<PAGE>   1

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

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       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 February 28, 2001, was $24,638,611.

     The number of shares of the registrant's Common Stock outstanding as of
February 28, 2001, was 9,033,603 shares.

     The following documents are hereby incorporated by reference into this Form
10-K.

     (1) Portions of the Registrant's 2001 Proxy Statement to be filed with the
Securities and Exchange Commission (Part III).

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<PAGE>   2

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM                                                                 PAGE
----                                                                 ----
<S>    <C>                                                           <C>
       PART I
1.     Business....................................................    1
2.     Properties..................................................    6
3.     Legal Proceedings...........................................    6
4.     Submission of Matters to a Vote of Security Holders.........    7
       Executive Officers of the Company...........................    8
       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........................................................   17
8.     Financial Statements and Supplementary Data.................   18
9.     Changes in and disagreements with Accountants on Accounting
       and Financial Disclosure....................................   49
       PART III
10.    Directors and Executive Officers of the Registrant..........   50
11.    Executive Compensation......................................   50
12.    Security Ownership of Certain Beneficial Owners and
       Management..................................................   50
13.    Certain Relationships and Related Transactions..............   50
       PART IV
14.    Exhibits, Financial Statement Schedules, and Reports on Form
       8-K.........................................................   51
       Signatures..................................................   55
</TABLE>
<PAGE>   3

                                     PART I

     Certain statements made in this Annual Report on Form 10-K are
"forward-looking" statements (within the meaning of the Private Securities
Litigation Reform Act of 1995). Such statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: the ability to maintain compliance with the financial
covenant requirements under the 1999 Credit Agreement (as defined herein) or to
obtain waivers from the lending institutions in the case such compliance is not
maintained; the impact of technological advancements on the ability of customers
and competitors to provide services comparable to that provided by the Company;
the amount of broadcast media distribution services business received under the
agreement with Initiative Media (as defined herein); the timing of completion
and the success of the Company's various restructuring plans and integration
efforts; the ability to consummate the sale of certain properties and non-core
businesses, including the 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.

     Through Portal Publications, Ltd. and its subsidiaries ("Portal"), the
Company also publishes greeting cards, calendars, art prints, and other wall
decor items, and sells these products primarily to mass-market merchants, card
shops, bookstores, art galleries, designers, and framers. In June 2000, the
Company's Board of Directors approved a plan to sell Portal.

     During 2000, the Company exited the digital photography systems business,
selling its events-based digital photography business in August 2000 and certain
assets that were primarily dedicated to its digital portrait systems business in
December 2000.

     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.

     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

                                        1
<PAGE>   4

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 design, 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 primarily 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, and publishing
systems.

     Using integrated equipment and licensed software, the Company offers a
method to store, manipulate, repurpose, and distribute digital images. 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.

     Using packaged applications that have been modified internally, the
Company's Mediator application provides customers with integrated media
management solutions, emphasizing on-line brand media management. Mediator
delivers an electronic media library, workflow management, and the means for
customers to manage their production process.

     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 Initiative Media Corporation (formerly
Western International Media Corporation) ("Initiative Media"), the Company
entered into a multi-year contract under which Initiative Media is obligated to
direct all of its broadcast media distribution business to the Company.

                                        2
<PAGE>   5

DISCONTINUED OPERATIONS

     Publishing.  Through 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
Portal.

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 28% of total revenues in 2000. 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 61% of the Company's revenues in 2000. 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 the Company believes may limit its 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 2000, approximately 2.0% 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 facility 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.

     The Company maintains a separate sales force to market digital services to
both its content management customers and to new customers. The Company also has
a separate 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

                                        3
<PAGE>   6

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 is 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 prepress businesses. Additionally, the Company believes that
it is able to maintain competitive prices by coordinating its customers'
in-house capabilities with its own equipment, thereby minimizing redundant
processes and lowering customer costs. In addition, the Company competes for
prepress work based on its ability to provide other digital imaging services.
For example, the Company provides digital archiving services for prepress
customers at a lower cost than if purchased on a stand-alone basis because of
the Company's ability to efficiently integrate the prepress and archiving
processes.

     Independent prepress providers typically provide services based upon a
customer's request for which the provider is paid on a per-job basis. In most
cases, there is no contractual arrangement that would prevent a customer from
changing prepress providers on a per-project basis. The Company does, however,
seek multi-year contracts with customers for whom it provides services at the
customer's location.

     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 its interactive business, the Company
competes with many local, national, and global firms that provide such services
either as their primary product offering or as an adjunct to a larger product
offering.

     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.

                                        4
<PAGE>   7

     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, 2000, the Company had approximately 4,700 total
employees, approximately 4,400 of whom were full-time employees. Of the total
employees, approximately 2,200 were salaried employees and approximately 2,500
were hourly employees. Approximately 435 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.

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 $1,801,000 and $284,000 for the years ended
December 31, 2000 and 1999, respectively.

RECENT DEVELOPMENTS

     The Company is subject to certain maintenance standards in order to remain
listed on the Nasdaq National Market (the "Nasdaq"). During periods in 2000, the
Company was not in compliance with the standard that requires certain listed
companies to maintain a minimum bid price of $5.00 for their common stock. In
December 2000, the Company effected a two-for-five reverse stock split that
resulted in the bid price of its common stock remaining above the required bid
price for the requisite period to remain listed on the Nasdaq. During 2001,
however, the price of the Company's common stock again failed to maintain the
minimum bid price, and the Company was notified by the Nasdaq that its common
stock will be delisted if compliance is not achieved by May 2001. The Company is
currently pursuing alternatives to trading on the Nasdaq, including being listed
on other national exchanges that have a lower minimum bid price requirement.

                                        5
<PAGE>   8

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.

New York City
(3 content management facilities; 1 broadcast facility; 1 digital facility)

Atlanta, Georgia
(1 content management facility)

Chicago, Illinois
metropolitan area
(10 content management facilities; 1 digital facility)

Detroit, Michigan
metropolitan area
(3 content management facilities; 1 broadcast facility)

Los Angeles, California
metropolitan area
(3 content management facilities; 1 broadcast facility)

Northern New Jersey
(4 content management facilities)

Central Michigan
(1 content management facility)

Wilmington, Ohio
(1 broadcast facility)

Central Illinois
(1 content management facility)

Rochester, New York
(1 digital facility)

Seattle, Washington
(2 content management facilities; 1 publishing facility)

San Diego, California
(1 content management facility)

San Francisco, California
metropolitan area
(2 content management facilities; 2 publishing facilities)

Dallas, Texas
(2 content management facilities)

Omaha, Nebraska
(1 content management facility)

Washington, DC
(1 content management facility)

Indianapolis, Indiana
(1 content management facility)

Orlando, Florida
(1 content management facility)

Nashua, New Hampshire
(1 digital facility)

International Locations:

United Kingdom
(4 content management facilities; 1 digital facility; 1 publishing facility)

Australia
(1 content management facility;
1 publishing facility)

Canada
(1 publishing facility)

     The Company owns nine of the content management facilities and one
publishing facility. The remaining facilities are operated under leases that
expire in 2001 through 2015. The Company also provides on-site services at
certain 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.

                                        6
<PAGE>   9

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

     The annual meeting of the stockholders of the Company was held on November
21, 2000. The stockholders voted on the following matters:

     1. The election of the following twelve directors of the Company for terms
expiring at the 2001 annual meeting of stockholders:

<TABLE>
<CAPTION>
                                                                SHARES       SHARES
                                                              VOTED FOR     WITHHELD
                                                              ----------    ---------
<S>                                                           <C>           <C>
Derek Ashley................................................  19,217,269      321,090
Fred Drasner................................................  19,083,337      455,022
John W. Dreyer..............................................  19,135,715      402,644
John R. Harris..............................................  15,264,694    4,273,665
Martin D. Krall.............................................  19,215,605      322,754
Marne Obernauer, Jr.........................................  19,223,329      315,030
David R. Parker.............................................  19,248,055      290,304
Howard Stringer.............................................  15,180,134    4,358,225
Joseph D. Vecchiolla........................................  19,222,655      315,704
John R. Walter..............................................  19,237,855      300,504
John Zuccotti...............................................  19,223,541      314,818
Mortimer B. Zuckerman.......................................  19,173,006      365,353
</TABLE>

     2. The approval of the Second Certificate of Amendment of the First
Restated Certificate of Incorporation of the Company to effect a two shares for
five shares reverse stock split of the Company's issued and outstanding common
stock.

<TABLE>
<CAPTION>
   SHARES          SHARES        SHARES
  VOTED FOR     VOTED AGAINST   ABSTAINED
-------------   -------------   ---------
<S>             <C>             <C>
18,885,676         632,718       19,965
</TABLE>

                                        7
<PAGE>   10

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.........................  58    Chairman and Director
Joseph D. Vecchiolla.................  45    Chief Operating Officer, Chief Financial Officer, and
                                             Director
Marne Obernauer, Jr..................  57    Vice Chairman and Director
Martin D. Krall......................  60    Executive Vice President, Chief Legal Officer,
                                             Secretary, and Director
</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, L.P. ("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, and President of U.S. News from 1985 to
1997, Chairman and Chief Executive Officer of Applied Printing Technologies,
L.P. ("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 served as Co-Chairman of Fast Company Media Group,
L.L.C. ("Fast Company"), from January 1999 until October 2000. Mr. Drasner was
also senior counsel to Shaw Pittman, formerly known as Shaw Pittman Potts &
Trowbridge, until his resignation in April 1996.

     Joseph D. Vecchiolla, Chief Operating Officer, Chief Financial Officer, and
a director of the Company, joined the Company in May 2000 as its Senior Vice
President and Chief Financial Officer and has served as Chief Operating Officer
since December 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 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.

     Marne Obernauer, Jr., Vice Chairman and a director of the Company, joined
the Company in May 1998 in connection with the merger with Devon Group, Inc.
("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.

     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 and as Executive
Vice President, Chief Legal Officer, and Secretary of Fast Company and its
majority owner, FC Holdings, L.L.C., from January 1999 until December 2000.
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.

                                        8
<PAGE>   11

                                    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 (NASDAQ
symbol AGTX). The following table sets forth the high and low closing sales
price for each period indicated, adjusted to reflect the two-for-five reverse
stock split effective December 5, 2000:

<TABLE>
<CAPTION>
                                                        2000                1999
                                                   ---------------    ----------------
                                                    HIGH      LOW      HIGH      LOW
                                                   ------    -----    ------    ------
<S>                                                <C>       <C>      <C>       <C>
First quarter....................................  $23.28    $8.28    $42.66    $17.19
Second quarter...................................  $15.63    $7.66    $36.56    $16.56
Third quarter....................................  $11.72    $8.28    $36.25    $19.53
Fourth quarter...................................  $ 9.22    $3.38    $24.53    $16.25
</TABLE>

     As of February 28, 2001, there were approximately 125 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.

ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                          ----------------------------------------------------
                                          2000(a)    1999(b)    1998(c)    1997(d)      1996
                                          --------   --------   --------   --------   --------
                                               (IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE
                                                                AMOUNTS)
<S>                                       <C>        <C>        <C>        <C>        <C>
Revenues................................  $566,540   $532,064   $338,942   $184,993   $132,725

Income (loss) from continuing
  operations before provision for
  income taxes and minority interest      $ 12,812   $ (7,270)  $ 16,290   $ 22,707   $ 10,820

Income (loss) from continuing
  operations............................  $ (2,142)  $(11,534)  $  6,318   $ 13,567   $  9,955

Earnings (loss) per common share from
  continuing operations:

  Basic.................................  $  (0.24)  $  (1.28)  $   0.77   $   2.19   $   1.96

  Diluted...............................  $  (0.24)  $  (1.28)  $   0.74   $   2.06   $   1.93

Total assets............................  $722,233   $931,010   $703,074   $224,793   $ 72,147

Long-term obligations:

  Long-term debt........................  $204,080   $298,125   $203,087   $    812   $  6,005

  Subordinated notes....................    27,745     29,867

  Obligations under capital leases......     1,540      3,814      3,475      2,011      1,265
                                          --------   --------   --------   --------   --------

Total...................................  $233,365   $331,806   $206,562   $  2,823   $  7,270
                                          ========   ========   ========   ========   ========

</TABLE>

     No dividends have been paid on the Company's common stock. Prior period
amounts have been adjusted to reflect the two-for-five reverse split of the
Company's common stock on December 5, 2000.
---------------
(a) Amounts in 2000 include gains on disposal of property and equipment of
    $2,327 and gains on sale of businesses of $16,590, as well as charges of
    $658, $583, and $2,056 for impairment of a business, impairments of property
    and equipment, and nonrestructuring-related employee termination costs,
    respectively.

(b) Amounts in 1999 include charges of $3,572, $744, $5,558, $2,402, $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.)

                                        9
<PAGE>   12

(c) 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.)

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

                                        10
<PAGE>   13

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

     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, 2000, compared with 1999

     Revenues in 2000 were $34,476 higher than in the comparable period in 1999.
This increase was primarily due to the revenues from Wace Group Limited
("Wace"), which was acquired in May 1999. Revenues in the 2000 period increased
by $24,119 from content management services, $7,176 from digital services, and
$3,181 from broadcast media distribution services. Increased revenues from
content management services primarily resulted from increased revenues of
$38,017 associated with the content management businesses acquired from Wace and
increased revenues of $13,919 at the Company's West Coast operations,
principally from customers in the entertainment industry. These increases were
partially offset by a decrease in revenues of $17,597 from the Black Dot
operations acquired in the merger with Devon Group, Inc. ("Devon"), primarily in
the area of creative services, and a decrease in revenues of $10,686 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.

     Revenues in 2000 include $23,251 related to businesses that were sold
during the year, primarily the digital portrait systems business and the
photographic laboratory business. Based on the lost revenue resulting from these
sold businesses, combined with the general downturn in the economy and early
indicators relating to general advertising, the Company believes it could
experience a decrease in revenues in the coming year.

     Gross profit increased $22,423 in 2000 as a result of the additional
revenues for the period discussed above. The gross profit percentage in 2000 was
33.7% as compared to 31.7% 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. Additionally, the gross profit
percentage increased as a result of the aforementioned decrease in revenues from
customers in the publications industry, which historically had lower gross
profit margins than the Company's other content management operations.

     Selling, general, and administrative expenses in 2000 were $20,750 higher
than in the 1999 period, and as a percent of revenue increased to 27.4% in the
2000 period from 25.3% in the 1999 period. Such expenses grew at a greater rate
than revenue due primarily to a higher rate of costs incurred at the Wace
operations than at the Company's other content management operations.
Additionally, selling, general, and administrative expenses in 2000 include a
charge of $2,056 for nonrestructuring-related employee termination costs.
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.

     The gain on disposal of fixed assets was $2,327 in 2000, primarily as a
result of the sale of real estate. The Company incurred a loss of $2,402 in 1999
when it abandoned or disposed of significant amounts of equipment 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 its various integration efforts.

     The gain on sale of businesses of $16,590 in 2000 primarily represents a
gain on the sale of certain assets that were dedicated to the Company's digital
portrait system business.

     The results of operations for 2000 reflect income of $202 related to
various restructuring efforts initiated by the Company (see Note 5 to the
Consolidated Financial Statements). Such income includes a charge of $651
related to a plan to close the Atlanta operation acquired as part of the Wace
acquisition (the "2000 Second Quarter Plan"), offset by the reversal of $853 of
certain liabilities no longer necessary related to the

                                        11
<PAGE>   14

1999 and 1998 restructuring plans. The charge for the 2000 Second Quarter Plan
consisted of $509 for facility closure costs and $142 for employee termination
costs for 37 employees.

     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. The results of operations for 2000 include income of $5 resulting from
the reversal of liabilities no longer needed related to the 1998 Second Quarter
Plan.

     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 was transferred to the
Company's other Midwest facilities. The results of operations for 2000 include
income of $42 resulting from the reversal of liabilities no longer needed
related to the 1998 Fourth Quarter Plan. The adjustment to the liability
primarily resulted from the Company negotiating favorable settlements on certain
building lease and maintenance obligations.

     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 moved 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 was moved to a smaller Foster City location. The results of
operations for 2000 include income of $105 resulting from the reversal of
liabilities no longer needed related to the 1999 Third Quarter Plan. The
adjustment to the liability resulted from less than anticipated employee
termination costs due to the voluntary resignation of certain employees, as well
as the Company negotiating favorable settlements on certain building lease and
maintenance obligations.

     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 and 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 intended to consolidate its Carlstadt, NJ, operation to occupy only
two of the three buildings that currently comprise that facility and sublet the
vacated building, as well as to transfer certain centralized administrative
functions to various regional operations, which would have resulted in the
closure of a New York metropolitan area administrative office. The results of
operations for 2000 include income of $701 related to the Fourth Quarter Plan,
due primarily to changes in the Company's senior management and a re-evaluation
of its operations, which resulted in the decision to continue to occupy all
three buildings at its Carlstadt, NJ, operation and to remain in the New York
metropolitan area administrative office previously identified for closure.

     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 transferred to its other facilities. The employees
terminated under the restructuring plans were 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, and
completed the 1999 Third Quarter Plan, the 1999 Fourth Quarter Plan, and the
2000 Second Quarter Plan during 2000.

                                        12
<PAGE>   15

     Impairments and other charges totaled $1,241 in 2000 and consisted of a
$583 impairment of property and equipment related to the Company's various
restructuring and integration efforts, as well as a $658 write down of
long-lived assets related to its events-based digital photography operation,
which was sold in August 2000.

     Interest expense in 2000 was $9,282 higher than in 1999 due primarily to
the interest on borrowings under the Company's primary credit facilities (the
"1999 Credit Agreement") to finance the Wace acquisition being outstanding for
the full year of 2000 as compared to only a portion of 1999, as well as an
overall increase in interest rates throughout 2000. Four interest rate swap
agreements entered into by the Company resulted in a reduction of interest
expense in 2000 of $553, as compared to additional interest expense in 1999 of
$354.

     The Company incurred a provision for income taxes at a rate equal to 97.2%
of the pretax income for the year. A provision was incurred at a rate that is
significantly higher than the statutory rate primarily due to additional Federal
taxes on foreign earnings and the permanent items related to the nondeductible
goodwill and the nondeductible portion of meals and entertainment expenses.

     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. During
the second quarter of 2000, the Company solicited bids and entered into
negotiations with a potential buyer. After long negotiations, the Company
believed it was no longer in its best interest to pursue the proposed
transaction and negotiations ceased. The Company is continuing to pursue the
sale of the publishing business, although there can be no assurance that a sale
will be consummated. The results of operations in 2000 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. In accordance
with the 1999 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
22.1% of the Company's outstanding common stock at December 31, 2000. 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. The Company also conducted
business in 1998 with Snyder Communications, Inc., ("Snyder"), a provider of
outsourced marketing services. At such time, the Chairman of the Board and the
Chairman were members of the Board of Directors of Snyder and in the aggregate
owned approximately 10.0% of the outstanding common stock. Sales to related
parties for the years ended December 31, 2000, 1999, and 1998, totaled $11,401,
$13,008, and $23,658, respectively, representing 2.0%, 2.4%, and 7.0%,
respectively, of the Company's revenues.

  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, $65,679 in revenues from 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.
                                        13
<PAGE>   16

     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 1998.

     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 its 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). The charge consisted of a charge of $636
related to the 1999 Third Quarter Plan, a charge of $4,155 related to the 1999
Fourth Quarter Plan, a charge of $228 related to the 1998 Second Quarter Plan,
and income of $1,447 related to the 1998 Fourth Quarter Plan. The charge for the
1998 Second Quarter Plan resulted from the Company not being released as early
as originally estimated from certain rental obligations on abandoned equipment.
The income related to the 1998 Fourth Quarter Plan resulted 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
resignation of certain employees.

     Impairments and other charges totaled $6,302 in 1999 and consisted 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 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 primarily consisted 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 approxi-

                                        14
<PAGE>   17

mately $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.

     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.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2000, the total amount outstanding under the 1999 Credit
Agreement was $219,430, of which $28,682 was outstanding under a revolving
credit line (the "Revolver") and $190,748 was outstanding under three term loans
(the "Term Loans"). The Revolver extends through June 2005, and the three Term
Loans extend through June 2005, June 2006, and June 2007, respectively. During
2000, the Company's borrowing capacity under the Revolver was reduced from
$100,000 to $81,000, resulting in an available borrowing capacity of $52,318 at
December 31, 2000. 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).

     In accordance with the requirements of the 1999 Credit Agreement, 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 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. 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, at which time the covenant
requirements revert back to those originally contained in the 1999 Credit
Agreement. 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.

     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 was deferred and is
being included as a component of interest expense over the remaining term of the
1999 Credit Agreement.

     At December 31, 2000, the Company was in compliance with all financial
covenants. Under the terms of the Fourth Amendment, the covenant requirements
revert back to the more restrictive covenant requirements originally contained
in the 1999 Credit Agreement beginning with the quarterly fiscal period ending
September 30, 2001. Based on its most recent projections, the Company does not
believe it will be able to

                                        15
<PAGE>   18

attain compliance with the original covenant requirements. If the Company does
not attain such 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 2000 the Company repaid $93,101 of its borrowings under the 1999
Credit Agreement, repaid $3,317 of notes and capital lease obligations, and made
contingent payments related to acquisitions of $4,770. In addition, the Company
invested $15,778 in facility construction and new equipment and spent $2,449 on
software-related projects. Such amounts were primarily generated from cash from
operating activities of $57,976, the sale of property, equipment, and businesses
that generated aggregate proceeds of $39,410, and sale and leaseback
transactions that generated proceeds of $12,922.

     Cash flows from operating activities of continuing operations during 2000
increased by $14,834 as compared to 1999 due primarily to improved customer
collection efforts and the timing of vendor payments. Cash generated by
discontinued operations in 2000 increased by $13,237 as compared to 1999.

     The Company expects to spend approximately $18,000 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, 2000, the Company had a liability of approximately $1,119
for the future costs related to its restructuring charges and a liability of
$3,602 for dividends in arrears on the Wace Preference Shares. The Company also
has minimum debt payments in 2001, inclusive of capital lease obligations, of
approximately $18,204.

     As part of its efforts to integrate and streamline its operations, the
Company continues to evaluate its various businesses and is pursuing strategies
to maximize their value, including the sale of noncore businesses, such as the
publishing business, and certain properties. 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 maintain compliance or obtain a waiver in
the event of noncompliance, if any, with the financial covenants under the 1999
Credit Agreement, will provide sufficient cash flows to fund its cash needs for
the foreseeable future.

     The Company is subject to certain maintenance standards in order to remain
listed on the Nasdaq National Market (the "Nasdaq"). During periods in 2000, the
Company was not in compliance with the standard that requires certain listed
companies to maintain a minimum bid price of $5.00 for their common stock. In
December 2000, the Company effected a two-for-five reverse stock split that
resulted in the bid price of its common stock remaining above the required bid
price for the requisite period to remain listed on the Nasdaq. During 2001,
however, the price of the Company's common stock again failed to maintain the
minimum bid price, and the Company was notified by the Nasdaq that its common
stock will be delisted if compliance is not achieved by May 2001. The Company is
currently pursuing alternatives to trading on the Nasdaq, including being listed
on other national exchanges that have a lower minimum bid price requirement.

     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

                                        16
<PAGE>   19

time of adoption of SFAS No. 133 will be reflected in other comprehensive income
if the swaps qualified as hedges under generally accepted accounting principles
prior to the adoption of SFAS No. 133. Otherwise, the gain or loss upon adoption
of SFAS No. 133 will be reflected in net income. Future gains and losses
resulting from the change in fair value of the swap agreements will be reflected
in cumulative comprehensive income to the extent the swaps qualify as cash flow
hedges under SFAS No. 133. To the extent the swaps do not qualify as cash flow
hedges under SFAS No. 133, such gains and losses will be reflected in net
income. Based on the fair value of its interest rate swaps at December 31, 2000
(see Note 22 to the Consolidated Financial Statements), and the high degree of
effectiveness of its swaps resulting in the swaps qualifying as hedges under
SFAS No. 133, the Company does not expect the adoption of SFAS No. 133 to have a
material effect on its financial position or results of operations.

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

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

     The Company's primary exposure to market risk is interest rate risk. The
Company had $219,430 outstanding under its credit facilities at December 31,
2000. 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 December 31, 2000. A change in interest rates of 1.0% would result in
an annual change in income before taxes of $1,294 based on the outstanding
balance under the Company's credit facilities and the notional amounts of the
interest rate swap agreements at December 31, 2000.

                                        17
<PAGE>   20

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                                        18
<PAGE>   21

                          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,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. 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,
2000 and 1999 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, 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.

                                          /s/ DELOITTE & TOUCHE LLP

New York, New York
February 27, 2001

                                        19
<PAGE>   22

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

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

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  6,406    $ 17,642
  Marketable securities.....................................     1,677       2,127
  Trade accounts receivable (net of allowances of $5,100 in
     2000 and $7,732 in 1999)...............................   100,394     119,997
  Due from affiliates.......................................     5,084       6,615
  Inventory.................................................    21,842      26,283
  Prepaid expenses..........................................     7,248      12,095
  Deferred income taxes.....................................    18,618      26,985
  Other current assets......................................     4,905      13,844
  Net current assets of discontinued operations.............    44,790      36,233
                                                              --------    --------
          Total current assets..............................   210,964     261,821
Property, plant, and equipment -- net.......................    63,789      95,281
Goodwill and other intangible assets (net of accumulated
  amortization of $31,325 in 2000 and $17,991 in 1999)......   424,031     437,674
Other assets................................................    23,449      23,846
Net non-current assets of discontinued operations...........               112,388
                                                              --------    --------
          Total assets......................................  $722,233    $931,010
                                                              ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $ 87,344    $ 90,954
  Current portion of long-term debt and obligations under
     capital leases.........................................    18,204      19,024
  Due to affiliates.........................................     1,115       1,909
  Other current liabilities.................................    21,626      33,477
                                                              --------    --------
          Total current liabilities.........................   128,289     145,364
Long-term debt..............................................   204,080     298,125
Subordinated notes..........................................    27,745      29,867
Obligations under capital leases............................     1,540       3,814
Deferred income taxes.......................................     3,896       2,975
Other liabilities...........................................    11,395       8,763
                                                              --------    --------
          Total liabilities.................................   376,945     488,908
                                                              --------    --------
Commitments and contingencies
Minority interest -- Redeemable Preference Shares issued by
  subsidiary................................................    36,584      34,152
                                                              --------    --------
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 2000 and 1999; shares issued and
     outstanding: 9,033,603 in 2000 and 22,474,772 in
     1999)..................................................        90         225
  Additional paid-in capital................................   388,704     386,548
  Accumulated other comprehensive income....................       522       1,264
  Retained earnings (deficit)...............................   (80,612)     19,913
                                                              --------    --------
     Total stockholders' equity.............................   308,704     407,950
                                                              --------    --------
          Total liabilities and stockholders' equity........  $722,233    $931,010
                                                              ========    ========
</TABLE>

                 See Notes to Consolidated Financial Statements
                                        20
<PAGE>   23

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

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

<TABLE>
<CAPTION>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              2000         1999        1998
                                                            ---------    --------    --------
<S>                                                         <C>          <C>         <C>
Revenues..................................................  $ 566,540    $532,064    $338,942
Cost of revenues..........................................    375,593     363,540     225,240
                                                            ---------    --------    --------
Gross profit..............................................    190,947     168,524     113,702
                                                            ---------    --------    --------
Selling, general, and administrative expenses.............    155,199     134,449      73,594
Amortization of intangibles...............................     13,334      11,306       5,724
Loss (gain) on disposal of property and
  equipment -- net........................................     (2,327)      2,402        (318)
Gain on sale of businesses................................    (16,590)
Restructuring charges (income)............................       (202)      3,572       8,550
Impairments and other charges.............................      1,241       6,302       5,659
                                                            ---------    --------    --------
          Total operating expenses........................    150,655     158,031      93,209
                                                            ---------    --------    --------
Operating income..........................................     40,292      10,493      20,493
Interest expense..........................................    (28,428)    (19,146)     (6,307)
Interest income...........................................        794         475       1,817
Other income -- net.......................................        154         908         287
                                                            ---------    --------    --------
Income (loss) from continuing operations before provision
  for income taxes and minority interest..................     12,812      (7,270)     16,290
Provision for income taxes................................     12,454       2,166       9,972
                                                            ---------    --------    --------
Income (loss) from continuing operations before minority
  interest................................................        358      (9,436)      6,318
Minority interest.........................................     (2,500)     (2,098)
                                                            ---------    --------    --------
Income (loss) from continuing operations..................     (2,142)    (11,534)      6,318
Income (loss) from discontinued operations................    (98,383)       (452)      1,858
                                                            ---------    --------    --------
Net income (loss).........................................   (100,525)    (11,986)      8,176
Other comprehensive income (loss).........................       (742)      1,268          27
                                                            ---------    --------    --------
Comprehensive income (loss)...............................  $(101,267)   $(10,718)   $  8,203
                                                            =========    ========    ========
Basic earnings (loss) per common share:
  Income (loss) from continuing operations................  $   (0.24)   $  (1.28)   $   0.77
  Income (loss) from discontinued operations..............     (10.88)      (0.05)       0.22
                                                            ---------    --------    --------
          Total...........................................  $  (11.12)   $  (1.33)   $   0.99
                                                            =========    ========    ========
Diluted earnings (loss) per common share:
  Income (loss) from continuing operations................  $   (0.24)   $  (1.28)   $   0.74
  Income (loss) from discontinued operations..............     (10.88)      (0.05)       0.22
                                                            ---------    --------    --------
          Total...........................................  $  (11.12)   $  (1.33)   $   0.96
                                                            =========    ========    ========
Weighted average number of common shares:
  Basic...................................................      9,040       8,982       8,225
  Diluted.................................................      9,040       8,982       8,490
</TABLE>

                 See Notes to Consolidated Financial Statements
                                        21
<PAGE>   24

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
Net income (loss)...........................................  $(100,525)  $ (11,986)  $   8,176
Adjustments to reconcile net income (loss) to net cash from
  operating activities:
  Depreciation and amortization.............................     38,552      35,352      17,838
  Deferred taxes............................................      6,731      (4,254)     (3,835)
  Noncash restructuring charges.............................     (1,019)                  2,063
  Noncash impairment charges................................      1,241       6,302       4,935
  Loss (gain) on disposal of property and equipment.........     (2,314)      2,402        (318)
  Gain on sale of businesses................................    (16,590)
  Provision for bad debts and returns.......................      3,929       2,732       1,869
  Loss (income) from discontinued operations................     98,383         452      (1,858)
  Other.....................................................      3,800         699        (156)
Changes in Operating Assets and Liabilities, net of effects
  of acquisitions:
  Trade accounts receivable.................................      6,169      (4,817)    (12,788)
  Due from/to affiliates....................................        737         342        (410)
  Inventory.................................................      2,806       2,666       1,941
  Income tax receivable.....................................     14,704      17,584      (1,804)
  Other assets..............................................       (861)     (4,743)     (4,556)
  Accounts payable and accrued expenses.....................     (1,960)    (11,628)     (8,892)
  Other liabilities.........................................     (5,079)      2,767         505
  Net cash provided by (used in) operating activities of
    discontinued operations.................................      9,272      (3,965)      1,382
                                                              ---------   ---------   ---------
Net cash provided by operating activities...................     57,976      29,905       4,092
                                                              ---------   ---------   ---------
Cash flows from investing activities:
  Property, plant, and equipment expenditures...............    (15,778)    (16,833)    (21,449)
  Software expenditures.....................................     (2,449)     (9,123)     (7,812)
  Proceeds from sale of businesses..........................     34,499
  Proceeds from the sale of property and equipment..........      4,911      13,910         500
  Investment in available-for-sale securities...............                   (200)   (178,433)
  Proceeds from sale of available-for-sale securities.......                            283,779
  Other investing activities................................     (4,770)     (5,921)     (4,721)
  Entities purchased, net of cash acquired..................               (120,929)   (259,770)
  Net cash used in investing activities of discontinued
    operations..............................................     (1,136)     (2,692)     (1,612)
                                                              ---------   ---------   ---------
Net cash provided by (used in) investing activities.........     15,277    (141,788)   (189,518)
                                                              ---------   ---------   ---------
Cash flows from financing activities:
  Repayments of term loans..................................    (59,244)
  Borrowings (repayments) under revolving credit
    line -- net.............................................    (33,857)    111,189     201,350
  Proceeds from sale/leaseback transactions.................     12,922       2,249       6,685
  Repayment of notes and capital lease obligations..........     (3,317)     (2,478)    (16,840)
  Proceeds from exercise of stock options...................                    960          24
  Net cash used in financing activities of discontinued
    operations..............................................       (469)       (303)       (398)
                                                              ---------   ---------   ---------
Net cash provided by (used in) financing activities.........    (83,965)    111,617     190,821
                                                              ---------   ---------   ---------
Net increase (decrease) in cash and cash equivalents........    (10,712)       (266)      5,395
Effect of exchange rate changes on cash and cash
  equivalents...............................................       (524)        (71)
Cash and cash equivalents at beginning of year..............     17,642      17,979      12,584
                                                              ---------   ---------   ---------
Cash and cash equivalents at end of year....................  $   6,406   $  17,642   $  17,979
                                                              =========   =========   =========
</TABLE>

                 See Notes to Consolidated Financial Statements
                                        22
<PAGE>   25

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

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

<TABLE>
<CAPTION>
                                                                                 ACCUMULATED
                                                                   ADDITIONAL       OTHER       RETAINED
                                                          COMMON    PAID-IN-    COMPREHENSIVE   EARNINGS
                                                          STOCK     CAPITAL     INCOME (LOSS)   (DEFICIT)
                                                          ------   ----------   -------------   ---------
<S>                                                       <C>      <C>          <C>             <C>
BALANCE AT JANUARY 1, 1998..............................  $ 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 prior period
  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
                                                          -----     --------       ------       ---------
Issuance of 109,510 common shares as additional
  consideration in connection with prior period
  acquisitions..........................................      1        1,999
Compensation cost of stock options issued to
  non-employees.........................................                  21
Unrealized holding loss on available-for-sale
  securities............................................                             (643)
Unrealized loss from foreign currency translation
  adjustments...........................................                             (157)
Reclassification adjustment for losses realized in net
  income................................................                               58
Two-for-five reverse stock split........................   (136)         136
Net loss................................................                                         (100,525)
                                                          -----     --------       ------       ---------
BALANCE AT DECEMBER 31, 2000............................  $  90     $388,704       $  522       $ (80,612)
                                                          =====     ========       ======       =========
</TABLE>

                 See Notes to Consolidated Financial Statements
                                        23
<PAGE>   26

                      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. At December
31, 2000, 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"), owned
approximately 22.1% of the Company's outstanding common stock.

     On December 5, 2000, the Company effected a two-for-five reverse stock
split of its common stock, which was approved by the Company's stockholders at
the Annual Meeting held on November 21, 2000. All references to the number of
shares and per-share amounts, other than those amounts in the Consolidated
Balance Sheets and Consolidated Statements of Stockholders' Equity, have been
adjusted to reflect the reverse stock split on a retroactive basis.

     Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform to the 2000 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 are classified as "available
for sale" and are recorded at fair market value. Unrealized gains and losses on
these investments are included as a component of "Other comprehensive income
(loss)", net of any related tax effect.

     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 are generally recognized when the Company no
longer has a consequential obligation to its customers. 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.

     GOODWILL AND OTHER INTANGIBLES:  Goodwill and other intangibles are being
amortized on the straight-line method over periods ranging from 5 to 40 years.
                                        24
<PAGE>   27
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, 2000, 1999, and
1998, 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 will be reflected in other comprehensive income if the
swaps qualified as hedges under generally accepted accounting principles prior
to the adoption of SFAS No. 133. Otherwise, the gain or loss upon adoption of
SFAS No. 133 will be reflected in net income. Future gains and losses resulting
from the change in fair value of the swap agreements will be reflected in
cumulative comprehensive income to the extent the swaps qualify as cash flow
hedges under SFAS No. 133. To the extent the swaps do not qualify as cash flow
hedges under SFAS No. 133, such gains and losses will be reflected in net
income. Based on the fair value of its interest rate swaps

                                        25
<PAGE>   28
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

at December 31, 2000 (see Note 22 to the Consolidated Financial Statements), and
the high degree of effectiveness of its swaps resulting in the swaps qualifying
as hedges under SFAS No. 133, the Company does not expect the adoption of SFAS
No. 133 to have a material effect on its financial position or results of
operations.

3. ACQUISITIONS AND DISPOSITIONS

     In May 1999, the Company 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 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 (the
"1999 Credit Agreement") (see Note 11 to the Consolidated Financial Statements).
The Company also acquired a portion of 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., a digital prepress and publishing company. The total
consideration paid was $442,730, including transaction costs. In addition, in
1998 the Company acquired five other entities for aggregate consideration of
$55,782.

     During 2000 and 1999, the Company made contingent payments in the form of
cash or shares of common stock in the aggregate amount of $6,397 and $5,087,
respectively, as additional consideration for certain acquisitions based on the
1999 and 1998 performance of the acquired businesses. In addition, the Company
will make contingent payments in 2001 in the form of cash in the amount of
approximately $2,234 related to an acquisition based on the 2000 performance of
the acquired business. Such amount is 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. The
excess of the purchase price over the fair value of assets acquired recorded in
1999 was approximately $142,679, which is being amortized primarily over 35
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 year ended
December 31, 1999, calculated as if the acquisitions had occurred on January 1,
1999. 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 1999 or
of results that may occur in the future.

<TABLE>
<CAPTION>
                                                              UNAUDITED
                                                                1999
                                                              ---------
<S>                                                           <C>
Total revenues..............................................  $601,174
Loss before provision for income taxes and minority
  interest..................................................  $(17,733)
Net loss....................................................  $(18,582)
Loss per common share:
  Basic.....................................................  $  (2.07)
  Diluted...................................................  $  (2.07)
</TABLE>

                                        26
<PAGE>   29
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In December 2000, the Company sold certain assets that were primarily
dedicated to its digital portrait system business for approximately $22,500, and
realized a gain of approximately $16,649. In August 2000, the Company sold its
events-based digital photography business for $220, and realized a loss of $59
subsequent to incurring an impairment charge of $658 during the year (see Note 6
to the Consolidated Financial Statements). In April 2000, the Company sold its
photographic laboratory business, which was acquired as part of Wace, for
approximately $11,800. The Company did not realize a gain or loss on the sale of
this business. The revenues, gross profit, and operating income from these
operations included in the Company's results of operations in 2000 were $23,251,
$8,638, and $4,919, respectively.

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 May 1998 merger with Devon
Group, Inc. During the second quarter of 2000, the Company solicited bids and
entered into negotiations with a potential buyer. After long negotiations, the
Company believed it was no longer in its best interest to pursue the proposed
transaction and negotiations ceased. The Company is continuing to pursue the
sale of the publishing business. For purposes of estimating the loss on
disposal, the Company assumed a disposal date of June 30, 2001, although there
can be no assurance that definitive terms will be reached with a potential buyer
within that timeframe.

     The accompanying financial statements 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 publishing business for the six
months ended June 30, 2000, the measurement date, and for the years ended
December 31, 1999 and 1998, presented as Discontinued Operations in the
accompanying Consolidated Statements of Operations, were as follows:

<TABLE>
<CAPTION>
                                                                      FOR THE YEARS ENDED
                                                      FOR THE SIX         DECEMBER 31,
                                                     MONTHS ENDED     --------------------
                                                     JUNE 30, 2000      1999        1998
                                                     -------------    --------    --------
<S>                                                  <C>              <C>         <C>
Revenues.........................................      $ 36,361       $90,168     $55,183
                                                       ========       =======     =======
Income (loss) from operations before income
  taxes..........................................      $ (3,134)      $   678     $ 4,149
Provision equivalent to income taxes.............             7         1,130       2,291
                                                       --------       -------     -------
Income (loss) from operations....................        (3,141)         (452)      1,858
Loss on disposal (including provision for income
  taxes of $2,157)...............................       (95,242)
                                                       --------       -------     -------
Income (loss) from discontinued operations.......      $(98,383)      $  (452)    $ 1,858
                                                       ========       =======     =======
</TABLE>

     The results of operations of the publishing business include an allocation
of interest expense of $2,950 for the six months ended June 30, 2000, and $4,513
and $1,757 for the years ended December 31, 1999 and 1998, respectively. The
estimated loss on disposal includes estimated future net income from operations
for the period from the measurement date through June 30, 2001, the assumed
disposal date, of $3,023, which includes an allocation of interest expense of
$1,697. The allocated interest expense consisted solely of the interest expense
on the Company's borrowings under 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.

     The results of operations of the publishing business, including the results
for the period subsequent to the measurement date that are included in the
estimated loss on disposal, and cash flows of the publishing

                                        27
<PAGE>   30
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

business for the years ended December 31, 2000, 1999, and 1998, include amounts
for selected items as follows:

<TABLE>
<CAPTION>
                                                            2000      1999      1998
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Income (loss) from operations before income tax........    $ (386)   $  678    $4,149
Interest expense.......................................    $3,989    $4,687    $1,867
Interest income........................................    $  139    $  132    $   75
Depreciation and amortization expense..................    $2,919    $4,072    $2,213
Loss on disposal of property and equipment.............    $   13    $   17    $    7
Property, plant, and equipment expenditures............    $1,136    $2,064    $1,634
Repayments of notes and capital lease obligations......    $  469    $  303    $  398
</TABLE>

     The net assets of discontinued operations include $363 and $832 at December
31, 2000 and 1999, 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 was transferred to 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 moved 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 was moved to a smaller Foster City location.

     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 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. The Fourth Quarter Plan was revised in the third and fourth quarters
of 2000 in connection with changes in the Company's senior management and a
re-evaluation of its operations. As a result, the Company decided to continue to
occupy all three buildings at its Carlstadt, NJ, operation and to remain in the
New York metropolitan area administrative office that was previously identified
for closure.

                                        28
<PAGE>   31
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In June 2000, the Company initiated and completed a plan to close the
Atlanta operation acquired as part of the acquisition of Wace (the "2000 Second
Quarter Plan"). 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, TX.

     The results of operations for the years ended December 31, 2000, 1999, and
1998, include restructuring income of $202, and restructuring charges of $3,572
and $8,550, respectively, and resulted from the various restructuring plans as
follows:

<TABLE>
<CAPTION>
                                                           2000      1999       1998
                                                           -----    -------    ------
<S>                                                        <C>      <C>        <C>
1998 Second Quarter Plan.................................  $  (5)   $   228    $5,713
1998 Fourth Quarter Plan.................................    (42)    (1,447)    2,837
1999 Third Quarter Plan..................................   (105)       636
1999 Fourth Quarter Plan.................................   (701)     4,155
2000 Second Quarter Plan.................................    651
                                                           -----    -------    ------
Total....................................................  $(202)   $ 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 (income) 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.

     The components of the restructuring charges (income) realized in 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>
Facility closure costs.......                     $(35)         $ (70)         $(812)         $ 509
Employee termination costs...                       (7)           (35)           (55)           142
Abandoned assets.............      $(5)                                          166
                                   ---            ----          -----          -----          -----
Total........................      $(5)           $(42)         $(105)         $(701)         $ 651
                                   ===            ====          =====          =====          =====
</TABLE>

                                        29
<PAGE>   32
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The charge for employee termination costs related to approximately 37
employees for the 2000 Second Quarter Plan.

     The amount included in "Other current liabilities" in the accompanying
Consolidated Balance Sheets as of December 31, 2000 and 1999, for the future
costs of the various restructuring plans and the amounts charged against the
respective restructuring liabilities in 2000 and 1999 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 January 1, 1999...     $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
Restructuring charge.........                                                     166         $ 651
Facility closure costs.......                       (57)         (155)           (371)         (173)
Employee termination costs...                       (36)          (53)           (341)         (142)
Abandoned assets.............       (169)          (118)          (10)           (459)
Adjustment to liability......         (5)           (42)         (105)           (867)
                                  ------        -------         -----         -------         -----
Balance at December 31,
  2000.......................     $  120        $   249         $   7         $   407         $ 336
                                  ======        =======         =====         =======         =====
</TABLE>

     The number of employees comprising the charge against the various
restructuring plans' liabilities in 2000, 1999, and 1998 for employee
termination costs was as follows:

<TABLE>
<CAPTION>
                                                              2000    1999    1998
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
1998 Second Quarter Plan....................................           25      44
1998 Fourth Quarter Plan....................................   14     108
1999 Third Quarter Plan.....................................    5      24
1999 Fourth Quarter Plan....................................   12     102
2000 Second Quarter Plan....................................   37
</TABLE>

     In 2000, the Company adjusted the liability associated with each of the
1998 and 1999 plans to reflect changes in estimates made when the plans were
initiated. The adjustments to the 1998 Fourth Quarter Plan primarily resulted
from the Company negotiating favorable settlements on certain building lease and
maintenance obligations. The adjustment to the 1999 Third Quarter Plan resulted
primarily from less than anticipated employee termination costs due to the
voluntary resignation of certain employees, as well as the Company negotiating
favorable settlements on certain building lease and maintenance obligations. The
adjustment to the 1999 Fourth Quarter Plan resulted primarily from the Company's
aforementioned decisions regarding its Carlstadt, NJ, operation and New York
metropolitan area administrative office.

     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

                                        30
<PAGE>   33
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's re-evaluation of its plans in light of the acquisition of Wace and the
voluntary resignation 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 transferred to its other facilities. The employees
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 completed the 1999 Third Quarter Plan, 1999 Fourth Quarter Plan, and the
2000 Second Quarter Plan during 2000. The remaining liabilities for these plans
primarily represent future rental obligations for abandoned property and
equipment.

     The Company is continuing to pursue operating efficiencies and synergies
and, as a result, may incur additional restructuring charges.

6. IMPAIRMENTS AND OTHER CHARGES

     Impairments and other charges for the years ended December 31, 2000, 1999,
and 1998, consisted of the following:

<TABLE>
<CAPTION>
                                                            2000      1999      1998
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Impairment of a business.................................  $  658    $  744    $2,509
Impairment of property and equipment.....................     583     5,558
Abandonment of a business................................                       3,150
                                                           ------    ------    ------
Total....................................................  $1,241    $6,302    $5,659
                                                           ======    ======    ======
</TABLE>

     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 Company
incurred similar charges in 1999 and 1998 of $744 and $2,509, respectively, to
write down the carrying value of the long-lived assets of this business based on
the discounted estimated future cash flows. The Company consummated the sale of
this business in August 2000 for approximately $220, and realized a loss of $59.
The revenues, gross profit, and operating loss from this business included in
the Company's results of operations for the years ended December 31, 2000, 1999,
and 1998, were as follows:

<TABLE>
<CAPTION>
                                                            2000      1999      1998
                                                            -----    ------    ------
<S>                                                         <C>      <C>       <C>
Revenues..................................................  $ 590    $2,033    $1,811
Gross profit..............................................  $(168)   $  322    $  460
Operating loss............................................  $(722)   $ (530)   $ (361)
</TABLE>

     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.

                                        31
<PAGE>   34
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. MARKETABLE SECURITIES

     The Company classified its investments in marketable securities as
"available for sale" and recorded them at fair market value. Marketable
securities at December 31, 2000, consisted of equity securities with a fair
market value of $1,677 and a cost of $859. Marketable securities at December 31,
1999, consisted of equity securities with a fair market value of $2,127 and a
cost of $200.

     At December 31, 2000 and 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 the sale of available-for-sale securities during
the year ended December 31, 1998, totaled $283,779 and resulted in no realized
gain or loss. There were no sales of marketable securities for the years ended
December 31, 2000 and 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>
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Work-in-process.............................................  $19,089    $21,718
Raw materials...............................................    2,753      4,565
                                                              -------    -------
Total.......................................................  $21,842    $26,283
                                                              =======    =======
</TABLE>

9. PROPERTY, PLANT, AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Land........................................................  $  5,028    $  7,293
Machinery and equipment.....................................    42,935      62,124
Buildings and improvements..................................    41,878      51,663
Furniture and fixtures......................................    10,071       7,211
Construction in progress....................................     3,370       3,778
                                                              --------    --------
Total.......................................................   103,282     132,069
Less accumulated depreciation and amortization..............    39,493      36,788
                                                              --------    --------
Net.........................................................  $ 63,789    $ 95,281
                                                              ========    ========
</TABLE>

     No interest was capitalized during the years ended December 31, 2000 and
1999.

                                        32
<PAGE>   35
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Accounts payable............................................  $19,623    $24,756
Salaries and benefits.......................................   20,188     19,583
Accrued commissions.........................................    4,502      4,643
Accrued customer rebates....................................    3,990      3,900
Accrued interest............................................    2,644      2,660
Other operating accruals....................................   36,397     35,412
                                                              -------    -------
Total.......................................................  $87,344    $90,954
                                                              =======    =======
</TABLE>

11. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Variable rate lines of credit...............................  $ 28,682    $ 62,537
Variable rate term loans....................................   174,498     234,688
6.5% IDA bond due 2004......................................       900         900
                                                              --------    --------
Total.......................................................  $204,080    $298,125
                                                              ========    ========
</TABLE>

     In March 1999, the Company entered into 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 original borrowing capacity under the 1999
Credit Agreement was 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, 2000, $219,430 was outstanding under the 1999 Credit Agreement, of which
$28,682 was outstanding under the Revolver and $190,748 was outstanding under
the Term Loans. The average variable rate on borrowings under the 1999 Credit
Agreement for the year ended December 31, 2000 was 10.0%. 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%. The Company is
prohibited from paying dividends on its common stock under the terms of the 1999
Credit Agreement.

                                        33
<PAGE>   36
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>

<S>                                                         <C>
2001......................................................  $ 16,916
2002......................................................    23,438
2003......................................................    26,250
2004......................................................    34,750
2005......................................................    66,744
Thereafter................................................    52,898
                                                            --------
Total.....................................................   220,996
Less current portion......................................    16,916
                                                            --------
Total long-term debt......................................  $204,080
                                                            ========
</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 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. 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. 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, at which time the covenant
requirements revert back to those originally contained in the 1999 Credit
Agreement. 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. The borrowing capacity of the revolving
line of credit was further reduced to $81,000 in December 2000, upon
consummation of the sale of certain assets of the Company's digital portrait
system business.

     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

                                        34
<PAGE>   37
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 was deferred and is being included as a component of interest
expense over the remaining term of the 1999 Credit Agreement.

     At December 31, 2000, the Company was in compliance with all financial
covenants. Under the terms of the Fourth Amendment, the covenant requirements
revert back to the more restrictive covenant requirements originally contained
in the 1999 Credit Agreement beginning with the quarterly fiscal period ending
September 30, 2001. Based on its most recent projections, the Company does not
believe it will be able to attain compliance with the original covenant
requirements. If the Company does not attain such 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.

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, 2000, L18,574, or approximately $27,745, of the Preference Shares
had been exchanged for Subordinated Notes. The Subordinated Notes, which bear
interest at a fixed annual rate of 10% 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 $2,500 and $2,098 on the Preference
Shares for the years ended December 31, 2000 and 1999, respectively, which are
reflected as "Minority interest" in the Consolidated Statements of Operations.
Due to the lack of distributable reserves in Wace, the Company has not made a
dividend payment on the Preference Shares since July 1999. Accrued dividends
totaling $3,602, and $1,102 are included as part of "Minority Interest" in the
Consolidated Balance Sheets at December 31, 2000 and 1999, respectively. The
Company incurred interest expense of $2,814 and $1,257 on the Subordinated Notes
for the years ended December 31, 2000 and 1999, respectively.

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.

                                        35
<PAGE>   38
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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>
2001........................................................  $1,486      $18,252
2002........................................................   1,125       15,802
2003........................................................     389       11,040
2004........................................................     154        8,818
2005........................................................                7,812
Later years.................................................               27,488
                                                              ------      -------
Total minimum lease payments................................   3,154      $89,212
                                                                          =======
Less imputed interest.......................................     326
                                                              ------
Present value of minimum lease payments.....................   2,828
Less current portion........................................   1,288
                                                              ------
Long-term obligation under capital leases...................  $1,540
                                                              ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Machinery and equipment.....................................  $18,208    $20,560
Less accumulated depreciation...............................   12,017     11,406
                                                              -------    -------
Net.........................................................  $ 6,191    $ 9,154
                                                              =======    =======
</TABLE>

     Total rental expense under operating leases amounted to $23,657, $20,723,
and $13,760, for the years ended December 31, 2000, 1999, and 1998,
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, 2000 and 1999, the remaining balance of the
deferred gain totaling $100 and $235, respectively, is included in "Other
liabilities," both current and noncurrent, in the accompanying Consolidated
Balance Sheets.

                                        36
<PAGE>   39
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                         2000       1999       1998
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Current:
  Federal.............................................  $ 1,900    $ 3,861    $ 9,828
  State...............................................    1,005      1,975      2,023
  Foreign.............................................    3,054        903
                                                        -------    -------    -------
Total current.........................................    5,959      6,739     11,851
                                                        -------    -------    -------
Deferred:
  Federal.............................................    5,849     (3,124)    (2,144)
  State...............................................    1,685       (955)       113
  Foreign.............................................   (1,181)      (652)
                                                        -------    -------    -------
Total deferred........................................    6,353     (4,731)    (2,031)
                                                        -------    -------    -------
Tax benefits not impacting provision:
  Federal.............................................      116        128        123
  State...............................................       26         30         29
                                                        -------    -------    -------
Total tax benefits not impacting provision............      142        158        152
                                                        -------    -------    -------
Total provision for income taxes......................  $12,454    $ 2,166    $ 9,972
                                                        =======    =======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                          2000       1999       1998
                                                         -------    -------    ------
<S>                                                      <C>        <C>        <C>
Taxes at statutory rate................................  $ 4,484    $(2,545)   $5,701
State income taxes, net of Federal tax benefit.........    1,766        682     1,407
Amortization of nondeductible goodwill.................    3,718      3,272     2,489
Additional Federal tax on foreign earnings.............    1,295
Meals and entertainment expenses.......................      602        475       302
Other -- net...........................................      589        282        73
                                                         -------    -------    ------
Provision for income taxes.............................  $12,454    $ 2,166    $9,972
                                                         =======    =======    ======
Federal statutory rate.................................    35.00%     35.00%    35.00%
Effective rate.........................................    97.21%    (29.79)%   61.22%
</TABLE>

     The Company generated income (loss) from continuing operations before
provision for income taxes and minority interest for the years ended December
31, 2000 and 1999, as follows:

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Domestic....................................................  $ 9,645    $(8,476)
Foreign.....................................................    3,167      1,206
                                                              -------    -------
Total.......................................................  $12,812    $(7,270)
                                                              =======    =======
</TABLE>

                                        37
<PAGE>   40
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Deferred tax assets:
Accounts receivable.........................................  $ 2,318    $ 3,172
Inventory...................................................    1,733      1,598
Property, plant, and equipment..............................    3,615      1,299
Obligations under capital leases............................                 235
Other liabilities...........................................   15,745     22,001
                                                              -------    -------
Total deferred tax assets...................................   23,411     28,305
                                                              -------    -------
Deferred tax liabilities:
Prepaid expenses............................................      852        812
Accrued expenses............................................    4,463      2,040
Other assets................................................    3,374      1,443
                                                              -------    -------
Total deferred tax liabilities..............................    8,689      4,295
                                                              -------    -------
Net deferred tax asset......................................  $14,722    $24,010
                                                              =======    =======
</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, 2000 and 1999.

15. STOCK OPTIONS

     In 1996, the Company adopted the 1996 Stock Option Plan (the "Employee
Plan") and the Non-employee Directors' Nonqualified Stock Option Plan (the
"Directors' Plan") (collectively, the "1996 Plans"). Under the Employee Plan,
options to purchase common stock of the Company were granted to key employees of
the Company and its affiliates. Options granted under the Employee Plan have a
term of ten years and initially became 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. In May 2000, all outstanding option grants under the
Employee Plan were amended to provide for ratable vesting over the five-year
period. Under the Directors' Plan, options were granted to members of the Board
of Directors who were not eligible for grants under the Employee Plan. Under the
Director's Plan, newly appointed non-employee directors were granted 10,000
options that vested ratably over a two-year period, and on each anniversary of
their appointment were granted an additional 2,000 options that were fully
vested on the grant date. All options granted under the Directors' Plan had an
exercise price equal to the fair market value on the grant date and have a term
of ten years. The 1996 Plans provided for a combined maximum of 1,680,000 shares
of the Company's common stock to be available for issuance upon exercise of
options.

     In May 1998, the Company adopted 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 purchase common stock of the Company to employees of the
Company and its affiliates, nonemployee directors, and independent contractors.
Options are granted under the 1998 Plan to members of the Board of Directors who
are not employees of the Company or any of its affiliates in the same manner as
under the provisions of the Directors' Plan. Options granted under the 1998 Plan
have a term of ten years unless a shorter term is established at date of grant.
Initially, options granted under the 1998 Plan vested over a five-year period
and, unless an alternative vesting schedule was established in individual award
agreements, vested 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

                                        38
<PAGE>   41
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. In addition, in
May 2000, all outstanding grants under the 1998 Plan were amended to provide for
ratable vesting over a five-year period. The 1998 Plan provides for a maximum of
2,800,000 shares of the Company's common stock to be available for issuance upon
exercise of options. At December 31, 2000, 1,335,000 shares remained available
for the issuance of stock options.

     Information relating to activity in the Company's stock option plans is
summarized in the following table. Unless otherwise indicated, options have been
granted 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, 1998..................    883,680       $ 39.73
Options granted.........................................    180,000       $119.64          $69.22
Options granted with exercise price greater than
  market................................................  1,605,200       $ 76.74          $36.42
Options exercised.......................................       (800)      $ 30.00
Options forfeited.......................................    (79,000)      $ 66.60
Options cancelled.......................................   (900,200)      $108.03
                                                          ---------
Options outstanding at December 31, 1998................  1,688,880       $ 45.76
Options granted.........................................     64,000       $ 31.28          $23.05
Options granted with exercise price greater than
  market................................................    136,000       $ 36.17          $17.87
Options exercised.......................................    (32,000)      $ 30.00
Options forfeited.......................................    (99,040)      $ 45.74
                                                          ---------
Options outstanding at December 31, 1999................  1,757,840       $ 44.78
Options granted.........................................    596,000       $ 12.28          $ 9.81
Options forfeited.......................................   (286,840)      $ 55.23
                                                          ---------
Options outstanding at December 31, 2000................  2,067,000       $ 33.96
                                                          =========
Options exercisable at December 31, 1998................    246,280       $ 33.89
                                                          =========
Options exercisable at December 31, 1999................    577,040       $ 41.51
                                                          =========
Options exercisable at December 31, 2000................    818,400       $ 39.90
                                                          =========
</TABLE>

     Information relating to options outstanding at December 31, 2000, 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>
$6.25 - $7.66     64,000       $ 6.34            9.88          4,000       $ 7.66
$12.97 - $17.66  532,000       $13.05            9.34         12,000       $16.33
$26.41 - $41.25  780,000       $30.21            5.99        501,600       $30.09
$56.25           681,000       $56.25            7.75        290,800       $56.25
$98.13            10,000       $98.13            3.30         10,000       $98.13
</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

                                        39
<PAGE>   42
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compensation cost recognized by the Company on the options granted to employees
and nonemployee directors in 2000, 1999, and 1998.

     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 2000, the Company granted 9,000
options with a three-year vesting period to employees of its affiliates who
provide legal support services. The fair value of these option grants of
approximately $93 will be recognized as compensation expense over the vesting
period. For the year ended December 31, 2000, the Company incurred $21 of
compensation expense related to these option grants. During 1999, the Company
granted 10,000 options to a former employee in connection with the abandonment
of a business. The fair value of this option grant of approximately $55 was
charged against the liability related to the abandonment of this business.

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

<TABLE>
<CAPTION>
                                                       2000         1999         1998
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>
Risk-free interest rate............................    5.89%        5.27%        5.34%
Expected life......................................  7.0 years    7.0 years    6.9 years
Expected volatility................................   0.8669       0.7912       0.6159
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 $7,382, $7,142, and $3,515 for the years ended December 31, 2000, 1999, and
1998, respectively. The pro forma net income (loss) and earnings (loss) per
share for the years ended December 31, 2000, 1999, and 1998, calculated as if
the Company had elected to account for the issuance of stock options under SFAS
No. 123, were as follows:

<TABLE>
<CAPTION>
                                                        2000         1999       1998
                                                      ---------    --------    ------
<S>                                                   <C>          <C>         <C>
Net income (loss)...................................  $(103,802)   $(16,128)   $6,137
Basic earnings (loss) per share.....................  $  (11.48)   $  (0.72)   $ 0.30
Diluted earnings (loss) per share...................  $  (11.48)   $  (0.72)   $ 0.30
</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, 2000, 1999, and 1998. The number of common shares used in the
computation of basic and diluted earnings per

                                        40
<PAGE>   43
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share for the years ended December 31, 2000, 1999, and 1998, including pro forma
computations, are summarized as follows:

<TABLE>
<CAPTION>
                                                      2000         1999         1998
                                                    ---------    ---------    ---------
<S>                                                 <C>          <C>          <C>
Basic:
  Weighted average issued shares outstanding......  9,030,000    8,974,000    8,221,000
  Contingently issuable common shares not
     issued.......................................     10,000        8,000        4,000
                                                    ---------    ---------    ---------
Weighted average shares outstanding -- Basic......  9,040,000    8,982,000    8,225,000
Effect of Dilutive Securities:
  Stock options and warrants......................                              264,000
  Contingently issuable common shares.............                                1,000
                                                    ---------    ---------    ---------
Weighted average shares outstanding -- Diluted....  9,040,000    8,982,000    8,490,000
                                                    =========    =========    =========
</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
conducted business in 1998 with Snyder Communications, Inc., ("Snyder"), a
provider of outsourced marketing services. At such time, the Chairman of the
Board and the Chairman were members of the Board of Directors of Snyder and in
the aggregate owned approximately 10.0% of the outstanding common stock. 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 10.0% 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 $5,084 and $6,615 at
December 31, 2000 and 1999, respectively, representing trade receivables. The
Company owed affiliates $1,115 and $1,909 at December 31, 2000 and 1999,
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
expired on December 31, 2000. However, the Company continues to provide services
to U.S. News and is currently negotiating a new agreement. 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. The Company
also occasionally provides services to and purchases services from related
parties in addition to those services covered by these agreements. Sales to and
purchases from related parties for the years ended December 31, 2000, 1999, and
1998, were as follows:

<TABLE>
<CAPTION>
                                                         2000       1999       1998
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Affiliate sales.......................................  $11,401    $13,008    $23,658
Affiliate purchases...................................  $   360    $ 2,962    $ 7,921
</TABLE>

     Sales to affiliates represented 2.0%, 2.4%, and 7.0%, of the Company's
revenues for the years ended December 31, 2000, 1999, and 1998, respectively.

     SHARED COSTS -- The Company receives certain legal, computer, and
administrative services from the Daily News and U.S. News. For such services,
the Company incurred charges of $1,138, $1,514, and $508 for

                                        41
<PAGE>   44
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the years ended December 31, 2000, 1999, and 1998, respectively. The Company
also received certain merger and acquisition 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 "Other noncurrent assets"
at December 31, 2000 and 1999.

     LEASES -- The Company leases office space in Washington, D.C., from U.S.
News for which it incurred charges of $267, $205, and $306, for the years ended
December 31, 2000, 1999, and 1998, respectively. The Company leased office space
in New York City from Applied Printing for a portion of 1998 for which it
incurred charges of $106. The Company leased a facility in New York City from
the Daily News for a portion of the year ended December 31, 2000, for the year
ended December 31, 1999, and a portion of the year ended December 31, 1998, for
which the Company incurred charges of $15, $156, and $174, respectively. The
Company also incurred charges with U.S. News of $220 and $184 for the years
ended December 31, 2000 and 1999, respectively, 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 eligible employees who
have attained 21 years of age may contribute on both a pre-tax and after-tax
basis. During 2000, the Company adopted certain plan amendments in order to
better attract and retain employees. Such amendments included reducing the
service requirement necessary for eligibility from six months to three months,
and changing the vesting in any discretionary Company contributions from 100%
upon completion of five years of service to ratably over each of the first five
years of service. Company contributions to the plan totaled $514 in 2000. There
were no Company contributions to the plan in 1999 or 1998.

     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, 2000, 1999, and 1998, were $2,764, $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,
2000, 1999, and 1998, were $807, $558, and $461, 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

                                        42
<PAGE>   45
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

high credit quality financial institutions and limits the amount of credit
exposure to any one financial institution.

     The Company provides credit to customers on an uncollateralized basis after
evaluating customer creditworthiness. 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 provided 28%, 30%, and 32% of
revenues for the years ended December 31, 2000, 1999, and 1998, respectively. In
addition, amounts due from these customers represent 27% and 23% of trade
accounts receivable at December 31, 2000 and 1999, 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>
                                                         2000       1999       1998
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Interest paid (net of amounts capitalized)............  $29,993    $22,092    $ 5,097
Income taxes paid (refunded)..........................  $(5,847)   $ 2,673    $15,214
</TABLE>

     Noncash investing and financing activities were as follows:

<TABLE>
<CAPTION>
                                                      2000       1999         1998
                                                     ------    ---------    ---------
<S>                                                  <C>       <C>          <C>
Additions to intangible assets for contingent
  payments.........................................  $2,234    $   7,784    $   5,001
Reduction of goodwill from amortization of excess
  tax deductible goodwill..........................  $  143    $     143    $     143
Common stock issued as additional consideration for
  prior period acquisitions........................  $2,000    $     240
Fair value of stock options issued to
  non-employees....................................  $   21    $      55
Exchange of Preference Shares for Subordinated
  Notes............................................  $   68    $  29,867
Increase in additional paid-in capital from income
  tax benefit associated with exercise of stock
  options..........................................            $      15    $       9
Acquisition of property, plant, and equipment in
  exchange for obligations under capital leases....                         $   3,373
Non-contingent future payments related to
  acquisitions.....................................                         $   1,234
Common stock and warrants issued for
  acquisitions.....................................                         $ 225,665

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

                                        43
<PAGE>   46
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                   2000                      1999
                                          ----------------------    ----------------------
                                          CARRYING    ESTIMATED     CARRYING    ESTIMATED
                                           AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                          --------    ----------    --------    ----------
<S>                                       <C>         <C>           <C>         <C>
ASSETS:
Cash and cash equivalents...............  $  6,406     $  6,406     $ 17,642     $ 17,642
Marketable securities...................  $  1,677     $  1,677     $  2,127     $  2,127
Other assets............................  $  2,814     $  2,814     $  5,165     $  5,165

LIABILITIES:
Long-term debt..........................  $220,996     $220,900     $315,231     $314,246
Subordinated notes......................  $ 27,745     $ 28,280     $ 29,867     $ 31,184
Minority interest.......................  $ 36,584     $ 33,181     $ 34,152     $ 32,295
Obligations under capital leases........  $  2,828     $  2,699     $  5,732     $  5,449

OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
Unrealized gain (loss) on interest rate
  swap agreements.......................               $    (26)                 $  2,058
Unrealized gain on warrants to purchase
  marketable securities.................               $      2                  $     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>   47
                      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, gain
(loss) on disposal of property and equipment, gain on sale of businesses,
restructuring income (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>
                                                               2000        1999        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
REVENUE:
Content Management Services................................  $513,581    $489,462    $304,067
Other operating segments...................................    52,959      42,602      34,875
                                                             --------    --------    --------
Total......................................................  $566,540    $532,064    $338,942
                                                             ========    ========    ========
OPERATING INCOME:
Content Management Services................................  $ 61,406    $ 53,968    $ 51,475
Other operating segments...................................     7,600       3,655       2,147
                                                             --------    --------    --------
Total......................................................    69,006      57,623      53,622
Other business activities..................................   (33,669)    (24,055)    (13,971)
Amortization of intangibles................................   (13,334)    (11,306)     (5,724)
Gain (loss) on disposal of property and equipment..........     2,327      (2,402)        318
Gain on sale of businesses.................................    16,590
Interest expense...........................................   (28,017)    (18,639)     (5,850)
Interest income............................................       794         475       1,817
Other income...............................................       154         908         287
Restructuring income (charges).............................       202      (3,572)     (8,550)
Impairments and other charges..............................    (1,241)     (6,302)     (5,659)
                                                             --------    --------    --------
Consolidated income (loss) from continuing operations
  before provision for income taxes and minority
  interest.................................................  $ 12,812    $ (7,270)   $ 16,290
                                                             ========    ========    ========
</TABLE>

                                        45
<PAGE>   48
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                               2000       1999       1998
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
INTEREST EXPENSE ON EQUIPMENT FINANCING:
Content Management Services.................................  $   403    $   487    $   378
Other operating segments....................................        8         17         21
Other business activities...................................                   3         58
                                                              -------    -------    -------
Total.......................................................  $   411    $   507    $   457
                                                              =======    =======    =======
DEPRECIATION EXPENSE:
Content Management Services.................................  $21,828    $20,782    $10,735
Other operating segments....................................    1,437      1,977      1,013
Other business activities...................................    1,953      1,287      1,523
                                                              -------    -------    -------
Total.......................................................  $25,218    $24,046    $13,271
                                                              =======    =======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
TOTAL ASSETS:
Content Management Services.................................  $614,177    $711,830
Other operating segments....................................    31,222      35,423
Other business activities...................................    32,044      35,136
Discontinued operations.....................................    44,790     148,621
                                                              --------    --------
Total.......................................................  $722,233    $931,010
                                                              ========    ========
EXPENDITURES ON LONG-LIVED ASSETS:
Content Management Services.................................  $ 14,858    $ 15,414
Other operating segments....................................     1,645       1,622
Other business activities...................................     1,724       8,920
                                                              --------    --------
Total.......................................................  $ 18,227    $ 25,956
                                                              ========    ========
</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 $15,038, $17,088, and $6,475 for the
years ended December 31, 2000, 1999, and 1998, respectively, and had long-lived
assets in foreign countries of $899

                                        46
<PAGE>   49
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and $675 as of December 31, 2000 and 1999, respectively. Segment information for
continuing operations relating to geographic regions for 2000 and 1999 was as
follows:

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
REVENUES:
United States...............................................  $514,672    $495,793
United Kingdom..............................................    47,696      32,746
Other foreign countries.....................................     4,172       3,525
                                                              --------    --------
Total.......................................................  $566,540    $532,064
                                                              ========    ========
LONG-LIVED ASSETS:
United States...............................................  $ 72,084    $ 88,033
United Kingdom..............................................     4,387      19,182
Other foreign countries.....................................       601         967
                                                              --------    --------
Total.......................................................  $ 77,072    $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, 2000, 1999, and
1998, consisted 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, 1998....................  $   (53)    $  22      $  (31)       $  --         $   (31)
Unrealized loss...............................                                          (4)             (4)
Reclassification adjustment for losses
  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
Unrealized loss...............................   (1,109)      466        (643)        (157)         (1,131)
Reclassification adjustment for losses
  realized in net income......................                                          58             389
                                                -------     -----      ------        -----         -------
Balance at December 31, 2000..................  $   817     $(343)     $  474        $  48         $   522
                                                =======     =====      ======        =====         =======
</TABLE>

                                        47
<PAGE>   50
                      APPLIED GRAPHICS TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

25. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                             2000 QUARTER ENDED
                                         -----------------------------------------------------------
                                         MARCH 31    JUNE 30(1)    SEPTEMBER 30(2)    DECEMBER 31(3)
                                         --------    ----------    ---------------    --------------
<S>                                      <C>         <C>           <C>                <C>
Revenues...............................  $144,319     $147,023        $140,043           $135,155
Gross profit...........................  $ 47,032     $ 50,416        $ 48,572           $ 44,927
Income (loss) from continuing
  operations before provision for
  income taxes and minority interest...  $ (4,645)    $ (1,112)       $  4,035           $ 14,534
Income (loss) from continuing
  operations...........................  $ (7,445)    $ (1,676)       $  1,821           $  5,158
Loss from discontinued operations......    (1,474)     (96,909)
                                         --------     --------        --------           --------
Net income (loss)......................  $ (8,919)    $(98,585)       $  1,821           $  5,158
                                         ========     ========        ========           ========
Earnings (loss) per common share from
  continuing operations:
  Basic................................  $  (0.82)    $  (0.19)       $   0.20           $   0.57
  Diluted..............................  $  (0.82)    $  (0.19)       $   0.20           $   0.57
</TABLE>

<TABLE>
<CAPTION>
                                                             1999 QUARTER ENDED
                                          ---------------------------------------------------------
                                          MARCH 31    JUNE 30     SEPTEMBER 30(4)    DECEMBER 31(5)
                                          --------    --------    ---------------    --------------
<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.................................  $ (0.06)    $   0.23       $   0.09           $  (1.53)
  Diluted...............................  $ (0.06)    $   0.23       $   0.09           $  (1.53)
</TABLE>

---------------
(1) Includes a restructuring charge of $611, an impairment charge of $583
    related to equipment abandoned in connection with the restructuring, and a
    charge of $658 for the write down of long-lived assets.

(2) Includes a gain of $2,359 on disposal of property and equipment.

(3) Includes a gain of $16,590 on sale of businesses.

(4) Includes a restructuring charge of $827 and an impairment charge of $1,038
    related to property and equipment disposed of in connection with the
    Company's restructuring plans.

(5) Includes a $2,745 restructuring charge, 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.

                                        48
<PAGE>   51

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

     Not applicable.

                                        49
<PAGE>   52

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     (a)Directors. -- The information with respect to directors required by this
        item is incorporated herein by reference to the 2001 Proxy Statement to
        be filed with the Securities and Exchange Commission by April 30, 2001.

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

ITEM 11.  EXECUTIVE COMPENSATION.

     The information required by this item is incorporated herein by reference
to the 2001 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 2001.

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

     The information required by this item is incorporated herein by reference
to the 2001 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 2001.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this item is incorporated herein by reference
to the 2001 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 2001.

                                        50
<PAGE>   53

                                    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, 2000 and 1999.

             Consolidated Statements of Operations for the Years Ended
             December  31, 2000, 1999, and 1998.

             Consolidated Statements of Cash Flows for the Years Ended
             December 31, 2000, 1999, 1998.

             Consolidated Statements of Stockholders' Equity for the Years
             Ended December 31, 2000, 1999, and 1998.

             Notes to Consolidated Financial Statements.

          2. Financial Statement Schedules:

             Schedule II -- Valuation and Qualifying Accounts for the years
             ended December 31, 2000, 1999, and 1998.

          3. Exhibits:

<TABLE>
            <S>           <C>
             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).
             3.1(c)       Second Certificate of Amendment of First Restated
                          Certificate of Incorporation.
             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).
</TABLE>

                                        51
<PAGE>   54
<TABLE>
            <S>           <C>
             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
                          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).
             3.2(c)       Amendment to Amended and Restated By-Laws of Applied
                          Graphics Technologies, Inc. (Incorporated by reference to
                          Exhibit No. 3.2(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, 2000).
             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 November 30, 2000,
                          between the Company and Joseph D. Vecchiolla.
            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)(i)    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(c)(ii)   Agreement and General Release, dated December 15, 2000,
                          between the Company and Derek Ashley.
            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).
</TABLE>

                                        52
<PAGE>   55

<TABLE>
<S>            <C>
10.6(d)(iii)   Separation Agreement, effective December 18, 2000, between the Company and Scott
               Brownstein.
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
               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 No. 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).
</TABLE>

                                        53
<PAGE>   56
<TABLE>
            <S>           <C>
            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.
</TABLE>

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

     (b) The Registrant filed the following reports on Form 8-K during the
quarter ended December 31, 2000.

     Current report on Form 8-K filed on December 6, 2000, regarding the
resignation of Derek Ashley as Vice Chairman, Chief Executive Officer, and Chief
Operating Officer of the Company.

     Current report on Form 8-K filed on December 7, 2000, regarding the
completion of a two-for-five reverse stock split of the Company's common stock.

                                        54
<PAGE>   57

                                   SIGNATURES

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

                                          APPLIED GRAPHICS TECHNOLOGIES, INC.
                                          (Registrant)

                                          By: /s/     FRED DRASNER
                                            ------------------------------------
                                                        Fred Drasner
                                                   Chairman and Director
                                                 (Duly authorized officer)

Date: March 19, 2001

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 19, 2001.

<TABLE>
<CAPTION>
                     SIGNATURE                                             TITLE
                     ---------                                             -----
<C>                                                  <S>
                 /s/ FRED DRASNER                    Chairman and Director
---------------------------------------------------    (Principal Executive Officer)
                   Fred Drasner

             /s/ JOSEPH D. VECCHIOLLA                Chief Operating Officer, Chief Financial Officer,
---------------------------------------------------    and Director (Principal Financial and
               Joseph D. Vecchiolla                    Accounting Officer)

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

             /s/ MARNE OBERNAUER, JR.                Vice Chairman and Director
---------------------------------------------------
               Marne Obernauer, Jr.

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

                /s/ JOHN W. DREYER                   Director
---------------------------------------------------
                  John W. Dreyer

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

                /s/ DAVID R. PARKER                  Director
---------------------------------------------------
                  David R. Parker

                /s/ HOWARD STRINGER                  Director
---------------------------------------------------
                  Howard Stringer
</TABLE>

                                        55
<PAGE>   58

<TABLE>
<CAPTION>
                     SIGNATURE                                             TITLE
                     ---------                                             -----

<C>                                                  <S>
                /s/ JOHN R. WALTER                   Director
---------------------------------------------------
                  John R. Walter

                 /s/ JOHN ZUCCOTTI                   Director
---------------------------------------------------
                   John Zuccotti
</TABLE>

                                        56
<PAGE>   59

                      APPLIED GRAPHICS TECHNOLOGIES, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
             FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                               ADDITIONS
                                                        ------------------------
                                           BALANCE AT   CHARGED TO     CHARGED                     BALANCE AT
                                           BEGINNING    COSTS AND     TO OTHER                       END OF
               DESCRIPTION                 OF 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, 2000
Allowance for doubtful accounts and
  returns................................    $7,732       $3,929       $   --         $ 6,561        $5,100
                                             ======       ======       ======         =======        ======
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
                                             ======       ======       ======         =======        ======
</TABLE>

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

(2) In 2000 and 1998 represents amounts written off. In 1999 represents $2,506
    for amounts written off and $4,143 for adjustments to goodwill relating to
    acquisitions.

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