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

                                    FORM 10-K

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

                   For the Fiscal Year Ended December 31, 1996

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                         Commission File Number 0-28208
                                 --------------

                       APPLIED GRAPHICS TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its charter)

            DELAWARE                                     13-3864004
(State or other jurisdiction of
 incorporation or organization)             (I.R.S. Employer Identification No.)


28 WEST 23RD STREET, NEW YORK, NY                                       10010
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code:   212-929-4111

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

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

  Title of each class                  Name of each exchange on which registered
  -------------------                  -----------------------------------------
Common Stock, par value                          Nasdaq National Market
    $.01 per share

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

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

The aggregate market value of registrant's voting stock held by non-affiliates
as of March 10, 1997, was $139,851,203.

The number of shares of the registrant's Common Stock outstanding as of March
10, 1997, was 14,349,683 shares.

The following documents are hereby incorporated by reference into this Form
10-K:
         (1) Portions of the Registrant's 1997 Proxy Statement to be filed with
             the Securities and Exchange Commission (Part III).
         (2) Form 8-K filed with the Securities and Exchange Commission on
             October 4, 1996 (Part II).
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                                TABLE OF CONTENTS


                                                                            PAGE
ITEM   PART I                                                               ----
----   ------
                                                                              1
  1.   BUSINESS
                                                                              8
  2.   PROPERTIES
                                                                              8
  3.   LEGAL PROCEEDINGS
                                                                              8
  4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       EXECUTIVE OFFICERS OF THE COMPANY                                      9

       PART II
       -------

  5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS                                                 11

  6.   SELECTED FINANCIAL DATA                                               11

  7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS                                 12

  8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                           15

  9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE                                 35

       PART III
       --------

  10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                    36

  11.  EXECUTIVE COMPENSATION                                                36

  12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT                                                      36

  13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                        36

       PART IV
       -------

  14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
         REPORTS ON FORM 8-K                                                 37

       SIGNATURES                                                            40
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                                     PART I

      Certain statements made in this Annual Report on Form 10-K are
"forward-looking" statements (within the meaning of the Private Securities
Litigation Reform Act of 1995). Such statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: a change in the trend toward electronic distribution of
content; competitors or customers of the Company providing services more
efficiently and cost effectively than the Company; an inability to obtain
additional, or to renew existing, on-site arrangements; an inability to expand
on-line distributions services; an inability to successfully enter the
event-driven and retail digital photography markets; lack of market acceptance
of the Company's digital photography product line; slower expansion of the
Company's sales force than planned; an inability to cross-sell the Company's
services; or an inability to obtain additional credit or financing vehicles.

ITEM 1. BUSINESS.


GENERAL

      Applied Graphics Technologies, Inc. (the "Company") is an independent
provider of digital prepress services to magazine publishers, advertising
agencies, entertainment companies, an automobile manufacturer and catalog
retailers. The Company's largest customers in each of these industries include
McGraw-Hill, Newsweek and Conde Nast; The InterPublic Group and Grey
Advertising; The Walt Disney Company and Time Warner; General Motors; and Sears
Roebuck & Company and Bloomingdale's. The Company provides its services on an
outsourcing basis in the Company's facilities or on-site at the customer's
location, emphasizing its ability to provide a full range of services more
effectively and economically than its customers could internally. In 1994,
through its predecessors, the Company began to provide advanced digital imaging
services to meet the evolving needs of its traditional customers and to exploit
the rapidly expanding needs of new groups of customers. Digital archiving and
distribution services are now being provided to customers including General
Motors, Time Warner's Time Picture Collection, CBS, the American Society of
Media Photographers and the United States Holocaust Memorial Museum. In 1996,
through the acquisition of the assets of SpotLink ("SpotLink"), a subsidiary of
Western Media International ("Western") , the Company also began to provide
content distribution services, which relate to the receiving, duplication and
shipping ("dub & ship") of radio and television advertisements.

      The scope of the Company's services and the range of customers that can
make use of these services have expanded with the emergence of electronic
distribution channels and the ability to create digital archives. "Prepress
services" combine text with black and white and full-color pictures and graphics
into page layout format, and have traditionally been used to prepare content for
reproduction in print. A similar process is required to digitize information for
electronic distribution via the World Wide Web, e-mail, proprietary on-line
services, and CD-ROM. Publishers, advertising agencies, entertainment companies,
and others of the Company's traditional customer base are increasingly looking
to exploit these new distribution channels. In addition, other companies are
looking to use electronic distribution channels for marketing and promotion, to
target individual or groups of customers, or as a cost-effective means of
reselling its graphic images. The Company intends to grow its business by
providing additional digital imaging services to meet the expanding needs of its
traditional client base and by using its experience with its customer base to
provide these services to new customers.

      The Company uses its Digital Link System and other commercially available
systems to provide digital imaging services. This system was initially developed
by the Company for the New York Daily News to assist the newspaper with its
demanding prepress and related image storage and retrieval functions. The
Company believes that this system, with its proprietary technology enhancements,
allows it to provide digital imaging services more efficiently and cost
effectively than existing alternative systems.

      Technological advances in desktop publishing and graphics software have
heightened differences between image-intensive "full service" users of prepress
services and other customers with less demanding needs, whose paramount


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concern is price. The Company believes that its primary customers, which are
full service users, are recognizing production complexities, the increasing use
of color and the need to remain abreast of technological developments and,
accordingly, are increasingly relying on outsourced digital prepress and digital
imaging services. The Company intends to continue to expand its base of
traditional prepress service users by emphasizing its ability to provide a full
range of high quality digital prepress and digital imaging services.

      The Company currently maintains a network of eleven facilities located in
metropolitan areas to provide localized services to its customers, many of which
have offices nationwide. Additionally, the Company provides its on-site services
at fourteen customer locations, often under multi-year contracts. The Company
believes that performing its services on-site strengthens its relationship with
its customers and broadens their demand for the range and volume of the
Company's services. Two of these on-site service locations also perform services
for other customers.

      The Company was incorporated in Delaware on December 12, 1995. On April
16, 1996, upon the Company's Registration Statement on Form S-1 under the
Securities Act of 1993 being declared effective, the Company acquired
substantially all of the assets and certain related liabilities relating to the
prepress, digital imaging services, and related businesses of Applied Printing
Technologies, L.P. ("Applied Printing").


SERVICES

      The Company provides a full range of digital prepress, digital imaging and
content distribution services.

      Digital Content Prepress Services. Digital content prepress services are
necessary to combine text with black and white and full-color picture and
graphic content into page format for publication in print and distribution on
the World Wide Web, e-mail, proprietary on-line services and CD-ROM. Prior to
recent developments in digital technologies, certain parts of the prepress
process were performed manually. Technological advancements have eliminated
several steps in the prepress process providing customers with additional
creative time while still meeting production schedules.

      In general, the prepress services provided by the Company begin with
scanning the customer's content into digital format. Scanning separates color
content into component colors and converts them into colors used in the printing
process -- cyan, magenta, yellow and black. Once the image is separated, two
file formats of the image are produced -- high resolution for final output and
low resolution for customer design and/or layout. The low resolution file is
sent to the customer on-line or on a computer disk, and the customer can
position the low resolution file into its page on its own desktop system and
size and crop the image as desired. Simultaneously, Company personnel compare
the "separated" image on the high resolution file to the original picture and
use specialized computer software to refine the colors and to make enhancements
to the image as the customer requests. Throughout this process, the Company
works closely with the creative and artistic directors of the customer. Often,
multiple iterations of the image are exchanged by the Company and the customer
before the final, high resolution image is set in the page. Company personnel
then replace the low resolution image and perform certain technical processes
(such as masking and trapping) to enhance the quality of the final product. The
page is then output to four separate color files (film or transmission) that
when processed will generate four pieces of film used to create four printing
plates per page. The image is generated in print by the cumulative effect of the
plates. Similarly, content to be distributed on-line is output to three colors
(red, green and blue) which is converted from the final high resolution file. In
performing prepress services, the Company frequently uses the Digital Link
System, which performs several prepress functions efficiently. See " --
Technology."

      Outsourced Facilities Management Services. In response to demands of
certain customers, the Company sometimes performs services at a customer's
location ("on-site") rather than at one of its facilities. In addition, it
performs services at a primary customer's location for other customers as
capacity allows. Contracts with customers for on-site work are often for three
years or more and for a base amount of services, although the Company believes
its on-site presence generates additional business in the form of digital
imaging services and more prepress work from that customer. If the primary
customer's work flow is high, or if there is an equipment failure at that
location, the Company augments on-site staff and equipment by working on the
primary customer's projects at the Company's other facilities. The Company's
on-site services vary according to the customer's needs. For some publications,
such as Newsweek, U.S. News & World Report and BusinessWeek, the Company is
responsible for operating, maintaining and staffing the on-site prepress
equipment and for performing all prepress services for editorial content.
Performing work on-site permits the Company to better understand its customers'
preferences and workflow demands. This, in turn, enables the Company to be more
responsive and to increase the level and type of service it provides. For
example, when performing on-site


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prepress work, the Company has the ability to introduce the customer to its
archiving and other digital imaging services. On-site work also reduces the time
needed to approve or discuss revisions with the customer and to deliver the
final product to the customer.

      Advanced Digital Imaging Services. The Company's advanced digital imaging
services were developed by its Digital Imaging Services Division ("DISD"),
established in 1993 upon hiring 18 people from Eastman Kodak Company's
Commercial Imaging Photo CD division. DISD commenced work on the Digital Link
System as a project for the New York Daily News to assist the newspaper with its
demanding prepress and related image storage and retrieval functions. Using
integrated equipment and proprietary software, the Digital Link System offers a
cost-effective, easy-to-use method to store, manipulate, repurpose and
distribute digital images. The open architecture of the Digital Link System
enables the Company to tailor the system to each customer's digital imaging
needs. The Company uses the Digital Link System to provide advanced digital
imaging services, such as archiving and on-line distribution, to both
traditional prepress and new groups of customers. These customers are
increasingly looking to exploit new distribution methods, such as the World Wide
Web, e-mail, proprietary on-line services and CD-ROM, all of which use digitized
content. The World Wide Web and proprietary on-line services provide access to
an organized method of "browsing" the Internet. Proprietary on-line services are
available only to paying subscribers, however, and provide their own proprietary
content as well as Internet access to such subscribers. Electronic mail, or
e-mail, is any method of transmitting information over a local or global
computer network to specific computer "addresses." Compact disc
read-only-memory, or CD-ROM, is a high-capacity storage facility for text and
images that has been organized for browsing on a personal computer equipped with
a CD-ROM reader.

      Archiving. The Company uses its Digital Link System to create digital
archives of photographic prints, slides, film and other images. Archiving images
provides the customer with an organized, easily accessible digital format in
which its images can be retrieved, distributed, substituted and re-edited.
Because the archived images are in digital form, they may be reused without
having to be rescanned, thereby saving time and money, and are in a format
suitable for print or on-line distribution. The Company's archiving services are
tailored to each customer by evaluating the content and the customer's needs and
provided to the customer as an open system archive. Once the images are
digitized, the Company customizes a database that allows the customer to quickly
access images using keywords, text searches or bar-codes. The archive may be
created at the customer's location or the Company's facilities depending on the
size of the library. The Company's archiving services are provided under
long-term contracts, are typically related to millions of images, and are
usually priced on a per-image basis according to the Company's evaluation of the
customer's images and the scope of services to be provided. For example, since
commencing its archiving services for Time Warner's Time Picture Collection, the
Company has archived an average of 15,000 images per month for this customer.

      Broadcast Media Distribution Services. Through the acquisition of the
assets of SpotLink, the Company has entered the "dub & ship" business. The "dub
& ship" business encompasses the duplication and distribution in large volumes
of television and radio commercials to broadcast and cable media for advertising
agencies and their clients. As part of the acquisition, the Company entered into
a long-term agreement under which Western will direct its "dub & ship" business
to the Company. The Company believes its entrance into the "dub & ship" business
will expand its services in the broadcast media area.

      On-Line Distribution. The Company provides consulting, development and
support services to customers establishing on-line publishing sites, and
maintains a World Wide Web server installation in its principal New York area
facility. The Company is one of nine businesses selected to create sites on The
Microsoft Network and has already created prototype sites for use on this
service and other services using Microsoft's publishing tools, including an
interactive text, image and audio site for Need to Know ("N2K"). U.S. News &
World Report and The Atlantic Monthly also have each used the Company's services
to establish sites on the World Wide Web. In conjunction with the American
Society of Media Photographers, the Company provides an on-line image
distribution service that archives pictures taken by the freelance photographers
of the Society and makes them available for sale on-line to photo editors,
researchers and others virtually anywhere in the world. To use this service,
film is processed and scanned into a Digital Link System and transmitted
on-line. Images are purchased directly from the Company, which the Company
believes will reduce reliance on photographic stock houses. This service is
provided with respect to the American Society of Media Photographer's library of
images and is also provided in connection with time-sensitive, newsworthy events
providing an almost instantaneous method of offering photographs for sale. The
Company provided this service at the Academy Awards in 1997 and 1996 as well as
in connection with the 1996 Olympic Games in Atlanta and other newsworthy
events.


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RELATED SERVICES

      At one of its facilities in Los Angeles, California, the Company provides
printing services principally for entertainment customers, such as The Walt
Disney Company. The Company prints movie posters, CD covers, video covers and
promotional materials. Revenues from these printing services represented less
than 10% of the Company's revenues in 1996.

      The Company has made a limited number of sales of the Digital Link System,
primarily to newspapers and the event-driven and retail digital photography
market. During 1996, the Company began to develop an expanded product line for
its Digital Link System in the areas of digital photography. The Company intends
to sell its Digital Link System to third party users and is considering
providing certain types of digital photographic services directly. It is
currently working with a major U.S. retailer whereby the Company's Digital Link
System is being beta-tested in four of the retailers in-store photographic
studio departments. Additionally, the Company is looking at various means of
entering the event-driven photographic market, either by selling a digital
photography version of its Digital Link System or by providing a complete
digital photography service based on the Digital Link System. There is no
assurance that this expanded product line and service offering will ever be
accepted in the marketplace or significantly contribute to the Company's
revenues.


TECHNOLOGY

      The Company's commitment to technology development enhances its ability to
provide prepress and advanced digital imaging and other digital imaging related
services. This commitment is demonstrated by its Digital Link System and its
internal communications and satellite transmission capabilities.

      The Digital Link System. The Digital Link System, which integrates digital
hardware and proprietary software, is a networked set of applications used to
digitally capture, edit, store, archive and retrieve large numbers of images.
Its features include zooming, enlarging, comparing side-by-side, sorting,
categorizing, annotating, rotating, cropping, color retouching and page layout.
Images that are archived using the system may be easily retrieved and
manipulated by computer and distributed through electronic distribution channels
that require digitized content.

      The Digital Link System uses integration software to link a variety of
different image capture devices such as digital cameras, drum and flatbed
scanners, wire services and other suitable high capacity storage devices.
Optional software from the Company's suite of applications may be added to suit
the customer's image management needs. For example, a customer may add a Photo
CD Gateway, which interfaces with a scanner to capture images. A customer may
also select the Digital Link Data Archivist which categorizes, reviews and
selects images stored in the Digital Link System. The Digital Link System
includes customized software which permits the system to interface with
virtually any equipment the customer may already have, such as a proprietary or
a "closed" prepress system or existing desktop systems. The software used in the
Digital Link System was created by a team headed by Scott A. Brownstein,
Executive Vice President of the Digital Imaging Services Division of the
Company. Mr. Brownstein played a major role in the development of many of the
technologies used in Kodak's patented Photo CD system.

      The Digital Link System enhances the delivery of prepress services. For
example, the system enables a user to quickly and easily retrieve an image, and
then enlarge, reposition and retouch the image as if using stand-alone prepress
computer equipment.

      During 1996, the Company developed and began to offer an expanded product
line for its Digital Link System in the area of Digital photography.

      Communications Networks. Each of the Company's facilities is connected by
a data network system which enables the Company to allocate prepress work among
its facilities for timely completion. The Company has also established
communications links among its facilities and customer sites at which the
Company is providing services. Additionally, the Company uses a satellite system
to deliver final prepress work in digital form to 10 printing plants of seven
unaffiliated printing companies. The Company leases transmission time on three
frequencies on a year-round basis and has installed satellite transmitting
equipment at its facilities and receiving equipment at the printing sites. This
system was established originally to assist Newsweek, U.S. News & World Report,
and BusinessWeek in meeting their


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demanding production cycles, but has been expanded to include transmissions for
other publications. These include Aviation Week and Engineering News Record,
which are McGraw-Hill publications, various Conde Nast publications on an as
needed basis and special editions of Time Warner publications including People.
The connection to multiple printing sites allows these publications to be
printed at several locations in order to meet distribution schedules. Company
personnel working at the printing plants on this network produce the film
required to create printing plates and coordinate and calibrate the receiving
equipment in an effort to ensure consistency in the final product among the
various printing sites.


CUSTOMERS

      The Company's customer base encompasses a wide variety of enterprises and
organizations, including leading publishers, advertising agencies, entertainment
companies, an automobile manufacturer and catalog and other businesses focused
on quality print and graphic images and the distribution of advertising content.
No single customer produced 10% or more of the Company's revenues in 1996. The
Company's twenty largest customers accounted for approximately 53.8% of the
Company's revenues in 1996. Revenues from many of the Company's large customers,
however, are an aggregation of revenues for services provided by the Company to
different groups or publications within a customer. For example, the Company
provides services to 12 divisions of The Walt Disney Company, each of which
plays a major role in the selection of a prepress vendor. In 1996, approximately
8.5% of the Company's total revenues came from multi-year contracts with U.S.
News & World Report, L.P., and Daily News, L.P., companies beneficially owned by
Mr. Mortimer B. Zuckerman, the Chairman of the Board of Directors of the
Company, and Mr. Fred Drasner, Chairman, Chief Executive Officer, and a director
of the Company. An additional 28.4% of the Company's revenues were under
multi-year contracts or arrangements with nonaffiliated customers. As is
customary in the prepress industry, in most cases there is no contractual
arrangement that would prevent prepress customers from selecting a competitor of
the Company to perform some or all of their prepress work. In 1996, 35 of the
Company's non-affiliate customers each generated over $500,000 of revenues for
the Company. As of December 31, 1996, the Company had over 800 customers.


SALES AND MARKETING

      To date, the Company has relied primarily on its senior officers, general
managers and regional sales organizations to market its prepress and digital
imaging services. Because they have conducted business together over several
years, personnel at each facility have established strong working relationships
with particular customer industries that are prevalent around its location. For
instance, personnel at the Los Angeles facilities have strong relationships with
the entertainment industry, at the Detroit facility with the automotive
industry, and at the New York facilities with the publishing industry. These
relationships also extend to advertising agencies that perform work for these
customers. This specialization within certain industries developed over the
Company's years of service performing prepress work.

      The Company is in the process of expanding its sales force to focus on
on-site and outsourcing arrangements for customers currently performing all or a
portion of their prepress work in-house. Because such a decision to outsource is
made at a level higher than prepress vendor selection decisions, the Company
believes that a separate sales force is more conducive to obtaining such
business.

      The Company is also is in the process of expanding its sales force to
market digital imaging services to traditional and new groups of customers.
Prior to the latter half of 1996, such services have been marketed only by
several senior officers of the Company. The Company is also expanding the sales
force of its SpotLink division. The Company believes its long-term agreement
with Western, a subsidiary of the InterPublic Group, and the largest media buyer
in the U.S., under which Western will direct its "dub & ship" business to the
Company, creates a significant sales opportunity. Additionally, the Company's
sales force has begun cross-selling the broad range of its services.


VENDOR ARRANGEMENTS

      The Company is a major purchaser of certain types of products. Because of
the dollar amount of the products it purchases, the Company has been in a
position to enter into arrangements with vendors pursuant to which the vendors
pay rebates and, in some instances, prepay to the Company a rebate based upon a
specified dollar volume of products


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purchased by the Company over a given time period. The Company is entitled to
retain the prepaid amount in full if it purchases the stated volume, and would
be obligated to repay all or a portion of the amount depending on the difference
between the stated volume and the volume actually purchased. In 1995, the
Company received prepaid rebates aggregating approximately $3.5 million,
approximately $0.8 million of which was earned with respect to volumes purchased
in 1995 and approximately $2.7 million of which is earnable based on purchases
to be made in 1997 and 1998. The Company expects, through its normal purchasing
requirements, to purchase the amounts necessary to earn the rebate prepaid with
respect to 1997 and 1998. The Company also received prepaid rebates in March
1996 aggregating approximately $0.9 million, all of which was earned in 1996.


COMPETITION

      Prepress services are performed primarily by three types of businesses:
(i) independent providers which typically do not also offer commercial printing
services as a principal part of their overall business; (ii) commercial printers
that provide image management services as an adjunct to their printing
businesses; and (iii) customers which perform certain services themselves using
available desktop publishing technologies. The industry is currently extremely
fragmented and serviced by a large number of regional and local businesses and
few national enterprises. Commercial printers providing prepress services
generally compete on the basis of the convenience of "one-stop shopping" for
prepress and printing services, and on price by bundling the cost of prepress
services with the printing cost or by substantially discounting the separate
prepress services. A customer might prefer services by a printer where price is
the primary consideration and quality of and control over the artistic process
are not key concerns. Independent providers, such as the Company, generally are
able to offer a higher level of specialization, customization and individualized
service and also provide customers with the flexibility to select the printer of
their choice, thus giving the customer greater leverage in negotiating for
printing services. A customer would look to perform its own prepress services
internally if the customer believed that control over the process was
advantageous and quality of the product was not paramount. Customers typically
provide for themselves only a portion of the prepress services they need,
augmenting their own capabilities, as needed, with third-party services usually
from independent providers.

      The Company competes for prepress work on the basis of quality of service,
price of service and the ability to satisfy demanding customers. The Company
believes that not every prepress provider can meet the demands of the types of
customers served by the Company. Among this smaller group, the Company competes
primarily based on historical reliability of service and on price. The Company
believes it maintains competitive prices by efficiently implementing new
technologies in its digital imaging and prepress businesses. Additionally, the
Company believes that it is able to maintain competitive prices by coordinating
its customers' in-house capabilities with its own equipment, thereby minimizing
redundant processes and lowering customer costs. In addition, the Company
competes for prepress work based on its ability to provide other digital imaging
services. For example, the Company provides digital archiving services for
prepress customers at a lower cost than if purchased on a stand-alone basis
because of the Company's ability to efficiently integrate the prepress and
archiving processes.

      Independent prepress providers typically provide services based upon a
customer's request for which the provider is paid on a per-job basis. In most
cases, there is no contractual arrangement that would prevent a customer from
changing prepress providers on a per-project basis. The Company has obtained,
however, several multi-year contracts, and intends to continue to compete for
additional such contracts. Pursuant to these contracts, the Company typically
provides most, if not all, of the required staff and equipment.

      In the publication area, the Company competes with numerous regional
prepress companies, such as Spectragraphics in the New York area, TSI Graphics
in St. Louis, and NEC in Tennessee. The Company competes nationally for
publication business with American Color. Additionally, the Company competes
with large commercial printers, such as R. R. Donnelley & Sons, Co., World Color
Press, Inc. and Quad/Graphics, Inc. These commercial printers typically offer
major price incentives through multiple year contracts for publications to do
both their printing and prepress work at that printer's facilities. The
Company's primary national competitor for advertising agency business is Wace,
U.S.A., which is headquartered in Chicago, and a number of smaller regional
prepress companies. The Company competes with many vendors in providing advanced
digital imaging services, including Wace, U.S.A. and R. R. Donnelley & Sons, Co.

      In the area of digital imaging and archiving, the Company competes with a
small number of software-development companies marketing products to manage
image databases. The Company believes however, that the breadth of service


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(i.e., associated scanning and output options) provided by the Company through
its Digital Link System surpasses that of these other products. For example,
Cascade and SRA are competing database software products; however, in both
cases, the Company has secured ancillary business (e.g., scanning services and
archiving) with enterprises using these competing products. T-1 is a production
and archiving alternative developed specifically for the newspaper market, and
is in direct competition with the Company's Digital Link System for customers in
the newspaper-publishing industry. The Company believes that its
fully-integrated system offers greater flexibility than its competitors'
systems, which are primarily stand-alone databases.

      In the area of retail photography and events imaging, competition to the
Company's offerings is mainly in the form of small software shops offering
digital solutions, such as EPS, Castleworks and ANSI. The Company believes that
its ability to effectively market its products and support its installations
surpasses the ability of its competitors. Various larger companies, such as
Polaroid and Kodak, compete with the Company as equipment vendors and offer more
fully equipped systems that utilize hardware components manufactured by their
respective parent companies, unlike the Company's offerings for retail
photography and events imaging, which are modular and capable of integrating
equipment (e.g., digital cameras and dye-sublimation printers) from virtually
any leading manufacturer.

      In the distribution of broadcast media (the dub & ship business), the
Company competes with many local and/or regional suppliers as well as certain
other suppliers that provide these services on a national basis. These services
are typically provided on a per-job basis. There are generally no contractual
arrangements that would prevent a customer from changing providers. The Company
believes competition is based on quality of duplication, speed and reliability
of distribution as well as price.


EMPLOYEES

      As of December 31, 1996, the Company had approximately 1,215 full-time
employees, approximately 418 of whom are salaried employees and approximately
797 of whom are hourly employees. Approximately 111 of the Company's employees
at the Chicago and Los Angeles facilities, primarily in the area of production,
are covered by two collective bargaining agreements with the Graphic
Communications International Union that expire August 31, 1998, and December 31,
1999, respectively. The Company has never experienced a work stoppage and
believes that its relationships with its employees, both unionized and
nonunionized, are satisfactory.


INTELLECTUAL PROPERTY

      The Company has a copyright in the software comprising the Digital Link(R)
System. Copyrights do not preclude competitors from developing comparable
software. The Company does not currently have any patents. The Company owns the
registered trademarks "Applied Graphics Technologies," "Digital Link," "AGT" and
other marks used in its business.


RECENT DEVELOPMENTS

      In March 1997, the Company signed a contract to be the primary provider of
digital prepress production services and distribution and warehousing of radio
and television commercials for General Motors. Under this long-term contract,
which initially runs through August 2000 and is renewable for an additional two
years at General Motors' option, the Company will consolidate all activities
relating to the use of General Motors' visual content, including photographic
images and audio and video commercials.


                                        7
<PAGE>   10
ITEM 2. PROPERTIES

      The Company maintains its corporate headquarters in New York City under a
lease expiring in 1998. The Company leases approximately 77,000 square feet of
space in Carlstadt, New Jersey, where it provides prepress services for
publications, retail catalog services, and advertising agencies and satellite
transmission services. The lease expires on December 31, 1999. The Company also
leases approximately 48,000 square feet of space in Chicago, Illinois, where it
provides prepress services for advertising agencies and publications. The lease
expires on January 31, 2001. The Company owns an approximately 100,000
square-foot facility in Los Angeles, where it provides prepress and certain
printing services primarily for entertainment industry customers and for
publications and advertising agencies. The following table identifies the
Company's facilities and the principal customer base serviced at each location.
Besides the Carlstadt, Chicago and Los Angeles facilities discussed above, the
facilities included in the following table are each less than 15,000 square feet
and have leases that expire in 1997 through 2002. The Company believes that its
facilities are adequate to meet its current requirements.

<TABLE>
<CAPTION>
      LOCATION                                            PRINCIPAL CUSTOMER BASE
      --------                                            -----------------------
<S>                                                       <C>
      New York City metropolitan area
         (2 facilities)...............................    Publications, advertising agencies, and general
                                                          accounts

      Rochester, New York.............................    Digital imaging services customers

      Boulder, Colorado...............................    Digital imaging services customers

      Detroit, Michigan
         (2 facilities)...............................    Automotive industry, advertising agencies

      Chicago, Illinois ..............................    Advertising agencies, publications and general
                                                          accounts

      Los Angeles metropolitan area
         (2 facilities)...............................    Entertainment companies, advertising agencies

      San Francisco metropolitan area.................    Publications, catalogs

      Wilmington, Ohio................................    Advertising agencies
</TABLE>

      The Company also provides on-site services at customer locations. The
services provided at on-site facilities include work performed for the primary
customer and in certain locations for additional customers as capacity allows.
The Company believes that its facilities are adequate to meet its current
requirements.


ITEM 3. LEGAL PROCEEDINGS.

      The Company is not subject to any material litigation, nor to the
Company's knowledge is any material litigation currently threatened against the
Company.


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

      There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.


                                        8
<PAGE>   11
EXECUTIVE OFFICERS OF THE COMPANY

      The following table lists the executive officers of the Company. Officers
are appointed by the Board of Directors and serve at the discretion of the Board
 .

<TABLE>
<CAPTION>
              NAME                      AGE                        POSITION
              ----                      ---                        --------
<S>                                      <C>    <C>
Fred Drasner....................         54     Chairman and Chief Executive Officer, Director

Melvin A. Ettinger..............         55     Vice Chairman and Chief Operating Officer, Director

Diane Romano....................         46     President

Martin D. Krall.................         56     Executive Vice President, Chief Legal Officer and
                                                Secretary, Director

Scott A. Brownstein.............         48     Executive Vice President, Digital Imaging Services
                                                Division

Louis Salamone, Jr..............         50     Senior Vice President and Chief Financial Officer

Georgia L. McCabe...............         42     Senior Vice President, Digital Imaging Services
                                                Division
</TABLE>


      Fred Drasner, Chairman and Chief Executive Officer and a director of the
Company, has been the Chief Executive Officer of Daily News, L.P. and
Co-Publisher of the New York Daily News since 1993, the Chief Executive Officer
of U.S. News & World Report, L.P. since 1985, and President of U.S. News & World
Report, L.P. from 1985 to February 1997, the Chairman and Chief Executive
Officer of Applied Printing since 1986, and the Vice-Chairman and Chief
Executive Officer of The Atlantic Monthly Company since 1986. Mr. Drasner also
was senior counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in
April 1996. Mr. Drasner also serves as a Director of Snyder Communications, Inc.

      Melvin A. Ettinger, Vice Chairman, Chief Operating Officer and a director
of the Company, joined the Company in April 1996. From January 1994 to March
1996, he served as President and Chief Executive Officer of Xerox Graphic
Systems, which conducts research and development of products to replace film. He
also served as Senior Vice President of Sun Chemical Corporation and President
and Chief Executive Officer of its subsidiary, Polychrome Corporation, a
supplier of lithographic plates, from 1990 to 1994.

      Diane Romano, President of the Company, served as Executive Vice President
of Applied Printing from 1993 to 1995 where she had overall responsibility for
prepress and digital imaging services, sales, operations and technical
developments. Ms. Romano served as Senior Vice President of the Publication and
Catalog Division of Applied Printing from 1988 to 1993.

      Martin D. Krall, Executive Vice President, Chief Legal Officer, Secretary
and a director of the Company, has been since January 1995 Executive Vice
President and the Chief Legal Officer of the Daily News, L.P., Applied Printing,
The Atlantic Monthly Company, and U.S. News & World Report, L.P. Prior to 1995,
Mr. Krall was a partner in the law firm of Shaw, Pittman, Potts & Trowbridge
where he was a member of the Management Committee from 1978 to 1994, and the
Vice-Chairman of such Committee from 1991 to 1994. From 1995, Mr. Krall also was
senior counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in
April 1996.

      Scott A. Brownstein, Executive Vice President, Digital Imaging Services
Division, was the Senior Vice President and General Manger of DISD from 1993 to
1995 where he was responsible for developing and marketing the Company's digital
imaging services. Prior to joining the Company, Mr. Brownstein served from
1987 to 1993 as Manager of Advanced Development for Worldwide Electronic Imaging
Systems, Consumer Imaging Division at the Eastman Kodak Company, responsible for
the design, development and implementation of Kodak's Photo CD technology and
end user technology for Photo CD.

      Louis Salamone, Jr., Senior Vice President and Chief Financial Officer of
the Company, joined the Company in 1996. He previously served as Vice President
and Chief Financial Officer of Nextel Communications, Inc., a provider of
wireless communications services, from September 1994 through May 1996. He was a
partner in Deloitte & Touche LLP, an international accounting and consulting
firm, from June 1980 through September 1994.


                                        9
<PAGE>   12
         Georgia L. McCabe, Senior Vice President, Digital Imaging Services
Division, was the Senior Vice President, Marketing and Business Development of
DISD at the Company from 1993 to 1995 where she was responsible for developing
the overall business and marketing strategies for the division. Prior to joining
the Company, Ms. McCabe served from 1991 to 1993 as Director of Worldwide
Commercial Photo CD at the Eastman Kodak Company, where she was responsible for
developing and implementing corporate strategies for marketing Photo CD
products. From 1988 to 1991, Ms. McCabe served as the Director of Worldwide
Marketing Strategy and Business Development for the Integration and System
Products Division at Eastman Kodak Company, responsible for marketing strategies
and programs for the division.


                                       10
<PAGE>   13
                                     PART II

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

      The common stock of the Company ("the "Common Stock") commenced trading on
April 17, 1996, the date of its initial public offering. The Common Stock is
traded on the Nasdaq National Market. The following table sets forth the high
and low sales price for each full quarterly period during which the Common Stock
was traded.

                                                    1996
                                          ------------------------
                                            High            Low
                                          --------        --------
          Third quarter                    16              10 1/2
          Fourth quarter                   29 1/8          14 3/4


      As of March 10, 1997, there were 967 holders of record of the Common
Stock. No dividends have been paid since the date of the initial public
offering. The Company currently intends to retain any future earnings for use in
the operation of its business for the foreseeable future. As of December 31,
1996, under the most restrictive covenant of the Company's revolving credit
facility, approximately $10,000,000 were available for the payment of dividends.


ITEM 6. SELECTED FINANCIAL DATA.

      The following financial data was prepared in accordance with the basis of
presentation discussed in Note 1 to the financial statements.

<TABLE>
<CAPTION>
December 31,                                              1996        1995(a)        1994(a)        1993        1992
----------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except per-share amounts)
<S>                                                    <C>          <C>             <C>           <C>        <C>
Revenues                                               $ 132,725    $ 117,802       115,986       103,973    $  80,753

Income (loss) before provision for income taxes        $  10,820    $  (7,812)       (8,757)          798    $     866

Net income (loss)                                      $   9,955    $  (7,812)       (8,757)          798    $     866

Earnings per common share:
  Primary                                              $    0.78

  Fully diluted                                        $    0.74

Total assets                                           $  72,147    $  44,809        53,859        57,506    $  46,633

Long-term obligations:
  Long-term debt                                       $   6,005    $     853         2,394         3,821    $   2,615
  Obligations under capital lease                          1,265        2,415         3,017         4,056        3,874
                                                       ---------    ---------     ---------     ---------    ---------
     Total                                             $   7,270    $   3,268         5,411         7,877    $   6,489
                                                       =========    =========     =========     =========    =========
</TABLE>

(a)   Amounts for 1995 and 1994 include reorganization charges of $3,060 and
      $6,668, respectively (see Note 19 to the financial statements).

(b)   No dividends have been paid on the Company's common stock.


                                       11
<PAGE>   14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      On April 16, 1996, the Company commenced the initial public offering (the
"Offering") of the Company's Common Stock. Concurrent with the Offering, the
Company acquired substantially all of the assets and certain liabilities
relating to the prepress, digital imaging services and related businesses of
Applied Printing (collectively, the "Prepress Business"). The acquisition of the
Prepress Business has been accounted for in a manner similar to a pooling of
interests. Accordingly, the financial statements of the Company reflect the
combined results of operations of the Prepress Business through April 16, 1996,
and the results of the Company from April 17, 1996, through December 31, 1996.
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto.


RESULTS OF OPERATIONS
Year Ended December 31, 1996, Compared with 1995

      Revenues in 1996 were $14,923,000 higher than in 1995 primarily due to
increased digital imaging services, additional on-site facilities management
contracts, and revenue from the ad management business that commenced in 1996.

      Additional gross profit of $8,977,000 in 1996 resulted from the additional
revenues for the year as well as from an increase in the higher margin digital
business and improved gross profit in the traditional prepress business as a
result of the Company shedding low margin business and implementing more cost
effective production workflows in certain of its facilities. These improvements
resulted in an increase in the gross profit percentage to 30.5% in 1996 as
compared to 26.7% in 1995.

      Selling expenses in 1996 were $670,000 lower than in 1995, resulting in a
decrease in the amount as a percent of revenue to 11.7% in 1996 from 13.7% in
1995. This improvement is primarily due to a reduction in costs associated with
the reorganization efforts and increased business from on-site facilities
management contracts and digital imaging services, which require less sales
support than the traditional prepress business.

      General and administrative expenses decreased $4,305,000 in 1996 and
represented 9.8% of revenue as compared to 14.7% in 1995. This decrease was
principally the result of non-recurring charges incurred in 1995 relating to
closed facilities and the reversal of certain bad debt and state sales tax
reserves no longer required in 1996. The sales tax reserve was established for
potential exposure with respect to an issue that was not raised by the
governmental authority within the statute of limitations period, which expired
in 1996. The reduction in the bad debt reserve reflects the results of an
improved collection effort in 1996. These decreases were partially offset by
increased costs associated with the new on-site facilities management contracts
and the ad management business. General and administrative expenses in 1996
include $1,534,000 of costs allocated from related parties. Prior to the
Offering, Applied Printing and other related parties provided general
management, treasury, financial reporting and legal services. These expenses
were allocated to the Prepress Business on the basis of either specific
identification or an allocation methodology that management believes to be
reasonable.

      Operating income in 1996 was $17,012,000 higher than in 1995 primarily due
to the improvements discussed above and the effects of a reorganization charge
of $3,060,000 incurred in 1995 with no corresponding charge incurred in 1996.

      Interest expense in 1996 was $1,499,000 less than in 1995 primarily due to
the repayment of debt with the proceeds from the Offering.

      Other income in 1996 was primarily comprised of investment income.

      Prior to the Offering, the Prepress Business was treated as a partnership
for Federal and state income tax purposes and was not subject to income tax. A
provision for income taxes is included for 1996 only for the results of
operations subsequent to April 16, 1996. See Note 11 to the financial statements
for a reconciliation of the statutory Federal income tax rate to the Company's
effective rate in 1996.


                                       12
<PAGE>   15
      In addition to its ongoing relationship with Applied Printing, the Company
also transacts business with the Daily News, L.P. (the "Daily News") and U.S.
News & World Report, L.P. ("U.S. News"), both of which are beneficially owned by
the Chairman of the Board of Directors of the Company and the Chief Executive
Officer of the Company. Sales to related parties for the years ended December
31, 1996, 1995, and 1994 totaled $11,610,000, $7,901,000 and $7,301,000,
respectively.


Year Ended December 31, 1995, Compared with 1994

      Revenues in 1995 increased by $1,816,000 as compared to 1994 primarily as
a result of increased advertising agency business, increased sales at the Los
Angeles division and a shift of advertising agency prepress work from Applied
Printing's printing division to the Company's metropolitan New York facilities.
Revenue increased, to a lesser extent, from an increase in prepress and digital
archiving sales to U.S. News and the Daily News. Revenue increases in 1995 were
mostly offset by a decrease in revenues at the Chicago facility and one of the
New York facilities. Growth in revenue also was temporarily disrupted in the
fourth quarter of 1995 by the relocation of one of the Los Angeles facilities
and the consolidation of one of the Company's New York City facilities into
other New York metropolitan area facilities.

      Gross profit as a percentage of revenue increased in 1995 to 26.7% from
26.5% in 1994. This increase was the net result of improving efficiencies at the
Company's two largest facilities and improved work flow coordination of certain
of the Company's customer on-site business with its own facilities, partially
offset by the relocations during 1995 of the San Francisco and Los Angeles
facilities, and a decrease in revenues at the Chicago facility and one of its
New York facilities.

      Selling expenses increased slightly in 1995 to 13.7% from 13.6% of revenue
in 1994 due to the higher selling costs related to increased sales in
advertising agency business. Selling expenses for prepress services are
significantly affected by the mix of work. Prepress services for advertising
agencies and entertainment companies tend to have higher sales commissions and
related selling costs compared to prepress services for publishing companies.

      General and administrative expenses in 1995 increased $1,032,000 to 14.7%
from 14.1% of revenue in 1994 primarily due to the increased expenses relating
to digital imaging services and New York advertising agency business and from an
increase in costs allocated from Applied Printing. General and administrative
expenses in 1995 include $6,645,000 of such allocated costs.

      Reorganization charges were incurred in 1995 as a result of the
consolidation of one of the Company's New York City facilities into other New
York metropolitan area facilities. A non-recurring reorganization charge of
$3,100,000 was recorded that consisted of $600,000 for assets that are no longer
utilized in the Company's business, $1,400,000 for contractual lease
obligations for facilities that provide no further benefit to the Company and
$1,100,000 for the related leasehold improvements.

      Interest expense, which increased $525,000 in 1995, represents interest on
equipment notes and leases of the Prepress Group and an allocation of Applied
Printing's interest expense The increase in interest expense during the year is
primarily due to an increase in total debt of Applied Printing to fund
acquisitions, capital expenditures and operations as well as an increase in
interest rates in 1995.

      The Company sustained damage to two of its New York City facilities in
1995. Insurance proceeds of approximately $4,200,000, offset by related costs,
resulted in a non-recurring gain of $2,023,000, which is included in Other
income. These gains were offset by other non-operating expenses totaling
$1,300,000, resulting in other income of $600,000 for the period.


                                       13
<PAGE>   16
LIQUIDITY AND CAPITAL RESOURCES

      Upon the issuance of the Company's common stock in an initial public
offering, the Company received net proceeds of $46,103,000. Of these proceeds,
$21,000,000 was used to repay secured senior indebtedness (the "Institutional
Senior Indebtedness") to Applied Printing's primary institutional lender that
had been assumed by the Company in connection with the acquisition of the
Prepress Business. A portion of this repayment represented a repayment of
intercompany borrowings and a portion represented a distribution to Applied
Printing. In addition, $16,000,000 of these proceeds was invested in short-term
interest-bearing investments which supported a standby letter of credit that, in
turn, collateralized payment of a $16,000,000 promissory note (the "Applied
Printing Note") payable to Applied Printing. The Applied Printing Note was
executed in connection with the acquisition of the Prepress Business and was
fully repaid by February 1997. The remaining proceeds were used for working
capital, capital expenditures, repayment of all intercompany borrowings except
for the Applied Printing Note, and other general corporate purposes.

      Prior to the Offering, the Company had historically financed its
operations and capital expenditures with cash generated by operations, through
intercompany borrowings, and from prepaid vendor rebates (see Note 13 to the
financial statements). Subsequent to the Offering, the Company has financed its
operations and capital expenditures with cash generated from operations,
proceeds from the Offering, sale and leaseback arrangements, and borrowings
under a revolving credit facility. During 1996, the Company received $4,093,000
in proceeds from sale and leaseback arrangements relating to previously acquired
equipment . In addition, the Company obtained a $10,000,000 revolving credit
facility during 1996, of which $5,628,000 was borrowed as of December 31, 1996.
The proceeds from the revolving credit facility were primarily used to purchase
and improve a new facility for the operations in Los Angeles, CA. The Company
intends to enter into a sale and leaseback or other financing arrangement in
1997 to finance this new facility and to use the proceeds to repay the amounts
borrowed under the revolving credit facility. The Company has not currently
obtained any commitment for such financing. The Company is also pursuing
additional credit facilities. The Company is currently negotiating additional
equipment leasing facilities with various financing sources. There is no
assurance that any specific amount of such financing will be consummated.

      Cash flows from operating activities decreased by $3,491,000 in 1996 as
compared to 1995 primarily due to the increase of accounts receivable
attributable to increased revenues and the paydown of accounts payable and other
liabilities. Cash flows used in investing activities increased by $14,500,000 in
1996 primarily due to the investment in a new facility in Los Angeles, CA,
including the purchase of the building, and additional equipment purchases
associated with the additional on-site facilities management contracts and the
new ad management business.

      Working capital increased $40,802,000 during 1996 principally as a result
of the repayment of short-term intercompany borrowings with the proceeds of the
offering and the increase in accounts receivable.

      The Company's capital expenditure plan for 1997 is approximately
$6,500,000 (exclusive of capital expenditures with respect to new on-site
facilities management contracts), essentially all of which is for new
manufacturing equipment. In addition, the Company expects its new contract with
General Motors will require an additional capital investment of approximately
$6,500,000 by the end of 1998. The Company intends to finance a substantial
portion of these expenditures under operating leases or sale and leaseback
arrangements.

      The Company believes that the cash flow from operations, its revolving
credit facility and its potential ability to obtain funding from financing
sources will be sufficient to fund its cash needs for the foreseeable future.

      The Company does not believe that inflation has had a material impact on
its business.


                                       14
<PAGE>   17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                                       15
<PAGE>   18
INDEPENDENT AUDITOR'S REPORT




To the Board of Directors and Stockholders
   of Applied Graphics Technologies, Inc.


We have audited the accompanying balance sheet of Applied Graphics Technologies,
Inc. (a majority-owned subsidiary of Applied Printing Technologies L.P.) ("the
Company") as of December 31, 1996, and the related statements of operations,
stockholders' equity and owner's equity (deficit), and cash flows for the year
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 audit.

We conducted our audit 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 that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.



/s/
DELOITTE & TOUCHE LLP
MARCH 12, 1997
NEW YORK, NEW YORK


                                       16
<PAGE>   19
                        REPORT OF INDEPENDENT ACCOUNTANTS




To the Owners of the Predecessor Group:


      We have audited the accompanying combined balance sheet of the Predecessor
Group to Applied Graphics Technologies, Inc. as of December 31, 1995, and the
related combined statements of operations, cash flows and changes in owners'
equity (deficit) for each of the two years in the period ended December 31,
1995. These financial statements are the responsibility of the Predecessor
Group's management. Our responsibility is to express an opinion on these
combined 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 that our audits provide a reasonable basis for our opinion.

      In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of the
Predecessor Group as of December 31, 1995 and the combined results of their
operations and cash flows for each of the two years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.


                                    /s/
                                    Coopers & Lybrand L.L.P.





New York, New York
March 8, 1996


                                       17
<PAGE>   20
                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                                 BALANCE SHEETS
              (In thousands of dollars, except per-share amounts)

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                          -----------------------------
                                                                              1996             1995
                                                                          ------------     ------------
<S>                                                                       <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                              $      2,567     $        666
   Marketable securities at cost                                                 1,600
   Accounts receivable - trade (net of allowances of $472 in 1996 and
     $1,431 in 1995)                                                            29,584           19,476
   Due from affiliates                                                                            1,841
   Inventory                                                                     4,639            3,582
   Prepaid expenses and other current assets                                     2,485            3,050
   Deferred income taxes                                                           705
                                                                          ------------     ------------
          Total current assets                                                  41,580           28,615

Property, plant and equipment, net                                              20,544           13,741
Goodwill (net of amortization of $552 in 1996 and $405 in 1995)                  7,121              551
Deferred income taxes                                                            1,644
Other assets                                                                     1,258            1,902
                                                                          ------------     ------------

          Total assets                                                    $     72,147     $     44,809
                                                                          ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY/OWNERS' DEFICIT
Current liabilities:
   Accounts payable and accrued expenses                                   $    19,630     $     20,096
   applied Printing Note                                                         1,600
   Current portion of long-term debt                                               507              711
   Current portion of obligations under capital leases                           1,354            1,576
   Intercompany borrowings                                                                       30,181
   Due to affiliates                                                               354
   Other current liabilities                                                     2,407            1,125
                                                                          ------------     ------------
          Total current liabilities                                             25,852           53,689

Long-term debt                                                                   6,005              853
Obligations under capital leases                                                 1,265            2,415
Other liabilities                                                                3,142            7,233
                                                                          ------------     ------------
          Total liabilities                                                     36,264           64,190
                                                                          ------------     ------------
Commitments and contingencies
Stockholders' Equity/Owners' Deficit:
   Preferred stock (no par value, 10,000,000 shares authorized; no
      shares outstanding)
   Common stock ($0.01 par value, 40,000,000 shares authorized;
      shares issued and outstanding: 14,349,683)                                   143
   Additional paid-in capital                                                   25,584
   Retained earnings                                                            10,156
   Owners' deficit                                                                              (19,381)
                                                                          ------------     ------------
      Total stockholders' equity/owners' deficit                                35,883          (19,381)
                                                                          ------------     ------------
           Total liabilities and stockholders' equity /owners' deficit    $     72,147     $     44,809
                                                                          ============     ============
</TABLE>

                        See Notes to Financial Statements


                                       18
<PAGE>   21
                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                            STATEMENTS OF OPERATIONS
                    (In thousands, except per-share amounts)


<TABLE>
<CAPTION>
For the years ended December 31,                     1996          1995          1994
                                                   ---------     ---------     ---------
<S>                                                <C>           <C>           <C>
Revenues                                           $ 132,725     $ 117,802     $ 115,986
Cost of revenues                                      92,242        86,296        85,297
                                                   ---------     ---------     ---------

Gross profit                                          40,483        31,506        30,689
                                                   ---------     ---------     ---------

Selling expenses                                      15,486        16,156        15,746
General and administrative expenses                   13,068        17,373        16,341
Reorganization charge                                                3,060         6,668
                                                   ---------     ---------     ---------
  Total operating expenses                            28,554        36,589        38,755
                                                   ---------     ---------     ---------

  Operating income (loss)                             11,929        (5,083)       (8,066)

Interest expense                                      (1,833)       (3,332)       (2,807)
Other income, net                                        724           603         2,116
                                                   ---------     ---------     ---------

Income (loss) before provision for income taxes       10,820        (7,812)       (8,757)

Provision for income taxes                               865
                                                   ---------     ---------     ---------
Net income (loss)                                  $   9,955     $  (7,812)    $  (8,757)
                                                   =========     =========     =========

Earnings per common share:
  Primary                                          $    0.78
  Fully diluted                                    $    0.74

Weighted average number of common shares:
  Primary                                             12,797
  Fully diluted                                       13,506
</TABLE>

                        See Notes to Financial Statements


                                       19
<PAGE>   22
                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                            STATEMENTS OF CASH FLOWS
                            (In thousands of dollars)


<TABLE>
<CAPTION>
For the years ended December 31,                                       1996         1995         1994
                                                                     --------     --------     --------
<S>                                                                  <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss)                                                    $  9,955     $ (7,812)    $ (8,757)
Adjustments to reconcile net income (loss) to
  net cash from operating activities:
      Depreciation and amortization                                     4,932        5,359        7,405
      Deferred taxes                                                   (2,349)
      Gain on insurance settlement                                        (18)      (2,023)      (1,908)
      Reorganization charges                                                         3,060        6,668
      Other                                                               (40)       1,012          747
Management of Changes in Operating Assets and Liabilities, net of
  effects of acquisitions:
      Accounts receivable                                             (11,442)       3,772       (2,550)
      Due from affiliates                                               1,917         (981)       2,110
      Inventory                                                          (937)        (422)        (426)
      Other assets                                                      2,452        1,401         (148)
      Accounts payable and accrued expenses                              (413)       1,387        2,513
      Other liabilities                                                (2,591)         204         (275)
                                                                     --------     --------     --------
Net cash provided by operating activities                               1,466        4,957        5,379
                                                                     --------     --------     --------

Cash flows from investing activities:
      Investment in marketable securities                              (1,600)
      Property, plant and equipment expenditures                      (14,851)      (3,455)      (4,296)
      Proceeds from the sale of fixed assets                            1,099        1,483
      Net proceeds from insurance claims                                  243        1,782        1,189
      Entities purchased, net of cash acquired                            350          (69)      (1,000)
                                                                     --------     --------     --------
Net cash used in investing activities                                 (14,759)        (259)      (4,107)
                                                                     --------     --------     --------

Cash flows from financing activities:
      Proceeds received from the sale of common stock                  46,103
      Borrowings under revolving credit line                            5,628
      Proceeds from sale/leaseback transactions                         4,093          558          945
      Repayment of Applied Printing Note                              (14,400)
      Repayment of notes and capital lease obligations                 (2,662)      (4,020)      (4,875)
      Increase in (repayments of) intercompany borrowings, net        (18,000)       3,789       10,367
      Net distributions to Applied Printing                            (5,568)      (4,449)      (8,422)
                                                                     --------     --------     --------
Net cash provided by (used in) financing activities                    15,194       (4,122)      (1,985)
                                                                     --------     --------     --------

Net increase (decrease) in cash and cash equivalents                    1,901          576         (713)
Cash and cash equivalents at beginning of year                            666           90          803
                                                                     ========     ========     ========
Cash and cash equivalents at end of year                             $  2,567     $    666     $     90
                                                                     ========     ========     ========
</TABLE>

                        See Notes to Financial Statements


                                       20
<PAGE>   23
                       APPLIED GRAPHICS TECHNOLOGIES, INC.
         STATEMENTS OF STOCKOLDERS' EQUITY AND OWNERS' EQUITY/(DEFICIT)
              (In thousands of dollars, except per-share amounts)


<TABLE>
<CAPTION>
                                                            Additional                Owner's
                                                 Common      Paid-in-     Retained    Equity/
                                                 Stock       Capital      Earnings    (Deficit)
                                                --------     --------     --------    --------
<S>                                             <C>          <C>          <C>         <C>
Balance at January 1, 1994                                                            $ 10,059
Net loss for the year                                                                   (8,757)
Distribution for the year                                                               (8,422)
                                                                                      --------

Balance at December 31, 1994                                                            (7,120)
Net loss for the year                                                                   (7,812)
Distribution for the year                                                               (4,449)
                                                                                      --------

Balance at December 31, 1995                                                           (19,381)
Issuance of 9,309,900 common shares in
   exchange for assets of Prepress Business     $     93
Issuance of 4,500,000 common shares in
   a public offering at $12.00 per share              45     $ 46,058
Issuance of 539,683 shares in an acquisition
   at $15.75 per share                                 5        8,495
Net income (loss) for the period                                          $ 10,156        (201)
Distribution for the year                                                               (9,387)
Conveyance                                                    (28,969)                  28,969
                                                --------     --------     --------    --------


Balance at December 31, 1996                    $    143     $ 25,584     $ 10,156    $      0
                                                ========     ========     ========    ========
</TABLE>

                        See Notes to Financial Statements


                                       21
<PAGE>   24
                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                          NOTES TO FINANCIAL STATEMENTS
               (In thousands of dollars, except per-share amounts)


1. ORGANIZATION AND BASIS OF PRESENTATION

      Applied Graphics Technologies, Inc. (the "Company") is a provider of
digital prepress services to magazine publishers, advertising agencies,
entertainment companies and catalog retailers. In addition, the Company provides
outsourced, on-site prepress and related services to third parties and advanced
digital imaging services, such as digital archiving and distribution services,
and commencing in December 1996, duplication and distribution services of
advertising content for the broadcast industry. The Company was incorporated in
Delaware on December 12, 1995. Applied Printing Technologies, L.P. ("Applied
Printing"), an entity beneficially owned by the Chairman of the Board of
Directors of the Company (the "Chairman") and the Chief Executive Officer of the
Company (the "CEO"), was issued 100 shares of common stock and became the
Company's sole stockholder.

      On April 16, 1996 (the "Offering Date"), the Company's Registration
Statement on Form S-1 under the Securities Act of 1933, as amended, relating to
the initial public offering (the "Offering") of the Company's Common Stock, was
declared effective. Upon the offering being declared effective, the Company
acquired substantially all of the assets and certain related liabilities
relating to the prepress, digital imaging services and related businesses of
Applied Printing (collectively, the "Prepress Business") in exchange for
9,309,900 shares of the Company's Common Stock and $37,000 of additional
consideration ("Additional Consideration") comprised of (i) the assumption by
the Company of the principal amount of collateralized senior indebtedness to
Applied Printing's primary institutional lender (the "Institutional Senior
Indebtedness") of $21,000 and (ii) the issuance of a promissory note by the
Company to Applied Printing (the "Applied Printing Note") of $16,000. The
Company received net proceeds of $46,103,000 from the Offering, of which
$21,000,000 was used to repay Institutional Senior Indebtedness and $16,000,000
was used to invest in short-term investments to support a standby letter of
credit that collateralized the Applied Printing Note. At December 31, 1996,
Applied Printing owned approximately 60% of the Company's outstanding common
stock.

      The acquisition of the Prepress Business has been accounted for in a
manner similar to a pooling of interests. Accordingly, the financial statements
of the Company reflect the combined results of operations of the Prepress
Business through April 16, 1996, and the results of the Company from April 17,
1996, through December 31, 1996. The financial statements through the Offering
Date have been prepared by combining the assets, liabilities, results of
operations and cash flows of the specific divisions that comprise the Prepress
Business. Historically, these specific divisions have operated as separate
business units and maintained their own books and records. Through the effective
date, Applied Printing managed the cash and financing requirements of all of its
divisions centrally; as such, the interest expense, and related intercompany
borrowing, represent an allocation of Applied Printing's interest expense and
the related debt. As discussed in Note 9, this allocation of debt is presented
as an intercompany borrowing. Additionally, Applied Printing and other related
parties had historically provided certain corporate, general and administrative
services to the Prepress Business including general management, treasury,
financial reporting, and legal services. Accordingly, the financial statements
include an allocation of expenses for such services. The combined financial
position and combined results of operations of the Prepress Business may differ
from results that may have been achieved had the Prepress Business operated as
an independent entity.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      CASH EQUIVALENTS: Cash equivalents include highly liquid investments with
a maturity of less than three months at the time of acquisition.

      MARKETABLE SECURITIES: Marketable securities consist of United States
government obligations that mature in January 1997. These securities support a
letter of credit that collateralizes the Applied Printing Note. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", these securities have been
classified as held to maturity and are recorded at amortized cost, which
approximates fair value due to their short-term maturity.


                                       22
<PAGE>   25
      INVENTORY: Raw materials are valued at the lower of cost (cost being
determined on a weighted average basis) or market. Work-in-process, consisting
of labor and materials on partially completed projects, is recorded at cost
(specific identification) but not in excess of net realizable value.

      PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at
cost. Depreciation is computed principally on the straight-line method over the
estimated useful lives of the assets, which generally range from 30 years for
buildings to three years for computer software and vehicles. Leasehold
improvements and amounts recorded under capital leases are amortized on the
straight-line method over the terms of the leases or their estimated useful
lives.

      REVENUE RECOGNITION: Revenue is recognized at the time projects are
shipped or transmitted to the customer. Revenue for digital archiving services
is recognized on a per-image basis as items are scanned.

      GOODWILL: Goodwill is being amortized on the straight-line method over
periods ranging from 7 to 20 years. The Company continually evaluates the
carrying value of goodwill by comparing it to the undiscounted expected future
cash flows to be generated. Goodwill is written off when there has been a loss
of value.

      INCOME TAXES: The Prepress Business was treated as a partnership for
Federal and state income tax purposes prior to the Offering Date and was not
subject to tax. A provision for income taxes is included in the Company's
Statement of Operations only for the period subsequent to the Offering Date.

      EARNINGS PER SHARE OF COMMON STOCK: Earnings per share of common stock are
computed by dividing net income by the weighted average of the number of shares
of common stock and common stock equivalents, where dilutive, outstanding.

      LONG-LIVED ASSETS: In accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", the Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable.

      ESTIMATES: The preparation of these 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

      RECLASSIFICATION OF PRIOR YEARS' FINANCIAL STATEMENTS: Certain prior-year
amounts in the accompanying financial statements have been reclassified to
conform with the 1996 presentation.


3. ACQUISITION

      On December 3, 1996, the Company acquired the assets of SpotLink, Inc.
("SpotLink"), a company that reproduces and distributes commercials to broadcast
and cable media, for a purchase price of approximately $8,500. The assets,
consisting primarily of duplication equipment, were acquired for 539,683 shares
of the Company's common stock.

      The acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities of SpotLink have been recorded at their
estimated fair values at the date of acquisition.. The excess of the purchase
price over the fair value of the net assets acquired was $6,716 and has been
recorded as goodwill, which is being amortized on the straight-line method over
20 years. The results of operations of SpotLink have been included in the
Statement of Operations since the date of the acquisition.


                                       23
<PAGE>   26
      The following unaudited pro forma information combines the results of
operations of the Company and SpotLink for the years ended December 31, 1996 and
1995, calculated as if the acquisition had occurred on January 1, 1995. The pro
forma information has been prepared for comparative purposes only and does not
purport to be indicative of the results of operations that would have occurred
had the acquisition been consummated at the beginning of 1996 and 1995 or of
results which may occur in the future.


<TABLE>
<CAPTION>
Unaudited                                                 1996          1995
                                                        ---------     ---------
<S>                                                     <C>           <C>
Total revenues                                          $ 139,867     $ 123,765
Income (loss) before provision for income taxes         $  10,614     $  (7,216)
Net income                                              $   9,933     $  (7,216)
Earnings per common share:
  Primary                                               $    0.78
  Fully diluted                                         $    0.74
</TABLE>


4. INVENTORY

    The components of inventory at December 31 were as follows:

<TABLE>
<CAPTION>
                                                       1996                1995
                                                      ------              ------
<S>                                                   <C>                 <C>
Work-in-Process                                       $2,596              $2,518
Raw Materials                                          2,043               1,064
                                                      ------              ------
Total                                                 $4,639              $3,582
                                                      ======              ======
</TABLE>


5. PROPERTY, PLANT, AND EQUIPMENT

   Property, plant, and equipment at December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                             1996         1995
                                                            -------      -------
<S>                                                         <C>          <C>
Machinery and equipment                                     $23,422      $19,279
Leasehold improvements                                        4,643        4,212
Buildings and improvements                                   11,050        4,768
Computer software                                             1,651        1,163
Furniture and fixtures                                        1,531        1,448
Construction in progress                                        203          538
                                                            -------      -------

Total                                                        42,500       31,408
Less accumulated depreciation and amortization               21,956       17,667
                                                            -------      -------

Net                                                         $20,544      $13,741
                                                            =======      =======
</TABLE>

      Interest capitalized on construction of buildings and improvements during
1996 was $130. Depreciation and amortization of property, plant, and equipment
charged to expense for the years ended December 31, 1996, 1995, and 1994 were
$4,785, $5,106, and $5,997, respectively.


                                       24
<PAGE>   27
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

      Accounts payable and accrued expenses at December 31 consisted of the
following:

<TABLE>
<CAPTION>
                                                       1996               1995
                                                      -------            -------
<S>                                                   <C>                <C>
Accounts payable                                      $ 7,694            $ 9,513
Salaries and benefits                                   4,329              4,499
Income taxes                                            2,449
Commissions                                             1,374              1,153
Other                                                   3,784              4,931
                                                      -------            -------

Total                                                 $19,630            $20,096
                                                      =======            =======
</TABLE>


7. APPLIED PRINTING NOTE

      On April 16, 1996, as part of the acquisition of the assets of the
Prepress Business, the Company issued a promissory note to Applied Printing in
the amount of $16,000. A principal payment in the amount of $14,400 was made
during 1996. The remaining balance of $1,600 was repaid in February 1997. This
obligation, which bore interest at the rate of 4.145% per annum, was
collateralized by a letter of credit. The Company incurred interest charges of
$295 during the 1996 period.


8. LONG-TERM DEBT

    Long-term debt at December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                               1996        1995
                                                              ------      ------
<C>                                                           <C>         <C>
3.62% - 8% notes payable due 1997 through 2000                $  377      $  853
Variable rate revolving credit line due 1998                   5,628
                                                              ------      ------

Total                                                         $6,005      $  853
                                                              ======      ======
</TABLE>

      In August 1996 the Company obtained a $10,000 revolving credit facility
that is collateralized by the Company's trade receivables. The credit facility
is a two-year variable-rate facility with a major financial institution. Under
the terms of the facility, the Company must comply with certain covenants
related to tangible net worth, ratio of debt to tangible net worth, and debt
service coverage ratio. At December 31, 1996, the Company was in compliance with
all covenants. Interest on funds borrowed is the prime lending rate, which at
December 31, 1996, was 8.25%. The Company also has the option to borrow at LIBOR
plus 2.25%. Borrowings under this LIBOR provision may have maturities of 30, 90,
or 180 days. At December 31, 1996, there were no outstanding borrowings under
the LIBOR provision. The average variable rate on this revolving credit facility
during the period in 1996 was 8.25%. As of December 31, 1996, under the most
restrictive covenant of the revolving credit facility, approximately $10,000
were available for the payment of dividends.


                                       25
<PAGE>   28
    Principal payments on the long-term debt are as follows:

<TABLE>
<C>                                                                       <C>
1997                                                                      $  507
1998                                                                       5,781
1999                                                                         166
2000                                                                          58
                                                                          ------

Total                                                                      6,512
Less current portion                                                         507
                                                                          ------

Total long-term debt                                                      $6,005
                                                                          ======
</TABLE>


9. INTERCOMPANY BORROWINGS

      The Prepress Business had been financed principally through advances from
Applied Printing. Historically, Applied Printing had financed all of its
operations, including those of the Prepress Business, with Institutional Senior
Indebtedness, borrowings from the Daily News, L.P. (the "Daily News") (see Note
13), and borrowings from the majority limited partner (collectively,
"Borrowings").

      Prior to the Offering Date the financial statements include an allocation
of Applied Printing's interest expense and related Borrowings. Applied
Printing's interest expense related to the Borrowings had been allocated to the
Prepress Business based on the ratio of net assets of the Prepress Business,
before an allocation of intercompany debt, to the sum of the total consolidated
net assets of Applied Printing plus the Applied Printing debt that is not
directly attributable to specific divisions within Applied Printing. The
intercompany borrowing amounts reflected in the financial statements represent
derived amounts which have been computed by applying Applied Printing's weighted
average interest rate to the allocated interest expense, calculated using the
methodology discussed above. The weighted average interest rates during the
period ended April 16, 1996, and the year ended December 1995, were 10.8% and
8.9%, respectively The Company incurred interest charges of $944, $2,683, and
$1,992 for the period ended April 16, 1996, and the years ended December 31,
1995 and 1994, respectively.


10. LEASES

      The Company leases certain property and equipment used in its operations
under agreements that are classified as both capital and operating leases. Such
agreements generally include provisions for inflation-based rate adjustments
and, in the case of leases for buildings and office space, payments of certain
operating expenses and property taxes.


                                       26
<PAGE>   29
      Future minimum rental payments required under capital leases and operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:

<TABLE>
<CAPTION>
                                                           Capital     Operating
                                                           Leases       Leases
                                                           -------      -------
<C>                                                        <C>          <C>
1997                                                       $ 1,537      $ 7,904
1998                                                           783        3,825
1999                                                           595        3,242
2000                                                                      1,782
2001                                                                      1,152
Later years                                                               5,057
                                                           -------      -------

Total minimum lease payments                                 2,915      $22,962
                                                                        =======
Less amount representing interest                              296
                                                           -------

Present value of minimum lease payments                      2,619
Less current portion                                         1,354
                                                           -------

Long-term obligation under capital leases                  $ 1,265
                                                           =======
</TABLE>

      Assets recorded under capital leases are included in property, plant and
equipment as follows:

<TABLE>
<CAPTION>
                                                         1996             1995
                                                        -------          -------
<S>                                                     <C>              <C>
Buildings                                               $ 4,768          $ 4,768
Machinery and equipment                                  11,431           11,172
                                                        -------          -------

Total                                                    16,199           15,940
Less accumulated depreciation                             8,660            7,609
                                                        -------          -------

Net                                                     $ 7,539          $ 8,331
                                                        =======          =======
</TABLE>

      Total rental expense under operating leases amounted to $7,578, $12,106,
and $9,241 for the years ended December 31, 1996, 1995, and 1994, respectively.

      In 1996, the Company entered into sale and leaseback arrangements that are
recorded as operating leases. The gain from these sale and leaseback
arrangements has been deferred and is being recognized in income as a credit
against future rental expenses. At December 31, 1996, the remaining balance of
the deferred gain totaling $233 is included in "Other Liabilities" in the
accompanying Balance Sheets.


11. INCOME TAXES

      The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
which requires the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred taxes are recognized based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns by applying currently enacted statutory tax
rates applicable to future years to differences between the financial statement
and tax bases of assets and liabilities.


                                       27
<PAGE>   30
      The Prepress Business was treated as a partnership for Federal and state
income tax purposes prior to the Offering Date and was not subject to tax. At
the date of the Offering, the Company recorded the applicable deferred tax
assets related to the differences between financial statement and tax basis of
the assets and liabilities of the Prepress Business. These deferred tax assets
were entirely offset by a valuation allowance. A provision for income taxes is
included in the Company's Statement of Operations only for the period subsequent
to the Offering Date.

      The components of the provision for income taxes were as follows:

<TABLE>
<CAPTION>
                                                                         1996
                                                                        -------
<S>                                                                     <C>
Current:
Federal                                                                 $ 2,287
State                                                                       927
                                                                        -------

Total current                                                             3,214
                                                                        -------

Deferred:
Federal                                                                  (2,349)
                                                                        -------

Total provision for income taxes                                        $   865
                                                                        =======
</TABLE>

      The provision for income taxes varied from the Federal statutory income
tax rate due to the following:

<TABLE>
<CAPTION>
                                                                        1996
                                                                       -------
<S>                                                                    <C>
Taxes at statutory rate                                                $ 3,679
State income taxes, net of Federal tax benefit                             612
Change in valuation allowance for Federal deferred tax assets           (3,870)
Meals and entertainment expenses                                           252
Other - net                                                                192
                                                                       -------

Provision for income taxes                                             $   865
                                                                       =======

Statutory rate                                                              34%
Effective rate                                                               8%
</TABLE>

      The components of the net deferred tax asset at December 31, 1996, and
April 16, 1996, were as follows:

<TABLE>
<CAPTION>
                                                     December 31,      April 16,
                                                        1996             1996
                                                       -------          -------
<S>                                                    <C>              <C>
Deferred tax assets:
Obligations under capital leases                       $   639          $   734
Property, plant, and equipment                             679              220
Accrued expenses                                         1,414            2,092
Other liabilities                                          300            1,615
Other assets                                               198              290
                                                       -------          -------

Total deferred tax assets                                3,230            4,951
Valuation allowance                                       (881)          (4,951)
                                                       -------          -------

Net deferred tax asset                                 $ 2,349          $     0
                                                       =======          =======
</TABLE>


                                       28
<PAGE>   31
      There were no deferred tax liabilities at December 31, 1996, and April 16,
1996. A valuation allowance was established at the date of initially recording
the deferred tax assets associated with the acquisition of the Prepress
Business. Due to the Prepress Business having historically incurred losses, the
valuation allowance was deemed necessary due to the uncertainty relating to the
Company's ability to utilize these benefits in the future. During the period
ended December 31, 1996, the Company reduced the valuation allowance by $3,870
for Federal and $200 for state deferred tax assets. Based on operating earnings
during 1996 and the Company's expectations of future earnings from established
contracts and relationships, the Company believes that it is more likely than
not that the benefit associated with Federal deferred tax assets will be
realized in the future and therefore has not established a valuation allowance
for Federal deferred tax assets at December 31, 1996. Based on the uncertainty
associated with the ability to utilize state benefits, the Company believes it
is not more likely than not that these benefits will be realized in the future
and therefore has established a valuation allowance.


12. STOCK OPTIONS

      In 1996, the Board of Directors and stockholders approved a Stock Option
Plan. Under such plan, options are granted to key employees of the Company to
purchase common stock of the Company. Options granted under the plan, which have
a term of ten years, become exercisable over a five year period in varying
amounts, but in no event less than 5% or more than 25% in any year for any
individual optionee. On the date of the Offering, 2,375,000 options were granted
with an exercise price of $12.00 per share. Additional grants were made in 1996
for 14,000 shares and 40,000 shares with an exercise price of $16.63 and $15.25,
respectively. Also in 1996, the Board of Directors approved a Non-employee
Directors' Nonqualified Stock Option Plan. Under such plan, options are granted
to members of the Board of Directors who are not employees of the Company.
Options granted under the plan become exercisable over a two year period and
have a term of ten years. On the date of the Offering, 100,000 options were
granted with an exercise price of $12.00. The plan also provides for an
additional 5,000 options to be granted to non-employee directors on each
subsequent anniversary date of having first become a member of the Board of
Directors. Such future option grants will have an exercise price equal to the
fair market value of the common stock on the date of grant and are fully vested
at grant.

      The two plans call for a combined maximum of 4,200,000 shares of the
Company's common stock to be available for issuance upon exercise of options.
During 1996, 35,000 and 3,000 options with an exercise price of $12.00 and
$16.63, respectively, were forfeited and became available for future issuance.
The weighted average exercise price of options outstanding at the end of the
year, options granted during the year, and options forfeited during the year was
$12.07, $12.07, and $12.37, respectively. No options were exercisable as of
December 31, 1996, and none expired or were exercised during 1996.

      The Company accounts for the issuance of stock options under the
provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees", which requires compensation cost to be measured at
the date of grant based on the intrinsic value of the options granted. The
intrinsic value of an option is equal to the difference between the market price
of the common stock on the date of grant and the exercise price of the option.
There was no compensation cost recognized by the Company on the options granted
in 1996.

      In 1995, Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", was issued. SFAS No. 123 provides for
an alternative measurement of compensation cost based on the fair value of the
options granted. The fair value of an option is based on the intrinsic value as
well as the time value of the option. The fair value of stock options granted
was estimated on the grant dates using the Black-Scholes option-pricing model
and the following assumptions: a risk-free interest rate of 6.75%; an expected
life of 6 years; expected volatility of 53.94%; and no expected dividends. The
weighted-average fair value of the options issued by the Company in 1996 was
$17,985. Had the Company elected to account for the issuance of stock options
under SFAS No. 123, the compensation cost would have been $2,511 for the year
ended December 31, 1996. The pro forma net income, primary earnings per share,
and fully diluted earnings per share for the year ended December 31, 1996,
calculated as if the Company had elected to account for the issuance of stock
options under SFAS No. 123, were $8,298, $0.66, and $0.63, respectively.


                                       29
<PAGE>   32
13. RELATED PARTY TRANSACTIONS

      In addition to the business it transacts with Applied Printing, the
Company also does business and shares services with entities beneficially owned
by the Chairman and the CEO, including the Daily News and U.S. News. The Company
also utilizes the travel-related services of ZWA, Inc., which is owned by the
Chairman.

      DUE TO/FROM AFFILIATES - Affiliates owed the Company $46 and $1,841 at
December 31, 1996 and 1995, respectively. The Company owed affiliates $400 at
December 31, 1996.

      AFFILIATE SALES AND PURCHASES - The Company has entered into Production
Services Agreements with U.S. News and the Daily News pursuant to which it will
provide prepress services. The agreement with U.S. News, which expires on
December 31, 2000, is renewable annually thereafter by mutual agreement of the
parties. The agreement with the Daily News commenced in October 1995 and is
renewable annually by mutual agreement of the parties. In 1995, the Company
entered into a two-year agreement to digitize the entire library of photographs
of an affiliate. In addition, the Company occasionally provides services to and
purchases services from related parties that are negotiated on an arms-length
basis. Sales to and purchases from related parties for the years ended December
31, 1996, 1995, and 1994 were as follows:

<TABLE>
<CAPTION>
                                          1996            1995            1994
                                         -------         -------         -------
<S>                                      <C>             <C>             <C>
Affiliate sales                          $11,610         $ 7,901         $ 7,301
Affiliate purchases                      $ 3,097         $   421         $   710
</TABLE>

      ALLOCATED COSTS - Prior to the Offering Date, Applied Printing and other
related parties provided to the Company certain administrative services that
included cash management, financial reporting, legal, and other similar
services. The costs allocated to the Company were based on either specific
identification of expenses attributable to the Prepress Business, where
practicable, or an allocation of the total costs incurred. For such services,
the Company incurred charges of $1,534, $6,645, and $6,128 for the period ended
April 16, 1996, and for the years ended December 31, 1995 and 1994,
respectively.

      In the opinion of management, such allocated costs have been made on a
basis that is considered to be reasonable; however, these costs are not
necessarily indicative of the total costs that the Company would have incurred
had it operated on a stand-alone basis.

      SHARED COSTS - Pursuant to shared services agreements, the Company
receives certain legal and computer services from the Daily News and U.S. News.
For such services, the Company incurred charges of $303, $150, and $198 for the
years ended December 31, 1996, 1995, and 1994, respectively. In 1995 and 1994,
the shared costs are included as part of the allocated costs.

      TECHNOLOGY DEVELOPMENT AGREEMENT - Under an arrangement with the Daily
News, the Company is reimbursed for the costs incurred in the development of
certain digital technologies. Such reimbursements totaled $100, $1,184, and
$1,956 in the years ended December 31, 1996, 1995, and 1994, respectively.

      LEASES - The Company leases office space in Washington, D.C. from U.S.
News. The charges incurred for the lease were $293, $281,and $281 for the years
ended December 31, 1996, 1995, and 1994, respectively. In addition, the Company
leases office space in New York City from Applied Printing and incurred charges
of $289 for the year ended December 31, 1996. The Company also leases a facility
from the Daily News and incurred charges of $53 for the year ended December 31,
1996.


                                       30
<PAGE>   33
      VENDOR AGREEMENT - The Company is a party to an agreement originally
entered into in January 1992 by Applied Printing with a vendor and its
affiliate. Pursuant to such agreement, the Company and Applied Printing are
obligated to purchase a specified cumulative annual minimum amount of the
vendor's products provided that the prices are market competitive and that the
products meet technological and customer specifications. The Company receives a
significant rebate from the vendor that varies based on the volume of products
purchased. In addition, in 1995, the vendor prepaid to the Company $2,745 of the
rebate expected to be earned in 1997 and 1998. If the Company does not earn the
full amount of the prepaid rebate in 1997 and 1998, it would be required to
repay the difference to the vendor along with interest accrued since 1995. The
Chairman is a guarantor of the Company's contingent repayment obligation. The
Company also received prepaid rebates in March 1996 aggregating approximately
$900, all of which was earned in 1996.

      In connection with the agreement, the vendor's affiliate loaned $15,000 to
the Chairman. The loan, which matures on December 31, 1998, bears interest at
the lender's commercial paper rate. If the Company and Applied Printing do not
jointly satisfy the cumulative minimum purchase obligations specified in the
agreement, the Chairman must repay the loan balance in full at that time. These
minimum purchase obligations have been satisfied to date, and the Company
expects, through its normal purchasing requirements, to continue to exceed such
minimum obligation through December 31, 1998. The Company believes that the
terms for its purchases of the products covered by this agreement are no less
favorable to the Company than those that could be obtained from another vendor.


14. RETIREMENT PLANS

      The Company has a defined contribution plan in which employees are
eligible to participate upon the completion of six months of service and the
attainment of 21 years of age. Participants can contribute into the plan on both
a pre-tax and after-tax basis. In addition, the Company can make discretionary
contributions into the plan. Participants vest 100% in the Company's
discretionary contribution upon the completion of five years of service. The
Company did not make any discretionary contributions for the years ended
December 31, 1996, 1995, and 1994.


15. COMMITMENTS AND CONTINGENT LIABILITIES

      The Company is contingently liable as a result of transactions arising in
the ordinary course of business and is involved in certain legal proceedings in
which damages and other remedies are sought. In the opinion of Company
management, after review with counsel, the ultimate resolution of these matters
will not have a material effect on the Company's Financial Statements.

      Applied Printing and its corporate general partner are defendants in
litigation arising out of Applied Printing's business. The Company is not a
defendant in any of such litigation, and does not believe there is a sustainable
basis for the Company to be named as a defendant in any of such litigation. If
the Company were to be named or held responsible in connection with any of such
litigation, the Company is indemnified by Applied Printing.


16. CONCENTRATION OF CREDIT RISK

      Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and trade
receivables. The Company maintains cash balances and cash equivalents with high
credit quality financial institutions and limits the amount of credit exposure
to any one financial institution.

      The Company provides credit to customers on an uncollateralized basis
after evaluating customer credit worthiness. The Company's customers are not
concentrated in any specific geographic region, but are concentrated in the
publishing, advertising agency, entertainment company, and catalog retailing
businesses. The Company's five largest customers, excluding related parties,
comprise 35%, 37%, and 34% of sales for the years ended December 31, 1996, 1995,
and 1994, respectively. In addition, amounts due from these customers represent
29% and 31% of trade accounts receivable as of December 31, 1996 and 1995,
respectively. Any termination or significant disruption of the Company's
relationships with any of its principal customers could have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows.


                                       31
<PAGE>   34
17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    Payments of interest and income taxes were as follows:

<TABLE>
<CAPTION>
                                                                   1996         1995        1994
                                                                 --------     --------    --------
<S>                                                              <C>          <C>         <C>
Interest paid (net of amounts capitalized)                       $    702     $    905    $    815
Income taxes paid                                                $    766

  Noncash investing and financing activities were as follows:

                                                                   1996         1995        1994
                                                                 --------     --------    --------

Conversion of intercompany borrowing into
  Applied Printing Note                                          $ 16,000
Distribution to Applied Printing in the form
  of increased intercompany borrowing                            $  3,819
Common stock issued in exchange for
  the Prepress Business                                          $     93
Common stock issued for acquisition                              $  8,500
Acquisition of property, plant, and equipment
  in exchange for obligations under capital leases                            $    480     $    562
Acquisition of property, plant, and equipment
  in exchange for notes payable                                                            $  1,088
Additions to goodwill for contingent
  purchase price adjustments                                                  $     69     $    108

Acquisitions:
Fair value of assets acquired                                    $  8,600                  $  1,020
Cash paid                                                                                    (1,000)
Value of common stock issued                                       (8,500)
                                                                 --------                  --------

Liabilities assumed                                              $    100                  $     20
                                                                 ========                  ========
</TABLE>


18. FAIR VALUE OF FINANCIAL INSTRUMENTS

      The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.


                                       32
<PAGE>   35
      The carrying amount and estimated fair values of financial instruments at
December 31, 1996 and 1995, are summarized as follows:

<TABLE>
<CAPTION>
                                                   1996                    1995
                                            ------------------      ------------------
                                           Carrying   Estimated    Carrying   Estimated
                                            Amount    Fair Value    Amount    Fair Value
                                            ------      ------      ------      ------
<S>                                         <C>         <C>         <C>         <C>
ASSETS:
Cash and cash equivalents                   $2,567      $2,567      $  666      $  666
Marketable securities                       $1,600      $1,600
Other assets                                $1,470      $1,470      $1,125      $1,125

LIABILITIES:
Applied Printing Note                       $1,600      $1,600
Long-term debt                              $6,512      $6,400      $1,564      $1,335
Obligations under capital leases            $2,619      $2,557      $3,991      $3,281
</TABLE>

      The following methods and assumptions were used to estimate the fair value
of financial instruments presented above:

      CASH AND CASH EQUIVALENTS - the carrying amount is a reasonable
approximation of fair value.

      MARKETABLE SECURITIES - due to the short-term maturity of the investments,
the carrying amount is a reasonable approximation of fair value.

      OTHER ASSETS - the carrying amount of non-trade accounts receivables is
a reasonable approximation of fair value.

      APPLIED PRINTING NOTE - due to the short-term nature of the obligation,
the carrying amount is a reasonable approximation of fair value.

      LONG-TERM DEBT - the fair value of notes payable, including the current
portion, is estimated by discounting the future streams of payments using the
rate at which the Company can currently obtain funds under its revolving credit
line. The carrying amount of the revolving credit line is a reasonable
approximation of fair value since it is a variable-rate obligation.

      OBLIGATIONS UNDER CAPITAL LEASES - the fair value of obligations under
capital leases, including the current portion, is estimated by discounting the
future streams of payments using the rate at which the Company can currently
obtain funds under its revolving credit line.


19. RESTRUCTURING CHARGES

      During 1994 and 1995, the Company restructured its operations in response
to the operational impact of acquisitions and the technological changes within
the industry. As part of the restructuring, the Company consolidated several
operations during 1994 and 1995 in an effort to gain operational and
administrative efficiencies. The Statements of Operations include restructuring
charges of $3,060 and $6,668 for the years ended December 31, 1995 and 1994,
respectively. Such charges were comprised primarily of the write off of assets,
including leasehold improvements, that are no longer utilized in the Company's
business and contractual lease obligations for facilities and equipment that
provide no further benefit to the Company. The Company utilized a discount rate
of 10% to determine the present value of the contractual lease payments. The
remaining balance of the restructuring liability as of December 31, 1996, was
$409, which the Company expects to be paid during 1997.


                                       33
<PAGE>   36
20. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

      Prior to the date of the Offering, the Company was treated as a
partnership for Federal and state income tax purposes and was not subject to
tax. Had the Company been treated as a C Corporation for the periods prior to
the date of the offering, the provision for income taxes, net income, and
earnings per common share for the year ended December 31, 1996, would have been
as follows:


<TABLE>
<CAPTION>
                                                                         1996
                                                                      ----------
<S>                                                                   <C>
Provision for income taxes                                            $      785
Net income                                                            $   10,035
Earnings per common share:
  Primary                                                             $     0.78
  Fully diluted                                                       $     0.74
</TABLE>


21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
1996 Quarter Ended                 March 31      June 30     September 30   December 31
                                   --------      --------      --------       --------
(In thousands of dollars, except
per-share amounts)
<S>                                <C>           <C>           <C>            <C>
Net sales                          $ 30,598      $ 30,988      $ 35,177       $ 35,962
Gross profit                       $  8,269      $  9,352      $ 11,542       $ 11,320
Income before provision for
  income taxes                     $    146      $  2,096      $  4,216       $  4,362
Net income                         $    146      $  2,033      $  4,005       $  3,771
Earnings per common share:
  Primary                          $   0.01      $   0.16      $   0.29       $   0.26
  Fully Diluted                    $   0.01      $   0.16      $   0.29       $   0.25


<CAPTION>
1995 Quarter Ended                 March 31      June 30     September 30   December 31
                                   --------      --------      --------       --------
(In thousands of dollars)
<S>                                <C>           <C>           <C>            <C>
Net sales                          $ 30,140      $ 29,711      $ 29,638       $ 28,313
Gross profit                       $  7,614      $  8,250      $  8,030       $  7,612
Net income (loss)                  $   (964)     $     82      $ (4,927)      $ (2,003)
</TABLE>


                                       34
<PAGE>   37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.


      The information required by this item is incorporated herein by reference
to the Company's Form 8-K filed with the Securities and Exchange Commission on
October 4, 1996.


                                       35
<PAGE>   38
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      (a)   Directors. -The information with respect to directors required by
            this item is incorporated herein by reference to the Company's 1997
            Proxy Statement to be filed with the Securities and Exchange
            Commission by April 30, 1997.

      (b)   Executive Officers. - The information with respect to officers
            required by this item is included at the end of Part I of this
            document under the heading Executive Officers of the Company.

ITEM 11. EXECUTIVE COMPENSATION.

      The information required by this item is incorporated herein by reference
to the Company's 1997 Proxy Statement to be filed with the Securities and
Exchange Commission by April 30, 1997.

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

      The information required by this item is incorporated herein by reference
to the Company's 1997 Proxy Statement to be filed with the Securities and
Exchange Commission by April 30, 1997.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      The information required by this item is incorporated herein by reference
to the Company's 1997 Proxy Statement to be filed with the Securities and
Exchange Commission by April 30, 1997.


                                       36
<PAGE>   39
                                     PART IV

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

      (a) Listed below are the documents filed as a part of this report:

            1. Financial Statements and the Independent Auditors' Reports:

                  Independent Auditors' Reports.

                  Balance Sheets.

                  Statements of Operations for the Years Ended December 31,
                  1996, 1995 and 1994.

                  Statements of Cash Flows for the Years Ended December 31,
                  1996, 1995 and 1994.

                  Statements of Stockholders' Equity and Owners' Equity
                  (Deficit) for the Years Ended December 31, 1996, 1995
                  and 1994.

                  Notes to Financial Statements.

            2. Financial Statement Schedules:

                  Not applicable.

            3. Exhibits:

                  3.1      Certification of Incorporation (Incorporated by
                           reference to Exhibit No. 3.1 forming part of the
                           Registrant's Registration Statement on Form S-1 (File
                           No. 333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).

                  3.2      Amended and Restated By-Laws of Applied Graphics
                           Technologies, Inc. (Incorporated by reference to
                           Exhibit No. 3.2 forming part of Amendment No. 3 to
                           the Registrant's Registration Statement on Form S-1
                           (File No. 333-00478) filed with the Securities and
                           Exchange Commission under the Securities Act of 1933,
                           as amended).

                  4        Specimen Stock Certificate (Incorporated by reference
                           to Exhibit No. 4 forming part of Amendment No. 3 to
                           the Registrant's Registration Statement on Form S-1
                           (File No. 333-00478) filed with the Securities and
                           Exchange Commission under the Securities Act of 1933,
                           as amended).

                  10.2     Applied Graphics Technologies, Inc. 1996 Stock Option
                           Plan (Incorporated by reference to Exhibit No. 10.2
                           forming part of Amendment No. 3 to the Registrant's
                           Registration Statement on Form S-1 (File No.
                           333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).

                  10.3     Applied Graphics Technologies, Inc. Non-Employee
                           Directors Nonqualified Stock Option Plan
                           (Incorporated by reference to Exhibit No. 10.3
                           forming part of Amendment No. 3 to the Registrant's
                           Registration Statement on Form S-1 (File No.
                           333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).


                                       37
<PAGE>   40
                  10.4*    Vendor Agreement, dated January 8, 1992, as amended
                           (Incorporated by reference to Exhibit No. 10.1
                           forming part of the Registrant's Report on Form
                           10-Q/A (File No. 0-28208) filed with the Securities
                           and Exchange Commission under the Securities Exchange
                           Act of 1934, as amended, for the quarterly period
                           ended March 31, 1996).

                  10.5     Agreement, dated May 1, 1979, between WAMM Associates
                           and Publisher Phototype International, L.P., as
                           amended (Incorporated by reference to Exhibit No.
                           10.5 forming part of Amendment No. 1 to the
                           Registrant's Registration Statement on Form S-1 (File
                           No. 333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).

                  10.6 (a) Employment Agreement, effective as of April 1,
                           1996, between the Company and Diane Romano
                           (Incorporated by reference to Exhibit No. 10.6
                           forming part of Amendment No. 3 to the Registrant's
                           Registration Statement on Form S-1 (File No.
                           333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).

                       (b) Employment Agreement, effective as of April 1, 1996,
                           between the Company and Georgia L. McCabe
                           (Incorporated by reference to Exhibit No. 10.6
                           forming part of Amendment No. 3 to the Registrant's
                           Registration Statement on Form S-1 (File No.
                           333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).

                       (c) Employment Agreement, effective as of March 13, 1996,
                           between the Company and Melvin A. Ettinger
                           (Incorporated by reference to Exhibit No. 10.6
                           forming part of Amendment No. 3 to the Registrant's
                           Registration Statement on Form S-1 (File No.
                           333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).

                       (d) Employment Agreement, effective as of April 1, 1996,
                           between the Company and Scott A. Brownstein
                           (Incorporated by reference to Exhibit No. 10.6
                           forming part of Amendment No. 3 to the Registrant's
                           Registration Statement on Form S-1 (File No.
                           333-00478) filed with the Securities and Exchange
                           Commission under the Securities Act of 1933, as
                           amended).

                       (e) Employment Agreement, effective as of June 1, 1996,
                           between the Company and Louis Salamone, Jr.

                  10.7     Form of Registration Rights Agreement (Incorporated
                           by reference to Exhibit No. 10.7 forming part of
                           Amendment No. 3 to the Registrant's Registration
                           Statement on Form S-1 (File No. 333-00478) filed with
                           the Securities and Exchange Commission under the
                           Securities Act of 1933, as amended).

                  16       Letter regarding Change in Certifying Accountant
                           (Incorporated by reference to the Registrant's Report
                           on Form 8-K (File No. 0-28208) filed with the
                           Securities and Exchange Commission under the
                           Securities Exchange Act of 1934, as amended, on
                           October 4, 1996.


                                       38
<PAGE>   41
                  27       Financial Data Schedule (EDGAR filing only).

                  99       Form 8-K filed October 4, 1996.

----------

* Confidential portions omitted and supplied separately to the Securities and
  Exchange Commission.

(b) The Company filed the following reports on Form 8-K during the quarter
    ended December 31, 1996:

    Form 8-K filed October 4, 1996, regarding change in certifying accountants.
    Form 8-K filed December 17, 1996, regarding the acquisition of SpotLink.


                                       39
<PAGE>   42
                                   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.


APPLIED GRAPHICS TECHNOLOGIES, INC.
(Registrant)


By: /s/ Fred Drasner
-----------------------------      March 31, 1997
Fred Drasner
Director, Chairman, and Chief Executive Officer
      (Duly authorized officer)

Date:  March 31, 1997


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 in
the capacities indicated on March 31, 1997.

      Signature                  Title
      ---------                  -----

/s/ Fred Drasner                 Director, Chairman, and Chief Executive Officer
-------------------------        (Principal Executive Officer)
Fred Drasner


/s/ Melvin A. Ettinger           Vice Chairman, Chief Operating
-------------------------        Officer, and Director
Melvin A. Ettinger

/s/ Diane Romano                 President
-------------------------
Diane Romano

/s/ Louis Salamone, Jr.          Senior Vice President and Chief Financial
-------------------------        Officer (Principal Financial and Accounting
Louis Salamone, Jr.              Officer)

/s/ Martin D. Krall              Executive Vice President, Chief Legal
-------------------------        Officer, Secretary and Director
Martin D. Krall

/s/ Mortimer B. Zuckerman        Chairman of the Board of Directors
-------------------------
Mortimer B. Zuckerman

/s/ John R. Harris               Director
-------------------------
John R. Harris

/s/ Edward H. Linde              Director
-------------------------
Edward H. Linde

/s/ Howard Stringer              Director
-------------------------
Howard Stringer

/s/ Linda J. Wachner             Director
-------------------------
Linda J. Wachner


                                       40
<PAGE>   43
                                EXHIBIT INDEX
                                -------------

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

              10.6(e)      Employment Agreement, effective as of June 1, 1996,
                           between the Company and Louis Salamone, Jr.

                  27       Financial Data Schedule (EDGAR filing only).

                  99       Form 8-K filed October 4, 1996.