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, 1997

                                       OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
For the transition period from _____ to_____


Commission File Number 0-28208

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


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



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

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

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

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

     Title of each class

Common Stock, par value $.01 per share

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

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

The aggregate market value of registrant's  voting stock held by  non-affiliates
as of February 28, 1998 was $763,864,610.

The number of shares of the registrant's Common Stock outstanding as of February
28, 1998, was 17,904,486 shares.

The following  documents  are hereby  incorporated  by reference  into this Form
10-K:
      (1) Portions  of the 1998 Proxy  Statement/Prospectus  included as part of
          the Registrant's  Registration  Statement on Form S-4 to be filed with
          the Securities and Exchange Commission (Part III).

                                TABLE OF CONTENTS


                                                                           PAGE
  ITEM     PART I

   1.      Business                                                         1

   2.      Properties                                                       8

   3.      Legal Proceedings                                                8

   4.      Submission of Matters to a Vote of Security Holders              8

           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                      16

   9.      Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosure
                                                                            39

           PART III

   10.     Directors and Executive Officers of the Registrant               40

   11.     Executive Compensation                                           40

   12.     Security Ownership of Certain Beneficial Owners
           and Management                                                   40

   13.     Certain Relationships and Related Transactions                   40

           PART IV

   14.     Exhibits, Financial Statement Schedules,
           and Reports on Form 8-K                                          41

           Signatures                                                       44












<PAGE>


                                     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:  the trend toward electronic distribution of content; the
efficiency  of  competitors  or  customers  of the  Company;  the  trend  toward
outsourcing  ancillary  functions;  the rate of expansion of services  under the
agreement with General  Motors;  the securing of  additional,  or the renewal of
existing, on-site arrangements;  the expansion of on-line distribution services;
the growth of the market for advanced  digital imaging  services;  the Company's
expansion into broadcast  media  distribution  services;  generating  additional
business from on-site customers;  the successful entry into the event-driven and
retail digital photography  markets;  market acceptance of the Company's digital
photography  product line;  the rate of expansion of the Company's  sales force;
cross-selling the Company's services; the rate of opening additional facilities;
the rate and level of  capital  expenditures;  and the  securing  of  additional
credit facilities.

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, automobile manufacturers, and retailers. The
Company's  largest  customers in each of these categories  include  McGraw-Hill,
Newsweek  and  Conde  Nast;  The  InterPublic  Group of  Companies  and Team One
Advertising;  The Walt Disney Company and Time Warner;  General Motors; The Home
Depot and Sears  Roebuck & Company.  The  Company  provides  its  services on an
outsourcing  basis  either  in the  Company's  own  facilities  or onsite 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,
the  Company  began to provide  advanced  digital  imaging  services to meet the
evolving needs of its customers. Digital archiving and distribution services are
now being provided to customers  including  General  Motors,  Time Warner's Time
Picture  Collection,   CBS,  ABC,  Citibank,   the  American  Society  of  Media
Photographers and the United States Holocaust Memorial Museum.

      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,  such  as on  the  World  Wide  Web  and  for  CD-ROM.
Publishers,   advertising  agencies,  entertainment  companies  and  others  are
increasingly  exploiting  these new  distribution  channels  for  marketing  and
promotion,  for  targeting  individual  or groups of customers or for  reselling
their graphic images in a cost-effective manner.

      The Company uses its Digital Link System and other commercially  available
systems to provide  digital  imaging  services.  The Digital Link System uses an
integrated  suite of  software  applications  that  allows the  Company to offer
customers the ability to capture, edit, store, archive, retrieve, and distribute
their content in a digital environment.

      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 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.

      In  December  1996,  the Company  acquired  the assets of  SpotLink,  Inc.
("SpotLink"),   a  subsidiary  of  Western   International   Media   Corporation
("Western"),  which is owned by The InterPublic Group of Companies. In September
1997, the Company acquired the broadcast media distribution  business of Winkler
Video   Associates,   Inc.   ("Winkler").   Through  the  SpotLink  and  Winkler
acquisitions,  the Company provides volume duplication and distribution of radio
and television  advertisements,  a service known as "dub and ship," to broadcast
stations. With the expansion into the broadcast media distribution business, the
Company  increased its service  offerings to existing  customers,  including The
Walt Disney Company and General Motors.

     The Company currently maintains a network of twenty-three principal digital
prepress  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 eighteen  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. Four 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  1933  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,  outsourced
facilities   management,   advanced   digital   imaging,   and  broadcast  media
distribution services.

      Digital  Prepress  Services.  Digital  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. 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,  the 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. The 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."

      Capitalizing  on these  services,  the Company  established  a Magazine Ad
Management   Division   and   Newspaper  Ad   Management   Division  to  provide
comprehensive   digital  prepress  and  print  content  management  services  to
magazines and newspapers.  The Magazine Ad Management  Division provides digital
advertising storage management and electronic  transmission services to magazine
publishers, advertising agencies, and printers nationwide using the Digital Link
System.  The Company has a multi-year  agreement  with Time,  Inc., to provide a
variety of digital ad management  services to People,  Time, Sports Illustrated,
Entertainment Weekly, Fortune, and Life and also has a multi-year agreement with
U.S.  News & World  Report,  L.P.,  to provide such  services.  The Newspaper Ad
Management  Division provides services to the New York Daily News and the Newark
(New Jersey)  Star-Ledger,  including  electronic  design,  digital  advertising
composition, and transmission of display advertising.

     During  1997,  the Company  acquired  the  operations  of several  prepress
companies,  including  all of the  assets  of MBA  Graphics,  Inc.  ("MBA"),  an
unaffiliated  provider of prepress  production,  direct  mailing,  and  brokered
commercial printing services primarily to The Home Depot at its four facilities.
Pursuant to the  acquisition  agreement with MBA, the Company may be required to
make  additional  payments,  in a combination  of cash and the Company's  common
stock, based upon MBA's financial performance for calendar years 1997, 1998, and
1999.  The Company also acquired  certain assets of Star Graphic Arts Co., Inc.,
an unaffiliated  prepress company in Northern California,  and all of the assets
of Vancor Color, Inc. ("Vancor"),  an unaffiliated provider of prepress services
in Southern California.  Pursuant to the acquisition  agreement with Vancor, the
Company may be required to make  additional  payments to Vancor in shares of the
Company's  common  stock  based  upon  Vancor's  financial  performance  for the
calendar years ended December 31, 1997, 1998, and 1999.

      Outsourced  Facilities  Management  Services.  In  response  to demands of
certain customers, the Company performs services at a customer's location rather
than at one of the Company's  facilities.  In addition,  the Company may perform
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, US. 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.  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.
These  advantages  enable the Company to be more  responsive and to increase the
level and type of service it provides.  For example,  when  performing  prepress
work  on-site,  the  Company has the ability to  introduce  the  customer to its
archiving and other digital imaging services.

      Advanced Digital Imaging Services.  The Company's Digital Imaging Services
Division ("DISD") commenced work on the Digital Link System in 1995 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 online distribution to both traditional prepress and new groups of
customers.  These customers are increasingly looking to distribute their content
digitally  through  traditional  media channels and 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 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.

      The  Company  has  developed  a family  of  digital  photography  systems,
including a digital portrait system and a portable digital events system.  These
systems integrate a suite of proprietary Digital Link software applications with
specialized  hardware and are based on an open  architecture  that  supports the
leading  digital  cameras and printers.  The Company  recently  consummated  the
acquisition  of two  digital  events  photography  businesses  and now  provides
complete  digital event  photography  services at various  locations,  including
sporting  events,  stadiums,  and  resorts.  To date the Company has not derived
significant revenues from these services.

     Broadcast  Media  Distribution  Services.  Through the SpotLink and Winkler
acquisitions,  the Company entered the broadcast media distribution  business in
which the Company  receives a master copy of a commercial on video or audiotape,
duplicates  the  tape,  and  ships  the  copies  via air  freight  to radio  and
television stations for rebroadcast.  As part of the SpotLink  acquisition,  the
Company  entered into a multi-year  contract under which Western is obligated to
direct all of its  broadcast  media  distribution  business to the Company.  The
Company has agreed to provide broadcast media  distribution  services to General
Motors under its contract to act as General Motors' digital content manager.

Related Services

      At its facility in Los Angeles,  California, the Company provides printing
services  performed  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 1997. The Company also licenses  software
and sells hardware related to the Digital Link System.

Technology

      The Company  aggressively  implements  technological  advances in order to
improve and expand its prepress and advanced digital imaging and 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 is a suite of proprietary
software  applications  that  integrates  a  wide  variety  of  digital  imaging
hardware. Operating over large area networks, including the World Wide Web, this
networked  set of  applications  is  used  to  capture,  edit,  store,  archive,
retrieve,  and distribute  large numbers of digital  assets,  including  images,
video,  and  audio.  Its  features  include  zooming,  enlarging,   side-by-side
comparison, sorting, categorizing, and text annotations, as well as a variety of
image  optimization  tools including  cropping and  retouching.  Images that are
archived  using the system  may be easily  retrieved  through  text and key word
searches,  manipulated by computer,  and distributed  through both  conventional
print  as  well as  electronic  distribution  channels  that  require  digitized
content.  To date,  this system has been used  predominantly  to process graphic
images, although it also is capable of capturing,  storing, and retrieving audio
and video files.

      The Digital Link System uses  software to integrate 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 each 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 Photo Editor that  categorizes,  reviews,  and selects  images
stored in the Digital Link System.  The Digital Link System includes  customized
software that permits the system to interface  with  virtually any equipment the
customer may already have, such as a proprietary or "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,
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.

      Communications Networks. Many of the Company's facilities are connected by
a data network  system that 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 eleven  printing  plants of
eight 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 magazine publishers in meeting their
demanding  production cycles but has been expanded to include  transmissions for
other  publications.  The  connection  to multiple  printing  sites allows these
publications  to be printed at several  locations in order to meet  distribution
schedules.  The Company personnel working at the printing plants on this network
produce the film  required to create  printing  plates and receive  digital data
used to drive computer to plate equipment.  In addition,  the Company  personnel
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, automobile manufacturers, and catalog and other businesses focused on
quality print and graphic images and the distribution of advertising content. In
1997, the Interpublic Group of Companies produced approximately $19.1 million in
revenues,  or 10.3%,  of the  Company's  total  revenues,  through  its  various
advertising  agencies,  including  the  work  provided  to the  broadcast  media
distribution   business  under  the  multi-year  contract  associated  with  the
acquisition of SpotLink.  The Company's twenty largest  nonaffiliated  customers
accounted for approximately  53.4% of the Company's  revenues in 1997.  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
twelve divisions of The Walt Disney Company, each of which plays a major role in
the selection of a prepress vendor. In 1997, approximately 9.1% of the Company's
total revenues came from business with affiliates.  Such affiliates include U.S.
News & World Report,  L.P.,  Daily News, L.P., and Applied  Printing,  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, as well as with Snyder  Communications,
Inc.,  of which both Messrs.  Zuckerman  and Drasner are members of the Board of
Directors and in the aggregate own approximately  13% of the outstanding  common
stock.  An  additional  34.8% 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.

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  continues  to expand 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,  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 to the  Company  based upon a  specified  dollar  volume of products
purchased by the Company over a given time period.

Competition

      Prepress  services are performed  primarily by three types of  businesses:
(i) independent  providers that typically do not also offer commercial  printing
services as a principal part of their overall business, (ii) commercial printers
that provide prepress and other image management services as an adjunct to their
printing   businesses,   and  (iii)  customers  that  perform  certain  services
themselves  using  available  desktop  publishing  technologies.   The  industry
currently is 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 the basis of 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   prepress
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 except for the  Company's
typical on-site arrangement for which a multi-year contract is obtained.

      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 multi-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.,
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
(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-l 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 broadcast media  distribution  business,  the Company competes with
many local  and/or  regional  suppliers as well as national  suppliers,  such as
Vyvx, Inc., a subsidiary of The Williams  Companies,  Inc.,  Digital  Generation
Systems, Inc., and VDI Media. These services are typically provided on a per-job
basis. The Company generally has 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, 1997,  the Company had  approximately  1,757  full-time
employees,  approximately  608 of whom are salaried  employees and approximately
1,149 of whom are hourly employees. Approximately 144 of the Company's employees
at two facilities, one each in Chicago and Los Angeles, primarily in the area of
production, are covered by two collective bargaining agreements with the Graphic
Communications International Union that expire August 31, 1999, 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 February 1998, the Company entered into a definitive  agreement to merge
Devon Group, Inc. ("Devon"),  a digital prepress and publishing company,  into a
newly-formed,  wholly-owned  subsidiary of the Company. As of and for the fiscal
year ended March 31,  1997,  Devon had total  assets,  revenues,  and  operating
income of $163.8 million, $209.5 million, and $29.1 million, respectively. Under
the terms of the  agreement,  which is subject to  regulatory  approval  and the
approval of the Company's and Devon's stockholders, the Company will pay $30 per
share in cash and distribute 0.6 share of the Company's common stock in exchange
for each outstanding share of Devon common stock. The total  consideration to be
paid is estimated to be $450 million  including  transaction  costs. To fund the
cash portion of the merger  consideration,  estimated to be  approximately  $230
million  including the transaction  costs, the Company has a  fully-underwritten
commitment from a commercial bank that would increase its borrowing  capacity to
$250  million.  This  commitment  expires on June 15, 1998.  The Company is also
contemplating  other  financing  alternatives  to fund  all or part of the  cash
portion of the merger consideration.

     In January  1998,  the Company  acquired  all of the assets of Flying Color
Graphics,  Inc. ("Flying Color") in exchange for $18.9 million, 68,103 shares of
the Company's  common stock, and the assumption of certain  liabilities.  Flying
Color was an unaffiliated  provider of prepress  services to various  retailers,
including  Spiegel,  with 1997 revenues of approximately  $18.7 million.  Flying
Color operates five facilities located throughout the Midwest.






<PAGE>



 Item 2. PROPERTIES

     The Company leases its corporate headquarters in New York City and operates
twenty-three  principal digital prepress  facilities at the locations  indicated
below.  Four of these  facilities  are  on-site  facilities  that  also  provide
services to other customers as capacity allows.

      New York City                  Northern New Jersey
      (3 facilities)                 (3 facilities)

      Atlanta, Georgia               Central Illinois
                                     (3 facilities)

      Boulder, Colorado              Rochester, New York

      Chicago, Illinois              San Diego, California
      (2 facilities)
                                     San Francisco, California
      Detroit, Michigan              metropolitan area
      (2 facilities)                 (2 facilities)

      Los Angeles, California        Washington, D.C.
      metropolitan area
      (2 facilities)                 Indianapolis, Indiana



     The Company  also  provides  on-site  services at fourteen  other  customer
locations in New York City, New Jersey,  Connecticut,  California, and Illinois.
At these on-site  facilities,  services are performed for a single customer.  In
addition, the Company maintains broadcast media distribution centers in New York
City,  Los Angeles,  and  Wilmington,  Ohio,  and operates  digital  photography
businesses  at two  customer  locations  in  Florida.  Except for one of the Los
Angeles and two of the Central Illinois prepress facilities,  which are owned by
the Company,  the prepress  and  broadcast  media  distribution  facilities  are
operated  under leases that expire in 1998 through  2002.  The Company  believes
that its facilities are adequate to meet its needs.


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, 1997.


<PAGE>



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


Name                    Age  Position

Fred Drasner..........  55   Chairman and Chief Executive Officer, Director

Melvin A. Ettinger....  57   Vice Chairman and Chief Operating Officer, Director

Diane Romano..........  47   President

Scott A. Brownstein...  49   Executive Vice President, Digital Imaging Services
                             Division
Martin D. Krall.......  57   Executive Vice President, Chief Legal Officer and
                             Secretary, Director


Louis Salamone, Jr....  51   Senior Vice President and Chief Financial Officer

Georgia L. McCabe.....  43   Senior Vice President, Digital Imaging Services
                             Division


     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.

     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,  manufacturing  and marketing the
Company's digital imaging services. Prior to joining the Company, Mr. Brownstein
served from 1988 to 1993 as Manager of Advanced  Development CD Imaging Division
at  the  Eastman  Kodak  Company,  where  he was  responsible  for  the  design,
development  and  implementation  of Kodak's  Photo CD  technology  and end user
technology for Photo CD.

     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.

     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.


<PAGE>



         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  Worldwide  Director of
Marketing,  Commercial  CD Imaging at the Eastman Kodak  Company,  where she was
responsible for developing and implementing  corporate  strategies for marketing
Photo CD products.


<PAGE>


                                                          PART II

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

     The common stock of the Company  commenced  trading on April 17, 1996,  the
date of its initial public offering. The Company's 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.


                           1997                    1996
                   --------------------     -------------------
                      High      Low            High      Low
                   --------- ----------     --------- ---------

  First quarter      35 3/8    25 1/8
  Second quarter     39 3/4    28 3/8
  Third quarter      57 7/8    36 1/4          16        10 1/2
  Fourth quarter     61 1/4    43 3/4          29 1/8    14 3/4


     As of March 20, 1998,  there were 3,309  holders of record of the Company's
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.  There  is  no
restriction  on the payment of dividends  under the Company's  revolving  credit
facility other than obtaining approval of the financial institution.


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.  No dividends have
been paid on the Company's common stock.
<TABLE>
<CAPTION>
December 31,                                          1997(b)     1996       1995 (a)   1994 (a)    1993
-------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(In thousands of dollars, except per-share
amounts)
<S>                                                <C>         <C>         <C>         <C>         <C>

Revenues                                            $184,993    $132,725    $117,802    $115,986    $103,973

Income (loss) before provision for income taxes       22,707      10,820      (7,812)     (8,757)        798

Net income (loss)                                     13,567       9,955      (7,812)     (8,757)        798

Earnings per common share (c):
 Basic                                                  0.88        0.79
 Diluted                                                0.83        0.77

Total assets                                         224,793      72,147      44,809      53,859      57,506

Long-term obligations:
  Long-term debt                                         812       6,005         853       2,394       3,821
  Obligations under capital lease                      2,011       1,265       2,415       3,017       4,056
                                                   ----------- ----------- ----------- ----------- -----------
     Total                                          $  2,823    $  7,270    $  3,268    $  5,411    $  7,877
                                                   =========== =========== =========== =========== ===========
<FN>

(a)  Amounts  for 1995 and 1994  include  reorganization  charges  of $3,060 and
     $6,668, respectively (see Note 21 to the financial statements).

(b)  Amounts  in 1997  include a charge  of $2,487  related  to the  Chapter  11
     bankruptcy  filing of one of the Company's  on-site  facilities  management
     customers, Nobody Beats the Wiz.

(c)  Amounts  in 1996  have  been  restated  in  accordance  with  Statement  of
     Financial Accounting Standards No. 128,"Earnings per Share."
</FN>
</TABLE>




<PAGE>



Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OFOPERATIONS

On April 16, 1996 (the  "Initial  Offering  Date"),  the Company  commenced  the
initial public offering (the "Initial Offering") of its common stock. Concurrent
with the Initial 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 the Initial Offering Date and the results of the Company thereafter.

      On September 3, 1997,  the  Company's  Registration  Statement on Form S-3
under the  Securities  Act of 1933,  as amended,  relating to an offering of the
Company's common stock (the "Offering"),  was declared effective. As part of the
Offering,  the  Company  sold  3,000,000  shares  of  common  stock,  generating
proceeds,   net  of  underwriters'   discount  and  transaction   expenses,   of
$121,700,000.  Also as part of the Offering, an additional 3,900,000 shares were
sold by certain stockholders of the Company, of which 3,650,000 shares were sold
by Applied Printing.

      The following  discussion and analysis should be read in conjunction  with
the Company's consolidated financial statements and notes thereto.

Results of Operations
Year Ended December 31, 1997, Compared with 1996

    Revenues in 1997 increased $52,268,000 or 39.4% over 1996. This increase was
primarily  due to  $13,102,000  of revenues  generated  from the  operations  of
additional  on-site  facilities  management  contracts  during 1997 that were in
effect for none or only a portion of 1996, $8,675,000 of increased revenues from
broadcast  media  distribution  operations  that have been acquired  since 1996,
increased  revenues of $6,016,000 in the digital imaging services  division from
equipment  and  software  license  sales,   archiving   services,   and  digital
photography operations,  $22,475,000 of additional revenues from the traditional
prepress business,  and receipt of a nonrefundable payment of $2,000,000 related
to an agreement with one of the Company's major suppliers.  Traditional prepress
revenues  increased  primarily  from an overall  increase in business at various
facilities,  the results of MBA Graphics,  Inc.  ("MBA"),  whose operations were
acquired in July 1997,  increased business at the Foster City facility resulting
from the  acquisition of the  operations of Star Graphics Arts Co., Inc.  ("Star
Graphics"),  in May  1997,  and  additional  revenue  generated  at the  Detroit
facility as a result of the contract entered into with General Motors to provide
prepress  services.  The revenues from the contract with General Motors have not
been  received at the pace  originally  anticipated.  The Company has assigned a
senior   executive  to  oversee  this  arrangement  and  plans  certain  capital
expenditures to further expand this business.

    The gross profit  percentage in 1997 was 35.1% as compared to 30.5% in 1996.
Gross  profit  increased  $24,492,000  or  60.5%  in  1997  as a  result  of the
additional  revenues for the period as discussed  above,  increased  business in
higher  margin  work,  and the  reduction  of  costs  due to  favorable  pricing
negotiated with certain suppliers.

    Selling,  general,  and  administrative  expenses  in 1997 were  $11,625,000
higher than in 1996 and as a percent of revenue  increased  slightly to 21.7% in
1997 from 21.5% in 1996.  Although  improvements were achieved from the increase
in revenues  discussed  above and  increased  business  from on-site  facilities
management  contracts,  which  require less sales  support than the  traditional
prepress  business,  such  improvements  were  offset  by  additional  corporate
expenses  incurred  related  to  being  a  publicly-traded  company,  additional
expenses  incurred  as part of the  Company's  expansion  and  development  of a
national  sales force to better  market its services,  and expanded  business at
certain operations.

     In  1997,  the  Company  incurred  a charge  of  $2,487,000  primarily  for
uncolledtable  receivables related to the Chapter 11 bankruptcy filing of one of
its on-site facilities management customers, Nobody Beats the Wiz.

    Interest expense in 1997 was $799,000 less than in 1996 primarily due to the
repayment of debt in April 1996 with the proceeds from the Initial  Offering and
the repayment of borrowings under the Company's line of credit in September 1997
with the proceeds  from the  Offering.  Interest  income in 1997 was  $1,227,000
higher than in 1996 due to investment earnings on the proceeds of the Offering.

    The effective  rate of the provision for income taxes  increased in 1997 due
to the lower than would be  expected  rate in 1996 as a result of a reversal  of
$4,070,000 of deferred tax asset valuation allowances in 1996 as compared to the
reversal of $881,000 of deferred tax asset valuation allowances in 1997.

    In addition to its ongoing  relationship with Applied Printing,  the Company
also transacts  business with other  affiliates,  including the Daily News, L.P.
and U.S. News & World Report,  L.P., both of which are 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"),  as  well  as  with  Snyder
Communications, Inc., a provider of outsourced marketing services, of which both
the  Chairman  and the CEO are  members  of the  Board of  Directors  and in the
aggregate  own  approximately  13% of the  outstanding  common  stock.  Sales to
related parties for the years ended December 31, 1997,  1996, and 1995,  totaled
$16,845,000, $11,610,000, and $7,901,000, respectively, representing 9.1%, 8.8%,
and 6.7%, respectively, of the Company's revenues.


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,  general, and administrative  expenses decreased $4,975,000 in 1996
and represented 21.5% of revenue as compared to 28.5% 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. Selling, general, and administrative expenses in
1996 include  $1,534,000 of costs allocated from related  parties.  Prior to the
Initial  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 Initial Offering.


    Prior to the  Initial  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 the Initial Offering Date.



<PAGE>



Liquidity and Capital Resources

     In September 1997, the Company  received  $121,700,000 in proceeds,  net of
underwriters'  discount and  transaction  expenses,  from the Offering.  Of such
proceeds,   approximately  $22,700,000  were  used  to  repay  the  amount  then
outstanding under the Company's revolving line of credit. The remaining proceeds
of approximately $99,000,000 were invested in marketable securities. The Company
plans to use a significant  portion of the proceeds from the Offering to further
expand its business  through  acquisitions.  During the  remainder of 1997,  the
Company used approximately $5,100,000 of the proceeds for acquisitions. Although
the Company continues to evaluate acquisition opportunities on an ongoing basis,
there is no assurance  that the Company will  successfully  complete  additional
acquisitions.  See below for a discussion of acquisitions  completed and pending
in 1998. The Company also received $5,641,000 from the exercise of 486,700 stock
options in 1997.

     During 1997,  the Company  repaid the  remaining  $1,600,000 of the Applied
Printing Note with the proceeds from the maturity of marketable  securities.  In
1997,  the Company  entered into several sale and  leaseback  arrangements  that
generated proceeds of $3,469,000. Such arrangements resulted in immaterial gains
that have been  deferred  and are being  recognized  as credits  against  future
rental  expense.  In  November  1997,  the  Company  renegotiated  its  existing
revolving line of credit,  increasing its borrowing  capacity to an aggregate of
$60,000,000,   consisting  of  a  $35,000,000  revolving  line  of  credit  (the
"Revolver")  and a  $25,000,000  acquisition  line of credit  (the  "Acquisition
Line"). The amount available to be borrowed under the Revolver may be limited by
outstanding eligible receivables.  Amounts borrowed under either the Revolver or
the Acquisition Line are collateralized  primarily by receivables and inventory.
The  Revolver and the  Acquisition  Line have  repayment  terms that run through
November 13, 2000, and December 1, 2003,  respectively.  Interest rates on funds
borrowed  under the  Revolver  and the  Acquisition  Line vary from the lower of
prime less 1.00% or LIBOR plus  0.50%,  to the  greater of prime plus  0.125% or
LIBOR plus 1.375%. Under the terms of these facilities,  the Company must comply
with certain covenants related to earnings, funded debt ratios, and fixed charge
coverage  ratios.  At December 31, 1997, the Company was in compliance  with all
covenants.  There are no borrowings currently  outstanding under either of these
facilities.

    Cash flows from operating  activities during 1997 increased by $2,173,000 as
compared to 1996 due primarily to cash generated from additional  income and the
timing of vendor payments offset by increased accounts receivable resulting from
additional  business,   increased  rebates  due  from  certain  suppliers,   and
additional  tax payments.  In addition to the cash generated and used as part of
the capital  transactions  described  above,  during  1997 the Company  invested
$15,232,000  in equipment,  including  $1,235,000  financed with a capital lease
obligation,  paid $10,533,000 related to acquisitions,  and repaid $4,805,000 of
debt and lease  obligations  with the proceeds from the  Offering,  the sale and
leaseback transactions, and the exercise of stock options.

    Working  capital  increased  $115,440,000  during  1997  primarily  from the
proceeds from the Offering,  increased  receivables,  including amounts due from
affiliates,  resulting from additional business at existing facilities, and from
acquired  operations.  The Company also  recorded a tax benefit in the amount of
$6,407,000  associated  with the exercise of stock options that reduced the cash
requirement for taxes in 1997. Long-term debt decreased $5,193,000 due primarily
to the repayment of amounts previously  borrowed under the line of credit with a
portion of the proceeds from the Offering.

    The Company expects to expend  approximately  $16,800,000 over the course of
the next twelve months for capital improvements, essentially all of which is for
modernization and growth,  including a $3,200,000  capital investment to further
expand the General Motors business,  a $5,000,000  investment in new information
systems,  and  $1,400,000 for expansion to handle  additional  business from The
Home  Depot.  The  Company  intends  to finance a  substantial  portion of these
expenditures under operating leases,  sale and leaseback  arrangements,  or with
working capital, including the proceeds from the Offering.

    The investment in new information  systems referred to above, which includes
replacing  and  upgrading  the  Company's  internal  financial  and  operational
systems,  will result in such  systems  being Year 2000  compliant.  The Company
expects to have these new systems  implemented by the second quarter of 1999. In
addition,  the Company has  performed a review of its  production  systems  and,
based on this review,  believes that such systems are Year 2000 compliant.  Some
of the Company's  suppliers and customers may face Year 2000 issues. The Company
has not fully  evaluated  the  impact of Year 2000  issues  with  respect to its
customers and suppliers.

    In January  1998,  the Company  acquired  Flying  Color  Graphics,  Inc.,  a
prepress company with five facilities  throughout the midwest, for approximately
$22,000,000.  The purchase price was paid for with approximately  $18,900,000 in
cash from the  Company's  working  capital  and 68,103  shares of the  Company's
common stock.

    In February 1998, the Company  entered into a definitive  agreement to merge
Devon Group, Inc. ("Devon"),  a digital prepress and publishing company,  into a
newly-formed,  wholly-owned  subsidiary of the Company. As of and for the fiscal
year ended March 31,  1997,  Devon had total  assets,  revenues,  and  operating
income of $163,751,000,  $209,522,000, and $29,063,000,  respectively. Under the
terms of the agreement, which is subject to regulatory approval and the approval
of the Company's and Devon's stockholders, the Company will pay $30 per share in
cash and distribute 0.6 share of the Company's common stock in exchange for each
outstanding  share of Devon common stock. The total  consideration to be paid is
estimated  to be  $450,000,000  including  transaction  costs.  To fund the cash
portion of the merger consideration,  estimated to be $230,000,000 including the
transaction  costs,  the Company has a commitment  from a  commercial  bank that
would increase its borrowing  capacity to $250,000,000.  This commitment expires
on June 15, 1998. The Company is also contemplating other financing alternatives
to fund all or part of the cash portion of the merger consideration.

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

    Statement of Financial  Accounting  Standards  (SFAS) No. 131,  "Disclosures
about  Segments of an Enterprise  and Related  Information,"  was issued in June
1997 and is effective  for  financial  statements  for periods  beginning  after
December 15,  1997.  This  statement  establishes  standards  for the way public
companies  report  information  about  operating  segments in annual and interim
financial  statements.  The Company believes its current  reporting systems will
enable it to comply with the implementation of SFAS No. 131.

    Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued
in October 1997 and is effective for  transactions  entered into in fiscal years
beginning  after  December 15, 1997.  This statement  establishes  standards for
recognizing  revenue  on  software  transactions  and  supersedes  Statement  of
Position (SOP) 91-1,  "Software  Revenue  Recognition." A proposed  Statement of
Position was issued in February 1998 that,  if issued,  would  postpone  certain
provisions  of  SOP  97-2  for  one  year.  The  Company  does  not  expect  the
implementation  of SOP 97-2 or the proposed  SOP, if issued,  to have a material
effect on its results of operations.

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



<PAGE>


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.




<PAGE>




INDEPENDENT AUDITOR'S REPORT



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


We have audited the accompanying consolidated balance sheets of Applied Graphics
Technologies,  Inc. and subsidiaries ("the Company") as of December 31, 1997 and
1996,  and the related  consolidated  statements  of  operations,  stockholders'
equity and owners' deficit,  and cash flows for the years then ended. Our audits
also included the financial  statement  schedule listed in the Index at Item 14.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial  statements and the financial  statement  schedule
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,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996 and the results of their  operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. Also, in
our opinion,  such financial statement schedule,  when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.



/s/
DELOITTE & TOUCHE LLP
March 23, 1998
New York, New York



<PAGE>





                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Owners of the Predecessor Group:


         We have audited the  accompanying  combined  statements of  operations,
cash flows and changes in owners' equity  (deficit) of the Predecessor  Group to
Applied Graphics Technologies,  Inc. for the year 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 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,  the combined  financial  statements  referred to above
present fairly, in all material respects, the combined results of operations and
cash flows of the  Predecessor  Group for the year ended  December 31, 1995,  in
conformity with generally accepted accounting principles.


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






New York, New York
March 8, 1996




<PAGE>


                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS
               (In thousands of dollars, except per-share amounts)

                                                                December 31,
                                                          ----------------------
                                                            1997          1996
                                                          ---------    ---------
ASSETS
Current assets:
   Cash and cash equivalents ..........................   $  12,584    $   2,567
   Marketable securities ..............................      90,150        1,600
   Trade accounts receivable (net of allowances
      of  $3,989 in 1997 and $472 in 1996) ............      43,025       29,584
   Due from affiliates ................................       5,561
   Inventory ..........................................       6,234        4,639
   Prepaid expenses and other current assets ..........       7,881        2,485
   Deferred income taxes ..............................       3,016          705
                                                          ---------    ---------
          Total current assets ........................     168,451       41,580

Property, plant, and equipment - net ..................      31,020       20,544
Goodwill (net of amortization of $1,289 in 1997
   and $552 in 1996) ..................................      22,229        7,121
Deferred income taxes .................................       1,384        1,644
Other assets ..........................................       1,709        1,258
                                                          ---------    ---------
          Total assets ................................   $ 224,793    $  72,147
                                                          =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Accounts payable and accrued expenses ..............   $  27,264    $  19,630
   Applied Printing Note ..............................                    1,600
   Current portion of long-term debt ..................         606          507
   Current portion of obligations under capital leases        1,697        1,354
   Due to affiliates ..................................         923          354
   Other current liabilities ..........................       6,793        2,407
                                                          ---------    ---------
          Total current liabilities ...................      37,283       25,852

Long-term debt ........................................         812        6,005
Obligations under capital leases ......................       2,011        1,265
Other liabilities .....................................       1,190        3,142
                                                          ---------    ---------
          Total liabilities ...........................      41,296       36,264
                                                          ---------    ---------
Commitments and contingencies
Stockholders' Equity:
   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:  17,836,383 in 1997
     and 14,349,683 in 1996) ..........................         178          143
   Additional paid-in capital .........................     159,627       25,584
   Unrealized investment loss .........................         (31)
   Retained earnings ..................................      23,723       10,156
                                                          ---------    ---------
      Total stockholders' equity ......................     183,497       35,883
                                                          ---------    ---------
       Total liabilities and stockholders' equity .....   $ 224,793    $  72,147
                                                          =========    =========





                 See Notes to Consolidated Financial Statements

<PAGE>




                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per-share amounts)


For the years ended December 31,              1997         1996          1995
                                            ---------    ---------    ---------

Revenues .................................  $ 184,993    $ 132,725    $ 117,802
Cost of revenues .........................    120,018       92,242       86,296
                                            ---------    ---------    ---------

Gross profit .............................     64,975       40,483       31,506
                                            ---------    ---------    ---------

Selling, general, and
    administrative expenses ..............     40,179       28,554       33,529
Charge for customer bankruptcy ...........      2,487
Reorganization charge ....................                                3,060
                                            ---------    ---------    ---------
  Total operating expenses ...............     42,666       28,554       36,589
                                            ---------    ---------    ---------

  Operating income (loss) ................     22,309       11,929       (5,083)

Interest expense .........................     (1,034)      (1,833)      (3,332)
Interest income ..........................      1,724          497
Other income (expense) - net .............       (292)         227          603
                                            ---------    ---------    ---------

Income (loss) before provision
   for income taxes ......................     22,707       10,820       (7,812)

Provision for income taxes ...............      9,140          865
                                            ---------    ---------    ---------
Net income (loss) ........................  $  13,567    $   9,955    $  (7,812)
                                            =========    =========    =========

Earnings per common share:
  Basic ..................................  $    0.88    $    0.79
  Diluted ................................  $    0.83    $    0.77

Weighted average number of
 common shares:
  Basic ..................................     15,475       12,660
  Diluted ................................     16,430       12,924

Pro Forma Net Income Data:
  Income (loss) before provision
     for income taxes,
     as reported .........................               $  10,820    $  (7,812)
  Pro forma provision for income taxes....                     785          115
                                                         ---------    ---------
  Pro forma net income (loss) ............               $  10,035    $  (7,927)
                                                         =========    =========

Pro forma earnings (loss) per common
 share:
  Basic ..................................               $    0.79    $   (0.80)
  Diluted ................................               $    0.78    $   (0.80)
Pro forma weighted average number
  of common shares:
  Basic ..................................                  12,660        9,930
  Diluted ................................                  12,924        9,930




                 See Notes to Consolidated Financial Statements

<PAGE>


                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands of dollars)


For the years ended December 31,              1997         1996         1995
                                            ---------    ---------    ---------

Cash flows from operating activities:
Net income (loss) ........................  $  13,567    $   9,955    $  (7,812)
Adjustments to reconcile net income
 (loss) to net cash from operating activities:
      Depreciation and amortization ......      6,222        4,932        5,359
      Deferred taxes .....................     (1,591)      (2,349)
      Gain on insurance settlement .......                     (18)      (2,023)
      Reorganization charge ..............                                3,060
      Charge for customer bankruptcy .....      2,487
      Other ..............................        644          (40)       1,012
Changes in Operating Assets and
  Liabilities, net of effects of acquisitions:
      Trade accounts receivable ..........    (13,779)     (11,442)       3,772
      Due from/to affiliates .............     (4,991)       1,917         (981)
      Inventory ..........................     (1,285)        (937)        (422)
      Other assets .......................     (1,042)       2,452        1,401
      Accounts payable and accrued
         expenses ........................      1,139         (413)       1,387
      Other liabilities ..................      2,268       (2,591)         204
                                            ---------    ---------    ---------
Net cash provided by operating
   activities ............................      3,639        1,466        4,957
                                            ---------    ---------    ---------

Cash flows from investing activities:
      Investment in available-for-
        sale securities ..................   (320,553)      (1,600)
      Proceeds from sale of available-
         for-sale securities .............    231,072
      Proceeds from maturities of held-
         to-maturity securities ..........      1,600
      Property, plant, and equipment
         expenditures ....................    (13,997)     (14,851)      (3,455)
      Proceeds from the sale of
         fixed assets ....................         12        1,099        1,483
      Net proceeds from insurance
         claims ..........................                     243        1,782
      Entities purchased, net of
         cash acquired ...................    (10,533)         350          (69)
                                            ---------    ---------    ---------
Net cash used in investing activities ....   (112,399)     (14,759)        (259)
                                            ---------    ---------    ---------

Cash flows from financing activities:
      Proceeds from sale of common
         stock ...........................    121,700       46,103
      Proceeds from exercise of stock
         options .........................      5,641
      Borrowings (repayments) under
         revolving credit line - net .....     (5,628)       5,628
      Proceeds from sale/leaseback
         transactions ....................      3,469        4,093          558
      Repayment of Applied Printing
         Note ............................     (1,600)     (14,400)
      Repayment of notes and capital
         lease obligations ...............     (4,805)      (2,662)      (4,020)
      Increase in (repayments of)
         intercompany borrowings - net ...                 (18,000)       3,789
      Distributions to Applied
         Printing - net ..................                  (5,568)      (4,449)
                                            ---------    ---------    ---------
Net cash provided by (used in)
   financing activities ..................    118,777       15,194       (4,122)
                                            ---------    ---------    ---------

Net increase in cash and cash
   equivalents ...........................     10,017        1,901          576
Cash and cash equivalents at
   beginning of year .....................      2,567          666           90
                                            ---------    ---------    ---------
Cash and cash equivalents at
   end of year ...........................  $  12,584    $   2,567    $     666
                                            =========    =========    =========




                 See Notes to Consolidated Financial Statements


<TABLE>

                                            APPLIED GRAPHICS TECHNOLOGIES, INC.
                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' DEFICIT
                                    (In thousands of dollars, except per-share amounts)

<CAPTION>

                                                                     Additional      Unrealized
                                                     Common           Paid-in-       Investment       Retained          Owners'
                                                     Stock            Capital           Loss          Earnings          Deficit
                                                   -----------      -------------   -------------    -----------      ------------
<S>                                                <C>              <C>             <C>              <C>              <C>

Balance at January 1, 1995                                                                                            $   (7,120)
Net loss                                                                                                                  (7,812)
Distribution                                                                                                              (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)                                                                                 $      10,156             (201)
Distribution                                                                                                              (9,387)
Conveyance                                                              (28,969)                                          28,969
                                                   -----------      -------------                     -----------      ------------

Balance at December 31, 1996                               143            25,584                         10,156       $        0
                                                                                                                      ============

Issuance of 3,000,000 common shares in a
  public offering at $43.00 per share                       30           121,670
Granting of 19,000 warrants to purchase
  common shares                                                              330
Issuance of 486,700 common shares upon
  exercise of stock options                                  5             5,636
Income tax benefit associated with
  exercise of stock options                                                6,407
Unrealized loss on investments in
 available-for-sale securities                                                       $     (31)
Net income                                                                                               13,567
                                                   -----------      -------------   -------------    -----------

Balance at December 31, 1997                       $       178      $    159,627     $     (31)   $      23,723
                                                   ===========      =============   =============    ===========
</TABLE>











                 See Notes to Consolidated Financial Statements

<PAGE>


                       APPLIED GRAPHICS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (In thousands of dollars, except per-share amounts)


1.  ORGANIZATION AND BASIS OF PRESENTATION

         Applied  Graphics   Technologies,   Inc.  and  its  subsidiaries   (the
"Company") provide digital prepress services to magazine publishers, advertising
agencies,   entertainment  companies,  automobile  manufacturers,   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 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  "Initial  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  "Initial  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  from the Initial
Offering,  of which $21,000 was used to repay Institutional  Senior Indebtedness
and $16,000 was used to invest in  short-term  investments  to support a standby
letter of credit that  collateralized the Applied Printing Note. At December 31,
1997,  Applied  Printing owned  approximately  28% of the Company's  outstanding
common stock.

         The acquisition of the Prepress  Business was 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 the Initial Offering Date and the results of the Company thereafter. The
statements of operations and cash flows covering the periods through the Initial
Offering Date have been prepared by combining the results of operations and cash
flows of the specific divisions that comprised the Prepress  Business.  Prior to
the  Initial  Offering  Date,  these  specific  divisions  operated  as separate
business units and maintained  their own books and records.  Through the Initial
Offering Date,  Applied Printing managed the cash and financing  requirements of
all of its divisions  centrally and, as such,  the interest  expense and related
intercompany  borrowing up until that date  represent an  allocation  of Applied
Printing's  interest expense and the related debt. As discussed in Note 10, this
allocation  of debt is presented  as an  intercompany  borrowing.  Additionally,
prior to the Initial  Offering Date,  Applied Printing and other related parties
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  results of operations and cash flows
for the years  ended  December  31,  1996 and 1995,  may have  differed  had the
Company operated as an independent entity during those entire periods.

    On September 3, 1997, the Company's Registration Statement on Form S-3 under
the Securities Act of 1933, as amended, relating to an offering of the Company's
common stock (the "Offering"),  was declared effective. As part of the Offering,
the Company sold 3,000,000 shares of common stock,  generating proceeds,  net of
underwriters'  discount and transaction expenses,  of $121,700.  Also as part of
the Offering,  an additional  3,900,000 shares were sold by certain stockholders
of the Company, of which 3,650,000 shares were sold by Applied Printing.


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation:  The Consolidated  Financial Statements include
the  accounts  of the  Company  and all of its  subsidiaries.  All  intercompany
accounts and  transactions  have been eliminated in the  Consolidated  Financial
Statements.

    Cash  and Cash  Equivalents:  Cash and  cash  equivalents  include  all cash
balances and highly  liquid  investments  having  original  maturities  of three
months or less.

    Marketable  Securities:  The  Company  has  classified  its  investments  in
marketable  securities  at December 31, 1997,  as  "available  for sale" and has
recorded them at fair market value.  Marketable securities at December 31, 1996,
were classified as "held to maturity" and were recorded at amortized cost.

    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,  materials,  and overhead 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 prepared and scanned.  Revenue from
the licensing of software and the sale of digital  equipment is recognized  upon
the later of delivery or satisfaction of significant obligations.

     Goodwill:  Goodwill is being  amortized  on the  straight-line  method over
periods ranging from 7 to 30 years.

    Income taxes:  The Company accounts for income taxes under the provisions of
Statement of Financial  Accounting  Standards  (SFAS) No. 109,  "Accounting  for
Income  Taxes." The Prepress  Business was treated as a partnership  for Federal
and state income tax  purposes  prior to the Initial  Offering  Date and was not
subject to tax.  A  provision  for income  taxes is  included  in the  Company's
Consolidated  Statements  of Operations  only for the periods  subsequent to the
Initial Offering Date.

     Earnings  per Share of Common  Stock:  The  Company  adopted  Statement  of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," in December
1997. In accordance  with the provisions of SFAS No. 128,  earnings per share of
common stock for prior periods, including pro forma amounts, have been restated.

     Long-lived   assets:  The  Company  evaluates  the  recoverability  of  its
long-lived  assets by comparing their carrying value to the expected future cash
flows to be  generated  from such assets when events or  circumstances  indicate
that an impairment may have occured.

    Recently  Issued  Accounting  Standards:  Statement of Financial  Accounting
Standards  (SFAS) No. 131,  "Disclosures  about  Segments of an  Enterprise  and
Related  Information,"  was issued in June 1997 and is effective  for  financial
statements  for periods  beginning  after  December  15,  1997.  This  statement
establishes  standards for the way public  companies  report  information  about
operating  segments  in annual and  interim  financial  statements.  The Company
believes  its  current  reporting  systems  will  enable it to  comply  with the
implementation of SFAS No. 131.

    Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued
in October 1997 and is effective for  transactions  entered into in fiscal years
beginning  after  December 15, 1997.  This statement  establishes  standards for
recognizing  revenue  on  software  transactions  and  supersedes  Statement  of
Position (SOP) 91-1,  "Software  Revenue  Recognition." A proposed  Statement of
Position was issued in February 1998 that,  if issued,  would  postpone  certain
provisions  of  SOP  97-2  for  one  year.  The  Company  does  not  expect  the
implementation  of SOP 97-2 or the proposed  SOP, if issued,  to have a material
effect on its results of operations.

    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 1997 presentation.


3. ACQUISITIONS

    In May 1997,  the Company  completed the purchase of certain  assets of Star
Graphic Arts Co., Inc., a prepress  company.  In June 1997, the Company acquired
certain assets of Digital Imagination, Inc. ("DI"), a digital events photography
business,  and also acquired certain rights from a former joint venture partner.
In July 1997,  the  Company  acquired  all of the assets of MBA  Graphics,  Inc.
("MBA"),  a provider  of  prepress  production,  direct  mailing,  and  brokered
commercial  printing  services.  In September 1997, the Company acquired certain
assets of the broadcast media distribution business of Winkler Video Associates,
Inc.  In December  1997,  the Company  acquired  the assets of another  prepress
company, Vancor Color, Inc., and the stock of another digital events photography
business, Amusematte Corp. For such acquisitions,  the Company paid an aggregate
of $11,024 from amounts  borrowed  under its line of credit and from proceeds of
the Offering, assumed $10,850 of liabilities, and granted warrants to purchase a
minimum of 19,000 shares of its common stock with an approximate  value of $330.
In addition,  the Company will make  contingent  payments in the form of cash or
shares of common stock in the amount of $3,174 as additional  consideration  for
certain  of  the  acquisitions   based  on  1997  performance.   Any  additional
consideration will be determined based upon the future financial  performance of
the acquired operations and will be recorded as additional purchase price at the
time the necessary conditions are satisfied.  Such additional  consideration may
be in the form of cash,  shares of common stock,  or warrants to purchase shares
of common stock.

    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 acquisitions were accounted for using the purchase method of accounting.
Accordingly,  the assets and  liabilities  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  in 1997 and 1996 was  $15,818  and
$6,716,  respectively,  and has  been  recorded  as  goodwill,  which  is  being
amortized on the straight-line  method over periods ranging from 20 to 30 years.
The  results of  operations  of these  acquisitions  have been  included  in the
Consolidated  Statements of Operations subsequent to the respective dates of the
acquisitions.

    At the time of the acquisition of DI, the Company intended to dispose of the
portion of the business  related to  photography  at golf courses and retain the
portion of the business that related to  photography  at events and  fixed-based
locations.  The projected cash loss for the golf course operations from the date
of acquisition  through the anticipated  date of disposal  totaled $1,068 and is
included as part of the purchase price. During the period June 6, 1997, the date
of acquisition,  through December 31, 1997, the golf course operations  incurred
cash losses of  approximately  $800.  Such losses  have been  excluded  from the
consolidated results of operations for the year ended December 31, 1997.

    The  following  unaudited  pro forma  information  combines  the  results of
operations of the Company and the  acquisitions for the years ended December 31,
1997 and 1996,  calculated  as if the  acquisitions  had  occurred on January 1,
1996. 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 acquisitions  been consummated at the beginning of 1996 or
of results which may occur in the future.


Unaudited                                         1997             1996
                                               -----------      -----------

Total revenues                                $  199,658       $ 164,338
Income before provision for income taxes      $   22,156       $   9,085
Net income                                    $   13,238       $   9,067
Earnings per common share:
  Basic                                       $     0.86       $    0.72
  Diluted                                     $     0.81       $    0.70



<PAGE>



4.  MARKETABLE SECURITIES

     The Company has  classified  its  investments  in marketable  securities at
December 31, 1997, as "available  for sale" and has recorded them at fair market
value.  Marketable  securities at December 31, 1996, were classified as "held to
maturity" and were recorded at amortized cost. Marketable securities at December
31 consisted of the following:

<TABLE>
<CAPTION>
                                                              1997                                    1996
                                               -----------------------------------    -------------------------------------
                                                                       Amortized                              Amortized
                                                  Market Value           Cost           Market Value             Cost
                                               -----------------    --------------    ----------------     ----------------
<S>                                            <C>                  <C>               <C>                  <C>
Debt issued by municipalities
  and their subdivisions:
   Maturing within 1 year                           $      400       $      400
   Maturing after 1 year through 5 years                 1,600            1,600
   Maturing after 5 years through 10 years               3,675            3,675
   Maturing after 10 years                               9,400            9,400
Corporate debt securities maturing within 1
   year                                                 55,341           55,372
Certificates of Deposit maturing within 1
   year                                                  4,498            4,498
Corporate Equity Fund                                    1,000            1,000
U.S. Government Treasury Fund                           14,236           14,236
U.S. Government Securities                                                                  $   1,600            $   1,600
                                               -----------------    --------------    ----------------     ----------------

Total                                                $  90,150        $  90,181             $   1,600            $   1,600
                                               =================    ==============    ================     ================
</TABLE>

     At December 31, 1997,  all marketable  securities  held by the Company were
available  for  current   operations   and  are  therefore   classified  in  the
Consolidated  Balance  Sheets as current  assets.  Unrealized  holding gains and
losses on available-for-sale securities, which were not material at December 31,
1997, are reflected as a separate  component of Stockholders'  Equity.  Proceeds
from sales of available-for-sale securities during the twelve month period ended
December 31, 1997,  totaled  $231,072 and resulted in no realized  gain or loss.
Realized  gains and losses  are  determined  based on a specific  identification
basis.


5.  INVENTORY

    The components of inventory at December 31 were as follows:

                                           1997               1996
                                        -----------        -----------

Work-in-Process                      $     2,721        $     2,596
Raw Materials                              3,513              2,043
                                        -----------        -----------

Total                                $     6,234        $     4,639
                                        ===========        ===========



<PAGE>



6.  PROPERTY, PLANT, AND EQUIPMENT

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

                                                        1997           1996
                                                     -----------     -----------

Land                                                 $  1,360        $  1,360
Machinery and equipment                                32,490          23,843
Leasehold improvements                                  8,423           7,019
Buildings and improvements                              7,119           6,893
Computer software                                       2,687           1,651
Furniture and fixtures                                  2,165           1,531
Construction in progress                                3,289             203
                                                     -----------     -----------

Total                                                  57,533          42,500
Less accumulated depreciation and amortization         26,513          21,956
                                                     ----------      -----------

Net                                                  $ 31,020        $ 20,544
                                                     ===========     ===========

         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, 1997,  1996, and
1995, was $6,055, $4,785 and $5,106, respectively.


7.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

                                       1997               1996
                                    -----------        -----------

Accounts payable                    $  13,098          $   7,694
Salaries and benefits                   5,207              4,329
Income taxes                               54              2,449
Commissions                             1,640              1,374
Other operating accruals                7,265              3,784
                                    -----------        -----------

Total                               $  27,264          $  19,630
                                    ===========        ===========


8.  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 $8 and $295 during
the years ended December 31, 1997 and 1996, respectively.



<PAGE>



9.  LONG-TERM DEBT

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

                                                1997               1996
                                             -----------        -----------

8% - Prime plus 1% notes payable
   due 1999 through 2002                     $   812            $   377
Variable rate revolving credit line                               5,628
                                             -----------        -----------

Total                                        $   812            $ 6,005
                                             ===========        ===========

     At  December  31,  1997,  the  Company  had  a  revolving  line  of  credit
aggregating  $60,000,  consisting  of a $35,000  revolving  line of credit  (the
"Revolver") and a $25,000  acquisition line of credit (the "Acquisition  Line").
The  amount  available  to be  borrowed  under the  Revolver  may be  limited by
outstanding eligible receivables.  Amounts borrowed under either the Revolver or
the Acquisition Line are collateralized  primarily by receivables and inventory.
The Revolver and the Acquisition Line are with a major financial institution and
have repayment  terms that run through  November 13, 2000, and December 1, 2003,
respectively.  Interest  rates on funds  borrowed  under  the  Revolver  and the
Acquisition Line vary from the lower of prime less 1.00% or LIBOR plus 0.50%, to
the  greater of prime plus 0.125% or LIBOR plus  1.375%.  Under the terms of the
facilities,  the Company must comply with certain covenants related to earnings,
funded debt ratios,  and fixed charge coverage ratios. At December 31, 1997, the
Company  was in  compliance  with all  covenants  and there were no  outstanding
borrowings  under  either the  Revolver  or the  Acquisition  Line.  The average
variable rate on revolving credit facility  borrowings  during 1997 and 1996 was
7.50%  and  8.25%,  respectively.  There is no  restriction  on the  payment  of
dividends other than obtaining approval of the financial institution.

    Principal payments on the long-term debt are as follows:

1998                                                               $    606
1999                                                                    399
2000                                                                    259
2001                                                                    111
2002                                                                     43
                                                                   -----------

Total                                                                 1,418
Less current portion                                                    606
                                                                   -----------

Total long-term debt                                               $    812
                                                                   ===========


10.  INTERCOMPANY BORROWINGS

     Prior to the Initial Offering Date, 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 15), and  borrowings  from the majority
limited partner (collectively, "Borrowings").

     Prior to the Initial  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  represented  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 and $2,683  for the period  ended  April 16,
1996, and the year ended December 31, 1995, respectively.


<PAGE>



11. 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.

    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:

                                                  Capital           Operating
                                                   Leases            Leases
                                               ------------       ------------

1998                                           $   1,991          $   7,320
1999                                               1,061              6,396
2000                                                 428              2,659
2001                                                 289              1,724
2002                                                 168              1,600
Later years                                          387              4,925
                                                 ------------     ------------

Total minimum lease payments                       4,324          $  24,624
                                                                  ============
Less imputed interest                                616
                                                 ------------

Present value of minimum lease payments            3,708
Less current portion                               1,697
                                                 ------------

Long-term obligation under capital leases        $ 2,011
                                                 ============

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

                                           1997               1996
                                       -------------       -----------

Buildings                              $   4,768           $  4,768
Machinery and equipment                   13,179             11,431
                                       -------------       -----------

Total                                     17,947             16,199
Less accumulated depreciation              9,766              8,660
                                       -------------       -----------

Net                                    $   8,181           $  7,539
                                       =============       ===========

     Total rental expense under operating  leases  amounted to $10,002,  $7,578,
and $12,106 for the years ended December 31, 1997, 1996, and 1995, respectively.

    The Company enters into sale and leaseback arrangements that are recorded as
operating  leases.  The gain  from  these  sale and  leaseback  arrangements  is
deferred and recognized as credits against future rental expenses over the terms
of the related  leases.  At December  31,  1997,  the  remaining  balance of the
deferred gain totaling $377 is included in "Other liabilities", both current and
noncurrent, in the accompanying Consolidated Balance Sheets.



<PAGE>



12. 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 this 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.

    The  Prepress  Business was treated as a  partnership  for Federal and state
income tax purposes  prior to the Initial  Offering  Date and was not subject to
tax. At the date of the Initial  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  Consolidated  Statements of Operations  only
for the periods subsequent to the Initial Offering Date.

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

                                                   1997            1996
                                               ------------    ------------

Current:
  Federal                                     $    3,018    $     2,287
  State                                            1,187            927
                                               ------------    ------------
Total current                                      4,205          3,214
                                               ------------    ------------

Deferred:
  Federal                                           (430)        (2,349)
  State                                           (1,161)
                                               ------------    ------------
Total deferred                                    (1,591)        (2,349)
                                               ------------    ------------

Tax benefits not impacting provision:
  Federal                                          4,650
  State                                            1,876
                                               ------------
Total tax benefits not impacting provision         6,526
                                               ------------

Total provision for income taxes              $    9,140      $     865
                                               ============    ============

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

                                                  1997             1996
                                               ------------    ------------

Taxes at statutory rate                       $    7,720       $   3,679
State income taxes, net of
   Federal tax benefit                             1,256             612
Change in valuation allowance
   for Federal deferred tax assets                                (3,870)
Permanent items                                      158             252
Other - net                                            6             192
                                               ------------    ------------

Provision for income taxes                    $    9,140      $      865
                                               ============    ============

Federal statutory rate                             34.00%          34.00%
Effective rate                                     40.25%           8.00%




<PAGE>



         The  components  of the net  deferred  tax asset at December 31 were as
follows:


                                                 1997            1996
                                            -------------   -------------

Deferred tax assets:
Accounts receivable                         $    1,978      $     221
Property, plant, and equipment                     837            679
Accrued expenses                                   349          1,193
Obligations under capital leases                   460            639
Other liabilities                                  262            300
Other assets                                       514            198
                                            -------------   -------------

Total deferred tax assets                        4,400            3,230
Valuation allowance                                                (881)
                                            -------------   -------------

Net deferred tax asset                      $    4,400       $    2,349
                                            ==============   ============

    There were no deferred  tax  liabilities  at December  31, 1997 and 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 year ended December
31, 1997,  the Company  reduced the valuation  allowance for state  deferred tax
assets by $881.  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 subsequent to the Initial Offering Date 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 and state deferred tax assets will be realized
in the future and  therefore  has not  established  a  valuation  allowance  for
deferred tax assets at December 31, 1997.


13. STOCK OPTIONS

    In 1996,  the Board of Directors  and  stockholders  approved a Stock Option
Plan (the "Employee  Plan") and a  Non-employee  Directors'  Nonqualified  Stock
Option  Plan (the  "Directors'  Plan").  Under the  Employee  Plan,  options are
granted to key employees of the Company to purchase common stock of the Company.
Options granted under the Employee 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.  Under  the
Directors'  Plan,  options are granted to members of the Board of Directors  who
are not employees of the Company. Options initially granted under the Directors'
Plan become exercisable over a two year period and have a term of ten years. The
Directors'  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.  At December 31, 1997,  1,504,100 shares were
reserved for the issuance of stock options.


<PAGE>



    Information  relating to activity in the  Company's  stock  option  plans is
summarized as follows:

                                                 Weighted         Weighted
                                Number of        Average          Average
                                 Shares       Exercise Price     Fair Value
                              -------------- ----------------- ---------------

Options granted on Initial
   Offering Date                2,475,000          $12.00          $17,489
Additional options granted         54,000          $15.61          $   496
Options forfeited                 (38,000)         $12.37
                              --------------

Options outstanding at
   December 31, 1996
   (none exercisable)           2,491,000          $12.07
Options granted                   255,500          $45.15          $ 6,858
Options exercised                (486,700)         $12.03
Options forfeited                 (50,600)         $12.79
                              --------------

Options outstanding at
   December 31, 1997            2,209,200          $15.89
                              ==============

Options exercisable at
   December 31, 1997               72,500          $18.29
                              ==============


    Information  relating  to options  outstanding  at  December  31,  1997,  is
summarized as follows:

                               Outstanding                   Exercisable
                 --------------------------------------- -----------------------

   Range of                Weighted Avg.  Weighted Avg.           Weighted Avg.
Exercise Prices   Options  Exercise Price Remaining Life Options  Exercise Price
---------------  --------- -------------- -------------- -------  --------------
$12.00 - $16.63  1,953,700     $12.07         8.29        52,500       $12.31
$34.00 - $39.25     60,000     $37.50         9.38        20,000       $34.00
$47.50             195,500     $47.50         9.83             0

    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
1997 and 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.
The following  weighted  average  assumptions  were used in calculating the fair
value of options granted:

                                       1997           1996
                                     ---------      ---------

Risk-free interest rate               6.20%          6.75%
Expected life                         6 years        6 years
Expected volatility                   0.5606         0.5394
Expected dividend yield               0%             0%



<PAGE>



    Had the Company  elected to account for the issuance of stock  options under
SFAS No. 123,  the  compensation  cost would have been $3,957 and $2,511 for the
years ended December 31, 1997 and 1996,  respectively.  The pro forma net income
and  earnings  per  share  for the  years  ended  December  31,  1997 and  1996,
calculated  as if the Company  had elected to account for the  issuance of stock
options under SFAS No. 123, were as follows:

                                                  1997              1996
                                                -------           -------

     Net Income                                 $11,203           $ 8,298
     Basic Earnings per Share                   $ 0.72            $ 0.66
     Diluted Earnings per Share                 $ 0.70            $ 0.66


14.  EARNINGS PER SHARE

     The Company  adopted the  provisions  of Statement of Financial  Accounting
Standards  (SFAS) No. 128,  "Earnings per Share," in December 1997. SFAS No. 128
requires  the  presentation  of both  basic and  diluted  earnings  per share as
opposed to primary and fully  diluted  earnings per share,  which were  required
under the previous  standard,  Accounting  Principles  Board  Opinion No. 15. In
accordance  with the provisions of SFAS No. 128, prior period earnings per share
data has been restated.

    Basic  earnings per share of common  stock are  computed by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding.  Diluted  earnings per share of common stock are computed by giving
effect to all dilutive potential shares.  There were no reconciling items to net
income to arrive at income available to common  stockholders for the years ended
December  31,  1997,  1996,  and 1995.  The number of common  shares used in the
computation of basic and diluted earnings per share for the years ended December
31, 1997, 1996, and 1995,  including pro forma  computations,  are summarized as
follows:

                                     1997            1996            1995
                                --------------  --------------  -------------
Basic:
   Weighted average shares
      outstanding                 15,475,000      12,660,000       9,930,000

Effect of Dilutive Securities:
   Stock options and warrants        946,000         264,000
   Contingently issuable
      common shares                    9,000
                                --------------  --------------  -------------

Diluted:
   Weighted average shares
      outstanding                 16,430,000      12,924,000      9,930,000
                                ==============  ==============  =============

15. 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 & World  Report,
L.P. ("U.S. News"), and occasionally utilizes an aircraft owned by ZWA, Inc., an
entity  owned by the  Chairman.  The  Company  also does  business  with  Snyder
Communications,  Inc. and its subsidiaries,  a provider of outsourced  marketing
services,  of which both the  Chairman  and the CEO are  members of the Board of
Directors and in the aggregate own approximately  13% of the outstanding  common
stock.

    Due to/from  affiliates  -  Affiliates  owed the  Company  $5,561 and $46 at
December 31, 1997 and 1996,  respectively,  representing trade receivables.  The
Company  owed   affiliates  $923  and  $400  at  December  31,  1997  and  1996,
respectively.

    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, 1997, 1996, and 1995, were as follows:

                                1997               1996               1995
                             ------------       ------------       ------------

Affiliate sales           $     16,845       $     11,610       $      7,901
Affiliate purchases       $      4,683       $      3,097       $        421

    Sales to  affiliates  represented  9.1%,  8.8%,  and  6.7% of the  Company's
revenues for the years ended December 31, 1997, 1996, and 1995, respectively.

    Allocated costs - Prior to the Initial  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 and $6,645 for the period ended April 16,
1996, and for the year ended December 31, 1995, 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 $308,  $303, and $150 for the years
ended December 31, 1997, 1996, and 1995, respectively. In 1995, the shared costs
are included as part of the allocated costs.

    Technology development agreement - Under an arrangement with the Daily News,
the Company was reimbursed for the costs incurred in the  development of certain
digital technologies.  Such reimbursements  totaled $100 and $1,184 in the years
ended December 31, 1996, and 1995,  respectively.  There was no reimbursement in
the year ended December 31, 1997.

    Leases - The Company leases office space in Washington, D.C. from U.S. News.
The charges incurred for the lease were $301, $293, and $281 for the years ended
December 31, 1997, 1996, and 1995, respectively. In addition, the Company leases
office space in New York City from Applied Printing and incurred charges of $385
and $289 for the years  ended  December  31,  1997 and 1996,  respectively.  The
Company also leases a facility  from the Daily News and incurred  charges of $72
and $53 for the years ended December 31, 1997 and 1996, respectively.

     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 future periods. If the Company does not earn the
full amount of the  prepaid  rebate in future  periods,  it would be required to
repay the  difference to the vendor along with  interest  accrued since 1995. At
December 31, 1997,  "Other current  liabilities"  in the Company's  Consolidated
Balance Sheet include  approximately $2,917 related to prepaid rebates, of which
approximately  $2,621  represents  an  amount  expected  to be  applied  to this
obligation  based on purchases  made during  1997.  Such amount to be applied is
also included as part of the total rebate receivable from the vendor included in
"Other current assets" in the  Consolidated  Balance Sheet at December 31, 1997.
The Chairman is a guarantor of the Company's contingent repayment obligation.

    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. 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.



<PAGE>



16. 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, 1997, 1996, and 1995.


17. 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  Consolidated  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 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.

18. 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, and catalog retailing businesses.
The Company's largest customer, a group of commonly owned advertising  agencies,
accounted for  approximately  $19,120,  or 10.3%, of revenues for the year ended
December 31, 1997.  The  Company's  five largest  customers,  excluding  related
parties, comprise 33%, 35%, and 37% of revenues for the years ended December 31,
1997,  1996,  and  1995,  respectively.  In  addition,  amounts  due from  these
customers  represent 26% and 29% of trade accounts receivable as of December 31,
1997 and 1996,  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.


<PAGE>



19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    Payments of interest and income taxes were as follows:

                                           1997           1996         1995
                                        ----------     ----------   ----------

Interest paid (net of
   amounts capitalized) ...............   $1,138         $702         $905
Income taxes paid .....................   $4,847         $766

    Noncash investing and financing activities were as follows:

                                           1997           1996         1995
                                        ----------     ----------   ----------

Notes payable issued in
   connection with an acquisition .....  $  488
Increase in additional paid-in
   capital from income tax
   benefit associated with
   exercise of stock options ..........  $ 6,407
Reduction of goodwill from
   amortization of excess tax
   deductible goodwill ................  $   119
Acquisition of property,
   plant, and equipment
   in exchange for obligations
   under capital leases ...............  $ 1,235                      $ 480
Additions to goodwill for
   contingent purchase
   price adjustments ..................  $ 3,174                      $  69
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

Acquisitions:
Fair value of assets acquired .........  $22,204        $ 8,600
Cash paid .............................  (11,024)
Fair value of common stock and
   warrants issued ....................     (330)        (8,500)
                                        ----------     ----------

Liabilities assumed ...................  $10,850        $   100
                                        ==========     ==========



<PAGE>



20. 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.

         The carrying amount and estimated fair values of financial  instruments
at December 31 are summarized as follows:

                                         1997                    1996
                                 ---------------------   ---------------------
                                 Carrying   Estimated    Carrying   Estimated
                                  Amount    Fair Value    Amount    Fair Value
                                 --------   ----------   --------   ----------

Assets:
Cash and cash equivalents ....   $12,584      $12,584     $2,567      $2,567
Marketable securities ........   $90,150      $90,150     $1,600      $1,600
Other assets .................   $ 5,995      $ 5,995     $1,470      $1,470

Liabilities:
Applied Printing Note ........                            $1,600      $1,600
Long-term debt ...............   $ 1,418      $ 1,263     $6,512      $6,400
Obligations under
   capital leases ............   $ 3,708      $ 3,629     $2,619      $2,557

    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 - the fair value of marketable securities is based on
quoted market prices or dealer quotes.

    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.


21. REORGANIZATION CHARGES

    During  1995,  the Company  reorganized  its  operations  in response to the
operational  impact of  acquisitions  and the  technological  changes within the
industry.  As part  of the  reorganization,  the  Company  consolidated  several
operations  during  1995 in an effort  to gain  operational  and  administrative
efficiencies.  The Consolidated  Statements of Operations include reorganization
charges  of $3,060 for the year ended  December  31,  1995.  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  balance of the  reorganization
liability,  which was fully paid by December 31,  1997,  was $409 as of December
31, 1996.



22. SUBSEQUENT EVENTS

    In January  1998,  the Company  acquired  Flying  Color  Graphics,  Inc.,  a
prepress company with five facilities  throughout the midwest, for approximately
$22,000. The purchase price was paid for with approximately $18,900 in cash from
the Company's working capital and 68,103 shares of the Company's common stock.

    In February 1998, the Company  entered into a definitive  agreement to merge
Devon Group, Inc. ("Devon"),  a digital prepress and publishing company,  into a
newly-formed,  wholly-owned  subsidiary of the Company. As of and for the fiscal
year ended March 31,  1997,  Devon had total  assets,  revenues,  and  operating
income of $163,751, $209,522, and $29,063, respectively.  Under the terms of the
agreement,  which is subject to  regulatory  approval  and the  approval  of the
Company's and Devon's  stockholders,  the Company will pay $30 per share in cash
and  distribute  0.6 shares of the  Company's  common stock in exchange for each
outstanding  share of Devon common stock. The total  consideration to be paid is
estimated to be $450,000  including  transaction costs. To fund the cash portion
of the merger consideration,  estimated to be $230,000 including the transaction
costs,  the Company has a commitment  from a commercial bank that would increase
its borrowing capacity to $250,000. This commitment expires on June 15, 1998.

    The Company is seeking  stockholder  approval at the Special Meeting in lieu
of Annual  Meeting  relating to the merger with Devon to increase  the number of
authorized  shares of its common  stock from  40,000,000  shares to  150,000,000
shares.

23. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

    Prior to the Initial Offering Date, the Company was treated as a partnership
for Federal and state  income tax  purposes  and was not subject to tax. The Pro
Forma Net Income Data in the Consolidated Statements of Operations presents what
the provision for income  taxes,  net income,  and earnings per common share for
the years ended December 31, 1996 and 1995, would have been had the Company been
treated as a C Corporation for the periods prior to the Initial Offering Date.


24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

1997 Quarter Ended               March 31   June 30  September 30 December 31(1)
                                 -------    -------  -----------  -----------
(In thousands of dollars,
   except per-share amounts)
Revenues ....................... $39,761    $41,311    $50,416      $53,505
Gross profit ................... $12,940    $15,261    $18,634      $18,140
Income before provision for
  income taxes ................. $ 4,259    $ 5,382    $ 6,995      $ 6,071
Net income ..................... $ 2,598    $ 3,283    $ 4,142      $ 3,544
Earnings per common share:
  Basic ........................ $  0.18    $  0.23    $  0.27      $  0.20
  Diluted ...................... $  0.17    $  0.21    $  0.25      $  0.19


1996 Quarter Ended               March 31   June 30  September 3  December 31
                                 -------    -------  -----------  -----------
(In thousands of dollars,
   except per-share amounts)
Revenues ....................... $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:
  Basic ........................ $  0.01    $  0.16    $  0.29      $  0.27
  Diluted ...................... $  0.01    $  0.15    $  0.29      $  0.26


(1)  Includes a pretax  charge of $2,487  related to the  Chapter 11  bankruptcy
     filing of one of the Company's  on-site  facilities  management  customers,
     Nobody Beats the Wiz.

<PAGE>



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


    The  information  required  by this  item  was  previously  reported  on the
Company's Form 8-K filed with the Securities and Exchange  Commission on October
4, 1996.


<PAGE>



                                                         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 1998 Proxy
              Statement/Prospectus   included   as   part   of   the   Company's
              Registration Statement on Form S-4 to be filed with the Securities
              and Exchange Commission by April 30, 1998.

         (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  1998  Proxy  Statement/  Prospectus  included  as  part  of  the  Company's
Registration  Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.

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

    The information required by this item is incorporated herein by reference to
the  1998  Proxy  Statement/  Prospectus  included  as  part  of  the  Company's
Registration  Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information required by this item is incorporated herein by reference to
the  1998  Proxy  Statement/  Prospectus  included  as  part  of  the  Company's
Registration  Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.



<PAGE>


                                                   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.

                    Consolidated Balance Sheets.

                    Consolidated  Statements of Operations  for the Years
                    Ended December 31, 1997, 1996, and 1995.

                    Consolidated  Statements  of Cash Flows for the Years
                    Ended December 31, 1997, 1996, and 1995.

                    Consolidated  Statements of Stockholders'  Equity and
                    Owners'  Deficit  for the Years  Ended  December  31,
                    1997, 1996, and 1995.

                    Notes to Financial Statements.

           2.   Financial Statement  Schedules:

                    Schedule II - Valuation and  Qualifying  Accounts for
                    the year ended December 31, 1997.

           3.   Exhibits:

            2.1         Asset Purchase  Agreement by and among Applied  Graphics
                        Technologies,  Inc., and Flying Color Graphics, Inc. and
                        its Shareholders dated January 16, 1998 (Incorporated by
                        reference  to  Exhibit  No.  2.1  forming  part  of  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 January
                        30, 1998). 

            2.2         Agreement  and Plan of Merger,  dated as of February 13,
                        1998, by and among Devon Group,  Inc.,  Applied Graphics
                        Technologies, Inc., and AGT Acquisition Corp.

            3.1         Certificate 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).

            10.4*       Loan and Purchase  Agreement,  dated January 8, 1992, as
                        amended  (Incorporated  by reference to Exhibit No. 10.4
                        forming part of Registrant's Report on Form 10-K/A (File
                        No.  0-28208)  filed with the  Securities  and  Exchange
                        Commission under the Securities Exchange Act of 1934, as
                        amended, for the fiscal year ended December 31, 1996).

            10.4(a)*    Second  Amendment to Loan and Purchase  Agreement  dated
                        April 19, 1996 (Incorporated by reference to Exhibit No.
                        10.4(a) forming part of the Registrant's  Report on Form
                        10-K/A (File No.  0-28208) filed with the Securities and
                        Exchange Commission under the Securities Exchange Act of
                        1934, as amended, for the fiscal year ended December 31,
                        1996).

            10.4(b)*    Third  Amendment  to Loan and Purchase  Agreement  dated
                        June 30, 1997. (Incorporated by reference to Exhibit No.
                        10.4(b) 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 June
                        30, 1997).

            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).

            10.6(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).

            10.6(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).

            10.6(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).

            10.6(e)(i)  Employment  Agreement,  effective  as of June  1,  1996,
                        between   the   Company   and   Louis   Salamone,    Jr.
                        (Incorporated   by  reference  to  Exhibit  No.  10.6(e)
                        forming  part of the  Registrant's  Report  on Form 10-Q
                        (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, 1997).

            10.6(e)(ii) Noncompetition,   Nonsolicitation,  and  Confidentiality
                        Agreement,  effective  as of June 1, 1996,  between  the
                        Company  and  Louis  Salamone,   Jr.   (Incorporated  by
                        reference  to Exhibit No.  10.6(e)  forming  part of the
                        Registrant's  Report  on Form 10-K  (File  No.  0-28208)
                        filed with the Securities and Exchange  Commission under
                        the Securities Exchange Act of 1934, as amended, for the
                        fiscal year ended December 31, 1996).

            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).

            23.1        Consent of Deloitte & Touche LLP

            23.2        Consent of Coopers & Lybrand L.L.P

            27.1        Financial Data Schedule (EDGAR filing only).

            27.2        Restated  Financial  Data  Schedule - 1996  Restatements
                        (EDGAR Filing only).

            27.3        Restated  Financial  Data  Schedule - 1997  Restatements
                        (EDGAR Filing only).

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

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

(b) The Registrant did not file any reports on Form 8-K during the quarter ended
December 31, 1997.


<PAGE>



                                   SIGNATURES

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


APPLIED GRAPHICS TECHNOLOGIES, INC.
(Registrant)


By: /s/ Fred Drasner

_____________________________      March 27, 1998
 Fred Drasner
Director, Chairman, and Chief Executive Officer
      (Duly authorized officer)

Date:  March 27, 1998


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 27, 1998.

         Signature
Title

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


/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
Louis Salamone, Jr.         (Principal Financial and Accounting Officer)

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



/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


<PAGE>




<TABLE>
                                                      APPLIED GRAPHICS TECHNOLOGIES, INC.
                                                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                     For the year ended December 31, 1997
                                                                (In thousands)
<CAPTION>



                                                                                   Additions
                                                                     ------------------------------------
                                   Balance at                         
                                   beginning      Charged to costs     Charged to other                      Balance at
          Description              of period        and expenses         accounts (1)     Deductions (2)    end of period
-------------------------------- --------------  ------------------  ------------------  ----------------  ---------------
<S>                               <C>             <C>                 <C>                 <C>                <C>

Allowances deducted in the 
 balance sheetfrom assets 
  to which they apply:

Allowance for doubtful accounts    $     472        $   3,990            $    308         $  (781)            $   3,989




<FN>
(1) Represents allowances for doubtful accounts recorded in connection  with acquisitions. 
    
(2) Represents uncollectible accounts written off.
</FN>
</TABLE>



<PAGE>