CIBC to  prepay  the
$4,000,000 of loans from private investors. In connection therewith, the Company
recorded  an  extraordinary  loss of  $143,000,  net of income  tax  benefit  of
$137,000 related to the write-off of deferred financing costs.

As of August  31,  1998,  the  Company's  line of credit  with its  London  bank
provides  for  combined  lines  of  credit  of  (pound)2,300,000  (approximately
$3,840,000) for working capital for its United Kingdom  operations.  Such credit
facility was increased from (pound)1,400,000  (approximately  $2,340,000) on May
13, 1998. The line of credit is renewable  annually and contains covenants which
require the  Company's  United  Kingdom  subsidiaries  to maintain a minimum net
worth of  (pound)500,000,  limit borrowings up to specified  amounts of accounts
receivable,  as defined,  and are  guaranteed  by the Company for the  principal
amount  of up to  (pound)500,000.  Amounts  outstanding  are  collateralized  by
substantially all of the Company's United Kingdom assets.


                                      F-16
<PAGE>

                                 Unidigital Inc.
             Notes to Consolidated Financial Statements (continued)

6. LONG-TERM DEBT (CONTINUED)

Maturities of long-term debt are as follows:

                                               AUGUST 31, 1998
                                              -----------------

     Year ending August 31
      1999                                     $  3,610,000
      2000                                        4,123,000
      2001                                        5,740,000
      2002                                        6,416,000
      2003                                       17,699,000
                                              -----------------
                                               $ 37,588,000
                                              =================
7. OBLIGATIONS UNDER CAPITAL LEASES

The Company leases certain  property and equipment which have been classified as
capital  leases.  At August 31, 1998 the cost and accumulated  depreciation  and
amortization  of  such  assets  was  approximately  $9,746,000  and  $3,023,000,
respectively.  At August  31,  1997 the cost and  accumulated  depreciation  and
amortization  of  such  assets  was  approximately  $7,179,000  and  $1,080,000,
respectively.

                                               AUGUST 31, 1998
                                              -----------------
     Year ending August 31,
      1999                                     $  2,306,000
      2000                                        1,764,000
      2001                                          927,000
      2002                                          311,000
      2003                                          153,000
                                              -----------------
     Total                                        5,461,000
     Less amount representing interest             (696,000)
                                              -----------------
     Present value of minimum lease payments      4,765,000
     Less current maturities                      1,935,000
                                              -----------------
                                               $  2,830,000
                                              =================


                                      F-17
<PAGE>

                                 Unidigital Inc.

                  Notes to Consolidated Financial Statements (continued)

8. LOANS AND NOTES PAYABLE TO STOCKHOLDERS

Loans payable to  stockholders  consist of two loans  aggregating  approximately
$362,000 of which approximately  $155,000 is payable on demand and approximately
$207,000 is due in November 1999. The loans bear interest at 8% per annum.

9. STOCK OPTIONS

Unidigital's Board of Directors has adopted,  and the stockholders of Unidigital
have approved the following  stock option plans:  (i) the 1995  Unidigital  Inc.
Long-Term Stock Investment Plan (the "1995 Stock Plan"); (ii) the 1995 Directors
Stock Option Plan (the "1995 Directors  Plan");  (iii) the 1997 Equity Incentive
Plan (the "1997 Plan");  and (iv) the 1997  Non-Employee  Director  Stock Option
Plan (the "1997 Non-Employee Director Plan"),  collectively,  the ("Stock Option
Plans").  The total aggregate number of shares of Common Stock for which options
may be granted under the Stock Option Plans is 875,000.

Under the Stock Option Plans as of August 31, 1998, the Company has committed to
grant  options to  purchase  Common  Stock as  follows:  (i)  226,717  shares at
exercise prices ranging from $4.50 to $7.75 per share,  vesting six months after
the date of grant  under the 1995 Stock Plan;  (ii) no shares have been  granted
under the 1995 Directors  Plan;  (iii) 410,199 shares at exercise prices ranging
from $5.25 to $9.63 per share,  vesting, in part, on the date of grant under the
1997 Plan and;  (iv) 15,000 shares at an exercise  prices  ranging from $5.13 to
$5.53 per share,  vesting  three  months  from the date of grant  under the 1997
Non-Employee  Director  Plan. All stock options were issued at fair market value
at the  date of grant  and have a ten year  term.  The  options  terminate  upon
termination of employment.

In connection  with the  acquisition of Elements (UK), a former  shareholder was
issued  options,  outside the plans,  which expire in February 2002, to purchase
50,000  shares of  Unidigital  Common  Stock at an  exercise  price of $6.00 per
share.


                                      F-18
<PAGE>
                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS (CONTINUED)

A summary of the Company's stock option  activity,  and related  information for
the years ended August 31, 1998, 1997 and 1996 is as follows:

                                                            WEIGHTED AVERAGE
                                             OPTIONS         EXERCISE PRICE
                                          --------------------------------------

Outstanding--September 1, 1995                 50,000            $ 6.00
Granted                                       160,167              6.75
                                          --------------------------------------
Outstanding--August 31, 1996                  210,167              6.57
Granted                                       174,103              4.88
Forfeited                                     (28,500)             6.75
                                          --------------------------------------
Outstanding--August 31, 1997                  355,770              5.73
Granted                                       384,999              6.89
Exercised                                      (3,499)             5.82
Forfeited                                     (74,204)             6.62
                                          --------------------------------------
Outstanding--August 31, 1998                  663,066            $ 6.31
                                          ======================================
Exercisable--August 31, 1998                  409,733            $ 5.93
                                          ======================================

Pro forma information regarding net income and earnings per share is required by
FAS  123,  and has been  determined  as if the  Company  had  accounted  for its
employee  stock  options  under the fair value method of FAS 123. The fair value
for these  options  was  estimated  at the date of grant  using a  Black-Scholes
options pricing model with the following weighted-average assumptions for August
31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                              AUGUST 31,
              ASSUMPTION                        1998             1997            1996
                                            ----------------------------------------------

<S>                                          <C>   <C>        <C>   <C>       <C>   <C> 
 Risk-free rate                              5.5 - 6.9%       5.9 - 6.9%      6.7 - 6.9%
 Dividend yield                                  -                -               -
 Volatility factor of the expected market
   price of the Company's common stock        .4 - 1.1         .4 - .6            .6
 Average life                                  5 years         5 years          5 years
</TABLE>



                                      F-19
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS (CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the Company's employee stock have characteristics  significantly  different from
those of traded options, and because changes in the subjective input assumptions
can materially  affect the fair value  estimate,  in management's  opinion,  the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.

The Company's pro forma information is as follows:
<TABLE>
<CAPTION>

                                                              AUGUST 31,
                                       ---------------------------------------------------------
                                             1998                1997               1996
                                       ---------------------------------------------------------

<S>                                      <C>                <C>                   <C>      
      Pro forma net income               $   954,000        $ 1,142,000           $ 524,000
      Pro forma net income per share:
             Basic                           $  0.27            $  0.36             $  0.20
             Diluted                         $  0.25            $  0.35             $  0.20
</TABLE>

The weighted average fair value of options granted during the years ended August
31, 1998, 1997 and 1996 were $4.46, $2.50 and $3.13, respectively.  The weighted
average remaining contractual life of the options outstanding at August 31, 1998
is 8.49 years.



                                      F-20
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

10. INCOME TAXES

The following comprises income tax expense:
<TABLE>
<CAPTION>
                                                   YEAR ENDED AUGUST 31,
                                           1998             1997            1996
                                      ------------------------------------------------

<S>                                     <C>              <C>             <C>        
U.S. income taxes:
  Current                               $  239,000       $    9,000      $   437,000
  Deferred                                 249,000           44,000          358,000
                                      ---------------- --------------- ---------------
                                           488,000           53,000          795,000
                                      ---------------- --------------- ---------------
United Kingdom income taxes:
  Current                                  302,000          538,000          212,000
  Deferred                                  51,000            2,000           58,000
                                      ---------------- --------------- ---------------
                                           353,000          540,000          270,000
                                      ================ =============== ===============
Total                                   $  841,000       $  593,000      $ 1,064,000
                                      ================ =============== ===============
</TABLE>

The following  reconciles  income tax expense,  computed at the statutory United
States Federal corporate rate, to income tax expense:
<TABLE>
<CAPTION>
                                                          YEAR ENDED AUGUST 31,
                                                     1998          1997          1996
                                               ------------------------------------------
<S>                                              <C>           <C>           <C>        
Income taxes at United States Federal            $  623,000    $  644,000    $   644,000
  statutory rate
State and local income taxes                         95,000        56,000        149,000
Nondeductible expenses and differences
  between United States and United Kingdom
  tax rates                                         123,000      (107,000)        16,000
Effect of Subchapter S status                             -             -       (112,000)
Effect of termination of Subchapter S
  election                                                -             -        367,000
                                               ------------------------------------------
Total                                            $  841,000    $  593,000    $ 1,064,000
                                               ==========================================
</TABLE>


                                      F-21
<PAGE>

                                 Unidigital Inc.

                  Notes to Consolidated Financial Statements (continued)

10. INCOME TAXES (CONTINUED)

The  liability  for deferred  income  taxes is based on U.S. and United  Kingdom
income tax rates applied to temporary  differences in the  recognition of income
and expenses for income tax and financial accounting purposes as follows:
<TABLE>
<CAPTION>

                                                     YEAR ENDED AUGUST 31,
                                               1998          1997           1996
                                         ------------------------------------------

<S>                                        <C>            <C>            <C>        
   Deferred tax liabilities:
     Use of cash basis for United
      States income tax purposes           $    88,000    $   175,000    $   316,000
     Difference in depreciation and
      amortization methods                     905,000        591,000        261,000
                                          -------------------------------------------
   Total deferred tax liability                993,000        766,000        577,000
   Less deferred tax asset:
    Allowance for doubtful accounts           (143,000)      (122,000)       (60,000)
    Other                                     (105,000)      (199,000)             -
                                          -------------------------------------------
   Net deferred tax liability              $   745,000    $   445,000    $   517,000
                                          ===========================================
</TABLE>

As part of the Company's initial public offering in February 1996, Elements (NY)
terminated its S Corporation  election.  Elements (NY) previously  filed federal
and state income tax returns under  Subchapter S of the Internal Revenue Code in
which its income was reportable by and taxed to its  stockholders.  Accordingly,
$367,000 of federal,  state and local  income  taxes,  applicable  to  temporary
differences in the  recognition of income and expenses for financial  accounting
and income tax reporting purposes existing at February 1, 1996, was recorded and
charged to operations  for the year ended August 31, 1996.  These  non-recurring
charges  result solely from the  termination  of the  Subchapter S status in the
United States.  Subsequent to February 1, 1996 income taxes on U.S. earnings are
taxed at the federal,  state and local levels,  whereas  previously,  only local
income taxes on U.S. earnings were payable at the corporate level.


                                      F-22
<PAGE>
                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

11. STOCKHOLDERS' EQUITY

SHARES RESERVED

As of August 31,  1998,  the Company has  reserved  for  issuance  approximately
1,439,000 shares of Common Stock as follows:  (i) 872,000 shares of Common Stock
upon exercise of options  granted or to be granted under its Stock Option Plans;
(ii) issuance of 50,000 shares of Common Stock upon exercise of options  granted
in connection  with the  acquisition of Elements (UK) (see Note 9); (iii) 92,000
shares of  Common  Stock  upon  exercise  of  warrants  issued  to the  managing
underwriter in connection with the PI, exercisable at a price of $7.20 per share
for a period of four years  commencing in February 1997;  (iv) 400,000 shares of
Common Stock upon exercise of warrants  issued in  connection  with loans to the
Company;  and (v)  25,000  shares of Common  Stock  issuable  upon  exercise  of
warrants issued to CIBC Oppenheimer in connection with the Company's  engagement
of CIBC Oppenheimer as its investment banker.

12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
                                                      YEAR ENDED AUGUST 31,
                                              1998           1997           1996
                                         -------------------------------------------
<S>                                        <C>           <C>              <C>       
 Numerator for basic and diluted
  earnings per share-net income
  available for common stockholders        $1,136,000    $1,341,000       $  830,000
                                         ===========================================
Denominator:
Denominator for basic earnings per
share weighted average shares               3,530,836     3,212,098        2,643,828
Effect of dilutive securities:
Stock options                                  74,971        34,760           19,080
Warrants                                      173,631        36,421               -
                                         -------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions              3,779,438     3,283,279        2,662,908
                                         ===========================================
</TABLE>

                                      F-23
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

12. EARNINGS PER SHARE (CONTINUED)

The  following  securities  have  been  excluded  from the  dilutive  per  share
computation as they are antidilutive:
<TABLE>
<CAPTION>

                                                       YEAR ENDED AUGUST 31,
                                                1998          1997            1996
                                       -------------- -------------- --------------
<S>                                            <C>          <C>               <C>   
     Stock options                             41,000       125,000           75,000
     Warrants                                 117,000        92,000           92,000
</TABLE>

13. COMMITMENTS

The Company leases their premises under operating lease  agreements which expire
at various  dates  through  February  2009.  The  Company  also  leases  certain
production  equipment  under  operating  leases  which  expire at various  dates
through August 2001.

Aggregate  minimum rental  payments for premises and equipment  under  operating
leases are approximately as follows:
<TABLE>
<CAPTION>

                                             TOTAL        PREMISES          EQUIPMENT
                                         --------------------------------------------

<S>  <C>                                  <C>            <C>             <C>        
    Year ending August 31,
     1998                                 $ 2,074,000    $1,522,000      $   552,000
     1999                                   1,820,000     1,344,000          476,000
     2000                                   1,603,000     1,332,000          271,000
     2001                                   1,362,000     1,362,000               -
     2002                                   1,161,000     1,161,000               -
     Thereafter                             4,444,000     4,444,000               -
                                         --------------------------------------------
    Total                                 $12,464,000    $11,165,000     $ 1,299,000
                                         ============================================
</TABLE>

Aggregate rental expense for the years ended August 31, 1998, 1997 and 1996
approximated $1,077,000, $515,000 and $378,000, respectively.



                                      F-24
<PAGE>
                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

14. SEGMENT INFORMATION

The Company's  reportable  segments are divisions that offer different  products
and services.  The reportable  segments are each managed separately because they
produce and distribute  distinct products with different  production  processes.
The Company has four reportable  segments:  large format,  financial and digital
print,  high end prepress and on-demand print and prepress.  The Company's large
format  division  consists of Unison  (MA) which  provides  digital  imaging and
photographic  processing in the Boston area. The Company's financial and digital
print division consists of Regent and provides  financial digital print business
and  printing  services in London.  The  Company's  high end  prepress  division
consists of Unison (NY) which provides  digital prepress and digital printing to
advertising  agencies and  corporations in the New York City area. The Company's
on-demand  print and  prepress  consists of  Elements  (NY),  Elements  (UK) and
Elements (SF) which provides on-demand print, digital prepress and retouching in
New York, London and San Francisco.  In addition the Company also has geographic
segments: United States and United Kingdom.

The Company  evaluates  performance  and allocates  resources based on profit or
loss from  operations  before  income  taxes.  The  accounting  policies  of the
reportable  segments  are  the  same  as  those  described  in  the  summary  of
significant  accounting policies.  Intersegment sales and transfers are recorded
at the Company's cost;  there is no intercompany  profit or loss on intersegment
sales or transfers.

The following  summarizes  the  operations  by geographic  segment for the years
ended August 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
                                                            AUGUST 31,
                                  1998                         1997                         1996
                          ---------------------- ----------------------------- ---------------------------
                         UNITED        UNITED         UNITED        UNITED          UNITED       UNITED
                         STATES        KINGDOM        STATES        KINGDOM         STATES       KINGDOM
                         ---------------------------------------------------------------------------------
<S>                   <C>           <C>            <C>            <C>            <C>           <C>        
Net sales             $31,526,000   $15,863,000    $16,293,000    $10,969,000    $ 5,561,000   $ 6,099,000
Income from             
 operations             4,514,000       874,000      1,200,000      1,939,000        763,000     1,226,000
Identifiable assets    56,528,000    10,787,000     24,309,000      8,724,000     13,334,000     4,290,000
Depreciation and 
 amortization           2,743,000     1,211,000      1,315,000        879,000        588,000       469,000
Capital expenditures    2,459,000       909,000      1,983,000      1,096,000        856,000     1,437,000
</TABLE>



                                      F-25
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

14. SEGMENT INFORMATION  (CONTINUED)

The  following  summarizes  operations  by industry  segment for the years ended
August 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
                                                            AUGUST 31, 1998
                              ----------------------------------------------------------------------------

                                                                               ON DEMAND
                                                 FINANCIAL       HIGH END      PRINT AND
                               LARGE FORMAT     AND DIGITAL      PREPRESS      PREPRESS
                                  SEGMENT      PRINT SEGMENT      SEGMENT       SEGMENT          TOTAL
                              ---------------- -------------- ------------- -------------- ---------------
<S>                             <C>             <C>            <C>           <C>             <C>         
Net sales                       $ 9,275,000     $10,836,000    $ 8,154,000   $ 19,124,000    $ 47,389,000
Income from
  operations                        950,000         122,000      2,236,000      2,080,000       5,388,000
Identifiable assets              18,763,000      10,461,000      9,701,000     28,390,000      67,315,000
Depreciation and
  amortization                      940,000         570,000        622,000      1,822,000       3,954,000
Capital expenditures                329,000         827,000        130,000      2,082,000       3,368,000

                                                            AUGUST 31, 1997
                              ----------------------------------------------------------------------------

                                                                               ON DEMAND
                                                 FINANCIAL       HIGH END      PRINT AND
                               LARGE FORMAT     AND DIGITAL      PREPRESS      PREPRESS
                                  SEGMENT      PRINT SEGMENT      SEGMENT       SEGMENT          TOTAL
                              ---------------- -------------- ------------- -------------- ---------------

Net sales                       $ 3,227,000     $ 6,460,000    $         -   $ 17,575,000    $ 27,262,000
Income from
  operations                        655,000         405,000              -      2,079,000       3,139,000
Identifiable assets               6,651,000       5,119,000              -     21,263,000      33,033,000
Depreciation and
  amortization                      319,000         284,000              -      1,591,000       2,194,000
Capital expenditures                147,000         706,000              -      2,226,000       3,079,000

                                                            AUGUST 31, 1996
                              ----------------------------------------------------------------------------

                                                                               ON DEMAND
                                                 FINANCIAL      HIGH END       PRINT AND
                               LARGE FORMAT     AND DIGITAL     PREPRESS       PREPRESS
                                  SEGMENT      PRINT SEGMENT     SEGMENT        SEGMENT          TOTAL
                              ----------------------------------------------------------------------------

Net sales                       $         -     $ 2,274,000    $         -    $ 9,386,000    $ 11,660,000
Income from
  operations                              -         137,000            -        1,852,000       1,989,000
Identifiable assets                       -       2,610,000            -       15,014,000      17,624,000
Depreciation and
 amortization                             -         202,000            -          855,000       1,057,000
Capital expenditures                      -         612,000            -        1,681,000       2,293,000
</TABLE>

                                      F-26
<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)

15. EMPLOYEE BENEFIT PLAN

The  Company  adopted  a  401(k)  Plan  effective  January  1,  1996,  in  which
substantially  all of the Company's U.S.  employees are eligible to participate.
Although the Plan provides for discretionary employer contributions,  there were
none for the years ended August 31, 1998, 1997 and 1996.

16. SUBSEQUENT EVENTS

On September 2, 1998, the Company  purchased  certain assets and assumed certain
liabilities of Mega Art  Corporation.  The aggregate  purchase price consists of
(i) cash payments of  $5,800,000,  (ii) issuance of 754,148 shares of restricted
Common Stock of the Company ($5,000,000),  (iii) a potential earn-out payment of
$1,200,000  payable  180 days after the date of  purchase  and (iv) a  potential
earn-out  payment  of  $1,200,000  and  $1,200,000  of Common  Stock  payable in
November  1999.  The Company  funded the cash portion of the purchase price from
their revolving line of credit.

On October 30, 1998, the Company  purchased  certain assets and assumed  certain
liabilities of Hy Zazula Associates,  Inc. The aggregate purchase price consists
cash of $2,275,000  and the issuance of 433,076  shares of in restricted  Common
Stock of the Company  ($2,275,000).  The Company  funded the cash portion of the
purchase  price from their  revolving  line of credit.  Of the  purchase  price,
$150,000 in cash and 28,552  shares of  restricted  Common Stock  ($150,000)  is
being held in escrow for a period of two years to  satisfy  any  indemnification
claims.

In November  1998,  the Company  sold one of its three  floors in a building for
$800,000 and entered into letters of intent to sell the remaining two floors for
$1,900,000.


                                      F-27
<PAGE>


                          Report of Independent Auditor

We have audited the consolidated financial statements of Unidigital, Inc., as of
August 31, 1998 and 1997,  and for each of the three  years in the period  ended
August 31,  1998 and have  issued our report  thereon  dated  November  19, 1998
(included  elsewhere  in this  Annual  Report).  Our audits  also  included  the
financial  statement  schedule listed in item 14(a) of this Annual Report.  This
schedule is the responsibility of the Company's  management.  Our responsibility
is to express an opinion based on our audits.

In our  opinion,  the  financial  statement  schedule  referred  to above,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.



                                                          Ernst & Young LLP


November 19, 1998
New York, New York


<PAGE>


                  SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
                                 UNIDIGITAL INC.

<TABLE>
<CAPTION>

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

                                                        Additions -   Deductions
                                          Balance at    Charged to    - Write-off       Balance at
                                          Beginning      Costs and    of Accounts         End of
              Description                 of Period      Expenses      Receivable        Period

---------------------------------------- ------------- -------------- ------------ -------------
<S>                                       <C>           <C>            <C>              <C>
YEAR ENDED AUGUST 31, 1998 
 Reserves and allowances deducted
 from asset accounts:
   Allowance for uncollectible 
   accounts                               $  266,000    $ 115,000      $  50,000        $ 331,000

YEAR ENDED AUGUST 31, 1997
 Reserves and allowances deducted
 from asset accounts:
   Allowance for uncollectible
   accounts                               $  201,000    $ 102,000      $  37,000        $ 266,000

YEAR ENDED AUGUST 31, 1997
 Reserves and allowances deducted
 from asset accounts:
   Allowance for uncollectible
   accounts                               $  110,000    $ 104,000      $  13,000        $ 201,000

</TABLE>