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, 1997

                           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)

545 West 45th Street, New York, New York                                  10036
-------------------------------------------------------------------------------
(Address of Principal Executive Offices)                              (Zip Code)

                                 (212) 397-0800
                                 --------------
                           (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,  1997  were:
$27,261,856.

     The aggregate  market value of the voting and non-voting  Common Stock held
by  non-affiliates  of the Issuer was:  $13,339,679 at October 31, 1997 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, 1997:

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

Common Stock, $.01 par value                          3,243,243

     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 1998 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. Management's Discussion and Analysis or Plan of Operation....... 12

          7. Financial Statements............................................ 16

          8. Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure............................. 16

PART III  9. Directors, Executive Officers, Promoters and Control
             Persons, Compliance with Section 16 (a) of the
             Exchange Act.................................................... 18

          10. Executive Compensation......................................... 18

          11. Security Ownership of Certain Beneficial Owners
              and Management................................................. 18

          12. Certain Relationships and Related Transactions................. 18

PART IV   13. Exhibits, List and Reports on Form 8-K......................... 19

SIGNATURES ...................................................................20

EXHIBIT INDEX.................................................................22

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

                                     - i -

<PAGE>

                                     PART I
                                     ------

Item 1.   Business.
------------------

General
-------

     Unidigital Inc., together with its wholly-owned subsidiaries (collectively,
the "Company"),  provides a full range of digital  prepress,  four color digital
offset printing, wide format and financial printing products and services to the
New York City, San Francisco, London and Boston markets. Using advanced computer
technology,  the Company provides the imaging and reproduction services required
by graphic artists and marketing  professionals  in connection with the creation
of printed and photographic  materials for their clients.  The Company's clients
include advertising  agencies,  publishers,  corporations,  government agencies,
retailers,  marketing  communications  firms  and  financial  institutions.  The
Company's  services  are  designed  to  afford  graphic  artists  and  marketing
professionals  the  ability to make  numerous  changes and  enhancements  in the
design and  content  of printed  materials  throughout  the design and  approval
process,  with  shorter  turnaround  times and at reduced  costs as  compared to
traditional industry methods.

     The Company conducts its operations through five wholly-owned subsidiaries:
(i) Unidigital Elements (NY), Inc.,  formerly known as LinoGraphics  Corporation
("Elements  (NY)");   (ii)  Elements  (UK)  Limited  ("Elements  (UK)");   (iii)
Unidigital  Elements  (SF),  Inc.,  formerly  known as  LinoGraphics  (Delaware)
Corporation  ("Elements  (SF)");  (iv)  Unison  (NY),  Inc.,  formerly  known as
Unidigital/Cardinal  Corporation  ("Unison  (NY)");  and (v) Unison (MA),  Inc.,
formerly known as Unidigital/Boris  Corporation  ("Unison (MA)").  Elements (NY)
engages in the digital prepress and four color digital offset printing  business
in New York City.  Elements (UK) engages in the digital  prepress and four color
digital offset printing business in London. In addition,  Elements (UK), through
its  wholly-owned  subsidiary  Regent  Communications  (UK) Limited  ("Regent"),
operates  a digital  print  business  in  London.  Elements  (UK) also  provides
printing  services to the London  financial  community  through its wholly-owned
subsidiary Libra City Corporate Printing Limited  ("Libra"),  which was acquired
in  May  1997.  Elements  (SF)  operates  an  on-demand  prepress  business  and
retouching studio in San Francisco. Unison (NY) engages in the digital prepress,
four color digital offset  printing and wide format  printing  businesses in the
New York City area.  Unison (MA) engages in the  business of four color  digital
offset printing, wide format, digital imaging and photographic processing in the
Boston area.

     The Company's core services include the following:

     Digital Prepress.  Digital prepress services involve preparing an image for
reproduction by any of several input,  digital  retouching,  proofing and output
processes.

     Four Color Digital Offset  Printing.  Four color digital  offset  printing,
also known as "on-demand"  or "short-run"  printing,  involves  translating  and
integrating  computer-generated  graphic  design and  content  into a four color
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.

                                   
<PAGE>

     Wide Format.  Wide format output allows for large format printing  produced
from graphic digital files.  Inkjet,  electrostatic  and laser  technologies are
utilized to produce  wide format  images on  different  substrates  for specific
applications.  Retail  point of purchase  displays,  posters and signage are the
most common uses for these  technologies.  The Company also provides  commercial
photographic  products and services that utilize digital imaging  technology for
the production of traditional photographic materials.

     Financial  Printing.  The Company's financial printing services include the
production,  formatting and printing of corporate finance and research documents
for corporate  clients.  The Company utilizes both traditional and digital print
technology to produce  these  documents.  Digital  printing and expertise in the
financial market are especially important for their customers, who often require
documents printed on-demand in both four color and black and white.

     The Company's logos are trademarks of the Company. All other trademarks and
trade names  referred to in this Form 10-KSB are the property of the  respective
owners and are not the property of the Company.

     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,  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.

     The Company was  incorporated in Delaware in 1995 when it effected a merger
of its  predecessor  companies  into a new  Delaware  corporation  for the  sole
purpose of relocating its state of 

                                      -2-
<PAGE>

incorporation from New York to Delaware.  The address of the Company's principal
executive  offices is 545 West 45th Street,  New York,  New York 10036,  and its
telephone number is (212) 397-0800.

Acquisition Strategy
--------------------

     As part of its on-going  business  strategy,  the Company  seeks to acquire
companies and businesses in markets with  concentrations  of graphic artists and
marketing  professionals.  In  furtherance  of this  strategy,  the  Company has
consummated  four  acquisitions  since February 1996. In March 1996, the Company
acquired  certain  assets  of  TX  Unlimited,  Inc.  ("TX"),  a  San  Francisco,
California  based graphics arts company.  In August 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  provided
digital  prepress,  digital  printing  and wide format  services in the New York
metropolitan area (the "Cardinal Acquisition").  The Cardinal Acquisition marked
the Company's  entry into short-run color digital print services in the New York
City market. In April 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,  wide format and digital
imaging (the "Boris Acquisition"). The Boris Acquisition increased the Company's
presence  by  entering  the  Boston  market and  enhanced  its  position  in the
photographic,  wide format,  digital printing and digital imaging market. In May
1997,  the Company  acquired all of the capital stock of Libra,  a  London-based
financial printer (the "Libra  Acquisition").  The Libra Acquisition has enabled
the  Company  to  market  its  services  to both the  financial  and  commercial
marketplace in the London market.

Services and Markets
--------------------

     Digital Prepress

     The Company provides a comprehensive array of high quality digital prepress
services including the production and finishing of photographic  quality or high
resolution   color  proofs,   production  of   electronic   color   separations,
imagesetting,  retouching,  production of plate-ready films and digital scanning
of artwork. These services are a necessary step between the creative process and
the actual printing of a graphic design.  Digital prepress  services provided by
the Company fall into two broad categories: input services and output services.

     --   Input Services
          Scanning is an input service that utilizes digital optic technology to
          digitize  photographic  transparencies,  negatives,  prints  or  other
          artwork which is then color corrected, retouched to specifications and
          stored on tape, disk or CD-ROM media.

                                      -3-
<PAGE>

     --   Output  Services
          Output  services  include  printing  images of digitized  files onto a
          variety of substrates  such as high quality color proofs which vary in
          size and resolution, prepress products required for volume printing of
          a design, camera-ready art for printer's mechanicals, plate-ready film
          for  a  high  quality  color  work,   contract  or  Match  Prints(TM),
          imagesetting and color separation.

     Four Color Digital Offset Printing

     The Company  provides four color digital offset printing  services,  in the
New York City, London and Boston markets.  Four color digital offset printing is
implemented by utilizing two Canon CLC 1000 digital color  copiers,  four Indigo
E-Print 1000 digital  printing  presses and one  Heidelberg  QuickMaster DI four
color digital  printing  press.  These digital  printing  presses allow for four
color process  printing that is both less expensive and quicker than traditional
production  processes by eliminating the traditional  production  needs of color
separations,  metal plates and other pre-production processes. Each press offers
different advantages to end-users in speed, production, quality and cost.

     --   Canon CLC 1000
          The Canon CLC 1000 is utilized  for print runs of 1 to 500.  The Canon
          CLC 1000 produces multiple copies immediately from a digital file with
          none of the pre-production processes traditional printing employs.

     --   Indigo E-Print 1000
          The Indigo E-Print 1000 is targeted for print runs of 1 to 1,000.  The
          Indigo  E-Print 1000  produces  high quality four color  printing on a
          variety of paper stocks within 24 hours.

     --   Heidelberg QuickMaster DI
          The  Heidelberg  QuickMaster  DI targets  print runs  between  500 and
          5,000.  The Heidelberg  QuickMaster DI also produces high quality four
          color  printing on a variety of paper stocks  within 24 hours,  but in
          longer print runs.

     Traditional  finishing and bindery  services are also provided as ancillary
services to these digital printing  processes.  The Company's London  operations
offer finished "on-demand" documents using the Xerox Docutech(TM),  a high speed
digital  press.  The  Company's  black and white digital  printing  services are
generally used for the production of financial documents.  With the introduction
of its digital color printing service in New York, London and Boston,  using the
Canon CLC 1000, the Indigo E-Print 1000 and the Heidelberg  QuickMaster  DI, the
Company  enables its clients to take a design  through the approval,  production
and printing phases at one location with one vendor.

                                      -4-
<PAGE>

     Wide Format

     The Company  provides  digital and traditional  photographic  solutions for
graphic  artists and  marketing  professionals.  Graphic  applications  for wide
format products and services  include point of purchase  displays for retailers,
trade show graphics,  vehicle graphics,  interior architectural signage,  museum
displays,  outdoor  signage,  outdoor  banners,  floor graphics,  art murals and
courtroom  displays.  The Company  utilizes  the  following  digital wide format
devices:

     --   Iris(TM)
          Iris(TM) output devices produce a high quality,  continuous tone color
          output on a variety of paper stocks.

     --   NovaJet(TM)
          NovaJet(TM)  inkjet  devices  produce full color  quality  graphics on
          paper, vinyl, transparency or canvas substrates from digital files.

     --   Cactus(TM)
          Cactus(TM) output devices utilize color toner based plotter technology
          that is timely,  cost  effective  and can be  finished in a variety of
          ways.

     --   Durst Lambda(TM)
          Durst  Lambda(TM)  output  produces  laser  printing  on  photographic
          substrates from digital files.  This technology  utilizes three lasers
          to precisely expose continuous tone full color images and designs onto
          mural size photographic print or transparency substrates.

     Financial Printing

     The Company provides financial printing services to financial  institutions
in the London  market.  The  Company's  black and white and four  color  digital
offset  printing  services  provide  financial  printing  clients a resource for
responsive,  accurate  corporate finance and research  documents  delivered in a
time sensitive  manner.  Financial  printing services are available on a 24-hour
basis and include typesetting,  formatting and remote locations for the printing
of financial documents.

     Ancillary Products and Services

     The Company also provides ancillary  products and services  associated with
its core services such as:

     --   Photographic Printing and Processing
          The Company,  through Unison (MA), operates a commercial  photographic
          lab  that  produces  traditional   photographic   printing  and  photo
          processing.

                                      -5-
<PAGE>

     --   Mounting and Lamination
          In connection  with the  production of digital  prepress color proofs,
          digital  four color  offset  printing  and wide format  printing,  the
          Company offers  mounting and laminating in a variety of substrates and
          finishes, along with many finishing services.

     --   Production Services
          The Company also provides  production  services to magazine publishers
          and advertising  agencies involving both digital prepress services and
          production  work.  Production  services include placing scanned images
          into existing layouts and image manipulation.

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

Customers
---------

     The  Company's  customers  consist  of  graphic  design  firms,   marketing
communications  departments,   financial  institutions,   advertising  agencies,
publishers,  corporations and individual graphic artists,  as well as businesses
in a variety of  industries  requiring  large display  graphics and  specialized
digital offset printing  services,  including  financial  printing.  The Company
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 customers'  satisfaction  with the quality of
previous   services.   Many  of  the  Company's   customer   relationships   are
long-standing,  and the Company believes that its  relationships  with customers
and its  reputation  for  quality  service  are  excellent.  The  Company  has a
diversified  client base, with the largest client accounting for less than 4% of
fiscal 1997 net sales.

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

     The  Company  markets  its  services  to a broad and  diverse  client  base
encompassing various industries by direct sales methods targeted at existing and
potential customers.  The Company sells its services utilizing sales persons and
a  director  of sales in each of its  locations.  In  developing  its  on-demand
digital printing services,  the Company seeks customers from its existing client
base and by  specifically  targeting and marketing to other end-users of printed
color media  encompassing a broad base of  industries.  The Company uses various
marketing  methods  including  direct  mail,   product  samples,   trade  shows,
promotions and internet sites.  The Company also mails out extensive  collateral
material on products and services offered, testimonials of previous projects and
"how to" sheets for file  preparation.  The internet  site is a  repository  for
information on products and services,  press releases on the Company,  up-coming
events and industry news.  

                                      -6-
<PAGE>

     In March 1997, the Company implemented a branding strategy to better market
the Company's diverse products and services.  There are three brands utilized by
the Company: Elements, with locations in New York City, San Francisco and London
(the "Elements Group"),  Unison,  with locations in New York City, San Francisco
and Boston (the "Unison  Group"),  and the "Regent  Group," a  consolidation  of
Regent and Libra, in the London market.  The Elements Group,  via  telemarketing
and direct mail, sells primarily to graphic artists and marketing  professionals
who  design  and  prepare  files  for  reproduction.  The New  York  and  London
operations  are open 24 hours a day, 6 days a week.  Projects  are priced from a
published  price list.  The Unison  Group  sells its  products  and  services to
primarily corporate clients,  marketing and communications  departments in large
corporations,  advertising  agencies and publishers.  Sales are  consultative in
nature,  largely project driven and are not usually subject to a published price
list.  The Regent Group sells  primarily to financial  institutions,  government
agencies and  corporations.  Sales are consultative in nature and project based.
To date,  the  Company  has not yet been able to  determine  the impact that the
branding strategy has had on the Company's financial performance.

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

     The  Company's  businesses  operate in highly  competitive  and  fragmented
markets.   Competition  in  the  commercial   printing  industry,   wide  format
photo-imaging  and  financial  printing  industry  is based on several  factors,
including  quality,  price and speed of  turnaround.  The Company's  competitors
include other providers of digital prepress services,  digital four color offset
and commercial printers, wide format, and financial print providers.

     Digital Prepress Providers

     The Company competes directly with other digital prepress providers,  which
generally are smaller  companies  and provide some,  but not all of the services
provided by the Company,  as well as storefront copy shops which provide some of
the Company's  lower-end  services  such as the printing of color proofs.  Other
direct competitors include traditional providers of prepress services, which may
have greater financial,  marketing and other resources than the Company, and the
in-house graphics  departments of large consumers of prepress services,  such as
advertising  agencies and large  corporations.  The Company  believes  that,  at
present,  only the largest  consumers can  economically  perform these  services
in-house.  However,  as  technology  improves and becomes less  expensive (as it
historically  has),  the  Company  expects  that it will lose a  portion  of its
business  to  existing  or  potential  clients  who  purchase  digital  prepress
equipment and perform some portion of their prepress requirements  in-house. The
Company believes it can effectively  compete with in-house  providers due to its
ability  to  provide  services  24 hours a day,  6 days a week,  at  competitive
prices. In addition,  since the Company serves hundreds of clients annually, the
Company is able to spread the capital  cost of the  equipment  quickly,  thereby
permitting  the Company to make  frequent  upgrades  and to  purchase  and lease
state-of-the-art  equipment which in-house  providers may not be able to do on a
cost-effective basis.

                                      -7-
<PAGE>

     The Company believes that to remain  competitive 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.

     Digital Four Color Offset and Commercial Printers

     The Company's  digital  on-demand  printing business faces competition from
conventional  printers  which  have  added,  or plan to  add,  digital  presses.
Further,  many of the Company's  prepress  competitors  have  purchased  digital
presses.  The  Company  believes  it has  several  competitive  advantages  over
conventional  printers  and  prepress  service  providers.  First,  the  Company
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  mentality.
Second,  the Company has existing  clients which the Company believes are likely
to become users of digital presses.  Third,  because digital  printing  provides
another type of output from the graphic artist's  computer files and because the
Company's  clients are accustomed to using the Company for output services,  the
Company  believes  its  customers  will begin to use the Company to provide this
value-added  service.  Finally,  unlike certain of its competitors,  the Company
presently  possesses  the computer  hardware,  software and expertise to support
digital printing.

     The  Company  competes  indirectly  with  commercial  printers  which often
provide  prepress  services to their clients in connection  with volume printing
services.  The Company  believes that it has a competitive  advantage  over such
conventional printers for several reasons.  Unlike many printers,  the Company's
operations  are  located  in large  urban  areas  with  high  concentrations  of
corporate clients and graphic artists, thereby facilitating rapid turnaround and
direct client  contact.  In addition,  most printers either cannot support or do
not have broad  experience  supporting the hardware and software  widely used by
graphic artists. In contrast,  the Company believes that it has the expertise to
support the digital printing services required by graphic artists.

     Wide Format

     The Company competes in a wide format  marketplace that is rapidly growing.
This industry is characterized by many smaller  companies often servicing narrow
market channels such as law firms,  local retailers and general display markets.
Such  companies are often at a financial  disadvantage  when  competing with the
Company's comprehensive array of output devices, software and inter-company high
speed network.  The Company's  expertise,  output devices,  software and network
enable the Company to output and manage large  projects  that are  difficult for
such smaller companies to administer.

     Financial Printing

     The Company  provides  document  creation  services and financial  printing
services in the London market only. Although competition is intense, the Company
has,  through use of  appropriate  technology  and by providing a  comprehensive
range of services, increased its market share.


                                      -8-
<PAGE>


     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.

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 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, 1997, the Company employed 314 persons, approximately 308
of whom are  full-time  employees.  Of such  employees,  204 are employed in the
United States and 104 are employed in the United Kingdom.  None of the Company's
employees is covered by a collective bargaining agreement. The Company considers
its employee relations to be satisfactory.

                                      -9-
<PAGE>

Item 2. Properties.
------------------

     The Company owns its principal executive offices in New York City, totaling
approximately  34,000  square feet of commercial  real estate.  Such property is
subject to a first  priority lien held by The Chase  Manhattan  Bank as security
for the  Company's  borrowings  under its credit  facilities.  In addition,  the
Company currently leases approximately 9,500 square feet in New York City, under
leases  which  expire in 1999 and that contain a one-year  renewal  option.  The
Company also leases  approximately  10,300  square feet in London,  which leases
expire in 2000.  In addition,  in  connection  with the Libra  Acquisition,  the
Company  acquired a lease for  approximately  8,900  square feet in London.  The
Company is currently  renegotiating  such lease.  In  connection  with the Boris
Acquisition, Unison (MA) assumed a lease for approximately 37,500 square feet in
Boston, which lease expires in December 1998 and has a five-year renewal option.
Finally,  the Company occupies  approximately  2,900 square feet of space in San
Francisco  pursuant to a  month-to-month  lease.  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."

     The  following  table  sets  forth  the high and low sales  prices  for the
Company's  Common Stock for the quarters  indicated  (since February 1, 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
-------------                                    ----                ---
                                              
February 29, 1996........................       $6 7/8               $5

May 31, 1996 ............................       $9 1/4               $4 7/16

August 31, 1996..........................       $8 5/8               $5 11/16

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

     As of October 31, 1997 the  approximate  number of holders of record of the
Common  Stock was 36 and the  approximate  number of  beneficial  holders of the
Common Stock was 325.

     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.

                                      -11-
<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operation.
-----------------------------------------------------------------

General
-------

     The Company provides a full range of digital  prepress,  four color digital
offset printing, wide format and financial printing products and services to the
New York City, San Francisco, London and Boston markets. Using advanced computer
technology,  the Company provides the imaging and reproduction services required
by graphic artists and marketing  professionals  in connection with the creation
of printed and photographic  materials for their clients.  The Company's clients
include advertising  agencies,  publishers,  corporations,  government agencies,
retailers,  marketing  communications  firms  and  financial  institutions.  The
Company's  services  are  designed  to  afford  graphic  artists  and  marketing
professionals  the  ability to make  numerous  changes and  enhancements  in the
design and  content  of printed  materials  throughout  the design and  approval
process,  with  shorter  turnaround  times and at reduced  costs as  compared to
traditional industry methods.

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,   through  a   wholly-owned   subsidiary,   consummated   the  Cardinal
Acquisition.  As a result of such  acquisition,  the  Company has  expanded  its
digital  prepress  and  digital  print  operations  in the  New  York  City  and
surrounding  area.  On  April 4,  1997,  the  Company,  through  a  wholly-owned
subsidiary,  consummated the Boris Acquisition and, as a result,  engages in the
business of digital imaging and  photographic  processing.  On May 22, 1997, the
Company,  through a wholly-owned  subsidiary,  consummated the Libra Acquisition
and, as a result,  provides  financial printing services to the London financial
community.  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.

     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 $15,602,038,  to $27,261,856 from $11,659,818 for the fiscal year ended
August 31, 1996. Net sales for the Company's United States operations  increased
by 193%,  or  $10,731,956,  from  $5,560,975 in the fiscal year ended August 31,
1996 to $16,292,931 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
sales from the  Elements  (SF)  operations  for the fiscal year ended August 31,
1997. Net sales for the Company's United Kingdom operations increased by 80%, or
$4,870,082,  from  $6,098,843  in the  fiscal  year  ended  August  31,  1996 to
$10,968,925  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.


                                      -12-
<PAGE>

     Cost of sales.  Cost of sales for the  fiscal  year ended  August 31,  1997
increased by 157%, or $8,827,995,  to $14,449,663 from $5,621,668 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 wide 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 $5,623,597,  from $4,049,474
for the fiscal  year ended  August 31,  1996 to  $9,673,071  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 $1,150,446,  to $3,139,122 from $1,988,676 for
the  fiscal  year  ended  August  31,  1996.  Of  this  amount,  $1,199,585  was
contributed  by the Company's  United States  operations  and  $1,939,537 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  $1,110,702,  to $1,205,110  from $94,408 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  $471,047,  to  $593,280  from  $1,064,327  for the fiscal year ended
August 31, 1996. The 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.


                                      -13-
<PAGE>


     Net income.  As a result of the factors described above, net income for the
fiscal year ended August 31, 1997  increased by 62%, or $510,791,  to $1,340,732
from $829,941 for the fiscal year ended August 31, 1996.

Liquidity, Capital Resources and Other Matters
----------------------------------------------

     Cash flow. Net cash provided by operations was $488,481 for the fiscal year
ended August 31, 1997 and  $1,488,318 for the fiscal year ended August 31, 1996.
Net cash used in investing  activities  was $6,896,171 for the fiscal year ended
August 31, 1997 and  $3,056,770  for the fiscal year ended August 31, 1996.  The
Company used  $1,367,586  and  $1,279,502  for the  acquisition  of property and
equipment during such respective  periods.  For the fiscal year ended August 31,
1997 and the fiscal year ended August 31, 1996, the Company  acquired  equipment
under  capital  leases of  $1,710,767  and  $1,013,849,  respectively,  and made
payments under capital leases of $1,761,154 and $692,311, respectively. Net bank
borrowings  provided  funds of  $7,442,946  for the fiscal year ended August 31,
1997 and $2,457,902 for the fiscal year ended August 31, 1996.

     Bank  credit  facilities.  The  Company  has  borrowing  arrangements  with
commercial  banks in both New York and London.  The Company has combined  credit
facilities  with  its New York  bank for its  United  States  operations  in the
aggregate  amount of $8,350,000,  which consist of a: (i)  $4,500,000  revolving
credit facility which is available for corporate acquisition purposes;  and (ii)
$3,850,000  line of credit  facility  which is  available  for  working  capital
purposes.  Such  credit  facilities  are  available  to be  used  by each of the
Company's four United States subsidiaries. Interest under such credit facilities
is at the Company's  option at the  Alternate  Base Rate or at the Adjusted LIBO
Rate,  as  defined,  plus  0.25% in the  United  States  and 2.25% in the United
Kingdom.  As of August 31,  1997,  the  Company  had an  outstanding  balance of
$1,725,000  under the revolving credit facility and $2,710,110 under the line of
credit.

     The credit  facilities  contain  covenants  which  require  the  Company to
maintain  certain  tangible net worth and debt service  coverage ratios based on
the combined assets of the Company and its subsidiaries and limiting  borrowings
up to specified amounts of accounts  receivable aged 90 days or less. The credit
facilities  are  secured  by a first  priority  lien on all of the assets of the
borrowers. The lines of credit are renewable annually each December.  Unidigital
is a  guarantor  on all bank  debts of the  Company's  United  States  operating
subsidiaries.

     The  Company  has  combined  lines of credit  of (Pound  Sterling)1,145,000
(approximately   $1,855,000)   for  working   capital  for  its  United  Kingdom
operations.  These lines of credit are  renewable  annually and bear interest at
2.25% over the  Bank's  Base  Rate,  as  defined,  for  borrowings  up to (Pound
Sterling)600,000  and bear  interest  at 2.75%  over the  Bank's  Base  Rate for
borrowings  in excess of such  amount.  At August 31,  1997,  the Company had an
outstanding  balance  of (Pound  Sterling)1,101,123  (approximately  $1,784,150)
under  these lines of credit  which bear  interest at a rate of 9.47% per annum.
These lines of credit  contain  covenants  limiting  borrowings  up to specified
amounts  of  accounts  receivable  aged 120 days or less and are  guaranteed  by
Unidigital for the principal amount of up to (Pound Sterling)500,000.


                                      -14-
<PAGE>

     As of August 31, 1997, the Company was not in compliance with all covenants
under its credit  facilities  with its New York bank, but received a waiver from
such bank for such noncompliance.

     Other  loans.  Between  May 1997 and July 1997,  the  Company  borrowed  an
aggregate principal amount of $4,000,000 pursuant to certain unsecured five-year
loans (the  "Unsecured  Loans").  The  holders of the  Unsecured  Loans have the
option to put such loans to the Company after one year.  In connection  with the
Unsecured  Loans,  the  Company  granted  five-year  warrants  to the lenders to
purchase up to an aggregate  amount of 400,000  shares of the  Company's  Common
Stock at an exercise price of $4.00 per share. In addition,  the Company granted
"piggyback"  registration  rights,  subject  to  certain  limitations,  to  such
lenders.  Included among the lenders were David  Wachsman and Harvey  Silverman,
directors of the Company.  Such directors loaned an aggregate of $300,000 of the
above  amount to the Company and  received  warrants to purchase an aggregate of
30,000 shares of the Company's Common Stock. The warrants,  which were deemed to
have a value of $602,000,  have been recorded as deferred financing costs, which
are being amortized on a straight-line basis over one year.

     In  addition,  in  connection  with the Cardinal  Acquisition,  the Company
assumed a loan in the principal  amount of $350,000 payable to the United States
Small  Business  Administration.  Such loan  matures on December 1, 2014.  As of
August 31, 1997, the Company had an  outstanding  balance of $334,368 under such
loan. In connection  with the Boris  Acquisition  and the acquisition of certain
assets of TX, the Company issued  promissory notes to the respective  sellers as
part of the consideration paid for such acquisitions. In the TX acquisition, the
Company issued a promissory note in the principal  amount of $85,000.  Such note
is payable in eight quarterly  installments and matures in September 1998. As of
August 31, 1997,  the Company had an  outstanding  balance of $42,500 under such
note.  In the Boris  Acquisition,  the Company  issued a promissory  note in the
principal amount of $150,000. Such note is payable in two equal installments and
matures  on  January  15,  1999.  As of August  31,  1997,  the  Company  had an
outstanding balance of $150,000 under such note. Finally, the Company has a term
loan in the  principal  amount of $1,400,000  with its New York bank.  Such term
loan  matured on September  1, 1997.  At  September 1, 1997,  such term loan was
rolled over into the Company's line of credit facility.

     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 the
Unsecured  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 decreased by $4,508,700 from
$2,319,343  at August 31, 1996 to a working  capital  deficit of  $2,189,357  at
August 31, 1997. Such decrease was attributable  primarily to increased  capital
lease and debt obligations incurred in connection with the Cardinal Acquisition,
the Boris  Acquisition and the Libra  Acquisition  offset, in part, by increased
net income.


                                      -15-
<PAGE>


     Acquisitions.   On  April  4,  1997,  Unison  (MA)  consummated  the  Boris
Acquisition.  The  aggregate  purchase  price  consisted of the  following:  (i)
$1,725,000 in cash; (ii) an aggregate of $300,000 in guaranteed  future payments
to Boris Image  Group and its  management  team;  (iii)  $250,000 in  restricted
Common  Stock  (45,480  shares);  (iv) a  potential  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.

     On May 22, 1997,  Elements  (UK)  consummated  the Libra  Acquisition.  The
purchase   price   included   cash   payments   of   (Pound   Sterling)1,823,750
(approximately  $2,972,700)  and a  potential  earn-out  payment of up to (Pound
Sterling)500,000 (approximately $815,000) payable by March 31, 1998.

     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 would  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.

Item 7. Financial Statements.
----------------------------

     The financial  statements  required to be filed pursuant to this Item 7 are
included  in  this  Annual  Report  on  Form  10-KSB.  A list  of the  financial
statements  filed herewith is found at "Item 13.  Exhibits,  List and Reports on
Form 8-K."

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure.
--------------------------------------------------------------------------------

     On  August  28,  1996,  Unidigital  selected  Ernst &  Young  LLP to act as
independent  accountants  for the  Company  and  informed  the  prior  auditors,
Cornick,  Garber & Sandler,  LLP, the Company's  independent  accountants  since
October 1995, of its decision. In connection with its audits for each of the two
years in the  period  ended  August  31,  1995  and  thereafter,  there  were no
disagreements with the prior auditors on any matters of accounting principles or
practices,  financial statement disclosure, or auditing scope or procedures. The
prior auditors' report on the Company's financial statements for each of the two
years in the  period  ended  August 31,  1995  contained  no adverse  opinion or
disclaimer of opinion and was not modified or qualified as to uncertainty, audit
scope, or accounting principles. The decision to change accountants was approved
by the Board of Directors of the Company.  The prior auditors have furnished the
Company with a letter  addressed  to the SEC stating  their  agreement  with the
above  statements.  Such letter appeared as Exhibit 16 to the Company's  Current
Report on Form 8-K filed with the SEC on September  4, 1996.  Prior to retaining
Ernst &  Young  LLP,  the  Company  had not  


                                      -16-
<PAGE>

consulted with Ernst & Young LLP regarding accounting  principles or the type of
opinion that would be rendered on the Company's financial statements.




                                      -17-
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance
        with Section 16(a) of the Exchange Act.
--------------------------------------------------------------------------------

     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
1998 Annual Meeting of Stockholders is incorporated  herein by reference to such
proxy statement.

Item 10.  Executive Compensation.
---------------------------------

     The discussion under the heading "Executive  Compensation" in the Company's
definitive  proxy  statement  for the 1998  Annual  Meeting of  Stockholders  is
incorporated herein by reference to such proxy statement.

Item 11.  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 1998
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

Item 12.  Certain Relationships and Related Transactions.
---------------------------------------------------------

     The  discussion  under  the  heading  "Certain  Relationships  and  Related
Transactions"  in the Company's  definitive  proxy statement for the 1998 Annual
Meeting  of  Stockholders  is  incorporated  herein by  reference  to such proxy
statement.



                                      -18-
<PAGE>


                                    PART IV

Item 13.  Exhibits, List 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.

          None.

     (a)  (3)  Exhibits.

          Reference is made to the Exhibit Index on Page 22.

     (b)  Reports on Form 8-K.

          On June 6, 1997,  the Company filed a Current  Report on Form 8-K with
          the  SEC  relating  to the  Libra  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 Libra
          Acquisition.

          On August 5, 1997,  the Company  filed a Current  Report on Form 8-K/A
          containing  required  financial  statements and pro forma  information
          relating to the  acquisition  disclosed in its Current  Report on Form
          8-K filed on June 6, 1997.




                                      -19-
<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 12th day of
December, 1997.

                                        UNIDIGITAL INC.


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



                                      -20-
<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        President, Chief Executive         December 12, 1997
-------------------      Officer and Chairman of the
William E. Dye           Board of Directors (principal
                         executive, financial and
                         accounting officer)


/s/Anthony Manser        Vice President and Director        December 12, 1997
------------------
Anthony Manser


/s/Peter Saad            Senior Vice President,             December 12, 1997
-------------------      Chief Operating Officer
Peter Saad               and Director


/s/Harvey Silverman      Director                           December 12, 1997
-------------------
Harvey Silverman


/s/David Wachsman        Director                           December 12, 1997
-------------------   
David Wachsman




                                      -21-
<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  Promissory  Note,  together  with  Schedule  of Holders.
               Incorporated by reference to Exhibit 4.1 to the Company's Current
               Report on Form 8-K dated June 6, 1997.

     4.5       Form of Subordinated  Promissory Note,  together with Schedule of
               Holders.   Incorporated  by  reference  to  Exhibit  4.1  to  the
               Company's  Quarterly  Report on Form 10-QSB for the quarter ended
               May 31, 1997.
          
     4.6       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.

     4.7       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.

                                      -22-
<PAGE>
         
Exhibit
No.                           Description of Exhibit
-------                       ----------------------

     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      Separation Agreement between Unidigital Inc. and Stephen McErlain
               dated July 15, 1996.  Incorporated  by reference to Exhibit 10.17
               to the Company's Annual Report on Form 10-KSB for the fiscal year
               ended August 31, 1996.

     10.5      Separation  Agreement  between  Unidigital Inc. and Michael Brown
               dated September 18, 1997.

     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).

     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*    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).

                                      -23-
<PAGE>
          
Exhibit
No.                           Description of Exhibit
-------                       ----------------------

     10.11*    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).

     10.12*    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.

     10.13*    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.

     10.14     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).

     10.15     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).
          
     10.16     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).

     10.17     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.
          
     10.18     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.

     10.19     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.

                                      -24-
<PAGE>
          
Exhibit
No.                           Description of Exhibit
-------                       ----------------------

     10.20     Credit  facilities  between  Elements  (UK)  Limited  and  Regent
               Communication  (UK)  Limited  and Lloyds  Bank.  Incorporated  by
               reference to Exhibit 10.22 to the Company's Annual Report on Form
               10-KSB for the fiscal year ended August 31, 1996.

     10.21     Credit  Agreement  dated as of April 3,  1997,  among  Unidigital
               Elements (NY), Inc., Unidigital/Cardinal Corporation,  Unidigital
               Elements (SF), Inc.,  Unidigital/Boris  Corporation and The Chase
               Manhattan Bank.  Incorporated by reference to Exhibit 10.4 to the
               Company's  Quarterly  Report on Form 10-QSB for the quarter ended
               February 28, 1997.
         
     10.22     Amended  Revolving  Credit  Note  dated  April  3,  1997  in  the
               aggregate  principal amount of $4,500,000  evidencing a revolving
               credit facility with The Chase Manhattan Bank.

     10.23     Amended  Line Loan  Note  dated  April 3,  1997 in the  aggregate
               principal amount of $3,850,000 evidencing line of credit facility
               with The Chase Manhattan Bank.

     10.24     Security  Agreement dated as of April 3, 1997,  among  Unidigital
               Elements (NY), Inc., Unidigital/Cardinal Corporation,  Unidigital
               Elements (SF), Inc.,  Unidigital/Boris  Corporation and The Chase
               Manhattan Bank.  Incorporated by reference to Exhibit 10.7 to the
               Company's  Quarterly  Report on Form 10-QSB for the quarter ended
               February 28, 1997.

     10.25     Pledge  Agreement  dated as of April 3, 1997  made by  Unidigital
               Inc.  in favor  of The  Chase  Manhattan  Bank.  Incorporated  by
               reference to Exhibit 10.8 to the  Company's  Quarterly  Report on
               Form 10-QSB for the quarter ended February 28, 1997.

     10.26     Guarantee  Agreement dated as of April 3, 1997 made by Unidigital
               Inc.  in favor  of The  Chase  Manhattan  Bank.  Incorporated  by
               reference to Exhibit 10.9 to the  Company's  Quarterly  Report on
               Form 10-QSB for the quarter ended February 28, 1997.

     10.27     Waiver and Amendment  Agreement  dated as of July 1, 1997,  among
               Unidigital Elements (NY), Inc., Unidigital/Cardinal  Corporation,
               Unidigital  Elements (SF),  Inc.,  Unidigital/Boris  Corporation,
               Unidigital Inc. and The Chase Manhattan Bank.

     10.28     Pledge  Security  Agreement  dated  as of July 1,  1997,  between
               Unidigital Inc. and The Chase Manhattan Bank.

                                      -25-
<PAGE>

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

     10.29     Second  Waiver  and  Amendment  Agreement  dated as of October 1,
               1997,  among Unidigital  Elements (NY),  Inc.,  Unison (NY), Inc.
               (formerly known as Unidigital/Cardinal  Corporation),  Unidigital
               Elements (SF),  Inc.,  Unison (MA), Inc. (the successor by merger
               to Unidigital/Boris  Corporation),  Unidigital Inc. and The Chase
               Manhattan Bank.
         
     10.30     Supplement dated as of October 1, 1997 to the Security  Agreement
               dated as of April 3, 1997, among Unidigital  Elements (NY), Inc.,
               Unidigital Elements (SF), Inc., Unidigital/Cardinal  Corporation,
               Unidigital/Boris Corporation and The Chase Manhattan Bank.
          
     10.31     Supplement dated as of October 1, 1997 to the Pledge and Security
               Agreement dated as of April 3, 1997,  between Unidigital Inc. and
               The Chase Manhattan Bank.

     16        Letter re:  Change in  Certifying  Accountants.  Incorporated  by
               reference to Exhibit 16 to the Company's  Current  Report on Form
               8-K dated September 4, 1996.

     21        Subsidiaries of the Company.

     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.


                                      -26-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           Page

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

Consolidated Balance Sheets as of
   August 31, 1997 and 1996.................................................F-3

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

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

Consolidated Statement of Stockholders' Equity 
   for the years ended August 31, 1996 and 1997.............................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, 1997 and 1996 and the related consolidated  statements of income, cash flows
and stockholders'  equity for the years then ended.  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,  1997 and 1996 and the  consolidated  results of
their  operations  and their cash  flows for the years then ended in  conformity
with generally accepted accounting principles.



Ernst & Young LLP
November 18, 1997

                                       F-2

<PAGE>
<TABLE>
<CAPTION>
                                         Unidigital Inc.

                                   Consolidated Balance Sheets

                                                                                August 31,
                                                                       ---------------------------
                                                                            1997           1996
                                                                       ------------   ------------


<S>                                                                    <C>            <C>
Assets
Cash and cash equivalents ..........................................   $  3,202,766   $  4,145,514
Accounts receivable, net of allowance of $266,000
   in 1997 and $201,000 in 1996 ....................................      9,752,807      3,207,857
Deferred financing costs, net ......................................        463,931           --
Prepaid expenses ...................................................      1,529,664        758,602
Other current assets ...............................................        765,760         76,527
                                                                       ------------   ------------
Total current assets ...............................................     15,714,928      8,188,500

Property and equipment, net ........................................     11,899,475      8,594,985
Intangible assets, net .............................................      5,330,923        797,213
Other assets .......................................................         87,964         42,628
                                                                       ------------   ------------
Total assets .......................................................   $ 33,033,290   $ 17,623,326
                                                                       ============   ============

Liabilities and stockholders' equity
Accounts payable and accrued expenses ..............................   $  5,181,684   $  1,792,973
Current portion of capital lease obligations .......................      1,998,443      1,476,076
Liability for cancellation of options ..............................           --          202,930
Current portion of long-term debt ..................................     10,018,332      1,819,773
Income taxes payable ...............................................        551,235        216,366
Loans and notes payable to stockholders ............................        154,591        361,039
                                                                       ------------   ------------
Total current liabilities ..........................................     17,904,285      5,869,157

Capital lease obligations, net of current portion ..................      2,875,577      1,974,033
Long-term debt, net of current portion .............................      2,127,796      1,898,865
Deferred income taxes ..............................................        445,000        516,596
Loans and notes payable to stockholders, net of current portion ....        207,496           --
                                                                       ------------   ------------
Total liabilities ..................................................     23,560,154     10,258,651

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; 3,243,243 shares and 3,189,216 shares
     issued and outstanding in 1997 and 1996, respectively .........         32,432         31,892
   Additional paid-in capital ......................................      6,291,613      5,462,153
   Retained earnings ...............................................      3,237,984      1,897,252
   Cumulative foreign translation adjustment .......................        (88,893)       (26,622)
                                                                       ------------   ------------
Total stockholders' equity .........................................      9,473,136      7,364,675
                                                                       ------------   ------------
Total liabilities and stockholders' equity .........................   $ 33,033,290   $ 17,623,326
                                                                       ============   ============

See notes to consolidated financial statements.
                                       F-3
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                             Unidigital Inc.

                                     Consolidated Income Statements

                                                                                   Year ended August 31
                                                                                   1997            1996
                                                                               ------------    ------------

<S>                                                                            <C>             <C>
Revenues
Net sales .................................................................    $ 27,261,856    $ 11,659,818

Expenses
Cost of sales .............................................................      14,449,663       5,621,668
Selling, general and administrative expenses ..............................       9,673,071       4,049,474
                                                                               ------------    ------------
Total operating expenses ..................................................      24,122,734       9,671,142
                                                                               ------------    ------------

Income from operations ....................................................       3,139,122       1,988,676

Interest expense ..........................................................      (1,094,628)       (326,805)
Interest expense-deferred financing costs .................................        (138,069)           --
Interest and other income .................................................          27,587         232,397
                                                                               ------------    ------------
Income before income taxes ................................................       1,934,012       1,894,268

Provision  for  income  taxes  (including
nonrecurring provision relating to termination of   
subchapter S status in 1996) ...........................................            593,280       1,064,327
                                                                               ------------    ------------
Net income ................................................................    $  1,340,732    $    829,941
                                                                               ============    ============

Net income per common share ...............................................    $       0.41    $       0.31
                                                                               ============    ============

Weighted average common shares outstanding ................................       3,272,809       2,643,828
                                                                               ============    ============

Pro forma income data (Notes 2 and 10):
   Historical income before income taxes ..................................                    $  1,894,268
   Pro forma adjustment for principal stockholder/officers'
    compensation...........................................................                          72,769
                                                                                               ------------
   Pro forma income before income taxes ...................................                       1,967,037
   Pro forma income taxes .................................................                         794,616
                                                                                               ------------
   Pro forma net income ...................................................                    $  1,172,421
                                                                                               ============
   Pro forma net income per common share ..................................                    $       0.44
                                                                                               ============


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


<PAGE>

<TABLE>
<CAPTION>

                                                           Unidigital Inc.

                                                Consolidated Statement of Cash Flows

                                                                                        Year ended August 31
                                                                                        1997            1996
                                                                                 --------------------------------
<S>                                                                                 <C>            <C>
Operating activities
Net income ................................................................         $ 1,340,732    $   829,941
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization ........................................           2,193,570      1,056,845
     Provision for deferred income taxes ..................................              24,432        415,060
     Provision for bad debts ..............................................             102,417        103,849
     Stock compensation ...................................................              50,000           --
Changes in assets and liabilities net of effects of businesses acquired:
   Accounts receivable ....................................................          (3,242,341)      (963,734)
   Prepaid expenses and other current assets ..............................          (5,046,364)      (565,783)
   Other assets ...........................................................            (170,680)       (21,723)
   Accounts payable and accrued expenses ..................................           5,007,655        729,598
   Income taxes payable ...................................................             229,420        (95,735)
                                                                                 --------------------------------
Net cash provided by operating activities .................................             488,841      1,488,318
                                                                                 --------------------------------
Investing activities
Additions to property and equipment .......................................          (1,367,586)    (1,279,502)
Business acquisitions .....................................................          (5,528,585)    (1,777,268)
                                                                                 --------------------------------
Net cash used in investing activities .....................................          (6,896,171)    (3,056,770)
                                                                                 --------------------------------
Financing activities
Payments of capital lease obligations .....................................          (1,761,154)      (692,311)
Payments for cancellation of options ......................................            (213,402)      (356,185)
Proceeds from long-term debt ..............................................           7,520,691      2,635,656
Payments of long-term debt ................................................             (77,745)      (177,754)
Stockholder repayments ....................................................                --         (327,556)
Dividends paid ............................................................                --         (750,000)
Proceeds from sale of common stock, net of issuance costs .................             (36,000)     5,224,045
                                                                                 --------------------------------
Net cash provided by financing activities .................................           5,432,390      5,555,895
                                                                                 --------------------------------
Effect of foreign exchange rates on cash ..................................              32,192        (28,731)
                                                                                 --------------------------------
Net (decrease)increase in cash and cash equivalents .......................            (942,748)     3,958,712
Cash and cash equivalents at beginning of year ............................           4,145,514        186,802
                                                                                 --------------------------------
Cash and cash equivalents at end of year ..................................         $ 3,202,766    $ 4,145,514
                                                                                 ================================
Supplemental disclosures
Interest paid .............................................................         $ 1,260,633    $   257,742
                                                                                 ================================
Income taxes paid .........................................................         $   725,946    $   889,673
                                                                                 ================================
Non-cash transactions
Equipment acquired under capital lease obligations ........................         $ 1,710,767    $ 1,013,849
                                                                                 ================================
Dividends payable as note .................................................         $      --      $   498,000
                                                                                 ================================
Business acquisitions net of liabilities of $5,451,958 (1997)
   and $2,096,909 (1996) ..................................................         $ 1,436,234    $ 1,062,268
                                                                                 ================================

See notes to consolidated financial statements

</TABLE>
                                       F-5
                                                 
<PAGE>

<TABLE>
<CAPTION>
                                                           Unidigital Inc.

                                           Consolidated Statement of Stockholders' Equity

                                                                                          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) ....         3,015    $   162,803    $ 2,450,834   $     (12,017)   $ 2,604,635
Cost of cancellation of options to purchase
   an additional interest in Elements .................                     (162,803)      (118,538)                      (281,341)
Exchange of S corporation stock .......................        (3,015)                      (16,985)                       (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 ........        11,500      5,212,545                                     5,224,045
Issuance of 39,216 shares of common stock in
   connection with the Unison (NY) asset acquisition ..           392        249,608                                       250,000
Dividends paid ........................................                                  (1,248,000)                    (1,248,000)
Net income ............................................                                     829,941                        829,941
Foreign currency translation adjustment ...............                                                     (14,605)       (14,605)
                                                            -----------------------------------------------------------------------
Balance at August 31, 1996 ............................        31,892      5,462,153      1,897,252         (26,622)     7,364,675
Issuance of 45,480 shares of common stock in
   connection with the Unison (MA) asset acquisition ..           455        249,545                                       250,000
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 .......................................            85         49,915                                        50,000
Net income ............................................                                   1,340,732                      1,340,732
Foreign currency translation adjustment ...............                                                     (62,271)       (62,271)
                                                            ------------------------------------------------------------------------
Balance at August 31, 1997 ............................        32,432    $ 6,291,613    $ 3,237,984   $     (88,893)   $ 9,473,136
                                                            ========================================================================

See notes to consolidated financial statements
                             
</TABLE>
                                       F-6
<PAGE>


                                 Unidigital Inc.

                   Notes to Consolidated Financial Statements

                                August 31, 1997

1. Organization

Unidigital Inc., a Delaware  corporation,  is the parent holding company of five
wholly-owned  operating  subsidiaries,  Unidigital Elements (NY), Inc., formerly
known as  LinoGraphics  Corporation  ("Elements  (NY)"),  Elements  (UK) Limited
("Elements   (UK)"),   Unidigital   Elements  (SF),  Inc.,   formerly  known  as
LinoGraphics  (Delaware)  Corporation  ("Elements  (SF)"),   Unidigital/Cardinal
Corporation ("Unison (NY)"), and  Unidigital/Boris  Corporation ("Unison (MA)").
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
through  its  wholly-owned  subsidiary  Libra City  Corporate  Printing  Limited
("Libra").  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 "IPO") 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 IPO 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

The  Company  invests  excess  daily  cash  balances  in  commercial  paper with
maturities not exceeding 30 days. The Company  considers such  investments 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  including  exercisable  renewal
options.

Intangible Assets

Intangible  assets relate to the excess of purchase price over the fair value of
the net tangible assets acquired, ("goodwill"), which is being amortized over 15
years.  Amortization of  approximately  $172,000 and  approximately  $33,000 was
recorded for the years ended August 31, 1997 and 1996, respectively. Accumulated
amortization at August 31, 1997 and 1996 was $239,000 and $67,000, 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
nondiscounted 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.

                                       F-8
<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


2.  Basis  of  Presentation  and  Summary  of  Significant  Accounting  Policies
(continued)

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.

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=  $1.62 and  $1.56 at August  31,  1997 and  1996,  respectively,  for
balance sheet accounts) and average  exchange rates  ((pound)1=  $1.64 and $1.55
for the year  ended  August  31,  1997 and 1996,  respectively,  for the  income
statement  accounts).  The  translation  difference  is  reflected as a separate
component of stockholders' equity.

                                       F-9

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


2.  Basis  of  Presentation  and  Summary  of  Significant  Accounting  Policies
(continued)

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.

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

Earnings  per share is based on the  weighted  average  number of common  shares
outstanding for each period presented.  Common stock equivalents are included if
dilutive.

                                      F-10

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


2.  Basis  of  Presentation  and  Summary  of  Significant  Accounting  Policies
(continued)

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  "Earnings  per Share,"  which is  required to be adopted for years  ending
after December 15, 1997.  Under the new  requirements  for  calculating  primary
earnings per share,  the dilutive  effect of stock  options and warrants will be
excluded. Statement No. 128 is not expected to have a material impact on the net
income and pro forma net income per share.

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  cancelled in  consideration  for payments of
approximately  (pound)180,000  (approximately $281,000). At August 31, 1997 such
amounts have been paid.

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 assets
acquired.  The purchase  agreement  requires  additional  payments  based on the
future  five  year  performance,  with a maximum  earn-out  of  $1,500,000.  The
potential earn-out will be recorded as additional purchase price when earned.

                                      F-11

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


3. Acquisitions (continued)

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) a
potential  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 Company  funded the purchase
from its credit facility arrangements with its New York bank. The total purchase
price of  $2,511,000,  which  includes  costs  incurred in  connection  with the
acquisition,   exceeded  the  tangible  net  assets  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.  The  aggregate  purchase  price  consisted of cash  payments of
(pound)1,823,750  (approximately $2,972,000) and a potential earn-out payment of
up to  (pound)500,000  (approximately  $815,000)  payable by March 31, 1998. The
Company funded the purchase price from the proceeds of unsecured five-year loans
and a line of credit from its United  Kingdom bank.  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.

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,
                                                     1997             1996
                                               -------------------------------

Net sales ..............................         $35,284,257      $34,676,550
Net income .............................             877,352          465,952
Net income per share ...................                0.27             0.18

4. Property and Equipment

Property and equipment consist of the following:

                                                             August 31,
                                                       1997             1996
                                                 -------------------------------

Buildings ......................................   $  2,224,258    $  2,057,789
Machinery and equipment ........................      9,001,782       7,608,765
Furniture and office equipment .................      2,855,918         297,310
Computer software ..............................      1,219,090         185,926
Leasehold improvements .........................        667,834         380,396
Vehicles .......................................        191,954          12,105
                                                   ------------    ------------
Total ..........................................     16,160,836      10,542,291
Less accumulated depreciation and amortization       (4,261,361)     (1,947,306)
                                                   ------------    ------------
                                                   $ 11,899,475    $  8,594,985
                                                   ============    ============


                                      F-13
<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


5. Debt

Debt consists of the following:
<TABLE>
<CAPTION>
                                                               
                                                               Facility        Amount Outstanding
                                                                Amount             August 31,
                                                               August 31,  ---------------------------
                                                                 1997          1997          1996
                                                            ------------------------------------------
<S>                                                          <C>           <C>          <C>
Lines of credit in the United States; interest at
   prime rate plus 1/2% ..................................   $      --     $     --     $   553,000
Credit  facilities in the United Kingdom;  interest at the
   bank's  overdraft  rate  plus 3%;  facility  amount  is
   approximately(pound)1,145,000 ($1,855,000) ............     1,855,000    1,784,150     1,188,973
Revolving line  of credit; matures  April 30, 2000,
   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 .................................     4,500,000    1,725,000          --
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 ........     3,850,000    2,710,110          --
Term loan,  matures March 11, 2001;  monthly  installments
   of $2,500 plus interest at prime plus 1/2% or at a
   fixed rate determined at the time of borrowing ........          --           --         141,665
Term loan;  matures September 1, 1997; monthly interest at
   prime .................................................     1,400,000    1,400,000     1,400,000
SBA loan,  matures  December 1, 2014;  monthly payments of
   $3,665; interest at prime rate plus 2.74% .............       350,000      334,368       350,000
Installment note due seller of Elements (SF);  payable in
   eight (8) quarterly installments of $11,600 including
   interest at 6% ........................................        85,000       42,500        85,000
Loans  from  private investors, beginning May   1997,
   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    4,000,000          --
Installment  note  due  seller  of  Unison  (MA),  matures
   January 15, 1999,  payable in two equal installments of
   $75,000 plus interest at 8% ...........................       150,000      150,000          --
                                                                          -----------   -----------
                                                                           12,146,128    3,718,638
Less current portion .....................................                 10,018,332    1,819,773
                                                                          -----------   -----------
                                                                          $ 2,127,796   $ 1,898,865
                                                                          ===========   ===========
</TABLE>
                                      F-14

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


5. Debt (continued)

In April 1997, the Company  renegotiated its credit facility  arrangements  with
its New York bank, resulting in a combined credit facility for its United States
operations in the aggregate  amount of  $8,350,000,  consisting:  (i) $4,500,000
revolving credit facility which is available for corporate acquisition purposes;
(ii)  $3,850,000  line of credit facility which is available for working capital
purposes.  Such  credit  facilities  are  available  to be  used  by each of the
Company's four United States subsidiaries. Interest under such credit facilities
is at the company's  option at the  Alternate  Base Rate or at the Adjusted LIBO
Rate,  as  defined,  plus  0.25% in the  United  States  and 2.25% in the United
Kingdom.  At September 1, 1997,  the Company's  $1,400,000  term loan was rolled
over into the Company's line of credit facility.

The credit  facilities  contain  covenants which require the Company to maintain
certain  tangible  net  worth  and debt  service  coverage  ratios  based on the
combined  assets of the Company and its  subsidiaries,  limit  borrowings  up to
specified  amounts of accounts  receivable,  as defined and limit the payment of
dividends.  Amounts  outstanding are  collateralized by substantially all of the
Company's  assets.  The lines of credit are renewable  annually  each  December.
Unidigital  is a  guarantor  on all bank debts of the  Company's  United  States
operating subsidiaries. As of August 31, 1997, the Company was not in compliance
with  certain  debt  covenants  and received a waiver from the bank for such non
compliance.

During 1997, the Company  borrowed an aggregate  principal  amount of $4,000,000
pursuant to unsecured  five-year  loans.  Such loans are payable on demand,  one
year after the date of  issuance.  In  connection  with such loans,  the Company
granted five-year  warrants to the lenders to purchase up to an aggregate amount
of 400,000  shares of the Company's  Common Stock at an exercise  price of $4.00
per share. In addition,  the Company granted  "piggyback"  registration  rights,
subject to certain limitations. Included among the lenders were directors of the
Company.  Such directors  loaned an aggregate of $300,000 of the above amount to
the Company and received  warrants to purchase an aggregate of 30,000  shares of
the Company's Common Stock.

The warrants,  which were deemed to have a value of approximately $602,000 based
on an independent  appraisal have been recorded as deferred financing costs, and
are being amortized on a straight-line basis over one year.

                                      F-15

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


5. Debt (continued)

Maturities of long term debt are as follows:

                                                         August 31, 1997
                                                      ----------------------

Year ending August 31
  1998                                                   $   10,018,332
  1999                                                           84,528
  2000                                                        1,734,400
  2001                                                           10,500
  2002                                                           11,700
  Thereafter                                                    286,668
                                                      ----------------------
                                                         $   12,146,128
                                                      ======================

6. Obligations Under Capital Leases

The Company  leases  certain  production  equipment and vehicles which have been
classified  as  capital  leases.  At August  31,  1997 the cost and  accumulated
depreciation  and amortization of such assets was  approximately  $7,179,000 and
$1,080,000,  respectively.  Future  minimum  payments  under these leases are as
follows:

                                                      August 31, 1997
                                                  ----------------------

Year ending:
   1998                                              $     2,386,513
   1999                                                    1,707,022
   2000                                                    1,083,495
   2001                                                      440,119
   2002                                                       18,366
                                                  ----------------------

 Total                                                     5,635,515
 Less amount representing interest                          (761,495)
                                                  ----------------------
 Present value of minimum lease payments                   4,874,020
 Less current maturities                                  (1,998,443)
                                                  ----------------------
 Noncurrent portion                                  $     2,875,577
                                                  ======================

                                      F-16
<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


7. 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.

8. 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  675,000,  subject to certain
adjustments to reflect changes in Unidigital's capital stock.

Under the Stock Option Plans as of August 31, 1997, the Company has committed to
grant  options to  purchase  Common  Stock as  follows:  (i)  179,103  shares at
exercise prices ranging from $4.50 to $6.75 per share, vest six months after the
date of grant and are exercisable under the 1995 Stock Plan; (ii) no shares have
been granted  under the 1995  Directors  Plan;  (iii) 60,000  shares at exercise
prices ranging from $5.375 to $5.50 per share, vest on the date of grant and are
exercisable  under the 1997 Plan and; (iv) 10,000 shares at an exercise price of
$5.125 per share,  vest three months from the date of grant and are  exercisable
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-17
<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


8. Stock Options (continued)

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

                                                      Weighted Average
                                        Options        Exercise Price
                                   ----------------- -----------------
Outstanding--September 1, 1995          50,000            $6.00
Granted                                103,500             6.75
                                   ----------------- -----------------
Outstanding--August 31, 1996           153,500             6.51
Granted                                174,103             4.88
Forfeited                              (28,500)            6.75
                                   ----------------- -----------------
Outstanding and exercisable--
   August 31, 1997                     299,103            $5.54
                                   ================= =================

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, 1997 and 1996:

                                                            August 31
                    Assumption                       1997             1996
                                                 -----------------------------

Risk-free rate                                    5.9--6.9%          6.7--6.9%
Dividend yield                                        -                 -
Volatility factor of the expected market price
   of the Company's common stock                   .4--.6              .6
Average life                                       5 years           5 years

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 and stock appreciation rights.

                                      F-18
<PAGE>

                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


8. Stock Options (continued)

The Company's pro forma information follows:

                                                            August 31
                    Assumption                       1997             1996
                                                 -----------------------------

Pro forma net income                              $1,014,000        $345,000
Pro forma net income per share                         $0.31           $0.13

The weighted average fair value of options granted during the years ended August
31,  1997 and 1996 were  $2.50 and $3.16,  respectively.  The  weighted  average
remaining  contractual life of the options outstanding at August 31, 1997 is 8.4
years.

9. Stockholders' Equity

Shares Reserved

The Company has reserved  for  issuance of  1,217,000  shares of Common Stock as
follows:  (i) 675,000 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 8); (iii) 92,000 shares of Common Stock upon exercise
of warrants  issued to the  managing  underwriter  in  connection  with the IPO,
exercisable at a price of $7.20 per share for a period of four years  commencing
February  1, 1997;  and (iv)  400,000  shares of Common  Stock upon  exercise of
warrants issued in connection with loans to the Company.

                                      F-19

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


10. Income Taxes

The following comprises income tax expense:

                                                Year ended August 31,
                                             1997                1996
                                     --------------------------------------
U.S. income taxes:
   Current                            $       9,000       $      437,089
   Deferred                                  44,000              357,575
                                     --------------------------------------
                                             53,000              794,664
                                     --------------------------------------
United Kingdom income taxes:
   Current                                  538,642              211,642
   Deferred                                   1,638               58,021
                                     --------------------------------------
                                            540,280              269,663
                                     --------------------------------------
Total                                 $     593,280       $    1,064,327
                                     ======================================

The following  reconciles  income tax expense,  computed at the statutory United
States Federal corporate rate, to income tax expense:

                                                           Year ended August 31,
                                                              1997       1996
                                                          ----------------------

Income taxes at United States Federal statutory rate ...  $  644,324 $  644,051
State and local income taxes ...........................      55,532    148,814
Nondeductible  goodwill  expense and  difference between
   United States and United Kingdom tax rates ..........    (106,576)    16,462
Effect of Subchapter S status ..........................         --    (112,000)
Effect of termination of Subchapter S election .........         --     367,000
                                                          ---------- ----------
Total ..................................................  $  593,280 $1,064,327
                                                          ========== ==========

                                      F-20

<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:

                                                           Year ended August 31,
                                                            1997          1996
                                                        ------------------------
Deferred tax liabilities:
   Use of cash basis for United States income tax
     purposes                                           $  175,041   $  316,047
   Difference in depreciation methods                      591,399      260,573
                                                        ------------------------
Total deferred tax liability                               766,440      576,620
Less deferred tax asset:
   Allowance for doubtful accounts                        (122,569)     (60,024)
   Primarily difference in reporting of royalty           (198,871)          -
                                                        ------------------------
Net deferred tax liability                              $  445,000   $  516,596
                                                        ========================

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  nonrecurring
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  a  combined  effective  tax  rate  of  approximately  46.5%,  whereas
previously,  only  local  income  taxes on U.S.  earnings  were  payable  at the
corporate level.


                                      F-21
<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


11. Commitments

The Company leases their premises under operating lease  agreements which expire
at various dates through March 2005.

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:

                                   Total            Premises          Equipment
                           -----------------------------------------------------
Year ending August 31:
   1998                     $    1,147,000    $      538,000     $      609,000
   1999                          1,009,000           543,000            466,000
   2000                            978,000           543,000            435,000
   2001                            922,000           543,000            379,000
   2002                            543,000           543,000                 --
   Thereafter                      768,000           768,000                 --
                           -----------------------------------------------------
Total                       $    5,367,000    $    3,478,000     $    1,889,000
                           =====================================================

Aggregate  rental  expense  for the year  ended  August  31,  1997  approximated
$515,000.  Rental  expense  for the year  ended  August  31,  1996  approximated
$378,000.

                                      F-22

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


12. Segment Information

The following  summarizes  the  operations  by geographic  segment for the years
ended August 31, 1997 and 1996:

                                                   August 31,
                                         1997                     1996
                              ------------------------   -----------------------
                                 United       United       United     United
                                 States       Kingdom      States     Kingdom
                              --------------------------------------------------
Net sales                     $16,292,931  $10,968,925  $ 5,560,975  $6,098,843
                              ==================================================
Income from operations        $ 1,199,585  $ 1,939,537  $   762,491  $1,226,185
                              ==================================================
Identifiable assets           $24,309,488  $ 8,723,802  $13,333,558  $4,289,768
                              ==================================================
Depreciation and amortization $ 1,315,269  $   878,301  $   588,168  $  468,677
                              ==================================================
Capital expenditures          $ 1,982,803  $ 1,095,550  $   856,337  $1,437,014
                              ==================================================

The  following  summarizes  operations  by industry  segment for the years ended
August 31, 1997 and 1996:

                                                 August 31,
                                        1997                     1996
                             -------------------------   -----------------------
                               Digital     Document       Digital     Document
                             Imaging and  Creation and  Imaging and Creation and
                               Prepress    Short-Run      Prepress    Short-Run
                               Service     Printing       Service     Printing
                               Segment     Segment        Segment     Segment
                             ---------------------------------------------------


Net sales                      $20,792,883  $6,468,973  $ 9,386,162  $2,273,656
                             ===================================================
Income from operations         $ 2,340,517  $  798,605  $ 1,851,660  $  137,016
                             ===================================================
Identifiable assets            $26,781,527  $6,251,763  $15,013,746  $2,609,580
                             ===================================================
Depreciation and amortization  $ 1,807,137  $  386,433  $   855,082  $  201,763
                             ===================================================
Capital expenditures           $ 2,372,729  $  705,624  $ 1,681,900  $  611,451
                             ===================================================

                                      F-23

<PAGE>


                                 Unidigital Inc.

             Notes to Consolidated Financial Statements (continued)


13. Employee Benefit Plan

The Company  adopted a 401(k) Plan  effective  January 1, 1996, in which most 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, 1997 and 1996.



                                      F-24