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                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                  FORM 10-K/A
                                AMENDMENT NO. 2

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       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)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      13-3864004
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

      450 WEST 33RD STREET, NEW YORK, NY                           10001
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  212-716-6600

       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

<TABLE>
<CAPTION>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
    COMMON STOCK, PAR VALUE $.01 PER SHARE                 NASDAQ NATIONAL MARKET
</TABLE>

     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 August 15, 2000, was $72,597,038.

     The number of shares of the registrant's Common Stock outstanding as of
August 15, 2000, was 22,584,282 shares.

     The following documents are hereby incorporated by reference into this Form
10-K/A:

                                     None.

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     This amendment is being filed to reflect the publishing business of Applied
Graphics Technologies, Inc. (the "Company"), as a discontinued operation. In
June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon Group,
Inc.
<PAGE>   3

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
          ITEM                                                                PAGE
          ----                                                                ----
<S>       <C>   <C>                                                           <C>
PART I      1.  Business....................................................    1
            2.  Properties..................................................    6
            3.  Legal Proceedings...........................................    6
            4.  Submission of Matters to a Vote of Security Holders.........    6
                Executive Officers of the Company...........................    7
PART II     5.  Market for the Registrant's Common Equity and Related
                  Stockholder Matters.......................................    9
            6.  Selected Financial Data.....................................    9
            7.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations.................................   11
           7A.  Quantitative and Qualitative Disclosures About Market
                  Risk......................................................   18
            8.  Financial Statements and Supplementary Data.................   19
            9.  Changes in and disagreements with Accountants on Accounting
                  and Financial Disclosure..................................   60
PART III   10.  Directors and Executive Officers of the Registrant..........   61
           11.  Executive Compensation......................................   64
           12.  Security Ownership of Certain Beneficial Owners and
                  Management................................................   67
           13.  Certain Relationships and Related Transactions..............   69
PART IV    14.  Exhibits, Financial Statement Schedules, and Reports on Form
                  8-K.......................................................   71
SIGNATURES..................................................................   74
</TABLE>
<PAGE>   4

                                     PART I

     Certain statements made in this Annual Report on Form 10-K/A 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 ability to attain compliance with the amended
financial covenants under the 1999 Credit Agreement (as defined herein) or to
obtain waivers from its lending institutions in the case such compliance is not
attained; the trend toward electronic distribution of content; the efficiency of
competitors or customers of the Company; the expansion of on-line distribution
services; the growth of the market for digital services; market acceptance of
the Company's digital photography product line; the amount of broadcast media
distribution services business received under the agreement with Western (as
defined herein); the timing of completion and the success of the Company's
various restructuring plans; the ability to sell certain properties and non-core
businesses, including its publishing business; the rate and level of capital
expenditures; and the adequacy of the Company's credit facilities and cash flows
to fund cash needs.

ITEM 1.  BUSINESS.

GENERAL

     Applied Graphics Technologies, Inc. and its subsidiaries (the "Company")
primarily provide digital media asset management services. Through its various
divisions and significant operations, including the Black Dot Group and Seven
Worldwide, the Company offers content management services, broadcast media
distribution services, and an array of digital services to magazine publishers,
advertising agencies, entertainment companies, automobile and other consumer
product manufacturers, and retailers.

     In May 1999, the Company, through a wholly-owned subsidiary, acquired Wace
Group Limited (formerly Wace Group Plc) ("Wace"), an international operator of
digital imaging businesses and a provider of digital services in the areas of
prepress, color management, and interactive multimedia. As a result of the
acquisition, the Company enhanced its range of services already provided in the
United States and expanded its operations into the United Kingdom and Australia.

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon Group,
Inc. ("Devon"). This business, which publishes greeting cards, calendars, art
prints, and other wall decor items, sells its products primarily to mass markets
merchants, card shops, bookstores, art galleries, designers, and framers.

     The Company was incorporated in Delaware on December 12, 1995. On April 16,
1996, simultaneous with the consummation of the initial public offering of its
common stock, 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").

SEGMENT INFORMATION

     See Note 23 to the Company's Consolidated Financial Statements for
financial information about industry segments.

SERVICES

     The Company's digital media asset management business consists of content
management services, digital services, and broadcast media distribution
services.

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<PAGE>   5

     Content Management Services.  The Company's content management services
cover a broad spectrum of services from creation through distribution. The scope
of the Company's content management 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. These services
include advertising production services, prepress services, electronic
transmission services, and limited print services.

     The Company provides a full range of advertising production services for
certain of its customers, primarily retailers. Such services include strategic
marketing, creative design, and photography. The Company's strategic marketing
services assist customers in reaching a broader audience with targeted messages
through the use of research, surveys, and media planning. The creative design
services offered by the Company provide customers with a creative concept along
with the requisite art direction, copywriting, and design for their advertising
and marketing materials. The Company's photographic services provide a wide
range of digital and traditional photographic services that include model
booking, prop acquisition, location procurement, set designing, and studio
photography.

     The Company offers a full range of prepress services to customers
regardless of whether the advertising production services are performed by the
Company, an advertising agency, or the customer. Prepress services 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. Most 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.

     Through its dedicated satellite, the Company provides electronic
transmission services to deliver its customers' creative content to locations
around the world. The Company also provides electronic design, digital
advertising composition, and transmission of display advertising to newspapers.
In addition, the Company provides printing services as an ancillary service to
certain customers, primarily those in the entertainment industry. For these
customers, the Company prints movie posters, CD covers, video covers, and
promotional materials. The Company also offers specialty printing for large
format requirements such as movie posters, billboards, and other outdoor
signage.

     Digital Services.  The Company offers a broad range of digital services and
products, including archiving systems, interactive services, digital photography
systems, and publishing systems.

     Using integrated equipment and proprietary software, the Company's Digital
Link(R) system offers a method to store, manipulate, repurpose, and distribute
digital images. The Company uses Digital Link to provide advanced digital
imaging services, such as archiving and online distribution, to new groups of
customers and to its existing content management customers. The Company creates
digital archives of photographic prints, slides, film, and other images to
provide the customer with an organized, easily accessible digital format in
which its images can be retrieved, distributed, substituted, and re-edited. 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
generally provided under long-term contracts 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.

     Through its interactive business, the Company offers website and multimedia
creative development, implementation, and management for various marketing and
e-commerce applications. The Company also provides customers with consulting
services regarding how technology can be used to improve the communication of
the customers' message.

     The Company has developed digital photography systems, including a digital
portrait system that integrates a suite of proprietary Digital Link software
applications with specialized hardware and is based on an open architecture that
supports the leading digital cameras and printers. The Company's digital
portrait system provides studio photography services to retailers and other
major providers in the consumer portrait market. The Company's digital portrait
system provides its customers with a web-based environment in which the end
retail consumer can process, store, manage, and distribute their photographs.
This system integrates

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with the customer's website, thereby providing the Company's customers with the
ability to retain their brand equity and reap any ancillary benefits of having
consumers visit their websites.

     The Company's TeamBase(TM) software provides newspaper and magazine
publishers with a professional publishing editorial system to assist in
streamlining operations and organizing workflow.

     Broadcast Media Distribution Services.  In its broadcast media distribution
business, 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 its acquisition of SpotLink,
Inc. ("SpotLink") in December 1996 from Western International Media Corporation
("Western"), 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.

DISCONTINUED OPERATIONS

     Publishing.  Through its subsidiary, Portal Publications, Ltd. ("Portal"),
the Company publishes greeting cards, posters, art prints, calendars, original
artwork, and other wall decor items. The product lines range from moderately
priced items intended for a broad customer base to higher quality items
consisting of fine art reproductions, limited edition prints, and upscale
posters intended for a narrower and more selective customer base. The Company
obtains the images for its publishing products by purchasing the rights to
publish photographs and artwork that are either in an artist's stock or are
commissioned specifically for the Company's use. Images are also obtained from
the public domain primarily through photo libraries. The Company's publishing
products are printed by outside vendors that are selected based upon quality,
ability to deliver, and price. The products are delivered directly to the
Company's warehouses, from where shipments are made directly to customers. The
Company's publishing customers are primarily mass-market merchants, card shops,
bookstores, art galleries, institutional customers, and framers.

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business.

CUSTOMERS

     The Company's digital media asset management customer base encompasses a
wide variety of enterprises and organizations, including retailers, publishers,
advertising agencies, entertainment companies, and automobile and other consumer
product manufacturers. The Company's five largest nonaffiliated customers
accounted for approximately 30% of total revenues in 1999. The loss of business
from any of these five top customers could have a material adverse effect on the
Company. The Company's fifty largest nonaffiliated customers accounted for
approximately 56% of the Company's revenues in 1999. 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,
which limits the Company's exposure to the loss of larger customers. In most
cases there is no contractual arrangement that would prevent customers from
selecting a competitor of the Company to perform some or all of their work. In
1999, approximately 2.4% 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 Mortimer B.
Zuckerman, the Chairman of the Board of Directors of the Company, and Fred
Drasner, Chairman and a director of the Company.

SALES AND MARKETING

     The Company relies primarily on its general managers and regional sales
organizations to market its content management 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, at the New York facilities
with the publishing industry, and at other locations with major retailers. These
relationships also extend to advertising agencies that perform work for these
customers.

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<PAGE>   7

     The Company maintains a separate sales force to market digital services to
existing content management customers and to new groups of customers. The
Company also has a sales force to market its broadcast media distribution
services.

     The Company sells its publishing products through an internal sales force
and independent representatives as well as through contacts and efforts of
senior executives. Sales of mass-market publishing products are managed through
in-store service programs that enhance the ability of a product to be carried by
customers for many years.

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

     Content Management Services:  Content management services, especially
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, such as R. R. Donnelley & Sons, Co., Quebecor Printing, Inc., and
Quad/Graphics, Inc., 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 and other content management services
with the printing cost or by substantially discounting the separate prepress
services. A customer might prefer services by a printer where price is the
primary consideration and quality of and control over the artistic process are
not key concerns. Independent providers, such as the Company, generally are able
to offer a higher level of specialization, customization, and individualized
service and also provide customers with the flexibility to select the printer of
their choice, thus giving the customer greater leverage in negotiating for
printing services. A customer would look to perform its own prepress services
internally if the customer believed that control over the process was
advantageous and quality of the product was not paramount. Customers typically
provide for themselves only a portion of the prepress services they need,
augmenting their own capabilities, as needed, with third-party services usually
from independent providers.

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

     Independent prepress providers typically provide services based upon a
customer's request for which the provider is paid on a per-job basis. In most
cases, there is no contractual arrangement that would prevent a customer from
changing prepress providers on a per-project basis except for the Company's
typical on-site arrangement for which a multi-year contract is obtained.

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<PAGE>   8

     The Company competes for advertising production services primarily with
major advertising agencies and professional photography studios primarily on the
basis of quality of service.

     Digital Services:  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. In the area of retail portrait photography,
the Company's main competitor is a division of Kodak. The Company believes that
its approach, which uses its customers' websites as the portals through which
consumers access their photographs as opposed to using a generic site, better
serves its customers by allowing the customers to retain their brand equity and
reap any ancillary benefits of having consumers visit their websites.

     Broadcast Media Distribution Services:  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.

     Publishing:  In the publishing business, the Company primarily competes
with major greeting card companies such as Hallmark Cards, Inc., and American
Greetings Corporation. The Company also competes with local and regional
producers of posters and art prints. The Company believes competition is based
on reliability of service, timeliness of delivery, and the ability to select
images with mass-market appeal.

EMPLOYEES

     As of December 31, 1999, the Company had approximately 5,200 total
employees, approximately 5,000 of whom were full-time employees. Of the total
employees, approximately 2,400 were salaried employees and approximately 2,800
were hourly employees. Approximately 480 of the Company's employees were covered
by collective bargaining agreements. 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 Digital Link.
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.

GEOGRAPHIC INFORMATION

     See Note 23 to the Company's Consolidated Financial Statements for
financial information about geographic regions. Operating income from foreign
operations was approximately $284,000 for the year ended December 31, 1999.

RECENT DEVELOPMENTS

     In March 2000, the Company announced that it had retained an investment
banking firm to explore strategic alternatives, including a possible sale of the
Company. In August 2000, the Board of Directors of the Company decided that it
would no longer actively pursue a sale of the Company, but would continue to
pursue other strategic alternatives. There can be no assurance that any
transaction will occur as a result of this effort.

     In April 2000, the Company sold the photographic laboratory business that
was acquired as part of Wace for a sales price of approximately $11,500,000. The
Company did not realize a gain or loss on the sale of this business.

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon. The
Company expects to consummate the sale of the publishing business by June 2001,
although there can be no assurance that the sale will be consummated within that
timeframe.

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<PAGE>   9

ITEM 2.  PROPERTIES

     The Company rents its corporate headquarters in New York City under a lease
that expires in 2011 and operates its principal facilities at the locations
indicated below.

<TABLE>
<S>                                  <C>                                  <C>
New York City                        Wilmington, Ohio                     Washington, DC
(5 content management facilities;    (1 broadcast facility)               (1 content management facility)
 1 broadcast facility; 1 digital
 facility)

Atlanta, Georgia                     Central Illinois                     Indianapolis, Indiana
(1 content management facility)      (2 content management facilities)    (1 content management facility)

Boulder, Colorado                    Rochester, New York                  Orlando, Florida
(1 digital facility)                 (1 digital facility)                 (3 content management facilities)

Chicago, Illinois                    Seattle, Washington                  Nashua, New Hampshire
metropolitan area                    (1 content management facility;      (1 digital facility)
(9 content management facilities;    1 publishing facility)
 1 digital facility)

Detroit, Michigan                    San Diego, California                International Locations:
metropolitan area                    (1 content management facility)
(3 content management facilities;                                         United Kingdom
 1 broadcast facility)                                                    (4 content management facilities;
                                                                          1 digital facility; 1 publishing

Los Angeles, California              San Francisco, California            facility)
metropolitan area                    metropolitan area                    Australia
(4 content management facilities;    (2 content management facilities;    (1 content management facility;
 1 digital facility; 1 broadcast     2 publishing facilities)             1 publishing facility)
 facility)

Northern New Jersey                  Dallas, Texas                        Canada
(4 content management facilities)    (2 content management facilities)    (1 publishing facility)

Central Michigan                     Omaha, Nebraska
(1 content management facility)      (1 content management facility)
</TABLE>

     The Company owns ten of the content management facilities and one
publishing facility. The remaining facilities are operated under leases that
expire in 2000 through 2009. The Company also provides on-site services at
certain other customer locations where services are performed only for that
specific customer. 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, 1999.

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EXECUTIVE OFFICERS OF THE COMPANY

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

<TABLE>
<CAPTION>
NAME                                        AGE                     POSITION
----                                        ---                     --------
<S>                                         <C>    <C>
Fred Drasner..............................  57     Chairman and Director
Derek Ashley..............................  40     Vice Chairman, Chief Executive Officer,
                                                   Chief Operating Officer, and Director
Marne Obernauer, Jr.......................  57     Vice Chairman and Director
Scott A. Brownstein.......................  51     Executive Vice President and Chief
                                                   Technology Officer
Martin D. Krall...........................  59     Executive Vice President, Chief Legal
                                                   Officer, Secretary, and Director
Joseph D. Vecchiolla......................  44     Senior Vice President and Chief Financial
                                                     Officer
</TABLE>

     Fred Drasner, Chairman and a director of the Company, served as Chief
Executive Officer of the Company from 1996 until April 2000. Mr. Drasner has
been co-owner of Pro Football, Inc., d/b/a The Washington Redskins, since July
1999. He has been the Chief Executive Officer of Daily News and Co-Publisher of
the New York Daily News since 1993, Co-Chairman of U.S. News & World Report,
L.P. ("U.S. News"), since 1998, Chief Executive Officer of U.S. News from 1985
to 1998, President of U.S. News from 1985 to 1997, Chairman and Chief Executive
Officer of Applied Printing since 1988, and Co-Chairman from 1998 to 1999 and
Vice-Chairman and Chief Executive Officer from 1986 to 1998 of The Atlantic
Monthly Company. Mr. Drasner has served as Co-Chairman of Fast Company Media
Group, L.L.C. ("Fast Company"), since January 1999. Mr. Drasner was also senior
counsel to Shaw Pittman, formerly known as Shaw Pittman Potts & Trowbridge,
until his resignation in April 1996.

     Derek Ashley, Vice Chairman, Chief Executive Officer, Chief Operating
Officer, and a director of the Company, joined the Company in May 1999 in
connection with the acquisition of Wace. Mr. Ashley served as Group Chief
Executive of Wace from June 1998 until its acquisition by the Company. Prior to
that, Mr. Ashley served as President and Chief Executive Officer of Seven
Worldwide, Inc., a wholly-owned subsidiary of Wace, from July 1997 and as
European Managing Director of Wace from 1995.

     Marne Obernauer, Jr., Vice Chairman and a director of the Company, joined
the Company in May 1998 in connection with the merger with Devon. Prior to
joining the Company, and up until its merger with the Company, he served as
Chief Executive Officer of Devon from 1980 and as Chairman of the Board of
Directors of Devon from 1986.

     Scott A. Brownstein, Executive Vice President and Chief Technology Officer
of the Company, was the Senior Vice President and General Manager of the
Company's digital operations from 1993 to 1995, where he was responsible for
developing, manufacturing, and marketing the Company's digital services.

     Martin D. Krall, Executive Vice President, Chief Legal Officer, Secretary,
and a director of the Company, has been Executive Vice President, Chief Legal
Officer, and Secretary of Daily News, Applied Printing, and U.S. News since
January 1995. Mr. Krall served as Executive Vice President, Chief Legal Officer,
and Secretary of The Atlantic Monthly Company from 1995 to 1999. Mr. Krall has
served as Executive Vice President, Chief Legal Officer, and Secretary of Fast
Company and its majority owner, FC Holdings, L.L.C., since January 1999. Prior
to 1995, Mr. Krall was a partner in the law firm of Shaw Pittman, 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 was also senior counsel
to Shaw Pittman until his resignation in April 1996.

     Joseph D. Vecchiolla, Senior Vice President and Chief Financial Officer of
the Company, joined the Company in May 2000. From February 1999 through April
2000 he served as Vice President of Marketing and Vice President of Finance at
Favorite Brands International, which was acquired by Nabisco in November 1999.
Favorite Brands International filed for protection under Chapter 11 of the U.S.
Bankruptcy

                                        7
<PAGE>   11

Code in March 1999. From May 1997 until February 1999 he served as President of
Old Greenwich Capital Corporation. From June 1993 through December 1997 he
served in various capacities at Bird Corporation, beginning as Senior Vice
President and Chief Financial Officer (June 1993 through September 1993), then
President, Chief Operating Officer, and Chief Financial Officer (September 1993
through January 1994), then President and Chief Executive Officer (January 1994
through April 1995), and finally Chairman of the Board of Directors (May 1995
through December 1997). Concurrent to his tenure at Bird Corporation, from May
1995 through December 1997, Mr. Vecchiolla served as Senior Vice President of
Corporate Finance at S.N. Phelps & Co., Vice President and Chief Financial
Officer of Wyatt Energy Corp., President of American Modular Technologies, LLP,
and Vice President and Chief Financial Officer of Commonwealth Oil of Puerto
Rico, LLP.

                                        8
<PAGE>   12

                                    PART II

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

     The Company's common stock is traded on the Nasdaq National Market. The
following table sets forth the high and low closing sales price for each full
quarterly period during 2000, 1999, and 1998.

<TABLE>
<CAPTION>
                                                       2000                   1999                   1998
                                                  ---------------        ---------------        ---------------
                                                  HIGH        LOW        HIGH        LOW        HIGH        LOW
                                                  ----        ---        ----        ---        ----        ---
<S>                                               <C>         <C>        <C>         <C>        <C>         <C>
First quarter...................................   9 5/16      3 5/16     17 1/16     6 7/8      60 1/4     45 1/2
Second quarter..................................   6 1/4       3 1/16     14 5/8      6 5/8      53 1/2     42 19/32
Third quarter...................................   4 11/16     3 5/16     14 1/2      7 3/16     55 3/4     12 1/2
Fourth quarter..................................                           9 3/16     6 1/2      16 1/2      7 7/8
</TABLE>

     As of September 26, 2000, there were 4,940 holders of record of the
Company's common stock. No dividends have been paid since April 17, 1996, the
date the Company's common stock commenced trading. The Company currently intends
to retain any future earnings for use in the operation of its business for the
foreseeable future. The Company is prohibited from paying dividends under its
existing credit facility.

     In February 2000, the Company issued 109,510 shares of its common stock as
additional contingent consideration to the former stockholders of Amusematte
Corp. and Agile Enterprise, Inc., which the Company acquired in December 1997
and September 1998, respectively. All contingencies on the additional
consideration were satisfied as of December 31, 1999. The sale and issuance of
such securities by the Company were effected in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.

ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                      --------------------------------------------------------
                                      1999(A)     1998(B)     1997(C)       1996      1995(D)
                                      --------    --------    --------    --------    --------
                                        (IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<S>                                   <C>         <C>         <C>         <C>         <C>
Revenues............................  $532,064    $338,942    $184,993    $132,725    $117,802
Income (loss) from continuing
  operations before provision for
  income taxes and minority
  interest..........................  $ (7,270)   $ 16,290    $ 22,707    $ 10,820    $ (7,812)
Income (loss) from continuing
  operations........................  $(11,534)   $  6,318    $ 13,567    $  9,955    $ (7,812)
Earnings (loss) per common share
  from continuing operations:
  Basic.............................  $  (0.51)   $   0.31    $   0.88    $   0.79
  Diluted...........................  $  (0.51)   $   0.30    $   0.83    $   0.77
Total assets........................  $931,010    $703,074    $224,793    $ 72,147    $ 44,809
Long-term obligations:
  Long-term debt....................  $298,125    $203,087    $    812    $  6,005    $    853
  Subordinated notes................    29,867
  Obligations under capital
     leases.........................     3,814       3,475       2,011       1,265       2,415
                                      --------    --------    --------    --------    --------
          Total.....................  $331,806    $206,562    $  2,823    $  7,270    $  3,268
                                      ========    ========    ========    ========    ========
</TABLE>

                                        9
<PAGE>   13

<TABLE>
<CAPTION>
                                               JUNE 30,
                                      --------------------------
                                        2000(E)         1999
                                      -----------    -----------
                                      (IN THOUSANDS OF DOLLARS,
                                      EXCEPT PER-SHARE AMOUNTS)
<S>                                   <C>            <C>            <C>         <C>         <C>
Revenues............................   $291,342       $224,655
Income (loss) from continuing
  operations before provision for
  income taxes and minority
  interest..........................   $ (5,757)      $  6,986
Income (loss) from continuing
  operations........................   $ (9,121)      $  1,493
Earnings (loss) per common share
  from continuing operations:
  Basic.............................   $  (0.40)      $   0.07
  Diluted...........................   $  (0.40)      $   0.07
Total assets........................   $764,358       $920,856
Long-term obligations:
  Long-term debt....................   $260,589       $302,655
  Subordinated notes................     28,119
  Obligations under capital
     leases.........................      2,773          5,207
                                       --------       --------
          Total.....................   $291,481       $307,862
                                       ========       ========
</TABLE>

     No dividends have been paid on the Company's common stock.
---------------
(a) Amounts in 1999 include charges of $3,572, $744, $5,558, $2,419, $750, $488,
    and $418 for restructurings, impairment of a business, impairments of
    property and equipment, loss on disposal and abandonment of fixed assets, a
    litigation accrual, write off of acquisition costs, and a change in
    accounting estimate, respectively. (See Note 5 and Note 6 to the
    Consolidated Financial Statements.)

(b) Amounts in 1998 include charges of $8,550, $3,150, and $2,509 for
    restructurings, abandonment of a business, and impairment of intangible
    assets, respectively. (See Note 5 and Note 6 to the Consolidated Financial
    Statements.)

(c) Amounts in 1997 include a charge of $2,487 related to the Chapter 11
    bankruptcy filing of one of the Company's customers.

(d) Amounts in 1995 include restructuring charges of $3,060.

(e) Amounts in 2000 include $611 and $1,241 for a restructuring charge and
    impairment charges, respectively. (See Note 3 and Note 4 to Interim
    Consolidated Financial Statements.)

                                       10
<PAGE>   14

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

     The accompanying financial statements have been restated to reflect the
Company's publishing business as a discontinued operation. The following
discussion and analysis (in thousands of dollars) should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto.

RESULTS OF OPERATIONS

  Year ended December 31, 1999, compared with 1998

     Revenues in 1999 were $193,122 higher than in the comparable period in
1998. Revenues increased by $206,000 from facilities operated for none or only a
portion of the 1998 period. Such increase was comprised of $130,205 in revenues
from Wace Group Limited (formerly Wace Group Plc) ("Wace"), $65,679 in revenues
from Devon Group, Inc. ("Devon"), and $10,116 in revenues from other acquired
operations. The acquisition of Wace and the merger with Devon were consummated
on May 21, 1999, and May 27, 1998, respectively. This increase in revenues from
acquired operations was offset by a decrease in revenues of $12,878 at
facilities operated during the comparable 1998 period. This decrease at existing
facilities was caused primarily by the loss of customers and reduced business
from other customers, principally those in the entertainment industry.

     Revenues in 1999 increased by $185,395 from content management services,
$4,538 from broadcast media distribution services, and $3,189 from digital
services. Increased revenues from content management services resulted from
revenues of $203,478 associated with acquired operations, primarily the content
management businesses acquired in the merger with Devon and the acquisition of
Wace, partially offset by a decrease in revenues of $18,083 at the Company's
prepress facilities operated in both periods. Increased broadcast media
distribution services revenues resulted from internally generated growth.
Increased revenues from digital services primarily resulted from the digital
operations acquired as part of Wace.

     Gross profit increased $54,822 in 1999 as a result of the additional
revenues for the period as discussed above. The gross profit percentage in 1999
was 31.7% as compared to 33.5% in the 1998 period. This decrease in the gross
profit percentage resulted from reduced margins at traditional prepress
facilities as a result of the decrease in revenues discussed above, which
resulted in lower absorption of fixed manufacturing costs and the acceptance of
lower margin work. In addition, the gross profit percentage of the creative
business within content management services decreased to 29.5% in 1999 from
33.2% in 1998 due to additional work being accepted at lower margins. These
decreases were partially offset by higher margins in the broadcast media
distribution business, which benefited from better pricing and internal
expansion that reduced reliance on outside services.

     Selling, general, and administrative expenses in 1999 were $60,855 higher
than in the 1998 period, and as a percent of revenue increased to 25.3% in the
1999 period from 21.7% in the 1998 period. Such expenses grew at a greater rate
than revenue due primarily to higher costs incurred at the Wace operations that
have not been fully integrated. Selling, general, and administrative expenses in
1999 include a charge of $750 for a litigation accrual and a charge of $418
related to increased amortization of software costs resulting from a change in
the estimated useful life.

     Amortization expense for intangible assets increased by $5,582 in 1999 due
primarily to the goodwill associated with acquisitions consummated during and
subsequent to the 1998 period.

     The loss on disposal of fixed assets was $2,402 in 1999. The Company
abandoned or disposed of significant amounts of equipment in 1999 as a result of
the reallocation of work among various facilities, a change in service
requirements of certain major customers, and a general upgrade of equipment at
certain of the Company's larger facilities to achieve anticipated efficiencies
from the various integration efforts.

     The results of operations for 1999 included a charge of $3,572 related to
various restructuring efforts initiated by the Company (see Note 5 to the
Consolidated Financial Statements). During 1998, the Company commenced two
separate plans to restructure certain of its operations (the "1998 Second
Quarter Plan" and the "1998 Fourth Quarter Plan", respectively). The 1998 Second
Quarter Plan was revised in the fourth quarter of 1998 in response to additional
acquisitions and a change in operation management. As part of the

                                       11
<PAGE>   15

1998 Second Quarter Plan, the Company closed a facility in New Jersey and made
modifications to its Carlstadt, NJ, facility to accommodate the transfer of work
performed at the closed location to the Carlstadt facility. In addition, as part
of the 1998 Second Quarter Plan, the Company vacated a portion of one of its
Chicago, IL, facilities and transferred a portion of the work performed at that
facility to its other Chicago metropolitan area facilities. Also as part of the
1998 Second Quarter Plan, the Company terminated certain employees and
consolidated the work performed in its West Coast facilities, resulting in the
closure of one such facility. The results of operations for 1999 included a
charge of $228 related to the 1998 Second Quarter Plan resulting from the
Company not being released as early as originally estimated from certain rental
obligations on abandoned equipment.

     As part of the 1998 Fourth Quarter Plan, the Company closed several
facilities in Illinois and terminated employees on a Company-wide basis. The
work performed at each of the closed Illinois facilities is being performed at
the Company's other midwest facilities. The results of operations for 1999
included income of $1,447 resulting from the reversal of liabilities no longer
needed related to the 1998 Fourth Quarter Plan. The adjustment to the liability
resulted from the Company not terminating as many employees as originally
anticipated and negotiating favorable settlements on certain building lease
obligations. Fewer employees were terminated under the 1998 Fourth Quarter Plan
than was originally anticipated due to the Company's re-evaluation of its plans
in light of the acquisition of Wace and the voluntary termination of certain
employees.

     The Company commenced a plan in the third quarter of 1999 to consolidate
certain of its West Coast operations (the "1999 Third Quarter Plan"). As part of
the 1999 Third Quarter Plan, the Company closed the Los Angeles facility
previously operated by Wace and intends to move Wace's San Francisco operation
to a more suitable facility. A portion of the work previously performed in the
Company's Foster City facility was transferred to Wace's San Francisco facility
and the remaining operation will be moved to a smaller Foster City location. The
results of operations for 1999 included a charge of $636 related to the 1999
Third Quarter Plan.

     The Company commenced action in the fourth quarter of 1999 to consolidate
certain of its New York and Chicago metropolitan area and United Kingdom
operations and consolidate certain administrative functions (the "1999 Fourth
Quarter Plan"). As part of the 1999 Fourth Quarter Plan, the Company transferred
all of the work performed at one of its New York City facilities to Wace's
Varick Street operation. Also as part of the 1999 Fourth Quarter Plan, the
Company is further consolidating its Carlstadt, NJ, operation to occupy only two
of the three buildings that currently comprise that facility. The Company
intends to sublet the vacated building. The Company also redistributed certain
work among its various metropolitan New York area operations. In the midwest,
the Company closed one of its Chicago facilities and transferred the work
previously performed there to one of Wace's Chicago facilities. In the United
Kingdom, the Company streamlined certain operations and workflows and initiated
a plan to shut down a portion of its digital operations. Additionally, as part
of the 1999 Fourth Quarter Plan, the Company initiated a plan to transfer
certain centralized administrative functions to the various regional operations,
which will result in the closure of a New York metropolitan area administrative
office. The results of operations for 1999 included a charge of $4,155 related
to the 1999 Fourth Quarter Plan.

     The Company does not anticipate any material adverse effect on its future
results of operations from the facility closings since all work performed at
such locations has been and will be transferred to its other facilities. The
employees terminated and to be terminated under the restructuring plans are
principally production workers, sales people, and administrative support staff.
The Company completed both the 1998 Second Quarter Plan and the 1998 Fourth
Quarter Plan during 1999. The Company expects to complete the 1999 Third Quarter
Plan and the 1999 Fourth Quarter Plan by September 2000 and December 2000,
respectively.

     Impairments and other charges totaled $6,302 in 1999 and were comprised of
$5,558 related to the impairment of property and equipment and $744 related to
the impairment of a business. The Company incurred a charge of $2,429 from the
impairment of equipment related to its various restructuring and integration
efforts. In addition, in connection with the acquisition of Wace, the Company
incurred a charge of $3,129 related to the abandonment of certain software
development projects that were replaced by systems

                                       12
<PAGE>   16

already in service at the various Wace locations or were no longer viable for
the combined entity. In December 1999, the Company incurred a charge of $744 for
the write down of long-lived assets related to its events-based digital
photography operation.

     Interest expense in 1999 was $12,839 higher than in 1998 due primarily to
the interest on borrowings to finance acquisitions. Four interest rate swap
agreements entered into by the Company resulted in $354 of additional interest
expense in the year.

     Interest income in 1999 was $1,342 lower than during the 1998 period due to
the sale of marketable securities to fund certain mergers and acquisitions in
1998.

     Other income in 1999 was primarily comprised of a gain of $1,000 on the
sale of an internet-related asset in connection with entering into a long-term
agreement to perform content management services and approximately $500 of
rental income associated with certain vacated properties. This income was
partially offset by a write-off of $488 for acquisition costs related to
transactions no longer being pursued.

     The Company incurred a provision for income taxes at a rate equal to 29.8%
of the pretax loss for the year. A provision was incurred, as opposed to a
benefit being received, due to the permanent items related to the nondeductible
goodwill associated with the Devon merger and the Wace acquisition and the
nondeductible portion of meals and entertainment expenses exceeding the amount
of the pretax loss.

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon. The
results of operations in 1999 include an after tax loss from discontinued
operations of $452, as compared to net income of $1,858 in 1998. In accordance
with the Company's credit agreement, the net after tax proceeds from the sale of
the publishing business will be used to repay outstanding borrowings.

     The Company continues to transact business with Applied Printing
Technologies, L.P. ("Applied Printing"), an entity beneficially owned by the
Chairman of the Board of Directors of the Company (the "Chairman of the Board")
and the Chairman of the Company (the "Chairman"), which owned approximately
22.2% of the Company's outstanding common stock at December 31, 1999. 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 and the Chairman as well as with Snyder
Communications, Inc., a provider of outsourced marketing services, of which both
the Chairman of the Board and the Chairman were members of the Board of
Directors and in the aggregate owned approximately 10.0% of the outstanding
common stock as of December 31, 1999. Sales to related parties for the years
ended December 31, 1999, 1998, and 1997, totaled $13,008, $23,658, and $16,845,
respectively, representing 2.4%, 7.0%, and 9.1%, respectively, of the Company's
revenues.

  Year ended December 31, 1998, compared with 1997

     Revenues in 1998 were $153,949 higher than in the comparable period in
1997. This increase resulted from $22,101 of revenues from additional business
generated internally and $131,848 of revenues from acquired operations. In 1998,
revenues increased by $142,556 from content management services, $6,605 from
broadcast media distribution services, and $4,788 from digital services.
Increased revenues from content management services were due primarily to the
operations of the content management business acquired in the merger with Devon
as well as other operations acquired subsequent to the 1997 period, including
the content management operations of Flying Color Graphics, Inc. ("Flying
Color"), and Color Control, Inc. ("Color Control"), which were acquired in
January 1998 and June 1998, respectively, and from an overall increase in
business at various facilities. Increased broadcast media distribution services
revenues primarily resulted from a full year of revenue in 1998 from operations
acquired in 1997 and internally generated growth. Increased revenues from
digital services primarily resulted from increased software and equipment sales,
including amounts generated from acquired operations, and increased digital
photography sales.

     The gross profit percentage in 1998 was 33.5% as compared to 34.6% in 1997.
Gross profit increased $49,701 in 1998 as a result of the additional revenues
for the period as discussed above.

                                       13
<PAGE>   17

     Selling, general, and administrative expenses in 1998 were $32,693 higher
than in 1997, and as a percent of revenue decreased to 21.7% in 1998 from 22.1%
in 1997.

     Amortization expense for intangible assets increased by $4,933 in 1998 due
primarily to the goodwill associated with acquisitions.

     The results of operations for 1998 include a charge of $8,550 related to
restructurings, comprised of $5,713 related to the 1998 Second Quarter Plan and
$2,837 related to the 1998 Fourth Quarter Plan.

     Impairments and other charges totaled $5,659 in 1998 and were comprised of
$3,150 relating to the abandonment of a business and $2,509 from the impairment
of intangible assets. In December 1998, the Company adopted a plan to cease
certain of its digital photography operations, primarily those operations
acquired as part of the acquisition of Digital Imagination, Inc. ("DI"), in June
1997. As of December 31, 1998, the Company had shut down all locations
associated with this operation. The charge of $3,150 related to the abandonment
of this operation is comprised primarily of the unamortized goodwill related to
the DI acquisition, the write-off of certain equipment no longer being utilized
as a result of the abandonment, and facility closure costs. In December 1998,
the Company incurred a charge of $2,509 for the write down of long-lived assets
related to its events-based digital photography operation.

     Interest expense in 1998 was $5,273 higher than in 1997 due primarily to
the interest on borrowings to finance the Devon merger and the Color Control
acquisition. Three interest rate swap agreements entered into by the Company
during 1998 resulted in an immaterial amount of additional interest expense in
the year.

     The effective rate of the provision for income taxes of 61.2% in 1998 was
higher than the statutory rate due primarily to the permanent items related to
the nondeductible goodwill associated with the Devon merger and other
acquisitions and the nondeductible portion of meals and entertainment expenses.

  Six months ended June 30, 2000, compared with 1999

     Revenues in the first six months of 2000 were $66,687 higher than in the
comparable period in 1999. This increase was due to the revenues from Wace,
which was acquired in the latter part of the 1999 period. Revenues in the 2000
period increased by $56,650 from content management services, $7,969 from
digital services, and $2,068 from broadcast media distribution services.
Increased revenues from content management services primarily resulted from
increased revenues of $64,759 associated with the content management businesses
acquired in the acquisition of Wace as well as from higher revenues at the
Company's West Coast operations, principally from customers in the entertainment
industry. These increases were partially offset by a decrease in revenues from
the Black Dot operations acquired in the merger with Devon, and a decrease in
revenues at the Company's East Coast operations, principally from customers in
the publications industry. Increased revenues from digital services resulted
from the digital operations acquired as part of Wace and from additional digital
photography systems sales. Increased revenues from broadcast media distribution
services resulted from internal growth.

     Gross profit increased $27,182 in the first six months of 2000 as a result
of the additional revenues for the period as discussed above. The gross profit
percentage in 2000 was 33.4% as compared to 31.3% in the 1999 period. This
increase in the gross profit percentage resulted primarily from the acquisition
of the Wace operations, which have higher gross profit margins than the
Company's other content management operations, and improved margins at the
Company's West Coast content management facilities, where the increase in
revenue discussed above resulted in greater absorption of fixed manufacturing
costs. These improvements were partially offset by lower margins at the
Company's East Coast content management operations, where the reduction in
revenue discussed above resulted in lower absorption of fixed manufacturing
costs and other operating inefficiencies.

     Selling, general, and administrative expenses in the first six months of
2000 were $29,350 higher than in the 1999 period, and as a percent of revenue
increased to 28.1% in the 2000 period from 23.3% in the 1999 period. Such
expenses grew at a greater rate than revenue due primarily to a higher rate of
costs incurred at the acquired Wace operations than at the Company's other
content management operations. Additionally,

                                       14
<PAGE>   18

selling, general, and administrative expenses in the 2000 period include a
charge of $1,732 for nonrestructuring-related employee termination costs.

     The results of operations for the six months ended June 30, 2000, include a
restructuring charge of $611 related to a plan (the "2000 Second Quarter Plan")
to close the Atlanta operation acquired as part of the Wace acquisition. The
charge for the 2000 Second Quarter Plan consisted of $456 for facility closure
costs and $155 for employee termination costs for 34 employees. As of June 30,
2000, no payments had been made related to the 2000 Second Quarter Plan.

     Impairment charges totaled $1,241 for the six months ended June 30, 2000,
and consisted of $583 from the impairment of equipment related to the 2000
Second Quarter Plan and $658 from the write down of long-lived assets related to
the Company's events-based digital photography business.

     Amortization expense for intangible assets increased by $1,737 in the first
six months of 2000 due primarily to the goodwill associated with the Wace
acquisition.

     Interest expense in the first six months of 2000 was $7,036 higher than in
the 1999 period due primarily to the interest on borrowings to finance the Wace
acquisition and higher interest rates under the amended and restated credit
agreement entered into in connection with the acquisition of Wace. Four interest
rate swap agreements entered into by the Company resulted in an immaterial
reduction of interest expense in the 2000 period.

     Notwithstanding the fact that the Company reported a pretax loss from
continuing operations for the period, the Company incurred a provision for
income taxes of $2,068. A provision was incurred, as opposed to a benefit being
received, due to the projected annual permanent items related to nondeductible
goodwill and the nondeductible portion of meals and entertainment expenses
exceeding the amount of the projected pretax loss for the year.

     The results of operations in the 2000 period include an after tax loss from
discontinued operations of $98,383, which consisted of a loss from operations of
$3,141 and an estimated loss on disposal of $95,242.

     Revenues from business transacted with affiliates for the six months ended
June 30, 2000 and 1999, totaled $5,493 and $6,460, respectively, representing
1.9% and 2.9%, respectively, of the Company's revenues.

LIQUIDITY AND CAPITAL RESOURCES

     In connection with the acquisition of Wace, the Company entered into an
amended and restated credit agreement (the "1999 Credit Agreement") with its
lending institutions. On June 4, 1999 (the "Initial Funding Date"), the Company
borrowed $296,000, the proceeds of which were used to pay off existing
borrowings under the Company's previous credit arrangements and to finance the
Wace acquisition. The total borrowing capacity under the 1999 Credit Agreement
is a maximum of $350,000, comprised of a $100,000 revolving credit line (the
"Revolver") and three term loans aggregating $250,000 (the "Term Loans"). The
Revolver extends through June 2005. The Term Loans are comprised of three
tranches of $125,000, $75,000, and $50,000 that have terms extending through
June 2005, June 2006, and June 2007, respectively. Interest rates on funds
borrowed under the 1999 Credit Agreement vary from either LIBOR or the prime
rate in effect at the time of the borrowing, plus a factor based on annual pro
forma EBITDA (as defined in the 1999 Credit Agreement).

     Under the terms of the 1999 Credit Agreement, the Company was obligated to
enter into hedge arrangements within 180 days of the Initial Funding Date for a
minimum of two years covering at least 30% of the amount borrowed on the Initial
Funding Date. The Company has entered into four interest rate swap agreements,
two of which expire in August 2003 (the "August 2003 Swaps"), one of which
expires in August 2001 (the "August 2001 Swap"), and one of which expires in
December 2001 (the "December 2001 Swap"). Under the August 2003 Swaps, the
August 2001 Swap, and the December 2001 Swap, the Company pays a fixed rate of
5.798%, 5.69%, and 6.45%, respectively, per annum on a quarterly basis and is
paid a floating rate based on the three month LIBOR rate in effect at the
beginning of each quarterly payment

                                       15
<PAGE>   19

period. The notional amounts of the August 2003 Swaps are $35,000 and $15,000
and the notional amounts of the August 2001 Swap and the December 2001 Swap are
$25,000 and $15,000, respectively.

     Under the terms of the 1999 Credit Agreement, the Company must comply with
certain covenants related to leverage ratios, interest coverage ratios, fixed
charge coverage ratios, minimum net worth, and capital spending. At December 31,
1999, the Company was in compliance with all covenants. At December 31, 1999,
total senior funded debt (as defined in the 1999 Credit Agreement) was $328,580.
Although the Company may continue to borrow up to the maximum capacity during
the course of subsequent periods, on the last day of each quarterly period in
1999 it was required to have a ratio of total senior funded debt to pro forma
EBITDA for the most recently completed four fiscal quarters that did not exceed
4.25 in order to remain in compliance with the covenants of the 1999 Credit
Agreement.

     In August 2000, the Company entered into an amendment to the 1999 Credit
Agreement (the "Fourth Amendment") to relax the interest coverage ratio and net
worth covenants as of June 30, 2000, and to modify all of the financial covenant
requirements to be less restrictive than previously required in the 1999 Credit
Agreement for the quarterly fiscal periods through June 30, 2001. In addition to
modifying the various financial covenants, the Fourth Amendment increased the
interest rates on all future borrowings under the 1999 Credit Agreement by 50
basis points and lowered the borrowing capacity of the Revolver to $85,000.

     In July 2000, the Company entered into an amendment to the 1999 Credit
Agreement (the "Third Amendment") that lowered the net worth covenant threshold
to enable the Company to proceed with its planned disposal of the publishing
business. Also in July 2000, the lending institutions granted a waiver of
covenant defaults to enable the Company to make the July 31, 2000, scheduled
interest payment to the holders of its subordinated notes. In connection with
entering into the Third Amendment and the Fourth Amendment, the Company incurred
fees of $496 and $1,535, respectively. The fee incurred in connection with the
Third Amendment is included in the loss on disposal of discontinued operations
for the six months ended June 30, 2000. The fee incurred in connection with the
Fourth Amendment will be included as a component of interest expense in future
periods.

     Based upon the modified financial covenants as contained in the Fourth
Amendment, the Company was able to remain in compliance with all covenants
through June 30, 2000. Had the Company not entered into the aforementioned
amendments to the 1999 Credit Agreement, the Company would not have been in
compliance with the interest coverage ratio and net worth covenants at June 30,
2000. The Company's net worth at June 30, 2000, was adversely affected by the
$95,242 estimated loss on disposal of the publishing business, including the
write off of approximately $100,000 of goodwill. There can be no assurance that
the Company will be able to attain compliance with the amended covenant
requirements in future periods. If the Company does not attain compliance, it
intends to engage in additional discussions with its lending institutions to
obtain additional waivers and amendments, although there can be no assurance
that such additional waivers or amendments will be granted.

     During 1999, in addition to the borrowings under the 1999 Credit Agreement
and the acquisition of Wace, the Company repaid $2,478 of notes and capital
lease obligations and invested $16,833 in facility construction and new
equipment. Additionally, the Company spent $9,123 on software-related projects.
Such amounts were primarily generated by cash flows from operations and sale and
leaseback transactions that generated proceeds of $2,249. The sale and leaseback
arrangements, which are accounted for as operating leases, resulted in
immaterial gains that have been deferred and are being recognized as a credit
against future rental expenses.

     Cash flows from operating activities during 1999 increased by $31,389 as
compared to 1998 due primarily to the receipt of income tax refunds and the
timing of customer collections.

     During the first six months of 2000, the Company repaid $37,522 of its
borrowings under the 1999 Credit Agreement, repaid $1,450 of notes and capital
lease obligations, and made contingent payments related to acquisitions of
$4,217. In addition, the Company invested $9,978 in facility construction and
new equipment, and spent $1,113 on software-related projects. Such amounts were
primarily generated from cash from

                                       16
<PAGE>   20

operating activities of $15,169 and the sale of property, equipment, and a
business that generated aggregate proceeds of $25,732.

     Cash flows from operating activities of continuing operations during the
first six months of 2000 decreased by $2,861 as compared to the comparable
period in 1999 due primarily to a decrease in cash from operating income and the
timing of collections from customers, partially offset by the timing of vendor
payments. Cash generated by discontinued operations during the first six months
of 2000 increased by $8,591 as compared to the 1999 period.

     The Company expects to spend approximately $17,000 over the course of the
next twelve months for capital improvements and management information systems,
essentially all of which is for modernization and growth. The Company intends to
finance a substantial portion of these expenditures under operating or capital
leases, sale and leaseback arrangements, or with working capital.

     At December 31, 1999, the Company had a liability of approximately $3,405
for the future costs related to its restructuring charges, which the Company
intends to finance from cash flows from operations. The Company is continuing to
pursue operating efficiencies and synergies and, as a result, may incur
additional restructuring charges. The Company anticipates terminating employees
on a Company-wide basis and potentially integrating certain operations during
2000.

     In March 2000, the Company announced that it had retained an investment
banking firm to explore strategic alternatives, including a possible sale of the
Company. In August 2000, the Board of Directors of the Company decided that it
would no longer actively pursue a sale of the Company, but would continue to
pursue other strategic alternatives. There can be no assurance that any
transaction will occur as a result of this effort.

     In April 2000, the Company sold the photographic laboratory business that
was acquired as part of Wace for a sales price of approximately $11,500. The
Company did not realize a gain or loss on the sale of this business.

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon. The
Company expects to consummate the sale of the publishing business by June 2001,
although there can be no assurance that the sale will be consummated within that
timeframe.

     The Company believes that cash flows from operations, including potential
improvements in operations as a result of its various integration and
restructuring efforts, sales of certain properties and certain non-core
businesses, and available borrowing capacity, subject to the Company's ability
to attain compliance or obtain a waiver in the event of noncompliance, if any,
with the revised financial covenants under the 1999 Credit Agreement, will
provide sufficient cash flows to fund its cash needs for the foreseeable future.

     Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities (an amendment of
FASB Statement No. 133)," was issued in June 2000. SFAS No. 138 amended certain
definitions and clarified certain requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires that entities recognize derivative instruments as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for the change in fair value of a
derivative instrument will depend on the intended use of the instrument. The
adoption of SFAS No. 133 will require the Company to reflect the fair value of
its interest rate swap agreements on its Consolidated Balance Sheet. The
offsetting gain or loss at the time of adoption of SFAS No. 133 will be
accounted for as a cumulative effect of a change in accounting principle in
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes." The cumulative gain or loss at the time of adoption of SFAS No. 133
and future gains and losses resulting from the change in fair value of the swap
agreements will be reflected in cumulative comprehensive income as a separate
component of stockholders' equity to the extent the swaps qualify as cash flow
hedges. To the extent the swaps do not qualify as cash flow hedges, such gains
and losses will be reflected in net income. The Company intends to determine

                                       17
<PAGE>   21

the potential impact of the adoption of SFAS No. 133 on its financial position
and results of operations by the end of 2000.

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

YEAR 2000 COMPLIANCE

     Many computer systems and applications use a two-digit field to designate a
year rather than a four-digit field. This could have resulted in these systems
and applications recognizing the use of "00" as either the year 1900 or some
other year as opposed to the year 2000 ("Y2K"). Such failure to recognize the
correct year could have resulted in system failures and miscalculations that
could have adversely impacted the ability of a company to do business (the "Y2K
Issue"). The Company identified, reviewed, implemented, and tested modifications
to its various computer systems and software to ensure Y2K compliance. The
Company did not experience any significant problems related to the Y2K Issue nor
was its business adversely impacted by the Y2K Issue.

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

     The Company's primary exposure to market risk is interest rate risk. The
Company had $312,539 and $275,643 outstanding under its credit facilities at
December 31, 1999, and June 30, 2000, respectively. Interest rates on funds
borrowed under the Company's credit facilities vary based on changes to the
prime rate or LIBOR. The Company partially manages its interest rate risk
through four interest rate swap agreements under which the Company pays a fixed
rate and is paid a floating rate based on the three month LIBOR rate. The
notional amounts of the four interest rate swaps totaled $90,000 at both
December 31, 1999, and June 30, 2000. A change in interest rates of 1.0% would
result in an annual change in income before taxes of $1,856 based on the
outstanding balance under the Company's credit facilities and the notional
amounts of the interest rate swap agreements at June 30, 2000.

                                       18
<PAGE>   22

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     (a) Audited financial statements.

                                       19
<PAGE>   23

                          INDEPENDENT AUDITORS' 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,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. 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,
1999 and 1998 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. 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.

     As discussed in Note 4 to the consolidated financial statements, the
Company discontinued the publishing business segment of its operations in June
2000. The results prior to the discontinuation are included in income (loss)
from discontinued operations in the accompanying consolidated financial
statements.

/s/ DELOITTE & TOUCHE LLP
---------------------------------------------------------

New York, New York
September 22, 2000

                                       20
<PAGE>   24

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                          CONSOLIDATED BALANCE SHEETS
              (IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 23,218    $ 17,979
  Marketable securities.....................................     2,127
  Trade accounts receivable (net of allowances of $7,732 in
    1999 and $9,325 in 1998)................................   119,997      76,786
  Due from affiliates.......................................     6,615       6,561
  Inventory.................................................    26,283      23,807
  Income tax receivable.....................................     3,477      14,936
  Prepaid expenses..........................................    12,095       2,947
  Deferred income taxes.....................................    26,985      19,443
  Other current assets......................................    10,367       9,485
  Net current assets of discontinued operations.............    36,233      26,258
                                                              --------    --------
         Total current assets...............................   267,397     198,202
Property, plant, and equipment -- net.......................    95,281      68,155
Goodwill and other intangible assets (net of accumulated
  amortization of $17,991 in 1999 and $7,002 in 1998).......   437,674     309,145
Deferred income taxes.......................................                 1,309
Other assets................................................    18,270      10,350
Net non-current assets of discontinued operations...........   112,388     115,913
                                                              --------    --------
         Total assets.......................................  $931,010    $703,074
                                                              ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $ 92,056    $ 48,891
  Current portion of long-term debt and obligations under
    capital leases..........................................    19,024       2,855
  Due to affiliates.........................................     1,909       1,513
  Other current liabilities.................................    33,477      20,442
                                                              --------    --------
         Total current liabilities..........................   146,466      73,701
Long-term debt..............................................   298,125     203,087
Subordinated notes..........................................    29,867
Obligations under capital leases............................     3,814       3,475
Deferred income taxes.......................................     2,975
Other liabilities...........................................     8,763       5,413
                                                              --------    --------
         Total liabilities..................................   490,010     285,676
                                                              --------    --------
Commitments and contingencies
Minority interest -- Redeemable Preference Shares issued by
  subsidiary................................................    33,050
                                                              --------
Stockholders' Equity:
  Preferred stock (no par value, 10,000,000 shares
    authorized; no shares outstanding)
  Common stock ($0.01 par value, shares authorized:
    150,000,000 in 1999 and 1998; shares issued and
    outstanding: 22,474,772 in 1999 and 22,379,127 in
    1998)...................................................       225         224
  Additional paid-in capital................................   386,548     385,279
  Accumulated other comprehensive income (loss).............     1,264          (4)
  Retained earnings.........................................    19,913      31,899
                                                              --------    --------
      Total stockholders' equity............................   407,950     417,398
                                                              --------    --------
         Total liabilities and stockholders' equity.........  $931,010    $703,074
                                                              ========    ========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       21
<PAGE>   25

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1999        1998        1997
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Revenues...................................................  $532,064    $338,942    $184,993
Cost of revenues...........................................   363,540     225,240     120,992
                                                             --------    --------    --------
Gross profit...............................................   168,524     113,702      64,001
                                                             --------    --------    --------
Selling, general, and administrative expenses..............   134,449      73,594      40,901
Amortization of intangibles................................    11,306       5,724         791
Loss (gain) on disposal of property and equipment..........     2,402        (318)        200
Restructuring charges......................................     3,572       8,550
Impairments and other charges..............................     6,302       5,659
                                                             --------    --------    --------
          Total operating expenses.........................   158,031      93,209      41,892
                                                             --------    --------    --------
Operating income...........................................    10,493      20,493      22,109
Interest expense...........................................   (19,146)     (6,307)     (1,034)
Interest income............................................       475       1,817       1,724
Other income (expense) -- net..............................       908         287         (92)
                                                             --------    --------    --------
Income (loss) from continuing operations before provision
  for income taxes and minority interest...................    (7,270)     16,290      22,707
Provision for income taxes.................................     2,166       9,972       9,140
                                                             --------    --------    --------
Income (loss) from continuing operations before minority
  interest.................................................    (9,436)      6,318      13,567
Minority interest..........................................    (2,098)
                                                             --------    --------    --------
Income (loss) from continuing operations...................   (11,534)      6,318      13,567
Income (loss) from discontinued operations.................      (452)      1,858
                                                             --------    --------    --------
Net income (loss)..........................................   (11,986)      8,176      13,567
Other comprehensive income (loss)..........................     1,268          27         (31)
                                                             --------    --------    --------
Comprehensive income (loss)................................  $(10,718)   $  8,203    $ 13,536
                                                             ========    ========    ========
Basic earnings (loss) per common share:
  Income (loss) from continuing operations.................  $  (0.51)   $   0.31    $   0.88
  Income (loss) from discontinued operations...............     (0.02)       0.09
                                                             --------    --------    --------
          Total............................................  $  (0.53)   $   0.40    $   0.88
                                                             ========    ========    ========
Diluted earnings (loss) per common share:
  Income (loss) from continuing operations.................  $  (0.51)   $   0.30    $   0.83
  Income (loss) from discontinued operations...............     (0.02)       0.09
                                                             --------    --------    --------
  Total....................................................  $  (0.53)   $   0.39    $   0.83
                                                             ========    ========    ========
Weighted average number of common shares:
  Basic....................................................    22,456      20,563      15,475
  Diluted..................................................    22,456      21,225      16,430
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       22
<PAGE>   26

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                          -----------------------------------
                                                            1999         1998         1997
                                                          ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss).......................................  $ (11,534)   $   6,318    $  13,567
Adjustments to reconcile net income (loss) to net cash
  from operating activities:
  Depreciation and amortization.........................     35,352       17,838        6,222
  Deferred taxes........................................     (4,254)      (3,835)      (1,591)
  Noncash restructuring charges.........................                   2,063
  Noncash impairment charges............................      6,302        4,935
  Loss (gain) on disposal of property and equipment.....      2,402         (318)         200
  Provision for bad debts and returns...................      2,732        1,869        3,990
  Other.................................................        699         (156)      (1,059)
Changes in Operating Assets and Liabilities, net of
  effects of acquisitions:
  Trade accounts receivable.............................     (4,817)     (12,788)     (13,779)
  Due from/to affiliates................................        342         (410)      (4,991)
  Inventory.............................................      2,666        1,941       (1,285)
  Income tax receivable.................................     17,584       (1,804)
  Other assets..........................................        833       (4,556)      (1,042)
  Accounts payable and accrued expenses.................    (11,628)      (8,892)       1,139
  Other liabilities.....................................      2,767          505        2,268
  Net cash provided by (used in) operating activities of
     discontinued operations............................     (3,965)       1,382
                                                          ---------    ---------    ---------
Net cash provided by operating activities...............     35,481        4,092        3,639
                                                          ---------    ---------    ---------
Cash flows from investing activities:
  Investment in available-for-sale securities...........       (200)    (178,433)    (320,553)
  Proceeds from sale of available-for-sale securities...                 283,779      231,072
  Proceeds from maturities of held-to-maturity
     securities.........................................                                1,600
  Property, plant, and equipment expenditures...........    (16,833)     (21,449)     (13,029)
  Software expenditures.................................     (9,123)      (7,812)        (968)
  Proceeds from the sale of property and equipment......     13,910          500           12
  Other investing activities............................     (5,921)      (4,721)
  Entities purchased, net of cash acquired..............   (120,929)    (259,770)     (10,533)
  Net cash used in investing activities of discontinued
     operations.........................................     (2,692)      (1,612)
                                                          ---------    ---------    ---------
Net cash used in investing activities...................   (141,788)    (189,518)    (112,399)
                                                          ---------    ---------    ---------
Cash flows from financing activities:
  Proceeds from sale of common stock....................                              121,700
  Proceeds from exercise of stock options...............        960           24        5,641
  Borrowings (repayments) under credit
     facilities -- net..................................    111,189      201,350       (5,628)
  Proceeds from sale/leaseback transactions.............      2,249        6,685        3,469
  Repayment of notes and capital lease obligations......     (2,478)     (16,840)      (4,805)
  Repayment of Applied Printing Note....................                               (1,600)
  Net cash used in financing activities of discontinued
     operations.........................................       (303)        (398)
                                                          ---------    ---------    ---------
Net cash provided by financing activities...............    111,617      190,821      118,777
                                                          ---------    ---------    ---------
Net increase in cash and cash equivalents...............      5,310        5,395       10,017
Effect of exchange rate changes on cash and cash
  equivalents...........................................        (71)
Cash and cash equivalents at beginning of year..........     17,979       12,584        2,567
                                                          ---------    ---------    ---------
Cash and cash equivalents at end of year................  $  23,218    $  17,979    $  12,584
                                                          =========    =========    =========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       23
<PAGE>   27

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              (IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                         ACCUMULATED
                                                          ADDITIONAL        OTHER
                                                COMMON     PAID-IN-     COMPREHENSIVE    RETAINED
                                                STOCK      CAPITAL      INCOME (LOSS)    EARNINGS
                                                ------    ----------    -------------    --------
<S>                                             <C>       <C>           <C>              <C>
Balance at January 1, 1997....................   $143      $ 25,584                      $ 10,156
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 holding loss on available-for-sale
  securities..................................                             $  (31)
Net income....................................                                             13,567
                                                 ----      --------        ------        --------
Balance at December 31, 1997..................    178       159,627           (31)         23,723
                                                 ----      --------        ------        --------
Issuance of 68,103 common shares in Flying
  Color Graphics, Inc., acquisition at $48.46
  per share...................................      1         3,299
Issuance of 4,427,290 common shares in Devon
  merger at $50 per share.....................     44       221,321
Issuance of 45,351 common shares in Agile
  Enterprise, Inc., merger at $22.05 per
  share.......................................      1           999
Issuance of 2,000 common shares upon exercise
  of stock options............................                   24
Income tax benefit associated with exercise of
  stock options...............................                    9
Unrealized holding gain on available-for-sale
  securities..................................                                 31
Unrealized loss from foreign currency
  translation adjustments.....................                                 (4)
Net income....................................                                              8,176
                                                 ----      --------        ------        --------
Balance at December 31, 1998..................    224       385,279            (4)         31,899
                                                 ----      --------        ------        --------
Issuance of 15,645 common shares as additional
  consideration in connection with a 1997
  acquisition.................................                  240
Issuance of 80,000 common shares upon exercise
  of stock options............................      1           959
Income tax benefit associated with exercise of
  stock options...............................                   15
Fair value of stock options issued to
  non-employee................................                   55
Unrealized holding gain on available-for-sale
  securities..................................                              1,117
Unrealized gain from foreign currency
  translation adjustments.....................                                151
Net loss......................................                                            (11,986)
                                                 ----      --------        ------        --------
Balance at December 31, 1999..................   $225      $386,548        $1,264        $ 19,913
                                                 ====      ========        ======        ========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       24
<PAGE>   28

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)

1. ORGANIZATION AND BASIS OF PRESENTATION

     Applied Graphics Technologies, Inc., and its subsidiaries (the "Company")
primarily provide digital media asset management services, offering content
management services, broadcast media distribution services, and an array of
digital services. The Company provides its digital media asset management
services to retailers, magazine publishers, advertising agencies, entertainment
companies, and automobile and other consumer product manufacturers.

     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 of the
Board") and the Chairman of the Company (the "Chairman"), was issued 100 shares
of common stock and became the Company's sole stockholder. Applied Printing
subsequently received 9,309,000 shares of the Company's common stock upon
completion of an initial public offering. At December 31, 1999, Applied Printing
owned approximately 22.2% of the Company's outstanding common stock.

     On September 3, 1997, the Company completed an offering of 6,900,000 shares
of its common stock (the "Offering"), 3,000,000 of which were sold by the
Company. The Offering generated proceeds to the Company, net of underwriters'
discount and transaction expenses, of $121,700. As part of the Offering,
3,900,000 shares were sold by certain stockholders of the Company, of which
3,650,000 shares were sold by Applied Printing.

     Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform to the 1999 presentation.

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:  Marketable Securities at December 31, 1999, were
classified as "available for sale" and were recorded at fair market value. The
Company held no marketable securities at December 31, 1998.

     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 the lower of cost or 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 certain machinery and equipment. Leasehold
improvements and amounts recorded under capital leases are amortized on the
straight-line method over the shorter of the terms of the leases or their
estimated useful lives.

     REVENUE RECOGNITION:  Revenues from content management services and
broadcast media distribution services are recognized at the time projects are
shipped or transmitted to the customer. Revenues for digital archiving services
are 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.

                                       25
<PAGE>   29
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     GOODWILL AND OTHER INTANGIBLES:  Goodwill and other intangibles are being
amortized on the straight-line method over periods ranging from 5 to 40 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." Foreign subsidiaries are taxed according to regulations existing
in the countries in which they do business. Provision has not been made for
United States income taxes on distributions that may be received from foreign
subsidiaries, which are considered to be permanently invested overseas.

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

     FOREIGN CURRENCY TRANSLATION:  Assets and liabilities of foreign operations
are translated from the functional currency into United States dollars using the
exchange rate at the balance sheet date. Revenues and expenses of foreign
operations are translated from the functional currency into United States
dollars using the average exchange rate for the period. Adjustments resulting
from the translation into United States dollars are included in other
comprehensive income.

     COMPREHENSIVE INCOME:  Other comprehensive income and accumulated other
comprehensive income as of and for the years ended December 31, 1999, 1998, and
1997, are comprised of unrealized gains and losses from foreign currency
translation adjustments and unrealized holding gains and losses on
available-for-sale securities.

     DERIVATIVE FINANCIAL INSTRUMENTS:  The Company has entered into four
interest rate swap agreements to reduce the Company's exposure to interest rate
risk on its variable rate borrowings under its credit facilities. Accordingly,
the interest rate swaps are treated as hedges and amounts receivable or payable
under the swaps are recorded as current assets or liabilities, respectively,
with realized gains and losses recognized as adjustments to interest expense.

     ESTIMATES:  The preparation of these financials 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.

     RECENTLY ISSUED ACCOUNTING STANDARDS:  Statement of Financial Accounting
Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities (an amendment of FASB Statement No. 133)," was issued
in June 2000. SFAS No. 138 amended certain definitions and clarified certain
requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities and requires that entities
recognize derivative instruments as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for the change in fair value of a derivative instrument will depend
on the intended use of the instrument. The adoption of SFAS No. 133 will require
the Company to reflect the fair value of its interest rate swap agreements on
its Consolidated Balance Sheet. The offsetting gain or loss at the time of
adoption of SFAS No. 133 will be accounted for as a cumulative effect of a
change in accounting principle in accordance with Accounting Principles Board
Opinion No. 20, "Accounting Changes." The cumulative gain or loss at the time of
adoption of SFAS No. 133 and future gains and losses resulting from the change
in fair value of the swap agreements will be reflected in cumulative
comprehensive income as a separate component of stockholders' equity to the
extent the swaps qualify as cash flow hedges. To the extent the swaps do not
qualify as cash flow hedges, such gains and losses

                                       26
<PAGE>   30
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

will be reflected in net income. The Company intends to determine the potential
impact of the adoption of SFAS No. 133 on its financial position and results of
operations by the end of 2000.

3. ACQUISITIONS

     In May 1999, the Company, through a wholly-owned subsidiary, acquired Wace
Group Limited (formerly Wace Group Plc) ("Wace"), an international operator of
digital imaging businesses and a provider of digital services in the areas of
prepress, color management, and interactive multimedia. The total cash
consideration paid by the Company was $125,141 including transaction costs. The
Company entered into an amended and restated credit agreement with its lending
institutions to finance the acquisition (see Note 11 to the Consolidated
Financial Statements). The Company also offered to acquire Wace's preferred
securities through an exchange for subordinated notes issued by the Company (see
Note 12 to the Consolidated Financial Statements).

     In January 1999, the Company acquired the outstanding stock of a publishing
company located in Australia for $1,300 in cash. In September 1999, the Company
acquired the operations of a broadcast media distribution company located in
California for $269 in cash.

     In May 1998, the Company, through a wholly-owned subsidiary, merged with
Devon Group, Inc. ("Devon"), a digital prepress and publishing company. The
Company paid $30 per share in cash and distributed 0.6 shares of the Company's
common stock in exchange for each outstanding share of Devon common stock. The
total consideration paid was $442,730 including transaction costs. To fund the
cash portion of the merger consideration, the Company used approximately $86,365
in cash from working capital, including cash acquired from Devon, and borrowed
$135,000 under its then existing credit facilities.

     In January 1998, the Company acquired the operations of Flying Color
Graphics, Inc. ("Flying Color"), a prepress company with five facilities
throughout the midwest. In June 1998, the Company acquired the stock of Color
Control, Inc. ("Color Control"), a prepress company with operations in Redmond,
WA. In May 1998, the Company acquired the operation of Tint Masters, Inc., a
prepress company with a facility in New Jersey. In September 1998, the Company,
through a wholly-owned subsidiary, merged with Agile Enterprise, Inc. ("Agile"),
a software development company located in Nashua, NH. In November 1998, the
Company acquired the operations of Electronic Color Imaging, LLC ("ECI"), a
prepress company located in Edgewater, NJ. For these five acquisitions, the
Company paid $51,482 in cash, issued 113,454 shares of the Company's common
stock valued at $4,300, and assumed certain liabilities.

     During 1999, the Company made contingent payments in the form of cash or
shares of common stock in the aggregate amount of $5,087 as additional
consideration for certain of the acquisitions based on 1998 performance of the
acquired businesses. In addition, the Company will make contingent payments in
2000 in the form of cash or shares of common stock in the amount of
approximately $7,784 related to certain acquisitions based on 1999 performance
of the acquired businesses. Such amounts are included in "Other current
liabilities" in the Consolidated Balance Sheets. Any additional consideration
will be determined based upon the future financial performance of the acquired
operations. Such contingent payments have been 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 or shares of common
stock.

     The acquisitions discussed above 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 the respective acquisitions, with
the amounts related to acquisitions consummated in 1999 subject to adjustment
based on the completion of appraisals and other analyses. The Company does not
expect such adjustments to be material. The excess of the purchase price over
the fair value of assets acquired recorded in 1999 and 1998, exclusive of the
publishing business (see Note 4 to the Consolidated Financial Statements), was
approximately $142,679 and $291,208, respectively, which is being amortized over
periods ranging from 20 to

                                       27
<PAGE>   31
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

40 years. The results of operations of these acquisitions have been included in
the Consolidated Statements of Operations subsequent to the respective dates of
acquisition.

     The following unaudited pro forma information combines the results of
operations of the Company, Wace, and the other acquisitions for the years ended
December 31, 1999 and 1998, exclusive of the publishing business (see Note 4 to
the Consolidated Financial Statements), calculated as if the acquisitions had
occurred on January 1, 1998. 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 1998 or of results that may occur in the future.

<TABLE>
<CAPTION>
                                                                   UNAUDITED
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Total revenues..............................................  $601,174    $593,658
Loss before provision for income taxes and minority
  interest..................................................  $(17,733)   $ (7,935)
Net loss....................................................  $(18,582)   $(11,402)
Loss per common share:
  Basic.....................................................  $  (0.83)   $  (0.51)
  Diluted...................................................  $  (0.83)   $  (0.51)
</TABLE>

4. DISCONTINUED OPERATIONS

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon. The
Company expects to consummate the sale of the publishing business by June 2001,
although there can be no assurance that the sale will be consummated within that
timeframe.

     The accompanying financial statements have been restated to reflect the
operations of the publishing business as a discontinued operation. The results
of operations of the discontinued business, presented as Discontinued Operations
in the accompanying Consolidated Statements of Operations, for the years ended
December 31, 1999 and 1998, were as follows:

<TABLE>
<CAPTION>
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Revenues....................................................  $90,168    $55,183
                                                              =======    =======
Income from operations before income taxes..................  $   678    $ 4,149
Provision equivalent to income taxes........................    1,130      2,291
                                                              -------    -------
Income (loss) from discontinued operations..................  $  (452)   $ 1,858
                                                              =======    =======
</TABLE>

     The results of operations of the publishing business include an allocation
of interest expense of $4,513 and $1,757 for the years ended December 31, 1999
and 1998, respectively. The allocated interest expense consisted solely of the
interest expense on the Company's borrowings under its primary credit
facilities, which represents the interest expense not directly attributable to
the Company's other operations. Interest expense was allocated based on the
ratio of the net assets of the discontinued operation to the sum of the
consolidated net assets of the Company and the outstanding borrowings under the
Company's primary credit facilities.

                                       28
<PAGE>   32
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The results of operations and cash flows of the discontinued operations for
the years ended December 31, 1999 and 1998, include amounts for selected items
as follows:

<TABLE>
<CAPTION>
                                                               1999      1998
                                                              ------    ------
<S>                                                           <C>       <C>
Interest expense............................................  $4,687    $1,867
Interest income.............................................  $  132    $   75
Depreciation and amortization expense.......................  $4,072    $2,213
Loss on disposal of property and equipment..................  $   17    $    7
Property, plant, and equipment expenditures.................  $2,064    $1,634
Repayments of notes and capital lease obligations...........  $  303    $  398
</TABLE>

     The net assets of discontinued operations include $832 and $1,135 at
December 31, 1999 and 1998, respectively, of long-term debt and obligations
under capital leases, inclusive of the current portion.

5. RESTRUCTURING

     During 1998, the Company commenced two separate plans to restructure
certain of its operations (the "1998 Second Quarter Plan" and the "1998 Fourth
Quarter Plan", respectively). The 1998 Second Quarter Plan was revised in the
fourth quarter of 1998 in response to additional acquisitions and a change in
operation management. As part of the 1998 Second Quarter Plan, the Company
closed a facility in New Jersey and made modifications to its Carlstadt, NJ,
facility to accommodate the transfer of work performed at the closed location to
the Carlstadt facility. In addition, as part of the 1998 Second Quarter Plan,
the Company vacated a portion of one of its Chicago, IL, facilities and
transferred a portion of the work performed at that facility to its other
Chicago metropolitan area facilities. Also as part of the 1998 Second Quarter
Plan, the Company terminated certain employees and consolidated the work
performed in its West Coast facilities, resulting in the closure of one such
facility.

     As part of the 1998 Fourth Quarter Plan, the Company closed several
facilities in Illinois and terminated employees on a Company-wide basis. The
work performed at each of the closed Illinois facilities is being performed at
the Company's other Midwest facilities.

     The Company commenced a plan in the third quarter of 1999 to consolidate
certain of its West Coast operations (the "1999 Third Quarter Plan"). As part of
the 1999 Third Quarter Plan, the Company closed the Los Angeles facility
previously operated by Wace and intends to move Wace's San Francisco operation
to a more suitable facility. A portion of the work previously performed in the
Company's Foster City facility was transferred to Wace's San Francisco facility
and the remaining operation will be moved to a smaller Foster City location.

     The Company commenced action in the fourth quarter to consolidate certain
of its New York and Chicago metropolitan area and United Kingdom operations and
consolidate certain administrative functions (the "1999 Fourth Quarter Plan").
As part of the 1999 Fourth Quarter Plan, the Company transferred all of the work
performed at one of its New York City facilities to Wace's Varick Street
operation. Also as part of the 1999 Fourth Quarter Plan, the Company is further
consolidating its Carlstadt, NJ, operation to occupy only two of the three
buildings that currently comprise that facility. The Company intends to sublet
the vacated building. The Company also redistributed certain work among its
various metropolitan New York area operations. In the midwest, the Company
closed one of its Chicago facilities and transferred the work previously
performed there to one of Wace's Chicago facilities. In the United Kingdom, the
Company streamlined certain operations and workflows and initiated a plan to
shut down a portion of its digital operations. Additionally, as part of the 1999
Fourth Quarter Plan, the Company initiated a plan to transfer certain
centralized administrative functions to the various regional operations, which
will result in the closure of a New York metropolitan area administrative
office.

                                       29
<PAGE>   33
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The results of operations for the years ended December 31, 1999 and 1998,
include charges of $3,572 and $8,550, respectively, and resulted from the
various restructuring plans as follows:

<TABLE>
<CAPTION>
                                                               1999       1998
                                                              -------    ------
<S>                                                           <C>        <C>
1998 Second Quarter Plan....................................  $   228    $5,713
1998 Fourth Quarter Plan....................................   (1,447)    2,837
1999 Third Quarter Plan.....................................      636
1999 Fourth Quarter Plan....................................    4,155
                                                              -------    ------
Total.......................................................  $ 3,572    $8,550
                                                              =======    ======
</TABLE>

     The components of the restructuring charges incurred in 1998 were as
follows:

<TABLE>
<CAPTION>
                                                              1998 SECOND     1998 FOURTH
                                                              QUARTER PLAN    QUARTER PLAN
                                                              ------------    ------------
<S>                                                           <C>             <C>
Facility closure costs......................................     $1,182          $  994
Employee termination costs..................................      1,108           1,067
Abandoned assets............................................      3,423             776
                                                                 ------          ------
Total.......................................................     $5,713          $2,837
                                                                 ======          ======
</TABLE>

     The charge for employee termination costs related to approximately 100
employees for the 1998 Second Quarter Plan and approximately 350 employees for
the 1998 Fourth Quarter Plan.

     The components of the restructuring charges incurred in 1999 were as
follows:

<TABLE>
<CAPTION>
                                    1998 SECOND     1998 FOURTH      1999 THIRD     1999 FOURTH
                                    QUARTER PLAN    QUARTER PLAN    QUARTER PLAN    QUARTER PLAN
                                    ------------    ------------    ------------    ------------
<S>                                 <C>             <C>             <C>             <C>
Facility closure costs............      $(93)         $  (514)          $468           $1,516
Employee termination costs........        (3)            (639)           152            2,081
Abandoned assets..................       324             (294)            16              558
                                        ----          -------           ----           ------
Total.............................      $228          $(1,447)          $636           $4,155
                                        ====          =======           ====           ======
</TABLE>

     The charge for employee termination costs related to approximately 34
employees for the 1999 Third Quarter Plan and approximately 137 employees for
the 1999 Fourth Quarter Plan.

                                       30
<PAGE>   34
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The amount included in "Other current liabilities" in the accompanying
Consolidated Balance Sheets as of December 31, 1999 and 1998, for the future
costs of the various restructuring plans and the amounts charged against the
respective restructuring liabilities in 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                    1998 SECOND     1998 FOURTH      1999 THIRD     1999 FOURTH
                                    QUARTER PLAN    QUARTER PLAN    QUARTER PLAN    QUARTER PLAN
                                    ------------    ------------    ------------    ------------
<S>                                 <C>             <C>             <C>             <C>
Restructuring charge..............    $ 5,713         $ 2,837
Facility closure costs............       (510)
Employee termination costs........       (818)
Abandoned assets..................     (2,880)
                                      -------         -------
Balance at December 31, 1998......      1,505           2,837
Restructuring charge..............                                     $ 636          $ 4,155
Facility closure costs............       (579)           (140)          (242)            (191)
Employee termination costs........       (288)           (385)           (64)          (1,685)
Abandoned assets..................       (572)           (363)
Adjustment to liability...........        228          (1,447)
                                      -------         -------          -----          -------
Balance at December 31, 1999......    $   294         $   502          $ 330          $ 2,279
                                      =======         =======          =====          =======
</TABLE>

     The number of employees comprising the charge against the various
restructuring plans' liabilities in 1999 and 1998 for employee termination costs
was as follows:

<TABLE>
<CAPTION>
                                                              1999    1998
                                                              ----    ----
<S>                                                           <C>     <C>
1998 Second Quarter Plan....................................   25      44
1998 Fourth Quarter Plan....................................  108
1999 Third Quarter Plan.....................................   24
1999 Fourth Quarter Plan....................................  102
</TABLE>

     In 1999, the Company adjusted the liability associated with both the 1998
Second Quarter Plan and the 1998 Fourth Quarter Plan to reflect changes to
estimates made when the plans were originally initiated. The adjustment to the
liability for the 1998 Second Quarter Plan primarily resulted from the Company
not being released as early as originally estimated from certain rental
obligations on abandoned equipment. The adjustment to the 1998 Fourth Quarter
Plan resulted from the Company not terminating as many employees as originally
anticipated and negotiating favorable settlements on certain building lease
obligations. Fewer employees were terminated under the 1998 Fourth Quarter Plan
than was originally anticipated due to the Company's re-evaluation of its plans
in light of the acquisition of Wace and the voluntary termination of certain
employees.

     The Company does not anticipate any material adverse effect on its future
results of operations from the facility closings since all work performed at
such locations has been and will be transferred to its other facilities. The
employees terminated and to be terminated under the restructuring plans are
principally production workers, sales people, and administrative support staff.
The Company completed both the 1998 Second Quarter Plan and the 1998 Fourth
Quarter Plan during 1999. The remaining liabilities for these plans primarily
represent future rental obligations for abandoned property and equipment. The
Company expects to complete the 1999 Third Quarter Plan and the 1999 Fourth
Quarter Plan by September 2000 and December 2000, respectively.

     The Company is continuing to pursue operating efficiencies and synergies
and, as a result, may incur additional restructuring charges. The Company
anticipates terminating employees on a Company-wide basis and potentially
integrating certain operations during 2000.

                                       31
<PAGE>   35
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. IMPAIRMENTS AND OTHER CHARGES

     Impairments and other charges for the years ended December 31, 1999 and
1998, consisted of the following:

<TABLE>
<CAPTION>
                                                               1999      1998
                                                              ------    ------
<S>                                                           <C>       <C>
Impairment of a business....................................  $  744    $2,509
Impairment of property and equipment........................   5,558
Abandonment of a business...................................             3,150
                                                              ------    ------
Total.......................................................  $6,302    $5,659
                                                              ======    ======
</TABLE>

     In December 1999, the Company incurred a charge of $744 for the write down
of long-lived assets related to its events-based digital photography operation.
The Company reviewed the assets of this operation for impairment due to having
incurred a similar charge in the prior year. The Company incurred a charge of
$2,509 in 1998 for the write down of long-lived assets related to this
operation. The revised carrying value of the assets of this operation as of
December 31, 1999 and 1998, was calculated based on discounted estimated future
cash flows.

     In 1999, the Company integrated certain operations, discontinued certain
services, and abandoned certain projects. Due to a change in the use of certain
assets resulting from such actions, the Company reviewed those assets of the
affected operations for impairment, resulting in a charge of $5,558 for the year
ended December 31, 1999. Of this charge, $2,429 related to a write down to net
realizable value of equipment to be disposed of that is no longer in service.
The charge also included $3,129 related to certain software development projects
that were replaced by systems already in service at the various Wace locations
or abandoned due to the project no longer being viable for the combined entity.

     In addition to the charges discussed above, in 1999 the Company incurred a
charge of $2,419 for the loss on disposal of property and equipment. Such
disposals primarily resulted from the reallocation of work among various
facilities, a change in service requirements of certain major customers, and a
general upgrade of equipment at certain of the Company's larger facilities to
achieve anticipated efficiencies from the various integration efforts. Also in
1999, selling, general, and administrative expenses included $418 of additional
amortization resulting from a change in the amortization of capitalized software
costs to better reflect the current trends in desktop software. The Company now
amortizes desktop and other non-production software over a one-year period.
Additionally, other expenses included a charge of $488 in 1999 for the write-off
of acquisition costs related to transactions no longer being pursued.

     In December 1998, the Company adopted a plan to cease certain of its
events-based digital photography operations, primarily the remaining operations
obtained in 1997 as part of the acquisition of Digital Imagination, Inc. ("DI").
As of December 31, 1998, the Company closed down all locations associated with
these operations. The charge of $3,150 related to the abandonment of this
operation is comprised primarily of the unamortized goodwill related to the DI
acquisition, the write-off of certain equipment no longer being utilized as a
result of the abandonment, and facility closure costs. At December 31, 1999 and
1998, a liability of approximately $382 and $713, respectively, related to this
abandonment is included in "Other current liabilities" in the accompanying
Consolidated Balance Sheets.

7. MARKETABLE SECURITIES

     The Company classified its investments in marketable securities at December
31, 1999, as "available for sale" and recorded them at fair market value. The
Company held no marketable securities at December 31, 1998. Marketable
securities at December 31, 1999, consisted of equity securities with a fair
market value of $2,127 and a cost of $200.

                                       32
<PAGE>   36
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 1999, all marketable securities held by the Company were
available for current operations and were therefore classified in the
Consolidated Balance Sheet as current assets. Unrealized holding gains and
losses on available-for-sale securities are reflected in "Other comprehensive
income (loss)." Proceeds from sales of available-for-sale securities during the
years ended December 31, 1998 and 1997, totaled $283,779 and $231,072,
respectively, and resulted in no realized gain or loss. There were no sales of
marketable securities for the year ended December 31, 1999. Realized gains and
losses are determined based on a specific identification basis.

8. INVENTORY

     The components of inventory at December 31 were as follows:

<TABLE>
<CAPTION>
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Work-in-process.............................................  $21,718    $19,227
Raw materials...............................................    4,565      4,580
                                                              -------    -------
Total.......................................................  $26,283    $23,807
                                                              =======    =======
</TABLE>

9. PROPERTY, PLANT, AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------    -------
<S>                                                           <C>         <C>
Land........................................................  $  7,293    $ 3,596
Machinery and equipment.....................................    62,124     37,791
Buildings and improvements..................................    51,663     48,011
Furniture and fixtures......................................     7,211      2,745
Construction in progress....................................     3,778      4,962
                                                              --------    -------
Total.......................................................   132,069     97,105
Less accumulated depreciation and amortization..............    36,788     28,950
                                                              --------    -------
Net.........................................................  $ 95,281    $68,155
                                                              ========    =======
</TABLE>

     Interest capitalized on construction of buildings and improvements and
other qualifying assets during the year ended December 31, 1998, was $227. No
interest was capitalized during the years ended December 31, 1999 and 1997.

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

<TABLE>
<CAPTION>
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Accounts payable............................................  $24,756    $21,024
Salaries and benefits.......................................   17,915      9,110
Accrued commissions.........................................    4,643      2,868
Accrued customer rebates....................................    3,900      2,393
Accrued interest............................................    2,660      2,465
Other operating accruals....................................   38,182     11,031
                                                              -------    -------
Total.......................................................  $92,056    $48,891
                                                              =======    =======
</TABLE>

                                       33
<PAGE>   37
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Variable rate lines of credit...............................  $ 62,537    $201,350
Variable rate term loans....................................   234,688
6% - 10% notes payable due 2001 through 2019................                   837
6.5% IDA bond due 2004......................................       900         900
                                                              --------    --------
Total.......................................................  $298,125    $203,087
                                                              ========    ========
</TABLE>

     In March 1999, the Company entered into an amended and restated credit
agreement (the "1999 Credit Agreement") to finance the Wace acquisition. The
1999 Credit Agreement replaced the credit agreement entered into in May 1998
(the "1998 Credit Agreement") and is secured by certain inventory, receivables,
and equipment. On June 4, 1999 (the "Initial Funding Date"), the Company
borrowed $296,000, the proceeds of which were used to pay off existing
borrowings under the 1998 Credit Agreement and to finance the Wace acquisition.
The total borrowing capacity under the 1999 Credit Agreement is a maximum of
$350,000, comprised of a $100,000 revolving line of credit (the "Revolver") and
three term loans totaling $250,000 (the "Term Loans"). The Revolver extends
through June 2005. The Term Loans are comprised of tranches of $125,000,
$75,000, and $50,000 that have terms extending through June 2005, June 2006, and
June 2007, respectively. Interest rates on funds borrowed under the 1999 Credit
Agreement vary from either LIBOR or the prime rate in effect at the time of the
borrowing, plus a factor based on annual pro forma EBITDA (as defined in the
1999 Credit Agreement). At December 31, 1999, $312,539 was outstanding under the
1999 Credit Agreement, of which $62,539 was outstanding under the Revolver and
$250,000 was outstanding under the Term Loans. The average variable rate on
borrowings under both the 1999 Credit Agreement and the 1998 Credit Agreement
for the year ended December 31, 1999, was 8.0%. The average variable rate on
borrowings under both the 1998 Credit Agreement and its predecessor agreement
for the year ended December 31, 1998, was 6.5%.

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

<TABLE>
<S>                                                         <C>
2000......................................................  $ 17,106
2001......................................................    21,562
2002......................................................    23,438
2003......................................................    26,250
2004......................................................    27,150
Thereafter................................................   199,725
                                                            --------
Total.....................................................   315,231
Less current portion......................................    17,106
                                                            --------
Total long-term debt......................................  $298,125
                                                            ========
</TABLE>

     Under the terms of the 1999 Credit Agreement, the Company was obligated to
enter into hedge arrangements for a minimum of two years covering at least 30%
of the amount borrowed on the Initial Funding Date. The Company entered into
four interest rate swap agreements (collectively, the "Swaps") under which the
Company pays a fixed rate per annum on a quarterly basis and is paid a floating
rate based on

                                       34
<PAGE>   38
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the three month LIBOR rate in effect at the beginning of each quarterly payment
period. The inception dates, notional amounts, fixed rates, and maturity dates
of the Swaps are as follows:

<TABLE>
<CAPTION>
  INCEPTION     NOTIONAL   FIXED     MATURITY
    DATE         AMOUNT    RATE        DATE
-------------   --------   -----   -------------
<S>             <C>        <C>     <C>
 August 1998    $35,000    5.798%   August 2003
 August 1998    $15,000    5.798%   August 2003
 August 1998    $25,000     5.69%   August 2001
December 1999   $15,000     6.45%  December 2001
</TABLE>

     The Swaps are being accounted for as hedges against the variable interest
rate component of the 1999 Credit Agreement. All or a portion of the swaps will
no longer be hedges and therefore will expose the Company to market risk to the
extent the borrowings under the 1999 Credit Agreement fall below the combined
notional amounts of the Swaps or the Credit Agreement is not extended beyond its
current term to at least cover the term of the 2003 Swaps. The counterparties to
the Swaps are major financial institutions. The Company believes the credit risk
associated with nonperformance will not be significant.

     Under the terms of the 1999 Credit Agreement, the Company must comply with
certain covenants related to leverage ratios, interest coverage ratios, fixed
charge coverage ratios, minimum net worth, and capital spending. Such covenants
become more restrictive in future periods. At December 31, 1999, the Company was
in compliance with all covenants. The Company is prohibited from paying
dividends on its common stock under the terms of the 1999 Credit Agreement.

     In August 2000, the Company entered into an amendment to the 1999 Credit
Agreement (the "Fourth Amendment") to relax the interest coverage ratio and net
worth covenants as of June 30, 2000, and to modify all of the financial covenant
requirements to be less restrictive than previously required in the 1999 Credit
Agreement for the quarterly fiscal periods through June 30, 2001. In addition to
modifying the various financial covenants, the Fourth Amendment increased the
interest rates on all future borrowings under the 1999 Credit Agreement by 50
basis points and lowered the borrowing capacity of the revolving line of credit
to $85,000.

     In July 2000, the Company entered into an amendment to the 1999 Credit
Agreement (the "Third Amendment") that lowered the net worth covenant threshold
to enable the Company to proceed with its planned disposal of the publishing
business. Also in July 2000, the lending institutions granted a waiver of
covenant defaults to enable the Company to make the July 31, 2000, scheduled
interest payment to the holders of its subordinated notes. In connection with
entering into the Third Amendment and the Fourth Amendment, the Company incurred
fees of $496 and $1,535, respectively. The fee incurred in connection with the
Third Amendment will be included in the loss on disposal of discontinued
operations. The fee incurred in connection with the Fourth Amendment will be
included as a component of interest expense in future periods.

     Based upon the modified financial covenants as contained in the Fourth
Amendment, the Company was able to remain in compliance with all covenants
through June 30, 2000. Had the Company not entered into the aforementioned
amendments to the 1999 Credit Agreement, the Company would not have been in
compliance with the interest coverage ratio and net worth covenants at June 30,
2000. There can be no assurance that the Company will be able to attain
compliance with the amended covenant requirements in future periods. If the
Company does not attain compliance, it intends to engage in additional
discussions with its lending institutions to obtain additional waivers and
amendments, although there can be no assurance that such additional waivers or
amendments will be granted.

                                       35
<PAGE>   39
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SUBORDINATED NOTES

     At May 21, 1999, Wace had L39,164, or approximately $62,733, of 8%
Cumulative Convertible Redeemable Preference Shares (the "Preference Shares")
outstanding. The Preference Shares carry the right to a fixed cumulative
preferential dividend of 8% and are redeemable on July 31, 2005.

     On July 5, 1999, the Company offered each holder of the Preference Shares
the right to exchange such Preference Shares, at an equivalent nominal rate, for
subordinated notes issued by the Company (the "Subordinated Notes"). As of
December 31, 1999, L18,531, or approximately $29,867, of the Preference Shares,
which accrued dividends through July 31, 1999, had been exchanged for
Subordinated Notes. The Subordinated Notes, which bear interest at a fixed rate
of 10% annually commencing on August 1, 1999, and mature on October 31, 2005,
are subject to redemption by the Company at any time after July 31, 2000. The
initial redemption premium is 4% and decreases in 0.5% increments every six
months until July 31, 2005, at which time the Subordinated Notes are redeemable
at par. The Subordinated Notes are listed on the London Stock Exchange.

     The Company recorded dividends of $2,098 on the Preference Shares for the
year ended December 31, 1999, which are reflected as "Minority interest" in the
Consolidated Statement of Operations. The Company incurred interest expense of
$1,257 on the Subordinated Notes for the period ended December 31, 1999.

13. 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:

<TABLE>
<CAPTION>
                                                           CAPITAL    OPERATING
                                                           LEASES      LEASES
                                                           -------    ---------
<S>                                                        <C>        <C>
2000.....................................................  $2,368      $17,233
2001.....................................................   1,951       13,987
2002.....................................................   1,420       11,126
2003.....................................................     587        8,162
2004.....................................................     156        6,343
Later years..............................................               22,196
                                                           ------      -------
Total minimum lease payments.............................   6,482      $79,047
                                                                       =======
Less imputed interest....................................     750
                                                           ------
Present value of minimum lease payments..................   5,732
Less current portion.....................................   1,918
                                                           ------
Long-term obligation under capital leases................  $3,814
                                                           ======
</TABLE>

                                       36
<PAGE>   40
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Buildings...................................................             $ 4,768
Machinery and equipment.....................................  $17,480     16,552
                                                              -------    -------
Total.......................................................   17,480     21,320
Less accumulated depreciation...............................    9,476     11,696
                                                              -------    -------
Net.........................................................  $ 8,004    $ 9,624
                                                              =======    =======
</TABLE>

     Total rental expense under operating leases amounted to $20,723, $13,760,
and $10,002, for the years ended December 31, 1999, 1998, and 1997,
respectively.

     The Company enters into sale and leaseback arrangements that are recorded
as either capital or operating leases. The gain from these sale and leaseback
arrangements is deferred and recognized as credits against either future
amortization of the leased asset or future rental expense over the terms of the
related leases. At December 31, 1999 and 1998, the remaining balance of the
deferred gain totaling $235 and $354, respectively, is included in "Other
liabilities," both current and noncurrent, in the accompanying Consolidated
Balance Sheets.

14. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                         1999       1998       1997
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
CURRENT:
  Federal.............................................  $ 3,861    $ 9,828    $ 3,018
  State...............................................    1,975      2,023      1,187
  Foreign.............................................      903
                                                        -------    -------    -------
Total current.........................................    6,739     11,851      4,205
                                                        -------    -------    -------
DEFERRED:
  Federal.............................................   (3,124)    (2,144)      (430)
  State...............................................     (955)       113     (1,161)
  Foreign.............................................     (652)
                                                        -------    -------    -------
Total deferred........................................   (4,731)    (2,031)    (1,591)
                                                        -------    -------    -------
TAX BENEFITS NOT IMPACTING PROVISION:
  Federal.............................................      128        123      4,650
  State...............................................       30         29      1,876
                                                        -------    -------    -------
Total tax benefits not impacting provision............      158        152      6,526
                                                        -------    -------    -------
Total provision for income taxes......................  $ 2,166    $ 9,972    $ 9,140
                                                        =======    =======    =======
</TABLE>

                                       37
<PAGE>   41
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                          1999       1998      1997
                                                         -------    ------    -------
<S>                                                      <C>        <C>       <C>
Taxes at statutory rate................................  $(2,545)   $5,701    $ 7,720
State income taxes, net of Federal tax benefit.........      682     1,407      1,256
Amortization of nondeductible goodwill.................    3,272     2,489         10
Meals and entertainment expenses.......................      475       302        148
Other -- net...........................................      282        73          6
                                                         -------    ------    -------
Provision for income taxes.............................  $ 2,166    $9,972    $ 9,140
                                                         =======    ======    =======
Federal statutory rate.................................    35.00%    35.00%     34.00%
Effective rate.........................................   (29.79)%   61.22%     40.25%
</TABLE>

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

<TABLE>
<CAPTION>
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Deferred tax assets:
Accounts receivable.........................................  $ 3,172    $   947
Inventory...................................................    1,598      1,095
Property, plant, and equipment..............................    1,299
Accrued expenses............................................               1,583
Obligations under capital leases............................      235        430
Other liabilities...........................................   22,001     17,968
Other assets................................................                 349
                                                              -------    -------
Total deferred tax assets...................................   28,305     22,372
                                                              -------    -------
Deferred tax liabilities:
Prepaid expenses............................................      812        672
Accrued expenses............................................    2,040
Other assets................................................    1,443
Property, plant, and equipment..............................                 948
                                                              -------    -------
Total deferred tax liabilities..............................    4,295      1,620
                                                              -------    -------
Net deferred tax asset......................................  $24,010    $20,752
                                                              =======    =======
</TABLE>

     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, 1999 and 1998.

15. 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") (collectively, the "1996 Plans"). Under the
Employee Plan, options were granted to key employees of the Company and its
affiliates 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 were
granted to members of the Board of Directors who were not eligible for grants
under the Employee Plan. Options granted to new appointees under the Directors'
Plan become exercisable over a two year period and have a term of ten years. The
Directors' Plan also provided for an additional 5,000 options to be granted to
non-employee

                                       38
<PAGE>   42
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

directors on each subsequent anniversary date of having first become a member of
the Board of Directors. Such anniversary option grants had an exercise price
equal to the fair market value of the common stock on the date of grant and were
fully vested at grant. The 1996 Plans provided for a combined maximum of
4,200,000 shares of the Company's common stock to be available for issuance upon
exercise of options.

     In May 1998, the Company's stockholders approved the 1998 Incentive
Compensation Plan, as amended and restated (the "1998 Plan"). As of the adoption
of the 1998 Plan, no further grants will be made under the 1996 Plans. The 1998
Plan allows for the granting of options to employees of the Company and its
affiliates, nonemployee directors, and independent contractors to purchase
common stock of the Company. Options are granted to members of the Board of
Directors who are not employees of the Company or any of its affiliates under
the 1998 Plan in the same manner as under the provisions of the 1996 Directors'
Plan. Options granted under the 1998 Plan have a term of ten years unless a
shorter term is established at date of grant. Options originally granted under
the 1998 Plan vest over a five year period and, unless an alternative vesting
schedule is established in individual award agreements, vest 20% on the first
anniversary of the grant date, 5% on each of the second through fourth
anniversaries of the grant date, and 65% on the fifth anniversary of the grant
date. In May 2000, the 1998 Plan was amended to change the standard vesting
schedule on future grants to be ratable over a five-year period unless an
alternative vesting schedule is established in individual award agreements. A
maximum of 7,000,000 shares of the Company's common stock is available for
issuance upon exercise of options under the 1998 Plan, inclusive of the
remaining shares available for grant under the 1996 Plans. At December 31, 1999,
there were 4,307,500 shares reserved for the issuance of stock options under the
1998 Plan.

     Information relating to activity in the Company's stock option plans is
summarized in the following table. Unless otherwise indicated, options have been
issued with exercise prices equal to market price.

<TABLE>
<CAPTION>
                                                                          WEIGHTED        WEIGHTED
                                                         NUMBER OF        AVERAGE         AVERAGE
                                                           SHARES      EXERCISE PRICE    FAIR VALUE
                                                         ----------    --------------    ----------
<S>                                                      <C>           <C>               <C>
Options outstanding at January 1, 1997.................   2,491,000        $12.07
Options granted........................................     255,500        $45.15          $26.84
Options exercised......................................    (486,700)       $12.03
Options forfeited......................................     (50,600)       $12.79
                                                         ----------
Options outstanding at December 31, 1997...............   2,209,200        $15.89
Options granted........................................     450,000        $47.86          $27.61
Options granted with exercise price greater than
  market...............................................   4,013,000        $30.70          $14.58
Options exercised......................................      (2,000)       $12.00
Options forfeited......................................    (197,500)       $26.64
Options cancelled......................................  (2,250,500)       $43.21
                                                         ----------
Options outstanding at December 31, 1998...............   4,222,200        $18.31
Options granted........................................     160,000        $12.19          $ 9.22
Options granted with exercise price greater than
  market...............................................     340,000        $14.58          $ 7.15
Options exercised......................................     (80,000)       $12.00
Options forfeited......................................    (247,600)       $18.30
                                                         ----------
Options outstanding at December 31, 1999...............   4,394,600        $17.91
                                                         ==========
Options exercisable at December 31, 1997...............      72,500        $18.29
                                                         ==========
Options exercisable at December 31, 1998...............     615,700        $13.55
                                                         ==========
Options exercisable at December 31, 1999...............   1,442,600        $16.60
                                                         ==========
</TABLE>

                                       39
<PAGE>   43
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Information relating to options outstanding at December 31, 1999, is
summarized as follows:

<TABLE>
<CAPTION>
                                 OUTSTANDING                         EXERCISABLE
                 -------------------------------------------   ------------------------
   RANGE OF                  WEIGHTED AVG.    WEIGHTED AVG.              WEIGHTED AVG.
EXERCISE PRICES   OPTIONS    EXERCISE PRICE   REMAINING LIFE   OPTIONS   EXERCISE PRICE
---------------  ---------   --------------   --------------   -------   --------------
<S>              <C>         <C>              <C>              <C>       <C>
$7.06 - $16.63   2,145,100       $12.06            6.82        915,300       $11.96
$22.50           2,162,500       $22.50            8.75        477,500       $22.50
$39.25 - $52.75     87,000       $48.15            6.87         49,800       $45.47
</TABLE>

     The Company accounts for the issuance of stock options to employees and
nonemployee directors in accordance with 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 1999, 1998, and 1997.

     The Company accounts for the issuance of stock options to nonemployees,
other than directors, in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which requires the cost of a transaction to be measured at the
date of grant based on the fair value of the options granted. SFAS No. 123 also
provides for an alternative measurement of compensation cost based on the fair
value of the options granted to employees and directors. 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. During 1999, the Company granted 25,000
options to a former employee in connection with the abandonment of the DI
business. The fair value of this option grant of approximately $55 was charged
against the liability related to the abandonment of the DI business. The
following weighted average assumptions were used in calculating the fair value
of options granted:

<TABLE>
<CAPTION>
                                                       1999         1998         1997
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>
Risk-free interest rate............................    5.27%        5.34%        6.20%
Expected life......................................  7.0 years    6.9 years    6.0 years
Expected volatility................................   0.7912       0.6159       0.5606
Expected dividend yield............................     0%           0%           0%
</TABLE>

     Had the Company elected to account for the issuance of stock options to
employees and directors under SFAS No. 123, the compensation cost would have
been $7,142, $3,515, and $3,957 for the years ended December 31, 1999, 1998, and
1997, respectively. The pro forma net income (loss) and earnings (loss) per
share for the years ended December 31, 1999, 1998 and 1997, calculated as if the
Company had elected to account for the issuance of stock options under SFAS No.
123, were as follows:

<TABLE>
<CAPTION>
                                                          1999       1998      1997
                                                        --------    ------    -------
<S>                                                     <C>         <C>       <C>
Net income (loss).....................................  $(16,128)   $6,137    $11,203
Basic earnings (loss) per share.......................  $  (0.72)   $ 0.30    $  0.72
Diluted earnings (loss) per share.....................  $  (0.72)   $ 0.30    $  0.70
</TABLE>

16. EARNINGS PER SHARE

     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, 1999, 1998, and 1997. The number of common shares used in the
computation of basic and diluted earnings per

                                       40
<PAGE>   44
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share for the years ended December 31, 1999, 1998, and 1997, including pro forma
computations, are summarized as follows:

<TABLE>
<CAPTION>
                                                    1999          1998          1997
                                                 ----------    ----------    ----------
<S>                                              <C>           <C>           <C>
Basic:
  Weighted average issued shares outstanding...  22,434,000    20,554,000    15,475,000
  Contingently issuable common shares not
     issued....................................      22,000         9,000
                                                 ----------    ----------    ----------
Weighted average shares outstanding -- Basic...  22,456,000    20,563,000    15,475,000
Effect of Dilutive Securities:
  Stock options and warrants...................                   658,000       946,000
  Contingently issuable common shares..........                     4,000         9,000
                                                 ----------    ----------    ----------
Weighted average shares
  outstanding -- Diluted.......................  22,456,000    21,225,000    16,430,000
                                                 ==========    ==========    ==========
</TABLE>

17. 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 of the Board and the Chairman, including the Daily News, L.P. (the
"Daily News") and U.S. News & World Report, L.P. ("U.S. News"). The Company also
does business with Snyder Communications, Inc. and its subsidiaries, a provider
of outsourced marketing services, of which both the Chairman of the Board and
the Chairman were members of the Board of Directors and in the aggregate owned
approximately 10.0% of the outstanding common stock at December 31, 1999. Also,
during the year ended December 31, 1998, the Company utilized the services of
Boston Properties, Inc. ("Boston Properties"), a real estate development company
of which the Chairman of the Board is the Chairman of the Board of Directors and
owns approximately 12.3% of the outstanding common stock, primarily for
construction related to office space occupied by the Company in New York City.

     Due to/from affiliates -- Affiliates owed the Company $6,615 and $6,561 at
December 31, 1999 and 1998, respectively, representing trade receivables. The
Company owed affiliates $1,909 and $1,513 at December 31, 1999 and 1998,
respectively.

     Affiliate sales and purchases -- The Company has entered into agreements
with U.S. News, the Daily News, and Applied Printing pursuant to which it
provides content management and digital services. The agreement with U.S. News
expires on December 31, 2000, and is renewable annually thereafter by mutual
agreement of the parties. The agreements with the Daily News are renewable
annually by mutual agreement of the parties. The agreement with Applied Printing
commenced in January 1999 and extends for a period of five years. The Company
paid $500 to secure the Applied Printing agreement, which is being amortized
over the life of the agreement. In addition, the Company occasionally provides
services to and purchases services from related parties. Sales to and purchases
from related parties for the years ended December 31, 1999, 1998, and 1997, were
as follows:

<TABLE>
<CAPTION>
                                                         1999       1998       1997
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Affiliate sales.......................................  $13,008    $23,658    $16,845
Affiliate purchases...................................  $ 2,962    $ 7,921    $ 4,683
</TABLE>

     Sales to affiliates represented 2.4%, 7.0%, and 9.1%, of the Company's
revenues for the years ended December 31, 1999, 1998, and 1997, respectively.

     Shared costs -- The Company receives certain legal and computer services
from the Daily News and U.S. News. For such services, the Company incurred
charges of $1,244, $508, and $308 for the years ended December 31, 1999, 1998,
and 1997, respectively. The Company also received certain merger and acquisition

                                       41
<PAGE>   45
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

services from the Daily News in 1999 and 1998, for which the Company was charged
$280 and $251, respectively.

     In addition, during 1998, the Company jointly implemented new financial and
administrative systems with the Daily News and U.S. News. Certain of the
software vendor costs incurred for this project were divided among the Company
and its affiliates on the basis of either specific identification or an
allocation of common charges based on an estimate of the number of end users.
The Company incurred charges of $3,810 during 1998 related to the software
vendor for this project, which was included as part of property, plant, and
equipment at December 31, 1999 and 1998.

     Leases -- The Company leases office space in Washington, D.C., from U.S.
News. The charges incurred for the lease were $205, $306, and $301, for the
years ended December 31, 1999, 1998, and 1997, respectively. The Company leased
office space in New York City from Applied Printing for a portion of 1998 and
the year ended December 31, 1997, for which it incurred charges of $106 and
$385, respectively. The Company leased a facility in New Jersey from the Daily
News and incurred charges of $72 for the year ended December 31, 1997. The
Company leased a facility in New York City from the Daily News for the year
ended December 31, 1999, and a portion of 1998, for which the Company incurred
charges of $156 and $174, respectively. The Company also incurred charges with
U.S. News of $184 for the year ended December 31, 1999, for leasing additional
space used by the Company at its corporate headquarters in New York City.

18. 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, 1999, 1998, and 1997.

     The Company has various defined contribution plans covering employees at
certain acquired operations who meet eligibility requirements. Amounts
contributed to these defined contribution plans are at the Company's discretion.
Contributions charged to operations for such plans for the years ended December
31, 1999 and 1998, were $1,983 and $806, respectively. The Company also
contributes to various multi-employer benefit plans that cover employees
pursuant to collective bargaining agreements. The total contributions to
multi-employer plans charged to operations for the years ended December 31,
1999, 1998, and 1997, were $558, $461, and $203, respectively.

19. 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.

20. CONCENTRATION OF CREDIT RISK

     Other than interest rate swap agreements (see Note 11 to the Consolidated
Financial Statements), 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.

                                       42
<PAGE>   46
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 retailing businesses. The
Company's five largest nonaffiliated customers, excluding related parties,
comprise 30%, 32%, and 33% of revenues for the years ended December 31, 1999,
1998, and 1997, respectively. In addition, amounts due from these customers
represent 23% and 17% of trade accounts receivable as of December 31, 1999 and
1998, 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.

21. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     Payments of interest and income taxes were as follows:

<TABLE>
<CAPTION>
                                                     1999         1998         1997
                                                   ---------    ---------    --------
<S>                                                <C>          <C>          <C>
Interest paid (net of amounts capitalized).......  $  22,092    $   5,097    $  1,138
Income taxes paid................................  $   2,673    $  15,214    $  4,847
</TABLE>

     Noncash investing and financing activities were as follows:

<TABLE>
<CAPTION>
                                                     1999         1998         1997
                                                   ---------    ---------    --------
<S>                                                <C>          <C>          <C>
Increase in additional paid-in capital from
  income tax benefit associated with exercise of
  stock options..................................  $      15    $       9    $  6,407
Reduction of goodwill from amortization of excess
  tax deductible goodwill........................  $     143    $     143    $    119
Acquisition of property, plant, and equipment in
  exchange for obligations under capital
  leases.........................................               $   3,373    $  1,235
Additions to intangible assets for contingent
  payments.......................................  $   7,784    $   5,001    $  3,174
Non-contingent future payments related to
  acquisitions...................................               $   1,234    $    488
Common stock issued as additional consideration
  for 1997 acquisition...........................  $     240
Fair value of stock options issued to
  non-employee...................................  $      55
Common stock and warrants issued for
  acquisitions...................................               $ 225,665    $    330
Exchange of Preference Shares for Subordinated
  Notes..........................................  $  29,867

Acquisitions:
Fair value of assets acquired....................  $ 254,561    $ 572,986    $ 22,204
Cash paid........................................   (125,419)    (272,752)    (11,024)
Fair value of common stock and warrants issued...                (225,665)       (330)
                                                   ---------    ---------    --------
Liabilities assumed..............................  $ 129,142    $  74,569    $ 10,850
                                                   =========    =========    ========
</TABLE>

22. 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

                                       43
<PAGE>   47
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<TABLE>
<CAPTION>
                                                   1999                      1998
                                          ----------------------    ----------------------
                                          CARRYING    ESTIMATED     CARRYING    ESTIMATED
                                           AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                          --------    ----------    --------    ----------
<S>                                       <C>         <C>           <C>         <C>
ASSETS:
Cash and cash equivalents...............  $ 23,218     $ 23,218     $ 17,979     $ 17,979
Marketable securities...................  $  2,127     $  2,127
Other assets............................  $  5,165     $  5,165     $  7,444     $  7,444
LIABILITIES:
Long-term debt..........................  $315,231     $314,246     $204,394     $204,355
Subordinated notes......................  $ 29,867     $ 31,184
Minority interest.......................  $ 33,050     $ 31,193
Obligations under capital leases........  $  5,732     $  5,449     $  5,023     $  5,007
OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
Unrealized gain (loss) on interest rate
  swap agreements.......................               $  2,058                  $ (1,711)
Unrealized gain on warrants to purchase
  marketable securities.................               $     68
</TABLE>

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

     Cash and cash equivalents -- the carrying amount is a reasonable
approximation of fair value.

     Marketable securities -- the fair value of marketable securities is based
on quoted market prices.

     Other assets -- the carrying amount of non-trade accounts receivable 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 credit
facilities. The carrying amount of the amounts outstanding under the 1999 Credit
Agreement is a reasonable approximation of fair value since it is a
variable-rate obligation.

     Subordinated notes -- the fair value of subordinated notes is estimated by
discounting the future stream of payments using the rate at which the Company
can currently obtain funds under its credit facilities.

     Minority interest -- the fair value of redeemable preference shares is
estimated by discounting the future stream of payments using the rate at which
the Company can currently obtain funds under its credit facilities.

     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 credit facilities.

     Interest rate swap agreements -- the fair value of the interest rate swap
agreements is the estimated amount the Company would receive or have to pay to
terminate the agreements.

     Warrants to purchase marketable securities -- the fair value of warrants to
purchase marketable securities is estimated using the Black-Scholes
option-pricing model.

                                       44
<PAGE>   48
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23. SEGMENT INFORMATION

     The Company has determined that its only reportable segment is content
management services. The content management services segment provides creative
and editorial design services and prepress services, which combine text with
pictures and graphics into page layout format for reproduction. The Company
provides content management services to magazine publishers, advertising
agencies, entertainment companies, automobile and other consumer products
manufacturers, and retailers.

     The Company identifies its reportable segments based on the services
provided by its various operations. The content management services segment is
an aggregation of such services the Company offers at its own facilities and the
similar services provided at customer locations under facilities management
contracts. The Company's other operating segments are broadcast media
distribution services and digital services, neither of which are reportable
segments because they do not meet the quantitative thresholds, and are reported
as "Other operating segments" in the following disclosure.

     The Company previously reported its publishing business as a reportable
segment. This segment, which sells greeting cards, calendars, art prints, and
other wall decor products to mass-market merchants, card shops, bookstores, art
galleries, designers, and framers, is reported as a discontinued operation (see
Note 4 to the Consolidated Financial Statements).

     The Company measures profit or loss of its segments based on operating
income. Operating income for segments includes interest associated with
equipment financing, which is included in interest expense in the Consolidated
Statements of Income, and excludes amortization of intangible assets, loss on
sale of fixed assets, restructuring charges, and impairments and other charges.
The accounting policies used to measure operating income of the segments are the
same as those outlined in Note 2 to the Consolidated Financial Statements.

     Segment information relating to results of continuing operations was as
follows:

<TABLE>
<CAPTION>
                                                       1999        1998        1997
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Revenue:
Content Management Services........................  $489,462    $303,243    $158,694
Other operating segments...........................    42,602      35,699      26,299
                                                     --------    --------    --------
Total..............................................  $532,064    $338,942    $184,993
                                                     ========    ========    ========
Operating Income:
Content Management Services........................  $ 53,968    $ 51,475    $ 22,348
Other operating segments...........................     3,655       2,147       6,132
                                                     --------    --------    --------
Total..............................................    57,623      53,622      28,480
Other business activities..........................   (24,055)    (13,971)     (5,950)
Amortization of intangibles........................   (11,306)     (5,724)       (791)
Gain (loss) on disposal of fixed assets............    (2,402)        318        (200)
Interest expense...................................   (18,639)     (5,850)       (464)
Interest income....................................       475       1,817       1,724
Other income (expense).............................       908         287         (92)
Restructuring charges..............................    (3,572)     (8,550)
Impairments and other charges......................    (6,302)     (5,659)
                                                     --------    --------    --------
Consolidated income (loss) from continuing
  operations before provision for income taxes and
  minority interest................................  $ (7,270)   $ 16,290    $ 22,707
                                                     ========    ========    ========
</TABLE>

                                       45
<PAGE>   49
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                       1999        1998        1997
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Interest expense on equipment financing:
Content Management Services........................  $    486    $    378    $    488
Other operating segments...........................        17          21           7
Other business activities..........................         3          58          75
                                                     --------    --------    --------
Total..............................................  $    506    $    457    $    570
                                                     ========    ========    ========
Depreciation expense:
Content Management Services........................  $ 20,782    $ 10,735    $  4,481
Other operating segments...........................     1,977       1,013         546
Other business activities..........................     1,287       1,523       1,028
                                                     --------    --------    --------
Total..............................................  $ 24,046    $ 13,271    $  6,055
                                                     ========    ========    ========
</TABLE>

     Segment information related to the Company's assets was as follows:

<TABLE>
<CAPTION>
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Total Assets:
Content Management Services.................................  $711,830    $470,484
Other operating segments....................................    35,423      33,601
Other business activities...................................    35,136      56,818
Discontinued operations.....................................   148,621     142,171
                                                              --------    --------
Total.......................................................  $931,010    $703,074
                                                              ========    ========
Expenditures on long-lived assets:
Content Management Services.................................  $ 15,414    $ 17,718
Other operating segments....................................     1,622       2,477
Other business activities...................................     8,920       9,066
                                                              --------    --------
Total.......................................................  $ 25,956    $ 29,261
                                                              ========    ========
</TABLE>

     Prior to 1999, all of the Company's revenues from continuing operations
were generated, and all of its property, plant, and equipment for continuing
operations was located, in the United States. The Company's publishing business
generated revenues in foreign countries of $17,088 and $6,475, and had
long-lived assets of $675 and $456, as of and for the years ended December 31,
1999 and 1998, respectively. Segment information for continuing operations
relating to geographic regions for 1999 was as follows:

<TABLE>
<CAPTION>
                                                                1999
                                                              --------
<S>                                                           <C>
Revenues:
United States...............................................  $495,793
United Kingdom..............................................    32,746
Other foreign countries.....................................     3,525
                                                              --------
Total.......................................................  $532,064
                                                              ========
</TABLE>

                                       46
<PAGE>   50
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                1999
                                                              --------
<S>                                                           <C>
Long-lived assets:
United States...............................................  $ 88,033
United Kingdom..............................................    19,182
Other foreign countries.....................................       967
                                                              --------
Total.......................................................  $108,182
                                                              ========
</TABLE>

24. COMPREHENSIVE INCOME

     Comprehensive income includes all changes to equity that are not the result
of transactions with shareholders and is comprised of net income and other
comprehensive income. Other comprehensive income and accumulated other
comprehensive income as of and for the years ended December 31, 1999, 1998, and
1997, are comprised of unrealized holding gains and losses on available-for-sale
securities and gains and losses from foreign currency translation adjustments.
No income tax effect is reported for unrealized gains and losses from foreign
currency translation adjustments since they relate to indefinite investments in
foreign subsidiaries. Comprehensive income and accumulated comprehensive income,
including related tax effects, were as follows:

<TABLE>
<CAPTION>
                                                                            FOREIGN       ACCUMULATED
                                                                           CURRENCY          OTHER
                                           HOLDING GAINS (LOSSES) ON      TRANSLATION    COMPREHENSIVE
                                         AVAILABLE-FOR-SALE SECURITIES    ADJUSTMENTS       INCOME
                                         -----------------------------    -----------    -------------
                                         PRETAX     TAX      AFTER TAX     AFTER TAX       AFTER TAX
                                         AMOUNT    EFFECT     AMOUNT        AMOUNT          AMOUNT
                                         ------    ------    ---------    -----------    -------------
<S>                                      <C>       <C>       <C>          <C>            <C>
Balance at January 1, 1997.............  $   --    $  --      $   --         $ --           $   --
Unrealized gain........................      53      (22)         31                            31
                                         ------    -----      ------         ----           ------
Balance at December 31, 1997...........      53      (22)         31           --               31
Unrealized loss........................                                        (4)              (4)
Reclassification adjustment for gains
  realized in net income...............     (53)      22         (31)                          (31)
                                         ------    -----      ------         ----           ------
Balance at December 31, 1998...........      --       --          --           (4)              (4)
Unrealized gain........................   1,926     (809)      1,117          151            1,268
                                         ------    -----      ------         ----           ------
Balance at December 31, 1999...........  $1,926    $(809)     $1,117         $147           $1,264
                                         ======    =====      ======         ====           ======
</TABLE>

25. SUBSEQUENT EVENTS

     In March 2000, the Company announced that it had retained an investment
banking firm to explore strategic alternatives, including a possible sale of the
Company. In August 2000, the Board of Directors of the Company decided that it
would no longer actively pursue a sale of the Company, but would continue to
pursue other strategic alternatives. There can be no assurance that any
transaction will occur as a result of this effort.

     In April 2000, the Company sold the photographic laboratory business that
was acquired as part of Wace for a sales price of approximately $11,500. The
Company did not realize a gain or loss on the sale of this business.

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon (see Note
4 to the Consolidated Financial Statements). The Company expects to consummate
the sale of the publishing business by June 2001, although there can be no
assurance that the sale will be consummated within that timeframe.

                                       47
<PAGE>   51
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

26. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                              1999 QUARTER ENDED,
                                          -----------------------------------------------------------
                                          MARCH 31     JUNE 30      SEPTEMBER 30(1)    DECEMBER 31(2)
                                          --------     -------      ---------------    --------------
                                              (IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<S>                                       <C>         <C>           <C>                <C>
Revenues................................  $93,945      $130,710        $151,144           $156,265
Gross profit............................  $29,094      $ 41,172        $ 51,548           $ 46,710
Income (loss) from continuing operations
  before provision for income taxes and
  minority interest.....................  $ 2,160      $  4,826        $  1,533           $(15,789)

Income (loss) from continuing
  operations............................  $  (565)     $  2,058        $    819           $(13,846)
Income (loss) from discontinued
  operations............................      940          (121)         (1,640)               369
                                          -------      --------        --------           --------
Net income (loss).......................  $   375      $  1,937        $   (821)          $(13,477)
                                          =======      ========        ========           ========
Earnings (loss) per common share from
  continuing operations:
  Basic.................................  $ (0.02)     $   0.09        $   0.03           $  (0.61)
  Diluted...............................  $ (0.02)     $   0.09        $   0.03           $  (0.61)
<CAPTION>
                                                              1998 QUARTER ENDED,
                                          -----------------------------------------------------------
                                          MARCH 31    JUNE 30(3)     SEPTEMBER 30      DECEMBER 31(4)
                                          --------    ----------     ------------      --------------
                                              (IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<S>                                       <C>         <C>           <C>                <C>
Revenues................................  $59,655      $ 71,795        $ 96,925           $110,567
Gross profit............................  $20,615      $ 25,268        $ 30,290           $ 37,529
Income (loss) from continuing operations
  before provision for income taxes.....  $ 9,446      $  4,364        $  4,045           $ (1,565)

Income (loss) from continuing
  operations............................  $ 5,573      $  2,581        $  2,100           $ (3,936)
Income (loss) from discontinued
  operations............................                    618           1,531               (291)
                                          -------      --------        --------           --------
Net income (loss).......................  $ 5,573      $  3,199        $  3,631           $ (4,227)
                                          =======      ========        ========           ========
Earnings (loss) per common share from
  continuing operations:
  Basic.................................  $  0.31      $   0.13        $   0.09           $  (0.18)
  Diluted...............................  $  0.30      $   0.13        $   0.09           $  (0.18)
</TABLE>

---------------
(1) Includes a $827 restructuring charge and a $1,038 impairment charge related
    to property and equipment in connection with the Company's plan to
    restructure its operations to achieve operating efficiencies associated with
    the growth of its content management operations, primarily resulting from
    the acquisition of Wace.

(2) Includes a $2,745 restructuring charge for continued integration efforts
    related to the acquisition of Wace, a $4,520 impairment charge related to
    property and equipment, a $744 charge for impairment of certain digital
    events photography operations, a loss of $2,368 on disposal of equipment,
    and a charge of $418 relating to a change in accounting estimate.

(3) Includes a $5,300 restructuring charge in connection with the Company's plan
    to restructure its operations to achieve operating efficiencies associated
    with the growth of its content management operations, primarily resulting
    from the merger with Devon and the acquisition of Color Control.

(4) Includes a $3,250 restructuring charge, a $3,150 charge related to the
    abandonment of certain of the Company's digital events photography
    operations obtained as part of the acquisition of DI, and a $2,509 charge
    for the impairment of intangibles related to the digital events photography
    operations obtained in the acquisition of Amusematte Corp. in 1997.

                                       48
<PAGE>   52

     (b) Unaudited financial statements.

                                       49
<PAGE>   53

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
              (IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                              JUNE 30,    DECEMBER 31,
                                                                2000          1999
                                                              --------    ------------
<S>                                                           <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  8,611      $ 23,218
  Marketable securities.....................................       289         2,127
  Trade accounts receivable (net of allowances of $7,879 in
    2000 and $7,732 in 1999)................................   107,551       119,997
  Due from affiliates.......................................     6,654         6,615
  Inventory.................................................    28,244        26,283
  Prepaid expenses..........................................     8,882        12,095
  Deferred income taxes.....................................    27,757        26,985
  Other current assets......................................    10,277        13,844
  Net current assets of discontinued operations.............    44,673        36,233
                                                              --------      --------
    Total current assets....................................   242,938       267,397
Property, plant, and equipment -- net.......................    71,252        95,281
Goodwill and other intangible assets (net of accumulated
  amortization of $21,861 in 2000 and $15,145 in 1999)......   427,058       437,674
Other assets................................................    23,110        18,270
Net non-current assets of discontinued operations...........                 112,388
                                                              --------      --------
         Total assets.......................................  $764,358      $931,010
                                                              ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $ 79,929      $ 92,056
  Current portion of long-term debt and obligations under
    capital leases..........................................    17,943        19,024
  Due to affiliates.........................................     1,466         1,909
  Other current liabilities.................................    23,750        33,477
                                                              --------      --------
         Total current liabilities..........................   123,088       146,466
Long-term debt..............................................   260,589       298,125
Subordinated notes..........................................    28,119        29,867
Obligations under capital leases............................     2,773         3,814
Deferred income taxes.......................................     3,413         2,975
Other liabilities...........................................    12,900         8,763
                                                              --------      --------
         Total liabilities..................................   430,882       490,010
                                                              --------      --------
Commitments and contingencies
Minority interest -- Redeemable Preference Shares issued by
  subsidiary................................................    32,982        33,050
                                                              --------      --------
Stockholders' Equity:
  Preferred stock (no par value, 10,000,000 shares
    authorized; no shares outstanding)
  Common stock ($0.01 par value, 150,000,000 shares
    authorized; shares issued and outstanding: 22,584,282 in
    2000 and 22,474,772 in 1999)............................       226           225
  Additional paid-in capital................................   388,547       386,548
  Accumulated other comprehensive income (loss).............      (688)        1,264
  Retained earnings (deficit)...............................   (87,591)       19,913
                                                              --------      --------
      Total stockholders' equity............................   300,494       407,950
                                                              --------      --------
         Total liabilities and stockholders' equity.........  $764,358      $931,010
                                                              ========      ========
</TABLE>

             See Notes to Interim Consolidated Financial Statements

                                       50
<PAGE>   54

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                               FOR THE SIX MONTHS
                                                                 ENDED JUNE 30,
                                                              ---------------------
                                                                2000         1999
                                                              ---------    --------
<S>                                                           <C>          <C>
Revenues....................................................  $ 291,342    $224,655
Cost of revenues............................................    193,894     154,389
                                                              ---------    --------
Gross profit................................................     97,448      70,266
                                                              ---------    --------
Selling, general, and administrative expenses...............     81,741      52,391
Amortization of intangibles.................................      6,744       5,007
Gain on disposal of property and equipment..................        (47)        (34)
Restructuring charges.......................................        611
Impairment charges..........................................      1,241
                                                              ---------    --------
          Total operating expenses..........................     90,290      57,364
                                                              ---------    --------
Operating income............................................      7,158      12,902
Interest expense............................................    (13,194)     (6,158)
Interest income.............................................        433         128
Other income (expense) -- net...............................       (154)        114
                                                              ---------    --------
Income (loss) from continuing operations before provision
  for income taxes and minority interest....................     (5,757)      6,986
Provision (benefit) for income taxes........................      2,068       4,927
                                                              ---------    --------
Income (loss) from continuing operations before minority
  interest..................................................     (7,825)      2,059
Minority interest...........................................     (1,296)       (566)
                                                              ---------    --------
Income (loss) from continuing operations....................     (9,121)      1,493
Income (loss) from discontinued operations..................    (98,383)        819
                                                              ---------    --------
Net income (loss)...........................................   (107,504)      2,312
Other comprehensive income (loss)...........................     (1,952)        134
                                                              ---------    --------
Comprehensive income (loss).................................  $(109,456)   $  2,446
                                                              =========    ========
Basic earnings (loss) per common share:
  Income (loss) from continuing operations..................  $   (0.40)   $   0.07
  Income (loss) from discontinued operations................      (4.35)       0.03
                                                              ---------    --------
  Total.....................................................  $   (4.75)   $   0.10
                                                              =========    ========
Diluted earnings (loss) per common share:
  Income (loss) from continuing operations..................  $   (0.40)   $   0.07
  Income (loss) from discontinued operations................      (4.35)       0.03
                                                              ---------    --------
  Total.....................................................  $   (4.75)   $   0.10
                                                              =========    ========
Weighted average number of common shares:
Basic.......................................................     22,615      22,396
Diluted.....................................................     22,615      22,397
</TABLE>

             See Notes to Interim Consolidated Financial Statements

                                       51
<PAGE>   55

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                FOR THE SIX MONTHS
                                                                  ENDED JUNE 30,
                                                              ----------------------
                                                                2000         1999
                                                              ---------    ---------
<S>                                                           <C>          <C>
Cash flows from operating activities:
Net income (loss)...........................................  $(107,504)   $   2,312
Adjustments to reconcile net income (loss) to net cash from
  operating activities:
  Depreciation and amortization.............................     19,578       14,704
  Deferred taxes............................................                  (1,760)
  Impairment charges........................................      1,241
  Loss (income) from discontinued operations................     98,383         (819)
  Other.....................................................        755          989
Changes in Operating Assets and Liabilities, net of effects
  of acquisitions and dispositions:
  Trade accounts receivable.................................      2,569        5,571
  Due from/to affiliates....................................       (482)        (712)
  Inventory.................................................     (3,536)      (2,640)
  Other assets..............................................      4,844        8,300
  Accounts payable and accrued expenses.....................     (8,294)     (12,628)
  Other liabilities.........................................       (962)      (3,864)
  Net cash provided by (used in) operating activities of
     discontinued operations................................      8,577          (14)
                                                              ---------    ---------
Net cash provided by operating activities...................     15,169        9,439
                                                              ---------    ---------
Cash flows from investing activities:
  Property, plant, and equipment expenditures...............     (9,978)      (6,491)
  Software expenditures.....................................     (1,113)      (4,860)
  Proceeds from sale of property and equipment..............     14,039
  Proceeds from sale of a business..........................     11,693
  Entities purchased, net of cash acquired..................                 (99,931)
  Other.....................................................     (4,217)      (5,066)
  Net cash used in investing activities of discontinued
     operations.............................................       (706)      (1,784)
                                                              ---------    ---------
Net cash provided by (used in) investing activities.........      9,718     (118,132)
                                                              ---------    ---------
Cash flows from financing activities:
  Proceeds from exercise of stock options...................                     210
  Proceeds from sale/leaseback transactions.................                   1,496
  Repayments of notes and capital lease obligations.........     (1,450)        (630)
  Repayments of term loans..................................    (33,397)
  Borrowings (repayments) under revolving credit
     line -- net............................................     (4,125)      98,524
  Net cash used in financing activities of discontinued
     operations.............................................        (87)         (41)
                                                              ---------    ---------
Net cash provided by (used in) financing activities.........    (39,059)      99,559
                                                              ---------    ---------
Net decrease in cash and cash equivalents...................    (14,172)      (9,134)
Effect of exchange rate changes on cash and cash
  equivalents...............................................       (435)
Cash and cash equivalents at beginning of period............     23,218       17,979
                                                              ---------    ---------
Cash and cash equivalents at end of period..................  $   8,611    $   8,845
                                                              =========    =========
</TABLE>

             See Notes to Interim Consolidated Financial Statements

                                       52
<PAGE>   56

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                  (UNAUDITED)
                 (IN THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                      FOR THE SIX MONTHS ENDED JUNE 30, 2000
                                                --------------------------------------------------
                                                                         ACCUMULATED
                                                          ADDITIONAL        OTHER        RETAINED
                                                COMMON     PAID-IN      COMPREHENSIVE    EARNINGS
                                                STOCK      CAPITAL      INCOME (LOSS)    (DEFICIT)
                                                ------    ----------    -------------    ---------
<S>                                             <C>       <C>           <C>              <C>
Balance at January 1, 2000....................   $225      $386,548        $ 1,264       $  19,913
Issuance of 109,510 common shares as
  additional consideration in connection with
  prior period acquisitions...................      1         1,999
Unrealized holding loss on available-for-sale
  securities..................................                              (1,066)
Unrealized loss from foreign currency
  translation adjustments.....................                              (1,202)
Reclassification adjustment for losses
  realized in net income......................                                 316
Net loss......................................                                            (107,504)
                                                 ----      --------        -------       ---------
Balance at June 30, 2000......................   $226      $388,547        $  (688)      $ (87,591)
                                                 ====      ========        =======       =========
</TABLE>

             See Notes to Interim Consolidated Financial Statements

                                       53
<PAGE>   57

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                           (IN THOUSANDS OF DOLLARS)

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements of
Applied Graphics Technologies, Inc. and its subsidiaries (the "Company"), which
have been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles, should be read in
conjunction with the notes to consolidated financial statements contained
elsewhere herein. In the opinion of the management of the Company, all
adjustments (consisting primarily of normal recurring accruals) necessary for a
fair presentation have been included in the financial statements. The operating
results of any quarter are not necessarily indicative of results for any future
period.

     Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform with the 2000 presentation.

2. DISCONTINUED OPERATIONS

     In June 2000, the Company's Board of Directors approved a plan to sell the
publishing business that was acquired as part of the merger with Devon Group,
Inc. The Company expects to consummate the sale of the publishing business
within the next year, although there can be no assurance that the sale will be
consummated within that timeframe. For purposes of estimating the loss on
disposal, the Company assumed a disposal date of December 31, 2000.

     The accompanying financial statements have been restated to reflect the
operations of the publishing business as a discontinued operation. Provision has
been made for estimated operating income through the expected disposal date and
for the estimated loss on disposal, including the write off of approximately
$100,000 of goodwill. The results of operations of the discontinued business and
the estimated loss on disposal, presented as Discontinued Operations in the
accompanying Consolidated Statements of Operations, were as follows:

<TABLE>
<CAPTION>
                                                              FOR THE SIX MONTHS
                                                                ENDED JUNE 30,
                                                              -------------------
                                                                2000       1999
                                                              --------    -------
<S>                                                           <C>         <C>
Revenues....................................................  $ 36,361    $39,731
                                                              ========    =======
Income (loss) from operations before income taxes...........  $ (3,134)   $(1,229)
Provision (benefit) equivalent to income taxes..............         7     (2,048)
                                                              --------    -------
Income (loss) from operations...............................    (3,141)       819
Loss on disposal (including provision for income taxes of
  $2,157)...................................................   (95,242)
                                                              --------    -------
Income (loss) from discontinued operations..................  $(98,383)   $   819
                                                              ========    =======
</TABLE>

     The results of operations of the publishing business include an allocation
of interest expense of $2,950 and $1,492 for the six month periods ended June
30, 2000 and 1999, respectively. The estimated loss on disposal includes
estimated future net income from operations for the period through December 31,
2000, the assumed disposal date, of $1,273, which includes an allocation of
interest expense of $1,000. The allocated interest expense consisted solely of
the interest expense on the Company's borrowings under its primary credit
facilities (the "1999 Credit Agreement"), which represents the interest expense
not directly attributable to the Company's other operations. Interest expense
was allocated based on the ratio of the net assets of the discontinued operation
to the sum of the consolidated net assets of the Company and the outstanding
borrowings under the 1999 Credit Agreement.

                                       54
<PAGE>   58
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The results of operations and cash flows of the discontinued operations
include amounts for selected items as follows:

<TABLE>
<CAPTION>
                                                              FOR THE SIX MONTHS
                                                                ENDED JUNE 30,
                                                              -------------------
                                                               2000        1999
                                                              -------    --------
<S>                                                           <C>        <C>
Interest expense............................................  $3,026     $ 1,586
Interest income.............................................  $   68     $    64
Depreciation and amortization expense.......................  $2,150     $ 1,812
Loss (gain) on disposal of property and equipment...........  $    8     $    (5)
Provision (benefit) equivalent to income taxes..............  $2,164     $(2,048)
Property, plant, and equipment expenditures.................  $  706     $ 1,156
Repayments of notes and capital lease obligations...........  $   87     $    41
</TABLE>

     The net assets of discontinued operations include $745 and $832 at June 30,
2000, and December 31, 1999, respectively, of long-term debt and obligations
under capital leases, inclusive of the current portion.

3. RESTRUCTURING

     In June 2000, the Company initiated and completed a plan (the "2000 Second
Quarter Plan") to close the Atlanta operation acquired as part of the
acquisition of Wace Group Limited ("Wace"). As part of the 2000 Second Quarter
Plan, the Company terminated certain employees and transferred the work
previously performed in the Atlanta facility to Wace's facility in Dallas,
Texas. The results of operations for the six month period ended June 30, 2000,
include a charge of $611 for the 2000 Second Quarter Plan, which consisted of
$456 for facility closure costs and $155 for employee termination costs for 34
employees. In 1998 and 1999, the Company commenced four separate plans to
restructure certain of its operations (the "1998 Second Quarter Plan," the "1998
Fourth Quarter Plan," the "1999 Third Quarter Plan," and the "1999 Fourth
Quarter Plan," respectively). The amounts included in "Other current
liabilities" in the accompanying Consolidated Balance Sheets as of June 30,
2000, and December 31, 1999, for the future costs of the various restructuring
plans, and the amounts charged against the respective restructuring liabilities
during the six months ended June 30, 2000, were as follows:

<TABLE>
<CAPTION>
                               1998 SECOND    1998 FOURTH     1999 THIRD    1999 FOURTH    2000 SECOND
                               QUARTER PLAN   QUARTER PLAN   QUARTER PLAN   QUARTER PLAN   QUARTER PLAN
                               ------------   ------------   ------------   ------------   ------------
<S>                            <C>            <C>            <C>            <C>            <C>
Balance at December 31,
  1999.......................     $ 294          $ 502          $ 330          $2,279
Restructuring charge.........                                                                  $611
Facility closure costs.......                      (54)          (167)           (257)
Employee termination costs...                      (37)           (53)           (312)
Abandoned assets.............      (102)          (106)            (4)           (366)
                                  -----          -----          -----          ------          ----
Balance at June 30, 2000.....     $ 192          $ 305          $ 106          $1,344          $611
                                  =====          =====          =====          ======          ====
</TABLE>

     The number of employees included in the charge against the various
restructuring plans' liabilities for employee termination costs for the six
months ended June 30, 2000, was 14, 5, and 12 for the 1998 Fourth Quarter Plan,
the 1999 Third Quarter Plan, and the 1999 Fourth Quarter Plan, respectively.

     The Company does not anticipate any material adverse effect on its future
results of operations from the various restructuring plans. The employees
terminated and to be terminated under the restructuring plans are principally
production workers, salespeople, and administrative support staff. The Company
completed both the 1998 Second Quarter Plan and the 1998 Fourth Quarter Plan
during 1999. The remaining liabilities for these plans primarily represent
future rental obligations for abandoned property and equipment. The Company

                                       55
<PAGE>   59
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expects to complete the 1999 Third Quarter Plan and the 1999 Fourth Quarter Plan
by September 2000 and December 2000, respectively.

     The Company is continuing to pursue operating efficiencies and synergies
and, as a result, may incur additional restructuring charges. During the six
month period ended June 30, 2000, the Company terminated 134 employees and
incurred employee termination costs of $1,732 that were not related to its
various restructuring plans. Such costs are included in "Selling, general, and
administrative expenses" in the accompanying Consolidated Statements of
Operations for the six month period ended June 30, 2000.

4. IMPAIRMENT CHARGES

     In June 2000, the Company incurred a charge of $583 from the impairment of
equipment abandoned in connection with the 2000 Second Quarter Plan. In May
2000, the Company commenced a plan to sell its events-based digital photography
business. In connection with such action, the Company incurred a charge of $658
for the write down of long-lived assets related to this business. The net assets
of this business, which are a component of the Company's digital services
segment, are included in "Other current assets" in the Company's Consolidated
Balance Sheet at June 30, 2000. The Company consummated the sale of this
business in August 2000 for approximately $220. The revenues, gross profit, and
operating loss from this business included in the Company's results of
operations for the six month period ended June 30, 2000 and 1999, were as
follows:

<TABLE>
<CAPTION>
                                                                SIX MONTHS
                                                              ENDED JUNE 30,
                                                              ---------------
                                                              2000      1999
                                                              -----    ------
<S>                                                           <C>      <C>
Revenues....................................................  $ 462    $1,056
Gross profit................................................  $(131)   $  207
Operating loss..............................................  $(632)   $ (198)
</TABLE>

5. LONG-TERM DEBT

     Under the terms of the 1999 Credit Agreement, the Company must comply with
certain financial covenants related to leverage ratios, interest coverage
ratios, fixed charge coverage ratios, minimum net worth, and capital spending.
In August 2000, the Company entered into an amendment to the 1999 Credit
Agreement (the "Fourth Amendment") to relax the interest coverage ratio and net
worth covenants as of June 30, 2000, and to modify all of the financial covenant
requirements to be less restrictive than previously required in the 1999 Credit
Agreement for the quarterly fiscal periods through June 30, 2001. In addition to
modifying the various financial covenants, the Fourth Amendment increased the
interest rates on all future borrowings under the 1999 Credit Agreement by 50
basis points and lowered the borrowing capacity of the revolving line of credit
to $85,000.

     In July 2000, the Company entered into an amendment to the 1999 Credit
Agreement (the "Third Amendment") that lowered the net worth covenant threshold
to enable the Company to proceed with its planned disposal of the publishing
business. Also in July 2000, the lending institutions granted a waiver of
covenant defaults to enable the Company to make the July 31, 2000, scheduled
interest payment to the holders of its subordinated notes. In connection with
entering into the Third Amendment and the Fourth Amendment, the Company incurred
fees of $496 and $1,535, respectively. The fee incurred in connection with the
Third Amendment is included in the loss on disposal of discontinued operations.
The fee incurred in connection with the Fourth Amendment will be included as a
component of interest expense in future periods.

     Based upon the modified financial covenants as contained in the Fourth
Amendment, the Company was in compliance with all covenants at June 30, 2000.
Had the Company not entered into the aforementioned amendments to the 1999
Credit Agreement, the Company would not have been in compliance with the

                                       56
<PAGE>   60
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest coverage ratio and net worth covenants at June 30, 2000. The Company's
net worth at June 30, 2000, was adversely affected by the $95,242 estimated loss
on disposal of the publishing business, including the write off of approximately
$100,000 of goodwill (see Note 2). There can be no assurance that the Company
will be able to attain compliance with the amended covenant requirements in
future periods. If the Company does not attain compliance, it intends to engage
in additional discussions with its lending institutions to obtain additional
waivers and amendments, although there can be no assurance that such additional
waivers or amendments will be granted.

6. INVENTORY

     The components of inventory were as follows:

<TABLE>
<CAPTION>
                                                              JUNE 30,    DECEMBER 31,
                                                                2000          1999
                                                              --------    ------------
<S>                                                           <C>         <C>
Work-in-process.............................................  $24,992       $21,092
Raw materials...............................................    3,252         5,191
                                                              -------       -------
Total.......................................................  $28,244       $26,283
                                                              =======       =======
</TABLE>

7. RELATED PARTY TRANSACTIONS

     Sales to, purchases from, and administrative charges incurred with related
parties during the six months ended June 30, 2000 and 1999, were as follows:

<TABLE>
<CAPTION>
                                                                 SIX MONTHS
                                                               ENDED JUNE 30,
                                                              ----------------
                                                               2000      1999
                                                              ------    ------
<S>                                                           <C>       <C>
Affiliate sales.............................................  $5,493    $6,460
Affiliate purchases.........................................  $  278    $2,252
Administrative charges......................................  $  734    $  832
</TABLE>

     Administrative charges include charges for certain legal, administrative,
and computer services provided by affiliates and for rent incurred for leases
with affiliates.

8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     Payments of interest and income taxes for the six months ended June 30,
2000 and 1999, were as follows:

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------   --------
<S>                                                           <C>       <C>
Interest paid...............................................  $15,145   $  7,651
Income taxes paid...........................................  $ 1,341   $  1,831
</TABLE>

     Noncash investing and financing activities for the six months ended June
30, 2000 and 1999, were as follows:

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------   --------
<S>                                                           <C>       <C>
Exchange of Preference Shares for subordinated notes........  $    68
Issuance of common stock as additional consideration in
  connection with prior period acquisitions.................  $ 2,000   $    240
Reduction of goodwill from amortization of excess tax
  deductible goodwill.......................................  $    98   $     17
Fair value of stock options issued to non-employee..........            $     55
</TABLE>

                                       57
<PAGE>   61
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------   --------
<S>                                                           <C>       <C>
Acquisitions:
Fair value of assets acquired...............................            $244,900
Cash paid...................................................            (105,777)
Non contingent future payments..............................             (17,778)
                                                                        --------
Liabilities assumed.........................................            $121,345
                                                                        ========
</TABLE>

9. SEGMENT INFORMATION

     Segment information relating to results of continuing operations for the
six months ended June 30, 2000 and 1999, was as follows:

<TABLE>
<CAPTION>
                                                                   SIX MONTHS
                                                                 ENDED JUNE 30,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Revenue:
Content Management Services.................................  $262,448    $205,798
Other operating segments....................................    28,894      18,857
                                                              --------    --------
Total.......................................................  $291,342    $224,655
                                                              ========    ========
Operating Income:
Content Management Services.................................  $ 27,406    $ 25,995
Other operating segments....................................     3,582       3,053
                                                              --------    --------
Total.......................................................    30,988      29,048
Other business activities...................................   (15,531)    (11,385)
Amortization of intangibles.................................    (6,744)     (5,007)
Restructuring charges.......................................      (611)
Gain on disposal of fixed assets............................        47          34
Impairment charges..........................................    (1,241)
Interest expense............................................   (12,944)     (5,946)
Interest income.............................................       433         128
Other income (expense)......................................      (154)        114
                                                              --------    --------
Consolidated income (loss) from continuing operations before
  provision for income taxes and minority interest..........  $ (5,757)   $  6,986
                                                              ========    ========
</TABLE>

     Segment information relating to the Company's assets as of June 30, 2000,
was as follows:

<TABLE>
<S>                                                           <C>
Total Assets:
Content Management Services.................................  $645,942
Other operating segments....................................    36,267
Other business activities...................................    37,476
Discontinued operations.....................................    44,673
                                                              --------
Total.......................................................  $764,358
                                                              ========
</TABLE>

                                       58
<PAGE>   62
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. RECENTLY ISSUED ACCOUNTING STANDARDS

     Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities (an amendment of
FASB Statement No. 133)," was issued in June 2000. SFAS No. 138 amended certain
definitions and clarified certain requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires that entities recognize derivative instruments as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for the change in fair value of a
derivative instrument will depend on the intended use of the instrument. The
adoption of SFAS No. 133 will require the Company to reflect the fair value of
its interest rate swap agreements on its Consolidated Balance Sheet. The
offsetting gain or loss at the time of adoption of SFAS No. 133 will be
accounted for as a cumulative effect of a change in accounting principle in
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes." The cumulative gain or loss at the time of adoption of SFAS No. 133
and future gains and losses resulting from the change in fair value of the swap
agreements will be reflected in cumulative comprehensive income as a separate
component of stockholders' equity to the extent the swaps qualify as cash flow
hedges. To the extent the swaps do not qualify as cash flow hedges, such gains
and losses will be reflected in net income. The Company intends to determine the
potential impact of the adoption of SFAS No. 133 on its financial position and
results of operations by the end of 2000.

11. SUBSEQUENT EVENT

     As previously disclosed, the Company announced in March 2000 that it had
retained an investment banking firm to explore strategic alternatives, including
a possible sale of the Company. In August 2000, the Board of Directors of the
Company decided that it would no longer actively pursue a sale of the Company,
but would continue to pursue other strategic alternatives. There can be no
assurance that any transaction will occur as a result of this effort.

12. SELECTED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                              2000 QUARTER ENDED,
                                                              --------------------
                                                              MARCH 31    JUNE 30
                                                              --------    --------
<S>                                                           <C>         <C>
Revenue.....................................................  $144,319    $147,023
Gross profit................................................  $ 47,032    $ 50,416
Loss from continuing operations before provision for income
  taxes and minority interest...............................  $ (4,645)   $ (1,112)

Loss from continuing operations.............................  $ (7,445)   $ (1,676)
Loss from discontinued operations...........................    (1,474)    (96,909)
                                                              --------    --------
Net loss....................................................  $ (8,919)   $(98,585)
                                                              ========    ========
Loss per common share from continuing operations:
  Basic.....................................................  $  (0.33)   $  (0.07)
  Diluted...................................................  $  (0.33)   $  (0.07)
</TABLE>

                                       59
<PAGE>   63

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

     Not applicable.

                                       60
<PAGE>   64

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     (a) Directors. -- The following table lists the directors and persons
nominated to be directors of the Company. The term of each director will expire
at the Company's 2000 annual meeting of stockholders unless such director is
nominated and elected to serve as a director for an additional one-year term at
such annual meeting or until their successors are elected and qualified or their
earlier resignation or removal.

<TABLE>
<CAPTION>
                                                                     DIRECTOR
NAME                                                          AGE     SINCE
----                                                          ---    --------
<S>                                                           <C>    <C>
Mortimer B. Zuckerman.......................................  63       1996
Fred Drasner................................................  57       1995
Derek Ashley................................................  40       1999
John W. Dreyer..............................................  62         --
John R. Harris..............................................  51       1996
Martin D. Krall.............................................  59       1996
Marne Obernauer, Jr.........................................  57       1998
David R. Parker.............................................  57       1998
Louis Salamone, Jr..........................................  53       1999
Howard Stringer.............................................  58       1996
Joseph D. Vecchiolla........................................  44         --
Linda J. Wachner............................................  54       1996
John R. Walter..............................................  53         --
John Zuccotti...............................................  63       1998
</TABLE>

     Mortimer B. Zuckerman, Chairman of the Board of the Company, has been
Chairman of the Board of Directors and a principal stockholder of Boston
Properties, Inc., a national real estate development and management company,
since 1970. He has been Chairman of U.S. News & World Report, L.P. ("U.S. News")
and Editor-in-Chief of U.S. News & World Report since 1985, Chairman of Daily
News, L.P. ("Daily News") and Co-Publisher of the New York Daily News since
1993, and served as Chairman of The Atlantic Monthly Company from 1980 to 1999.
Mr. Zuckerman has served as Chairman of Fast Company Media Group, L.L.C. ("Fast
Company") and President of FC Holdings, L.L.C., its majority owner, since
January 1999. Mr. Zuckerman also serves as a director of Snyder Communications,
Inc. ("Snyder"), Loews Cineplex Entertainment Corporation, and Chase Manhattan
Bank National Advisory Board.

     Fred Drasner, Chairman and a director of the Company, served as Chief
Executive Officer of the Company from 1996 until April 2000. Mr. Drasner has
been co-owner of Pro Football, Inc., d/b/a The Washington Redskins, since July
1999. He has been the Chief Executive Officer of Daily News and Co-Publisher of
the New York Daily News since 1993, Co-Chairman of U.S. News since 1998, Chief
Executive Officer of U.S. News from 1985 to 1998, President of U.S. News from
1985 to 1997, Chairman and Chief Executive Officer of Applied Printing since
1988, and Co-Chairman from 1998 to 1999 and Vice Chairman and Chief Executive
Officer from 1986 to 1998 of The Atlantic Monthly Company. Mr. Drasner has
served as Co-Chairman of Fast Company since January 1999. Mr. Drasner was also
senior counsel to Shaw Pittman, formerly known as Shaw Pittman Potts &
Trowbridge, until his resignation in April 1996. Mr. Drasner also serves as a
director of Snyder and Ventiv Health, Inc.

     Derek Ashley, Vice Chairman, Chief Executive Officer, Chief Operating
Officer, and a director of the Company, joined the Company in May 1999 following
the acquisition by the Company of Wace Group Limited (formerly Wace Group Plc
("Wace")), of which Mr. Ashley was Group Chief Executive. Wace operated an
international network of digital imaging businesses and provided digital
services in the areas of prepress, color management, interactive multimedia
services, and print procurement. Mr. Ashley served as Group Chief Executive of
Wace from June 1998 until its acquisition by the Company. Prior to that,

                                       61
<PAGE>   65

Mr. Ashley served as President and Chief Executive Officer of Seven Worldwide,
Inc., a wholly-owned subsidiary of Wace, from July 1997 and as European Managing
Director of Wace from 1995.

     John W. Dreyer, has been Chairman of the Board since 1978 and Chief
Executive Officer since 1977 of Pitman Company, a graphic arts and image
supplier. He also served as President of Pitman Company until 1998 and Chief
Operating Officer until 1994. Mr. Dreyer is also a director of Presstek, Inc.

     John R. Harris has been President, Chief Executive Officer, and a director
of Ztango.com, a wireless Internet software and services company, since
September 1999 and Chairman of the Board of Directors since April 2000.
Previously, Mr. Harris was a Corporate Vice President at Electronic Data Systems
Corp. ("EDS") from 1997 through March 1999 where he was responsible for
marketing and corporate strategy. From 1989 to 1997, he served as President of
the Communications Industry Group at EDS where he was responsible for four
business units directed toward wirelines, wireless, media, and interactive
services markets. Mr. Harris also serves as a director of CapRock Communications
Corp. and Ventiv Health, Inc.

     Martin D. Krall, Executive Vice President, Chief Legal Officer, Secretary,
and a director of the Company, has been Executive Vice President, Chief Legal
Officer, and Secretary of Daily News, Applied Printing, and U.S. News since
January 1995. Mr. Krall served as Executive Vice President, Chief Legal Officer,
and Secretary of The Atlantic Monthly Company from 1995 to 1999. Mr. Krall has
served as Executive Vice President, Chief Legal Officer, and Secretary of Fast
Company and FC Holdings, L.L.C., its majority owner, since January 1999. Prior
to 1995, Mr. Krall was a partner in the law firm of Shaw Pittman, where he was a
member of the Management Committee from 1978 to 1994, and Vice Chairman of such
Committee from 1991 to 1994. From 1995, Mr. Krall was also senior counsel to
Shaw Pittman until his resignation in April 1996.

     Marne Obernauer, Jr., Vice Chairman and a director of the Company, served
as Chairman of the Board of Directors of Devon Group, Inc. ("Devon"), from 1986
and Chief Executive Officer of Devon from 1980 until Devon's merger with and
into a wholly-owned subsidiary of the Company in May 1998. Mr. Obernauer also
serves as a director of The Advest Group, Inc.

     David R. Parker is a founder and Managing General Partner of Interprise
Technology Partners, L.P., a venture capital fund focused on Internet and
information technology investments established in January 1999. From 1992
through May 1998, Mr. Parker was Chairman of ProSource Distribution Services,
Inc., a food service distributor, which was acquired by AmeriServe, Inc., in May
1998. In May 1998, Mr. Parker became Vice Chairman of AmeriServe, Inc.,
overseeing the integration of ProSource into AmeriServe. He served in this
capacity until he resigned his officer position in August 1998 and his position
on AmeriServe's Board of Directors in November 1999. Mr. Parker also serves on
the Board of Directors of Tupperware Corporation and World Commerce Online, Inc.

     Louis Salamone, Jr., has been Senior Vice President and Chief Financial
Officer of Enrev Corporation since June 2000. From 1996 through 2000, Mr.
Salamone was Senior Vice President and Chief Financial Officer of the Company.
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.

     Howard Stringer has been the Chairman and Chief Executive Officer of Sony
Corporation of America since December 1998 and served as its President from 1997
to December 1998. From 1995 to 1997, Mr. Stringer was Chairman and Chief
Executive Officer of Tele-TV, a joint venture among NYNEX, Pacific Telesis, and
Bell Atlantic to provide home video delivery through telephone lines. Before
joining Tele-TV, Mr. Stringer was President of CBS/Broadcast Group from 1988 to
1995 where he oversaw all broadcast operations, including news, sports,
entertainment, and network-owned stations. Mr. Stringer serves on the Board of
Directors of Loews Cineplex Entertainment Corporation and TiVo Inc.

     Joseph D. Vecchiolla, Senior Vice President and Chief Financial Officer,
joined the Company in May 2000. From February 1999 through April 2000 he served
as Vice President of Marketing and Vice President of Finance at Favorite Brands
International, which was acquired by Nabisco in November 1999. Favorite Brands
                                       62
<PAGE>   66

International filed for protection under Chapter 11 of the U.S. Bankruptcy Code
in March 1999. From May 1997 until February 1999 he served as President of Old
Greenwich Capital Corporation. From June 1993 through December 1997 he served in
various capacities at Bird Corporation, beginning as Senior Vice President and
Chief Financial Officer (June 1993 through September 1993), then President,
Chief Operating Officer, and Chief Financial Officer (September 1993 through
January 1994), then President and Chief Executive Officer (January 1994 through
April 1995), and finally Chairman of the Board of Directors (May 1995 through
December 1997). Concurrent to his tenure at Bird Corporation, from May 1995
through December 1997, Mr. Vecchiolla served as Senior Vice President of
Corporate Finance at S.N. Phelps & Co., Vice President and Chief Financial
Officer of Wyatt Energy Corp., President of American Modular Technologies, LLP,
and Vice President and Chief Financial Officer of Commonwealth Oil of Puerto
Rico, LLP.

     Linda J. Wachner has been a director, President, and Chief Executive
Officer of the Warnaco Group, Inc., since August 1987 and Chairman of the Board
since August 1991. Ms. Wachner also served as Chairman and Chief Executive
Officer of Authentic Fitness Corporation from May 1990 until its merger with
Warnaco in December 1999. Ms. Wachner also serves as a director of the New York
Stock Exchange, Inc.

     John R. Walter has been Chairman of Ashlin Management Corporation, a
management consulting firm, since December 1997 and Chairman of the Board of
Manpower, Inc., an employment services company, since April 1999. From November
1996 through July 1997, he served as President and Chief Operating Officer of
AT&T Corp. Mr. Walter was Chairman and Chief Executive Officer from 1989 to
October 1996 and President from 1987 to 1991 of R.R. Donnelley & Sons Company, a
print and digital information management, reproduction, and distribution
company. Mr. Walter also serves on the Board of Directors of Abbott
Laboratories, Celestica, Inc., Deere & Company, Jones Lang LaSalle, Inc., and
Manpower, Inc.

     John Zuccotti has been Chairman of Brookfield Financial Properties, Inc.
(formerly World Financial Properties) since 1996 and in 1998 was appointed Vice
Chairman of Brookfield Properties Corporation. Mr. Zuccotti has served as
President and Chief Executive Officer of Olympia & York Companies (USA) from
January 1990 until its reorganization in November 1996, at which time Brookfield
Financial Properties, Inc., was formed to carry on a portion of the principal
business of Olympia & York Companies (USA). Various entities affiliated with
Olympia & York Companies (USA) filed for protection under Chapter 11 of the U.
S. Bankruptcy Code, starting in 1992. Olympia & York Companies (USA) was
reorganized in 1996 and all bankruptcy proceedings were completed as of 1997.
Mr. Zuccotti has been a senior counsel at Weil, Gotshal & Manges LLP since 1997.
Mr. Zuccotti also serves as a director of eight funds of The Dreyfus
Corporation, a director of Empire Blue Cross and Blue Shield, and a trustee of
Columbia University.

     (b) Executive Officers. -- The information with respect to executive
officers required by this item is included at the end of Part I of the Company's
Report on Form 10-K/A for the fiscal year ended December 31, 1999, under the
heading Executive Officers of the Company.

     Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers and persons who own more
than 10% of a registered class of the Company's equity securities to file with
the Commission and the Nasdaq Stock Market initial reports of ownership and
reports of changes in ownership of the Company's common stock and other equity
securities of the Company. In addition, under Section 16(a), trusts for which a
reporting person is a trustee or a beneficiary (or for which a member of his
immediate family is a beneficiary) may have a separate reporting obligation with
regard to ownership of the Company's common stock and other equity securities of
the Company. Such reporting persons are required by rules of the Commission to
furnish the Company with copies of all Section 16(a) reports (specifically,
Forms 3, 4, and 5) they file. Based solely on the Company's review of the copies
of such forms it has received and written representations from certain reporting
persons that they were not required to file Forms 5 for the last fiscal year,
the Company believes that all of its officers, directors, and greater than ten
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during fiscal 1999.

                                       63
<PAGE>   67

ITEM 11.  EXECUTIVE COMPENSATION.

     The following table sets forth the compensation paid to the Chief Executive
Officer of the Company and to each of the six other most highly compensated
executive officers (the "Named Executive Officers") for fiscal years 1999, 1998,
and 1997.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                            LONG TERM
                                                                           COMPENSATION
                                                                              AWARDS
                                             ANNUAL COMPENSATION           ------------
                                     -----------------------------------    NUMBER OF
                                                            OTHER ANNUAL    SECURITIES     ALL OTHER
                                     SALARY       BONUS     COMPENSATION    UNDERLYING    COMPENSATION
NAME AND PRINCIPAL POSITION   YEAR     ($)         ($)          ($)        OPTIONS (#)        ($)
---------------------------   ----   -------     -------    ------------   ------------   ------------
<S>                           <C>    <C>         <C>        <C>            <C>            <C>
Fred Drasner................  1999   778,846          --             (1)          --             --
  Chairman and Former Chief   1998   300,000          --             (1)          --             --
  Executive Officer           1997   300,000          --             (1)          --             --
Martin D. Krall.............  1999   348,000(2)  100,000(2)          (1)          --             --
  Executive Vice President,   1998          (2)         (2)        --        100,000             --
  Chief Legal Officer, and    1997          (2)         (2)        --             --             --
  Secretary
Louis Salamone, Jr.(3)......  1999   327,772          --             (1)          --             --
  Former Senior Vice
     President                1998   259,401          --             (1)      65,000             --
  and Chief Financial
  Officer                     1997   240,000          --             (1)          --             --
Marne Obernauer, Jr. .......  1999   311,538          --             (1)          --             --
  Vice Chairman               1998   162,355(4)       --       30,817(5)          --             --
                              1997        --          --           --             --             --
Diane Romano(6).............  1999   309,462          --       33,092(7)          --             --
  President e-business and    1998   275,339          --       32,581(7)          --             --
  publications divisions      1997   250,000          --       33,381(7)          --             --
Derek Ashley................  1999   231,461(8)  400,000       52,010(9)     300,000             --
  Vice Chairman, Chief        1998        --          --           --             --             --
  Executive Officer, and      1997        --          --           --             --             --
  Chief Operating Officer
Jonathan Swindle............  1999   230,481          --       43,847(10)         --        225,000(11)
  Former Senior Vice          1998    90,000(12)      --       24,865(10)    100,000             --
  President, Administration   1997        --          --           --             --             --
</TABLE>

---------------
 (1) The Named Executive Officer received perquisites or other personal benefits
     in the years shown, although the value of these benefits did not exceed in
     the aggregate the lesser of $50,000 or 10% of his salary and bonus in such
     year.

 (2) Mr. Krall does not receive compensation directly from the Company. The 1999
     amounts shown reflect reimbursement of the affiliate that employs Mr. Krall
     in accordance with the shared services agreement with such affiliate, plus
     reimbursement of the affiliate for work performed by Mr. Krall in 1999 for
     the Company in connection with the Wace acquisition and payment of a bonus.
     In 1998 and 1997 the Company reimbursed its affiliates $115,000 and
     $90,000, respectively, for legal services provided to the Company by such
     affiliates, of which Mr. Krall's services were a part. The Company is not
     able to determine how much of the reimbursement in those years was
     attributable to Mr. Krall's services.

 (3) Mr. Salamone's employment ceased on August 3, 2000. In connection with such
     termination, Mr. Salamone received a severance payment equal to one year's
     salary.

 (4) Mr. Obernauer, Jr., commenced employment with the Company in May 1998,
     following the merger of Devon, of which Mr. Obernauer, Jr., was Chief
     Executive Officer, with and into a wholly-owned subsidiary of the Company.

                                       64
<PAGE>   68

 (5) The amount shown includes $25,325 as payment of professional fees for tax
     and accounting services provided to Mr. Obernauer, Jr., as well as an
     imputed amount for use of a Company-owned automobile.

 (6) Ms. Romano served as President from 1996 through March 2000.

 (7) The amount shown represents payment by the Company of apartment rent for a
     residence in New York City maintained partially for the Company's benefit
     and the reimbursement for a leased automobile and automobile insurance.

 (8) Mr. Ashley commenced employment with the Company in May 1999, following the
     Company's acquisition of Wace, of which Mr. Ashley was Group Chief
     Executive.

 (9) The amount shown includes payment by the Company of $40,810 of apartment
     rent for a residence in Chicago maintained partially for the Company's
     benefit, as well as reimbursement for a leased automobile and automobile
     insurance and payment of health club dues.

(10) The amount shown represents payment by the Company of apartment rent and
     related expenses for a residence in New York City maintained partially for
     the Company's benefit.

(11) The amount shown represents amounts received by Mr. Swindle as severance
     payments. Mr. Swindle's employment ceased on November 26, 1999.

(12) Mr. Swindle commenced employment with the Company in June 1998.

STOCK OPTION GRANTS IN FISCAL YEAR 1999

     No stock options were granted during fiscal year 1999 to Named Executive
Officers, other than Derek Ashley. The following table sets forth information
concerning the stock options granted during 1999.

                       OPTION GRANTS IN FISCAL YEAR 1999

<TABLE>
<CAPTION>
                                         INDIVIDUAL GRANTS                       POTENTIAL REALIZABLE VALUE
                       -----------------------------------------------------      AT ASSUMED ANNUAL RATE OF
                       NUMBER OF      % OF TOTAL                                  STOCK PRICE APPRECIATION
                       SECURITIES      OPTIONS                                         FOR OPTION TERM
                       UNDERLYING     GRANTED TO     EXERCISE                    ---------------------------
                        OPTIONS       EMPLOYEES       PRICE       EXPIRATION         5%              10%
NAME                    GRANTED        IN 1999        ($/SH)         DATE            ($)             ($)
----                   ----------     ----------     --------     ----------     -----------     -----------
<S>                    <C>            <C>            <C>          <C>            <C>             <C>
Derek Ashley.........   300,000         64.5(1)       12.00        5/24/09        1,256,386       4,132,984
</TABLE>

---------------
(1) Based on total grants of options to purchase 465,000 shares of the Company's
    common stock.

     No Named Executive Officer exercised stock options in fiscal year 1999. The
following table sets forth information concerning the number and value of
unexercised stock options granted to Named Executive Officers at December 31,
1999.

              AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND
                       1999 FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                          NUMBER OF SECURITIES     VALUE OF UNEXERCISED
                                                         UNDERLYING UNEXERCISED        IN-THE-MONEY
                                                           OPTIONS AT FISCAL        OPTIONS AT FISCAL
                                                              YEAR-END (#)             YEAR-END ($)
                                                             (EXERCISABLE/            (EXERCISABLE/
NAME                                                         UNEXERCISABLE)           UNEXERCISABLE)
----                                                     ----------------------    --------------------
<S>                                                      <C>                       <C>
Fred Drasner...........................................           --/--                  --/--
Martin D. Krall........................................       65,000/115,000             --/--
Louis Salamone, Jr. ...................................       63,000/102,000             --/--
Marne Obernauer, Jr. ..................................           --/--                  --/--
Diane Romano...........................................       90,000/90,000              --/--
Derek Ashley...........................................           --/300,000             --/--
Jonathan Swindle.......................................       20,000/80,000              --/--
</TABLE>

                                       65
<PAGE>   69

COMPENSATION OF DIRECTORS

     Directors who are not also employees of the Company or its affiliates
("nonemployee directors") receive from the Company $1,000 for each Board or
committee meeting attended and reimbursement of expenses incurred in attending
such meetings. Directors are also eligible to receive options to purchase the
Company's common stock under the Company's 1998 Incentive Compensation Plan, as
amended and restated (the "Incentive Compensation Plan").

     Under the Incentive Compensation Plan, employees, nonemployee directors,
certain affiliated persons, and independent contractors of the Company may be
granted cash awards, options to purchase the Company's common stock, stock
appreciation rights, stock awards, stock units, performance shares, and
performance units. Options to purchase the Company's common stock granted under
the Incentive Compensation Plan have a term of ten years and, except for those
granted to nonemployee directors, vest over a five-year period pursuant to a
vesting schedule determined by the committee administering the plan or, in lieu
thereof, a vesting schedule specified in the plan. Under this plan, each
nonemployee director is granted options to purchase 25,000 shares of the
Company's common stock upon commencement of his or her service as a director
that vest ratably over a two-year period. In addition, each nonemployee director
then in office is automatically granted, on the anniversary date of his or her
commencement of service as a director, a fully-vested, non-qualified option to
purchase 5,000 shares of the Company's common stock at a per-share exercise
price equal to its fair market value on such date. In April 1999, Messrs. Harris
and Stringer and Ms. Wachner each received grants of options to purchase 5,000
shares of the Company's common stock at an exercise price of $7.063 per share.
In May 1999, Messrs. Parker and Zuccotti each received grants of options to
purchase 5,000 shares of the Company's common stock at an exercise price of
$10.563 per share. In April 2000, Messrs. Harris and Stringer and Ms. Wachner
each received grants of options to purchase 5,000 shares of the Company's common
stock at an exercise price equal to $6.000 per share. In May 2000, Messrs.
Parker and Zuccotti each received grants of options to purchase 5,000 shares of
common stock at an exercise price equal to $3.063 per share.

EXECUTIVE EMPLOYMENT CONTRACTS

     In May 1999, the Company entered into an employment agreement with Mr.
Ashley, pursuant to which Mr. Ashley was to receive an annual base salary of
$400,000, a discretionary bonus that was to be no less than $100,000 for the
first twelve months of his employment, and a grant of options to purchase shares
of the Company's common stock. In May 2000, in connection with Mr. Ashley's
appointment as Chief Executive Officer of the Company, the Compensation
Committee resolved to increase Mr. Ashley's salary to $600,000 and to pay Mr.
Ashley a bonus of $400,000 in the event certain performance criteria were
satisfied. In addition, the Committee resolved to change the expiration of the
term of Mr. Ashley's agreement from May 2001 to the earlier of May 2002 or a
change of control of the Company. Mr. Ashley's employment agreement contains a
noncompete provision applicable during the term (and any extensions thereof) and
extends for a period of the longer of two years from commencement of employment
or six months after termination of employment with the Company, except in the
event Mr. Ashley's employment is terminated by the Company without cause, in
which case the noncompete provision terminates. The agreement also contains a
nonsolicitation provision applicable during the term (and any extensions
thereof) and for one year after termination of employment with the Company.

     The Company has also entered into an agreement with Ms. Romano extending
the term of her employment agreement with the Company for the three-year period
from April 2000 through March 2003. During such extended term, Ms. Romano will
serve as President of the Company's e-business divisions and the publications
divisions of its content management business. Ms. Romano's agreement contains a
noncompete provision applicable during the term (and any extensions thereof) and
a nonsolicitation provision applicable during the term (and any extensions
thereof), and for one year after termination of her employment with the Company.
The agreement provides for an annual base salary of $325,000, a bonus upon
attainment of certain objectives, and options to purchase shares of the
Company's common stock.

                                       66
<PAGE>   70

CHANGE OF CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS

     In March 2000, the Company announced that it had retained an investment
banking firm to explore the Company's strategic alternatives to enhance value
for the Company's stockholders, including the possible sale of the Company. In
order to incentivize the Company's key personnel to remain with the Company or
otherwise make themselves available to the Company to assist in the process, in
March 2000 the Compensation Committee approved payments to four key personnel in
the event of the sale of the Company and the satisfaction of certain conditions.
In August 2000, the Board decided that it would no longer actively pursue a sale
of the Company, but would continue to pursue other strategic alternatives.
Consequently, the Compensation Committee resolved that such personnel would no
longer be eligible for such payments in the event of a sale of the Company,
although in certain limited circumstances, if a sale occurred prior to May 8,
2001, Mr. Salamone would be entitled to $500,000 pursuant to the terms of the
Agreement and General Release, effective June 4, 2000, between the Company and
Mr. Salamone.

     Mr. Ashley's agreement contains a provision that requires the Company to
continue to pay Mr. Ashley's base salary and provide certain employee benefits
for the shorter of the remaining term of the agreement or six months, in the
event that Mr. Ashley's employment is terminated by the Company without cause.

     Ms. Romano's employment agreement contains provisions that require the
Company to make a cash payment to Ms. Romano equivalent to the amount of base
salary provided for in the agreement for the longer of the remaining term of the
agreement or two years in the event that Ms. Romano's employment is terminated
by the Company without cause or if Ms. Romano resigns for good reason, which
includes termination of employment following a change in control of the Company.
In addition, under either of these circumstances, Ms. Romano would also be
entitled to receive a cash payment equal to the aggregate amount that the market
value of the Company's common stock as of the date of the termination exceeds
the exercise price of any nonvested stock options held by Ms. Romano and to the
continuation of certain employee benefits. In the event that Ms. Romano is
employed by the Company on March 31, 2003, and a new agreement is not entered
into extending the term of the existing agreement, Ms. Romano would be entitled
to receive a cash payment equal to one year's base salary and the continuation
of employee benefits for one year.

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

SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS

     The following table sets forth, as of September 26, 2000, information
regarding the beneficial ownership of the Company's common stock by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
Company's common stock, (ii) each director and each nominee to the Board of
Directors, (iii) each of the executive officers of the Company named in the
Summary Compensation Table under "Executive Compensation," and (iv) all
directors and executive officers of the Company as a group. Except as indicated,
each person identified in the following table has sole voting and investment
power with respect to the shares shown. Percentage ownership of the Company's
common stock is based on 22,584,282 shares outstanding as of September 26, 2000.

<TABLE>
<CAPTION>
                                                               SHARES OF      PERCENTAGE OF
                                                                 COMMON        OUTSTANDING
                                                                 STOCK           SHARES
                                                              BENEFICIALLY    BENEFICIALLY
NAME OF BENEFICIAL OWNER                                         OWNED            OWNED
------------------------                                      ------------    -------------
<S>                                                           <C>             <C>
Applied Printing Technologies, L.P.(1)(2)...................   4,985,000          22.1%
State of Wisconsin Investment Board(3)......................   3,517,000          15.6
Capital Group International, Inc.(4)........................   2,742,700          12.1
Dimensional Fund Advisors, Inc.(5)..........................   1,198,500           5.3
Mortimer B. Zuckerman(1)....................................          --            --
Fred Drasner(1).............................................          --            --
Marne Obernauer, Jr.(6).....................................     524,799           2.3
Diane Romano(7).............................................     135,000             *
Louis Salamone, Jr.(7)......................................     101,000             *
Jonathan Swindle(8).........................................          --            --
</TABLE>

                                       67
<PAGE>   71

<TABLE>
<CAPTION>
                                                               SHARES OF      PERCENTAGE OF
                                                                 COMMON        OUTSTANDING
                                                                 STOCK           SHARES
                                                              BENEFICIALLY    BENEFICIALLY
NAME OF BENEFICIAL OWNER                                         OWNED            OWNED
------------------------                                      ------------    -------------
<S>                                                           <C>             <C>
Derek Ashley(7).............................................      60,000             *
Martin D. Krall(7)..........................................     105,000             *
John R. Harris(7)...........................................      16,250             *
David R. Parker(9)..........................................      39,000             *
Howard Stringer(10).........................................      55,000             *
Linda J. Wachner(10)........................................      65,000             *
John Zuccotti(7)............................................      35,000             *
John W. Dreyer..............................................          --            --
Joseph D. Vecchiolla........................................          --            --
John R. Walter..............................................          --            --
All directors and executive officers as a group (16
  persons)(11)..............................................   6,256,049          26.9%
</TABLE>

---------------
  *  Represents holdings of less than 1%.

 (1) Applied Printing Technologies, L.P. ("Applied Printing") is a limited
     partnership in which Mr. Drasner, the Company's Chairman and a director, is
     a minority limited partner and Mr. Zuckerman, Chairman of the Company's
     Board, beneficially owns the remaining limited partnership interests, and
     Mr. Zuckerman is the sole stockholder of the corporate general partner and
     a corporate limited partner. Messrs. Zuckerman and Drasner comprise the
     board of directors of the corporate general partner of Applied Printing.
     Mr. Zuckerman is the sole stockholder of the corporate general partner and
     therefore can change at any time the members of the board of directors of
     that entity. Consequently, Mr. Zuckerman indirectly will be able to
     exercise substantial influence over the outcome of all matters submitted to
     a vote of the Company's stockholders, including election of the members of
     the Company's Board, amendment of the Company's Restated Certificate of
     Incorporation and the consummation of a merger, sale of substantially all
     of the Company's assets or other significant corporate transactions. The
     address of Applied Printing is 77 Moonachie Avenue, Moonachie, New Jersey
     07074.

 (2) Shares shown are reported on a Schedule 13D dated April 26, 1996, as
     amended on September 4, 1997, November 26, 1997, September 1, 1998, October
     5, 1998, and November 25, 1998, filed with the Commission. Voting power
     with respect to such shares is held by Mr. Zuckerman.

 (3) Shares shown are reported on a Schedule 13G dated February 10, 2000, and
     amended March 10, 2000, and on a Form 13F dated August 14, 2000, filed with
     the Commission by State of Wisconsin Investment Board. The address of this
     person is P.O. Box 7842, Madison, Wisconsin 53708.

 (4) Shares shown are reported on a Schedule 13G dated February 8, 1999, and
     amended August 9, 1999, and February 10, 2000, filed with the Commission by
     Capital Group International, Inc. ("Capital") on behalf of itself and
     Capital Guardian Trust Company ("Capital Trust"). Capital is the parent
     holding company of Capital Trust, a bank, which may be deemed the
     beneficial owner of the shares reported on the Schedule 13G through its
     service as investment manager of certain institutional accounts. Capital
     Trust has voting power over only 2,046,500 of the shares reported. Capital
     and Capital Trust disclaim beneficial ownership of the shares of the
     Company's common stock covered by the Schedule 13G. The address of the
     above persons is 11100 Santa Monica Boulevard, Los Angeles, California
     90025.

 (5) Shares shown are reported on a Form 13F dated August 29, 2000, filed with
     the Commission by Dimensional Fund Advisors, Inc. The address of this
     person is 1299 Ocean Avenue, Santa Monica, California 90401.

 (6) Includes an aggregate of 7,200 shares held by Mr. Obernauer, Jr., as
     trustee, for trusts created for the benefit of his two sons, a niece, and a
     nephew over which Mr. Obernauer, Jr., has sole voting and investment power.

                                       68
<PAGE>   72

 (7) Represents shares of the Company's common stock issuable upon exercise of
     currently exercisable options.

 (8) Left the employment of the Company in November 1999.

 (9) Includes 35,000 shares of the Company's common stock issuable upon exercise
     of currently exercisable options.

(10) Includes 45,000 shares of the Company's common stock issuable upon exercise
     of currently exercisable options.

(11) Does not include Mr. Swindle. Includes 712,250 shares of the Company's
     common stock issuable upon exercise of currently exercisable options.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Mr. Zuckerman beneficially owns the shares of the Company's common stock
owned by Applied Printing and beneficially owns a majority of U.S. News and
Daily News. Additionally, Mr. Drasner is a minority limited partner of Applied
Printing, U.S. News, and Daily News. The following is a description of certain
transactions between the Company and Applied Printing, U.S. News, and Daily
News, respectively.

CONTENT MANAGEMENT AND DIGITAL IMAGING SERVICES FOR AFFILIATES

     The Company provides content management services to U.S. News under an
agreement that expires December 31, 2000, and is renewable annually thereafter
by mutual agreement of the parties. In addition, the Company provides content
management services to a New York Daily News periodical, digital archiving
services to the New York Daily News, and certain advertising make-up and related
graphic services for Daily News' publications, all under agreements which are
renewable annually by mutual agreement of the parties. The Company also provides
content management services to Applied Printing under an agreement that expires
December 31, 2004. In order to secure this agreement, the Company paid $500,000
to Applied Printing in 1999. The Company also performs additional services for
U.S. News, Daily News, and Applied Printing on a per-project basis.

     The Company's 1999 revenues included approximately $5,513,000, $3,525,000,
and $3,970,000 for services performed for each of U.S. News, Daily News, and
Applied Printing, respectively. Included in the revenue figure for 1999 is
$299,000 recognized under an agreement by Agile Enterprise, Inc., a wholly-owned
subsidiary of the Company, to license certain software to U.S. News.

SHARED SERVICES AGREEMENT

     The Company entered into a shared services agreement in 1999 with U.S. News
and Daily News, under which both U.S. News and Daily News provide legal,
computer, and administrative services to the Company. Under this agreement, the
Company pays a percentage of the costs associated with U.S. News and Daily News
employees who provide such services to the Company based on the percentage of
each such employee's total time that is devoted to Company-related matters,
including costs for services provided by Mr. Krall. See "Report of the
Compensation Committee of the Board of Directors of the Company on Executive
Compensation -- Base Salary." The term of the agreement is for one year and is
renewable annually. During 1999, the Company incurred charges of approximately
$1,514,000 for such services.

     The Company also received certain merger and acquisition services from
Daily News personnel in 1999 for which the Company was charged $280,000.

OTHER TRANSACTIONS

     The Company subleases space at the headquarters of U.S. News in Washington,
D.C., from U.S. News. Such space is used primarily to perform content management
services for U.S. News. The amount incurred by the Company for the sublease in
fiscal year 1999 totaled approximately $205,000 and corresponds to the amounts
U.S. News is required to pay for space under the prime lease.

                                       69
<PAGE>   73

     The Company leases additional space at its corporate headquarters from U.S.
News, for which the Company incurred charges of $184,000 in 1999.

     The Company has used certain Daily News space at its New York location, for
which the Company incurred charges of $156,000 in 1999.

     Applied Printing provides printing services to the Company on a per-project
basis. In 1999, the Company incurred charges of approximately $2,962,000 for
such services.

     The Company engaged the law firm of Weil, Gotshal & Manges LLP, at which
John Zuccotti, a director of the Company, is senior counsel, to perform legal
services for the Company in 1999 and 2000.

     Pitman Company, of which John W. Dreyer, a nominee for director, is
Chairman of the Board and Chief Executive Officer, is a distributor of film and
other graphic arts materials. In 1999, the Company purchased approximately
$25,000,000 of such materials from Pitman Company. The Company believes that the
terms for its purchases of such materials are no less favorable to the Company
than those that could be obtained from another vendor.

VENDOR AGREEMENT

     The Company is a major purchaser of film and other graphic arts materials
used in its manufacturing process, much of which it purchases through Pitman
Company. See "Compensation Committee Interlocks and Insider Participation and
Certain Transactions -- Other Transactions." Because of the dollar amount of the
products it purchases, the Company has been in a position to enter into
arrangements with manufacturers of such products pursuant to which the
manufacturers pay rebates and, in some instances, prepay to the Company a rebate
based upon a specified dollar volume of products purchased by the Company over a
given time period. The Company is entitled to retain the prepaid amount in full
if it purchases the stated volume, and would be obligated to repay all or a
portion of the amount depending on the difference between the stated volume and
the volume actually purchased.

     In 1995, pursuant to an agreement with one of its manufacturers, the
Company received prepaid rebates aggregating approximately $2.7 million, which
has been and will be earned based on purchases made and to be made from 1996
through 2000. The Company expects approximately $596,000 of rebates earned in
1999 to be applied to its obligation related to prepaid rebates. The agreement
was extended by the parties, effective July 1, 1998, through December 31, 2001.
Minimum purchase obligations have been satisfied to date, and the Company
expects, through its normal purchasing requirements, to purchase the amounts
necessary to earn rebates with respect to the period through 2001 in excess of
the amount to be deducted by the manufacturer.

     In connection with this agreement, the manufacturer's affiliate loaned $15
million to Mr. Zuckerman. The loan, which matured on December 31, 1998, bore
interest at the lender's commercial paper rate and was repaid in full by Mr.
Zuckerman in January 1999. 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 or manufacturer.

                                       70
<PAGE>   74

                                    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' Report:

       Independent Auditors' Report.

       Consolidated Balance Sheets as of December 31, 1999 and 1998, and June
        30, 2000.

        Consolidated Statements of Operations for the Years Ended December 31,
        1999, 1998, and 1997, and
         for the six months ended June 30, 2000 and 1999.

        Consolidated Statements of Cash Flows for the Years Ended December 31,
        1999, 1998, and 1997, and
         for the six months ended June 30, 2000 and 1999.

        Consolidated Statements of Stockholders' Equity for the Years Ended
        December 31, 1999, 1998, and
         1997, and for the six months ended June 30, 2000.

       Notes to Consolidated Financial Statements.

     2. Financial Statement Schedules:

        Schedule II -- Valuation and Qualifying Accounts for the years ended
        December 31, 1999, 1998, and
          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. (Incorporated
                   by reference to Exhibit No. 2.2 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 Act of 1934, as amended, for the fiscal year ended
                   December 31, 1997).

       3.1(a)     First Restated 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).

       3.1(b)     Certificate of Amendment of First Restated Certificate of
                  Incorporation (Incorporated by reference to Exhibit No. 3.1(b)
                  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 June 30, 1998).

       3.2(a)     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).

       3.2(b)       Amendment to Amended and Restated By-Laws of Applied
                    Graphics Technologies, Inc. (Incorporated by reference to
                    Exhibit No. 3.3 forming part of the Registrant's

                                       71
<PAGE>   75

                    Registration Statement on Form S-4 (File No. 333-51135)
                    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).

       10.6(a)     Employment Agreement, effective as of May 1, 2000, between
                   the Company and Joseph D. Vecchiolla (Incorporated by
                   reference to Exhibit No. 10.6(a) 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 Act of 1934, as amended, for the quarterly period
                   ended June 30, 2000).

       10.6(b)     Agreement and General Release, effective June 4, 2000,
                   between the Company and Louis Salamone, Jr. (Incorporated by
                   reference to Exhibit No. 10.6(b) 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 Act of 1934, as amended, for the quarterly period
                   ended June 30, 2000).

       10.6(c)     Employment Agreement, effective as of May 24, 1999, between
                   the Company and Derek Ashley (Incorporated by reference to
                   Exhibit No. 10.6(c) forming part of 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 June 30,
                   1999).

       10.6(d)(i)   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(d)(ii)  Employment Agreement Extension dated March 23, 1998, between
                    the Company and Scott Brownstein (Incorporated by reference
                    to Exhibit No. 10.6(d)(ii) forming part of the Registrant's
                    Registration Statement on Form S-4 (File No. 333-51135)
                    filed with the Securities and Exchange Commission under the
                    Securities Act of 1933, as amended).

       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).

       10.8         Applied Graphics Technologies, Inc., 1998 Incentive
                    Compensation Plan, as Amended and Restated (Incorporated by
                    reference to Exhibit No. 10.8 forming part of Registrant's
                    Report on Form 10-Q (File No. 0-28208) filed with the
                    Securities and Exchange

                                       72
<PAGE>   76

                    Commission under the Securities Exchange Act of 1934, as
                    amended, for the quarterly period ended June 30, 1999).

       10.8(a)     Amendment No. 1, dated as of May 8, 2000, to the Applied
                   Graphics Technologies, Inc., Amended and Restated 1998
                   Incentive Compensation Plan (Incorporated by reference to
                   Exhibit No. 10.8(a) 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 June 30,
                   2000).

       10.9(a)     Amended and Restated Credit Agreement, dated as of March 10,
                   1999, among Applied Graphics Technologies, Inc., Other
                   Institutional Lenders as Initial Lenders, and Fleet Bank,
                   N.A. (Incorporated by reference to Exhibit 99.2 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 March 22, 1999).

       10.9(b)     Amendment No. 1, dated as of June 2, 1999, to the Amended and
                   Restated Credit Agreement among Applied Graphics
                   Technologies, Inc., Other Institutional Lenders as Initial
                   Lenders, and Fleet Bank, N.A. (Incorporated by reference to
                   Exhibit No. 10.9(b) forming part of 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 June 30,
                   1999).

       10.9(c)     Amendment No. 2, dated July 28, 1999, to the Amended and
                   Restated Credit Agreement among Applied Graphics
                   Technologies, Inc., Other Institutional Lenders as Initial
                   Lenders, and Fleet Bank, N.A. (Incorporated by reference to
                   Exhibit No. 10.9(c) forming part of 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 September
                   30, 1999).

       10.9(d)     Amendment No. 3, dated as of July 21, 2000, to the Amended
                   and Restated Credit Agreement among Applied Graphics
                   Technologies, Inc., Other Institutional Lenders as Initial
                   Lenders, and Fleet Bank, N.A. (Incorporated by reference to
                   Exhibit No. 10.9(d) 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 June 30,
                   2000).

       10.9(e)     Amendment No. 4, dated as of August 11, 2000, to the Amended
                   and Restated Credit Agreement among Applied Graphics
                   Technologies, Inc., Other Institutional Lenders as Initial
                   Lenders, and Fleet Bank, N.A. (Incorporated by reference to
                   Exhibit No. 10.9(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 June 30,
                   2000).

       21           Subsidiaries of the Registrant.

       23           Consent of Deloitte & Touche LLP

       27           Financial Data Schedule (EDGAR filing only).

(b) The Registrant did not file any reports on Form 8-K during the quarter ended
December 31, 1999, or the six months ended June 30, 2000.

                                       73
<PAGE>   77

                                   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/     DEREK ASHLEY
                                            ------------------------------------
                                                        Derek Ashley
                                               Vice Chairman, Chief Executive
                                                          Officer,
                                                 Chief Operating Officer, and
                                                          Director
                                                  (Duly authorized officer)

Date: October 10, 2000

                                       74
<PAGE>   78

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                               ADDITIONS
                                                        ------------------------
                                          BALANCE AT    CHARGED TO   CHARGED TO                     BALANCE AT
                                         BEGINNING OF   COSTS AND       OTHER                         END OF
DESCRIPTION                                 PERIOD       EXPENSES    ACCOUNTS(1)   DEDUCTIONS(2)      PERIOD
-----------                              ------------   ----------   -----------   --------------   ----------
<S>                                      <C>            <C>          <C>           <C>              <C>
Allowances deducted in the balance
  sheet from assets to which they
  apply:
For the year ended December 31, 1999
Allowance for doubtful accounts and
  returns..............................     $9,325        $2,732       $2,324         $(6,649)        $7,732
                                            ======        ======       ======         =======         ======
For the year ended December 31, 1998
Allowance for doubtful accounts and
  returns..............................     $3,989        $  775       $7,859         $(3,298)        $9,325
                                            ======        ======       ======         =======         ======
For the year ended December 31, 1997
Allowance for doubtful accounts and
  returns..............................     $  472        $3,990       $  308         $  (781)        $3,989
                                            ======        ======       ======         =======         ======
</TABLE>

---------------
(1) Represents allowances for doubtful accounts and returns recorded in
    connection with acquisitions.

(2) In 1999 represents $2,506 for amounts written off and $4,143 for adjustments
    to goodwill relating to acquisitions. In 1998 and 1997 represents amounts
    written off.

                                       75