<PAGE>   1

================================================================================
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                  FORM 10-KSB
(MARK ONE)
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
      OF 1934
          FOR THE TRANSITION PERIOD FROM                TO
                           COMMISSION FILE NUMBER 0-27934

                           KATZ DIGITAL TECHNOLOGIES, INC.
                   (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      13-3871120
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)


            TWENTY-ONE PENN PLAZA                                  10001
              NEW YORK, NEW YORK                                 (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

ISSUER'S TELEPHONE NUMBER: (212) 594-4800

<TABLE>
<CAPTION>
                                    TITLE OF CLASS  EXCHANGE ON WHICH REGISTERED
                                    --------------  ----------------------------
<S>                                 <C>             <C>
SECURITIES REGISTERED PURSUANT TO   COMMON STOCK,    NASDAQ NATIONAL MARKET
SECTION 12(G) OF THE EXCHANGE ACT:  $.001 PAR
                                    VALUE
</TABLE>

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

     Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.  [ ]

     Issuer's revenues for its most recent fiscal year: $19,839,689

     The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of March 24, 1998: $10,999,724

     The number of shares outstanding of the Issuer's Common Stock is 4,948,649
(as of 3/24/98).

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Part III, incorporated by reference into the Company's Proxy Statement for
the Company's 1998 Annual Meeting of Shareholders, filed with the Commission on
March 27, 1998.

     Transitional Small Business Disclosure Format:  Yes:  [ ]     No:  [X]
================================================================================
<PAGE>   2

                        KATZ DIGITAL TECHNOLOGIES, INC.
                     INDEX TO ANNUAL REPORT ON FORM 10-KSB
               FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                              ITEMS IN FORM 10-KSB

<TABLE>
<CAPTION>
FACING PAGE                              PAGE
-----------                              ----
<S>          <C>                                                           <C>
PART I
  Item  1.   Description of Business.....................................     1
  Item  2.   Description of Properties...................................     5
  Item  3.   Legal Proceedings...........................................  None
  Item  4.   Submission of Matters to a Vote of Security Holders.........  None

PART II
  Item  5.   Market for Common Equity and Related Stockholder Matters....     6
  Item  6.   Management's Discussion and Analysis of Financial Condition
               and Results of Operations.................................     7
  Item  7.   Financial Statements........................................    10
  Item  8.   Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure..................................  None

PART III
  Item  9.   Directors, Executive Officers, Promoters and Control
               Persons; Compliance with Section 16(a) of the Exchange
               Act.......................................................    10
  Item 10.   Executive Compensation......................................    10
  Item 11.   Security Ownership of Certain Beneficial Owners and
               Management................................................    10
  Item 12.   Certain Relationships and Related Transactions..............    10
  Item 13.   Exhibits and Reports on Form 8-K............................    11
Signatures...
</TABLE>

                                        i
<PAGE>   3

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

INTRODUCTION

     Katz Digital Technologies, Inc. (the "Company") provides a broad range of
digital prepress and digital short-run printing services to produce full-color
and black and white printed materials. The Company was organized in 1987 as a
typography brokerage business and, in February 1991, discontinued substantially
all of its typography brokerage operations and commenced offering digital
prepress services. The Company commenced offering digital short-run printing
services in February 1994 with its Cactus printing system and expanded such
capabilities by adding Indigo and Heidelberg printing capabilities in February
1995 and February 1996, respectively. In August 1996, the Company acquired The
Sarabande Press, Inc., a company located in lower Manhattan of New York City,
providing services similar to those provided by the Company but to a different
customer base. In July 1997, the Company acquired Advanced Digital Services,
Inc., a New York City prepress company specializing in high-end retouching.

INDUSTRY OVERVIEW

     Prepress services involve the transfer of an image into high resolution
masters. During the process, images and colors can be changed to achieve the
desired end result. Once the process is completed, the work is ready for volume
printing. Prior to the use of computers in the design of printed materials,
prepress services were labor-intensive mechanical processes. Digital prepress
services provide the ability to produce high-quality pre-production materials,
such as Iris and Fiery prints, film and paper proofs, full-color film
separations, match prints and plate-ready film, and allow customers to modify or
alter an image prior to approval of the design, in less time and at reduced
costs due to the elimination of labor-intensive mechanical processes.

     Printing services traditionally consist of a variety of methods, such as
offset and web printing, which require the production of film for the creation
of printing plates. To produce printed materials using these methods, the
printing plates are installed on the printing press to enable ink to be
transferred to paper. Because of the need to produce film to create printing
plates and the amount of labor required, these methods are generally not cost
efficient for short-run printing. Digital printing enables the reproduction of
an image stored on a computer disk by a number of different digital printing
systems, including Indigo, Cactus and Heidelberg, without the need to create
plate-ready film or traditional printing plates. Instead, such image is either
transferred directly from the Company's computer network to special printing
plates included in the Indigo and Heidelberg short-run printing systems or
delivered directly to a plotter which, in turn, transfers the image to paper in
the Cactus printing process. As a result, digital printing provides a
cost-efficient means to print materials on demand and/or in limited quantities
as required. In addition, by eliminating the need for film in the process,
digital printing allows for faster turnaround times and "on-demand" printing.

     The digital prepress and digital printing industry, which began in the
early 1990s as a result of the widespread use of computers, is a new and
emerging industry. The market for these services is growing rapidly and is
expected to continue to grow rapidly in the near future. The Company expects
(based on publicly available reports and articles) that annual revenues from
digital short-run printing services, will increase from a currently estimated $7
billion, to an estimated $20 billion, by the year 2001, an annual growth rate of
27%. See "Forward Looking Information."

SERVICES

  Prepress Services

     The Company's prepress services involve the creation of a digital image,
either by downloading a file from a computer disk provided by the customer onto
the Company's computer network or by scanning printed material provided by the
customer directly onto such network. The Company then provides the reproduction
of the digital image by any of several printing processes. The Company's
prepress services afford the Company's customers the ability to modify and
enhance an image throughout the design approval process,

                                        1
<PAGE>   4

with shorter turnaround times and at lower costs than traditional (non-digital)
prepress processes. Once the design is approved by the customer, the Company can
reproduce the image in various formats, including:

     - Iris Prints.  Iris prints are produced by a continuous-tone ink-jet Iris
      digital printing system which continuously applies ink to paper, rather
      than printing by noticeable dot patterns, resulting in higher quality
      prints. The Company offers Iris printing services on its standard size
      Iris printer, which produces printed materials in dimensions up to 11" x
      17" on special Iris paper, available in gloss, semi-gloss and matte
      finishes. The Company also offers Iris printing services on its over-sized
      Iris printer, which produces printed materials in dimensions up to 33" x
      46" on almost any flexible stock medium, including paper, acetate, vinyl
      and silk materials. The standard size Iris printer is typically used to
      produce proofs for color and design positioning, mock-ups, annual report
      proofs and presentation materials in quantities between one and 150
      copies. The over-sized Iris printer is typically used to produce posters
      and exhibit and display items in quantities between one and 50 copies. The
      Company's normal turnaround time for standard and oversize Iris prints is
      approximately five hours and 24 hours, respectively.

     - Fiery Prints.  The Company produces less expensive plain paper prints in
       dimensions up to 11" x 17" on a Canon(R) color copier utilizing a
       toner-based Fiery Raster Image Processor. Fiery prints are superior in
       quality to standard color copies because they are printed directly from a
       digital file. Fiery prints are generally used for design proofs,
       presentation books, packaging labels and other pre-production materials
       in varying quantities (typically between 25 and 150 copies), where cost
       is more important than color and detail quality. The Company's normal
       turnaround time for Fiery prints is approximately five hours.

     - Imagesetter Film and Paper Output.  The Company uses high-quality
       imagesetters to produce black and white film and paper proofs in
       dimensions up to 35" x 44". These proofs are typically used by customers
       to review print advertisements, newspaper circulars and camera ready
       artwork prior to final approval for printing. The Company's normal
       turnaround time for these services is approximately five hours.

     - Film Separations and Match Prints.  Imagesetters are used to digitally
       transfer images to any number of separate film pages, each representing a
       different color in dimensions up to 35" x 44". The full-color film
       separations are used to create printing plates for use in traditional
       printing processes. In addition, the film separations can be used to
       create match prints, whereby each piece of color film is transferred to
       paper, resulting in a full-color proof for review by the customer. The
       Company has the capability to digitally enhance, retouch and alter images
       to customer specifications prior to the production of film. The Company's
       normal turnaround time for these services ranges from approximately four
       to 24 hours, depending on the quantity produced.

     - Slides.  The Company produces full-color slides, by digitally
       transferring an image to a slide recorder. Slides are typically used by
       customers as presentation materials. The Company's normal turnaround time
       for producing slides ranges from approximately four to 24 hours,
       depending on the service requested.

     - Transfers.  The creation of transfers is a traditional prepress process
       which involves the transfer of a negative from one surface to another
       surface. This service is typically provided to customers who desire to
       view a design on a different surface, such as a glass bottle, prior to
       printing. This service can also be utilized to create overlays to enhance
       transparencies used during presentations. The Company's normal turnaround
       time for such services is approximately five hours.

     - Digital C Prints.  In 1997, the Company began offering Digital C Prints,
       which are large format prints using a photographic process as contrasted
       with toner-based products. The prints are available in sizes up to 49" x
       49" and can be produced as backlit, or print matte or gloss, on
       photographic paper. The Company's normal turnaround time for this service
       is approximately 24 hours.

                                        2
<PAGE>   5

  Digital Printing Services

     The Company offers "on demand," digital short-run printing services
utilizing state-of-the-art equipment, enabling the Company to print materials
without the need to produce the film required to create printing plates used in
traditional printing processes. The Company utilizes the following digital
printing systems:

     -  Indigo E-Print 1000 Digital Press ("Indigo").  The Indigo printing
        system is an ink-on-paper printing system which provides an affordable
        means to print full-color materials in quantities from one to 1,500
        copies. Printing such limited quantities of most materials by
        traditional printing processes is usually cost prohibitive. The Indigo
        printing system can print materials in dimensions up to 11" x 17". The
        Indigo printing system is typically used to produce sell sheets, compact
        disk covers, cassette inserts, newsletters, fliers, brochures,
        pamphlets, holiday cards and invitations. The Company's normal
        turnaround time for Indigo printing services ranges from approximately
        twelve to 48 hours, depending upon the number of copies being produced.

     -  Cactus 52" Plotter ("Cactus").  The Cactus printing system is a large
        format printer which produces full-color materials in dimensions up to
        52" in width and up to any length requested by the customer. The Cactus
        printing system is typically used to produce posters, billboards and
        other large format exhibits, such as bus station advertisements,
        intended to be viewed from a distance. The Cactus printing system is a
        cost-effective means to produce such materials in quantities as few as
        one and up to 150 copies. The normal turnaround time for Cactus printing
        services is approximately 24 hours.

     -  Heidelberg GTO-DI Perfector ("Heidelberg").  The Heidelberg printing
        press is a five-color, high-quality printing press which produces
        lithographic-quality printed materials. The Heidelberg printing press
        prints materials using five colors on a wide variety of paper stock. The
        Heidelberg printing press can be used to print materials such as
        full-color research reports, post-cards and in-store promotional
        displays in dimensions up to 14" x 20", in quantities up to 15,000
        copies. The normal turnaround time for such services ranges from
        approximately 48 to 72 hours, depending upon the number of copies being
        produced.

     -  Finishing.  The Company offers a variety of finishing services, such as
        laminating, mounting, collating, trimming, stitching, folding and
        binding, to customer specifications.

  Katz On-Line

     The Company offers a service known as Katz On-Line, through which customers
communicate with the Company via computer modem. Customers are able to place
orders with the Company directly over Katz On-Line by completing order forms
electronically and downloading their files onto the Company's computer network.
Katz On-Line can also be used by customers to make inquiries about their
projects and send files to the Company to complete or add to a file previously
sent (either by Katz On-Line or otherwise). During 1996, the Company
significantly enhanced this service through the installation of ISDN
transmission lines, which increases the speed of transmission between the
Company and the customer, as well as the addition of internet capabilities. The
Company believes that Katz On-Line customers who utilize this service shorten
the turnaround time for completion of their projects. During 1997, Katz On-Line
was enhanced to provide internet access to customers and a Wide-Area Network
("WAN") for intercompany communications.

  Digital Photography

     In the second quarter of 1997, the Company commenced operations of its
newly constructed digital photography studio. The studio consists of
approximately 7,500 square feet of space and provides facilities for digital
photographic shoots of various types of products. Digital photography, similar
to traditional forms of photography, generally involves the shooting of still
shots of inanimate objects or live models. Unlike traditional photography, the
resulting images are captured and stored on a computer rather than on film and
can be more readily manipulated to meet customer requirements. The Company
expects that digital

                                        3
<PAGE>   6

photography services will attract new customers, as well as complement the
digital printing services provided to existing customers. See "Forward Looking
Information."

SALES AND MARKETING

     The Company's sales efforts are conducted primarily through the efforts of
its 28 sales representatives. Each sales representative maintains a list of
current customers and is expected to solicit potential customers. The Company's
sales representatives are paid a percentage of net sales and, in certain cases,
receive a base salary.

     The Company uses various marketing methods, including direct mailings,
in-person solicitations, print advertising, telemarketing and participation in
trade shows. The Company also periodically mails sales brochures and newsletters
and advertises in trade journals. In addition, the Company has sponsored events
in the reception area gallery of its corporate offices at which the Company's
and its customers' print work are exhibited.

     The Company generally has not competed for projects through the process of
competitive bidding. The Company believes, however, that, as a result of the
recent increase in its digital printing services, the Company may seek to obtain
projects through the competitive bidding process. There can be no assurance that
the Company will be successful in having its bids accepted for such services,
or, if accepted, that awarded projects will generate sufficient revenues to
result in profitable operations.

COMPETITION

     The commercial printing industry is highly fragmented and intensely
competitive. The Company faces competition from several large, financially
strong companies which offer a variety of (i) digital prepress services,
including Iris and Fiery prints and film separations and outputs, all of which
directly compete with the Company's prepress services, and traditional
(non-digital) prepress services which indirectly compete with the Company's
services; (ii) printing services including digital short-run printing, such as
Indigo, and large format printing, such as Cactus, both of which directly
compete with the Company's printing services, and (iii) long-run traditional
printing services, which the Company does not provide. The Company also faces
competition from smaller printing companies which provide only certain of these
services. Competition is largely based on price, quality, speed and servicing
the specialized needs of customers.

     The commercial printing industry, particularly the digital prepress and
printing segment of the industry, is characterized by rapidly evolving
production technology. The Company has invested significant funds in its
equipment, made commitments to finance its leased equipment and expended
substantial time and resources to train its personnel in the operation of its
existing equipment and integrate the operations of its production facility. In
the event of substantial improvements in digital prepress and printing
technologies and equipment, the Company may be required to acquire such new
technologies and equipment, at significant cost, and/or abandon all or a portion
of its existing equipment.

SUPPLY

     The Company is dependent on a limited number of third-party suppliers for
most of the ink, film and paper used in its operations. The Company believes
that alternative sources of supply are available for most of such supplies. The
Company is, however, dependent on Indigo America, Inc., the only supplier of the
ink used in connection with the Indigo printing system. The Company also
purchases specially treated paper used for Indigo printing and for standard Iris
prints, from single source suppliers; however, alternative sources of supply are
available for such paper supplies. The Company is dependent on the ability of
its suppliers, among other things, to provide adequate inventories of such
materials within scheduled delivery times. The Company does not maintain
contracts with any of its suppliers and purchases supplies pursuant to purchase
orders placed from time to time in the ordinary course of business. Failure by a
supplier to continue to supply the Company with such material on commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, would adversely affect the Company's ability to deliver products and
provide services in a timely

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manner and on a competitive cost basis. To date, the Company has not experienced
any material delays or disruptions in its operations as a result of the failure
by any of its suppliers to provide necessary materials.

CUSTOMERS

     Substantially all of the Company's sales have been made to customers in the
New York City area. The Company's customers include advertising and graphic arts
agencies, publishers, investment banking firms, professional service firms and
commercial banks, as well as businesses in a variety of industries requiring
specialized printing services.

     Many of the Company's relationships with its customers are long-standing.
The Company, however, does not generally have any long-term written commitments
from its customers; rather, sales are made for individual projects pursuant to
purchase orders placed from time to time in the ordinary course of business.
Continued engagements by customers for successive jobs are primarily dependent
upon the quality of customer service previously provided. No single customer
accounted for greater than 4% of the Company's net sales in the year ended
December 31, 1997.

INTELLECTUAL PROPERTY

     Presently, the Company has not registered any patents or trademarks.
However, the Company has submitted an application to register a trademark for
the service mark "KATZ IT!"(TM) which the Company uses in connection with its
marketing for digital prepress and printing services.

GOVERNMENT AND ENVIRONMENTAL REGULATION AND COST OF COMPLIANCE

     The Company's operations, although not heavily regulated, are subject to
limited Federal, state and local laws, regulations and ordinances governing the
handling and disposal of hazardous substances and relating to employee safety
and health. The Company contracts the services of a third party to remove any
hazardous substances generated in its operations. The Company believes, based
upon its internal control procedures and disposal methods, that it is in
compliance in all material respects with all of such laws, regulations and
ordinances and that no permits or licenses are required for the operation of the
Company's business as presently conducted. To date, the cost of compliance with
such laws, regulations and ordinances has not been material. In the event the
Company expands its operations, it may be subject to additional environmental
laws, regulations or ordinances, including requirements to obtain certain
environmental permits. The Company cannot predict the environmental legislation
or regulations that may be enacted in the future or how existing or future laws
or regulations will be administered or interpreted. Developments such as
additional requirements imposed by more stringent laws or regulations, as well
as more vigorous enforcement policies of regulatory agencies or stricter
interpretation of existing laws, may require additional expenditures by the
Company, some or all of which may be material.

EMPLOYEES

     As of March 10 1998, the Company employed 397 persons, including 5
executive officers, of whom 9 were part-time employees and 388 were full-time
employees. The Company believes that its relations with its employees are
satisfactory. None of the Company's employees are represented by a union.

ITEM 2.  DESCRIPTION OF PROPERTY

     During 1997, the Company leased the following spaces: (i) approximately
24,000 square feet of space at Twenty-One Penn Plaza, New York, New York, used
for the Company's principal executive offices and production facilities,
expiring on June 30, 2008, with a monthly base rent of $27,700, increasing to
$36,900 per month on July 1, 1998, and further increasing to $40,900 per month
on April 1, 2002 for the remainder of the term of the lease; (ii) approximately
8,000 square feet of space also at Twenty-One Penn Plaza, used for the Company's
digital photography studio, expiring on June 30, 2008, with a monthly base rent
of $11,700 until March 31, 2002 and $12,900 for the remainder of the term of the
lease; and (iii) approximately 660 square feet of space at 5300 West Atlantic
Avenue, Delray Beach, Florida, used for sales office, at a monthly rent of

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$1,100. The lease for such Florida space expired on February 28, 1998. As of
March 24, 1998, the Company was occupying such space without a written lease
agreement in effect, and is in the process of negotiating the terms of a written
lease agreement for such space. The Company believes that its current facilities
are satisfactory for its present needs.

ITEM 3.  LEGAL PROCEEDINGS

     None.

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

     None.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  Market Information.

     Since March 1996, the Company's Common Stock has traded on the NASDAQ
National Market System under the symbol "KATC." The following table sets forth
the high and low sales prices of the Common Stock as reported by NASDAQ for each
full quarterly period since such date.

<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              ----      ---
<S>                                                           <C>       <C>
Fiscal Year Ended December 31, 1996
  First Quarter (March 26 to March 31)......................   $6 1/4   $5 1/16
  Second Quarter............................................    8 1/8    5 1/4
  Third Quarter.............................................    5 3/4    3 3/4
  Fourth Quarter............................................    4 1/8    2 3/4
Fiscal Year Ended December 31, 1997
  First Quarter.............................................   $4       $2
  Second Quarter............................................    3 5/8    2
  Third Quarter.............................................    5 1/2    2 3/8
  Fourth Quarter............................................    5 1/8    3 3/8
</TABLE>

  Security Holders.

     To the best knowledge of the Company, at March 24, 1998, there were 42
record holders of the Company's Common Stock. The Company believes there are
numerous beneficial owners of the Company's Common Stock whose shares are held
in "street name." To the best knowledge of the Company, the number of beneficial
owners as of March 24, 1998 was 716.

  Dividends.

     Except for S corporation distributions made to the Company's stockholders
prior to March 25, 1996 (the effective date of the initial public offering of
the Company's Common Stock), the Company has not paid, and has no current plans
to pay, dividends on its Common Stock. The Company currently intends to retain
all earnings for use in its business.

  Sales of Unregistered Securities.

     In 1997, the Company granted options under its Amended and Restated 1996
Stock Option Plan to 42 persons (39 employees and 3 non-employee directors) to
purchase an aggregate of 347,500 shares of the Company's Common Stock at
exercise prices ranging from $2.63 to $5.19 per share.

                                        6
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ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following table sets forth for the periods indicated, the percentage of
net sales represented by certain items reflected in the Company's statement of
operations. The statements of operations contained in the Company's financial
statements and the following table also includes pro forma adjustments for
income taxes for 1996 and 1995.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1997     1996     1995
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Net Sales...................................................  100.0%   100.0%   100.0%
Cost of goods sold..........................................   46.2     44.9     38.5
Gross profit................................................   53.8     55.1     61.5
Selling, general and administrative expenses................   46.0     47.8     42.5
Net earnings (loss).........................................    4.4     (1.3)    16.1
Pro forma net earnings......................................    4.4      2.2      9.2
</TABLE>

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     Net sales for the year ended December 31, 1997 were $19,839,689, an
increase of $4,273,770 or 27.5%, as compared to $15,565,919 for the year ended
December 31, 1996. The increase in net sales was primarily attributable to
increased volume of services to existing customers, growth of the customer sales
base from new products and the inclusion of sales from Advanced Digital
Services, Inc. ("ADS") which was acquired on July 31, 1997 and The Sarabande
Press ("Sarabande"), which was acquired on August 1, 1996.

     Cost of goods sold for the year ended December 31, 1997 was $9,159,226, an
increase of $2,170,727, or 31.1%, as compared to $6,988,499 for the year ended
December 31, 1996. The increase in cost of goods sold was primarily attributable
to (i) increased production wages and supplies related to the greater volume
including sales from the acquisitions of ADS and Sarabande and (ii) the
increased proportion of digital short-run printing services which have a greater
cost of sales than the Company's prepress services.

     Gross profit for the year ended December 31, 1997 was $10,680,463, an
increase of $2,103,043, or 24.5%, compared to $8,577,420 for the year ended
December 31, 1996. Gross profit as a percent of net sales decreased to 53.8% for
the year ended December 31, 1997 from 55.1% for the year ended December 31,
1996. The decreased gross profit rate in 1997 compared to 1996 reflects the
increased proportion of digital short-run printing services which have a lower
gross profit margin than the Company's prepress services.

     Selling, general and administrative expenses for the year ended December
31, 1997 were $9,116,431, an increase of $1,681,616, or 22.6%, as compared to
$7,434,815 for the year ended December 31, 1996. The increase was primarily
attributable to (i) increased selling costs associated with the increased level
of sales, (ii) increased administrative salaries and related payroll taxes,
(iii) increased rent and (iv) increased goodwill amortization.

     Net interest expense for the year ended December 31, 1997 was $111,738, an
increase of $44,317 or 65.7% compared to $67,421 for the year ended December 31,
1996. The increase was due to a combination of less interest income earned on
the unused proceeds from the Company's initial public offering as those funds
were used in the business and increased interest expense from additional
borrowings for production equipment in the form of capital leases. In 1997, the
settlement gain of $154,450 from the termination of the Company's defined
benefit pension plan, resulted from the final distribution of plan assets to
beneficiaries.

     The provision for taxes in 1997 reflect an effective rate of 46.0% compared
to an effective rate of 53.4% on a pro forma basis in 1996. The lower rate in
1997 results from the greater level of earnings before tax and additional state
tax credits in 1997. Actual income taxes in 1996 amounted to $940,131 and
included a non-recurring charge of $660,000 due to the termination of the
Company's Subchapter S status.

     As a result of the foregoing, net earnings (loss) increased to $867,983 for
the year ended December 31, 1997 from a loss of $197,176 for the year ended
December 31, 1996, an increase of $1,065,159. Net earnings after giving effect
to a pro forma adjustment for income tax provisions in 1996 would have been
$346,563.

                                        7
<PAGE>   10

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Net sales for the year ended December 31, 1996 were $15,565,919, an
increase of $4,922,181 or 46.2%, as compared to $10,643,738 for the year ended
December 31, 1995. The increase in net sales was primarily attributable to
increased digital short-run printing, sales from the acquisition of The
Sarabande Press, Inc. and an industry trend towards digital printing services
compared to more conventional printing. Digital printing growth was augmented in
February 1996 when the Company acquired its Heidelberg digital printing press.
Net sales also increased as a result of increased sales efforts and the addition
of new sales representatives. The increase in net sales is generally
attributable to increases in the amount of services provided, rather than
increases in the prices charged for its services, since the prices charged for
such services did not increase during the year.

     Cost of goods sold for the year ended December 31, 1996 was $6,988,499, an
increase of $2,891,637, or 70.6%, as compared to $4,096,862 for the year ended
December 31, 1995. The increase in cost of goods sold was primarily attributable
to increased production personnel and startup costs for the Company's new
Heidelberg printing press, which generally has greater costs of sales as
compared to other services provided by the Company, and increased production
personnel in other digital short-run printing services. Other contributing
factors included additional costs associated with the Company's fulfillment of
increased orders for the Company's services, severe weather conditions which
hampered production efforts during the Company's move to its current facility in
January 1996 and the inclusion of the operations of The Sarabande Press, Inc.
which was acquired in August 1996.

     Gross profit for the year ended December 31, 1996 was $8,577,420, an
increase of $2,030,544, or 31.0%, compared to $6,546,876 for the year ended
December 31, 1995. Gross profit as a percent of net sales decreased to 55.1% for
the year ended December 31, 1996 from 61.5% for the year ended December 31,
1995. The lower gross profit percentage in 1996 was attributable to certain
one-time costs associated with the Company's continued expansion into digital
short-run printing in addition to the impact of an increased proportion of sales
of this lower margin service (compared to digital prepress services).

     Selling, general and administrative expenses for the year ended December
31, 1996 were $7,434,815, an increase of $2,906,564, or 64.2%, as compared to
$4,528,251 for the year ended December 31, 1995. The increase was primarily
attributable to increased costs associated with the Company's move to a larger
facility and additional management personnel reflecting increased levels of
business including the acquisition of The Sarabande Press, Inc.

     Net interest expense for the year ended December 31, 1996 was $67,421, a
decrease of $37,958, or 36.0%, as compared to $105,379 for the year ended
December 31, 1995. The decrease was due to interest income derived from the
investment of unused proceeds from the Company's initial public offering, offset
by interest costs associated with additional equipment leases. In 1996, the
curtailment loss of $322,179 resulted from the Company's decision to terminate
its defined benefit pension plan.

     Included in the 1996 provision for income taxes is a non-recurring charge
of $660,000 for additional Federal and state income taxes resulting from the
termination of the Company's S Corporation tax status.

     As a result of the foregoing, net earnings (loss) decreased to a $197,176
loss for the year ended December 31, 1996 from earnings of $1,708,743 for the
year ended December 31, 1995, a decrease of $1,905,919. Net earnings, after
giving effect to a pro forma adjustment for income tax provisions, would have
been $346,563 and $976,341 for the years ended December 31, 1996 and 1995,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1997, the Company had working capital of $4,109,920,
compared to working capital of $4,498,058 at December 31, 1996. Substantially
all of the working capital decrease was attributable to decreased cash and cash
equivalents including the unused portion of amounts raised through the Company's
initial public offering in 1996 offset by an accounts receivable increase.

                                        8
<PAGE>   11

     Net cash provided by operating activities was $590,515 for the year ended
December 31, 1997 and resulted primarily from the net earnings for the year. Net
cash used in investing activities totaled $1,288,249 and resulted from
investment in property and equipment and the acquisition of ADS. Net cash used
in financing activities amounted to $1,078,511 including payments to
stockholders and payments made under capital lease obligations. Cash and cash
equivalent balances decreased by $1,776,245 in 1997 to a total of $1,651,930 at
December 31, 1997.

     The Company maintained a $3,000,000 line of credit with a commercial bank.
At December 31, 1997, there were no outstanding borrowings under the line. On
January 9, 1998, in conjunction with an acquisition as described below, the
Company replaced the line of credit with a secured revolving credit facility
note. The Company believes that the current cash balances, current borrowing
capacity and cash generated from operations during the year will provide
sufficient cash to meet its operating requirements for the next twelve months.
See "Forward Looking Information".

     On January 9, 1998 as amended on March 6, 1998, a wholly-owned subsidiary
of the Company acquired substantially all of the assets of Speed Graphics, Inc.
(Speed) and DDP, Inc. an affiliate of Speed. Speed is based in New York City and
provides commercial photo lab, prepress, photo imaging and digital short-run
printing services.

     As aggregate consideration for the acquisition, Speed received cash in the
amount of $10,964,000 and 173,913 shares of the Company's common stock valued at
$750,000.

     Concurrently with the acquisition, the Company entered into a loan
agreement with a commercial bank whereby the bank agreed to loan the Company (i)
$6,000,000 in the form of a secured term loan note and (ii) up to $7,000,000 in
the form of secured revolving credit loans. The term loan note is payable in
sixteen (16) quarterly installments and bears interest at either the bank's
Alternate Base Rate or the adjusted LIBOR rate plus the Applicable Margin, at
the Company's option. The revolving credit loans, which are available at the
lesser of $7,000,000 or the Adjusted Borrowing Base, are payable on December 31,
2002 and each revolving credit loan may be designated by the Company as an
Alternate Base Rate Loan or a Eurodollar loan. The Company used a portion of the
available financing to fund the cash portion of the acquisition consideration.
The loan agreement contains certain restrictive covenants including minimum
tangible net worth, fixed charge coverage and funded debt ratio.

     On July 31, 1997 the Company completed its acquisition by merger of
Advanced Digital Services, Inc. ("ADS"). The purchase price, after adjustments
as provided in the acquisition agreement, of $1,406,284 was composed of $500,000
in cash, $70,611 in 7% five year notes and 301,818 restricted shares of the
Company's common stock. The final purchase price is subject to adjustment based
on revenues generated by the ADS operations during the twelve month period
following the merger. In addition, concurrent with the merger, the former
shareholders of ADS each entered into five year employment agreements, as well
as agreements imposing certain non-competition and confidentiality restrictions.

OTHER MATTERS

     The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company has upgraded its management
information systems to ensure proper processing of transactions including those
relating to the Year 2000 and beyond. Although the Company believes that the
information systems of its major customers and vendors (insofar as they relate
to the Company's business) comply with Year 2000 requirements, there can be no
assurance that the Year 2000 issue will not affect the information system of
such customers and vendors as they relate to the Company's business, or that any
such impact on such customers' and vendors' information systems would not have a
material adverse effect on the Company's business, financial condition or
results of operations.

EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for the

                                        9
<PAGE>   12

Company's fiscal year ending December 31, 1998. The statement addresses the
reporting and displaying of comprehensive income and its components. Earnings
per share will only be reported for net income and not for comprehensive income.
Adoption of SFAS No. 130 is not expected to have a material effect on the
Company's financial statement disclosures.

     In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for the
Company's fiscal year ending December 31, 1998. The statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 is not expected
to have a material effect on the Company's financial statement disclosures.

ITEM 7.  FINANCIAL STATEMENTS

     Reference is made to the Financial Statements referred to in the
accompanying Index, setting forth the consolidated financial statements of the
Company, together with the report of Grant Thornton, LLP, dated February 20,
1998 (except for Note O, as to which the date is March 6, 1998).

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

     The information required under this Item was included in the Company's 1998
Proxy Statement under the headings "Election of Directors," "Executive
Officers," "The Committees," "Attendance at Meetings" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," was filed with the
Securities and Exchange Commission and mailed to shareholders of the Company on
or about March 27, 1998, and is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

     The information required under this Item was included in the Company's 1998
Proxy Statement under the heading "Executive Compensation," was filed with the
Securities and Exchange Commission and mailed to shareholders of the Company on
or about March 27, 1998, and is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required under this Item was included in the Company's 1998
Proxy Statement under the heading "Securing Ownership of Certain Beneficial
Owners and Management," was filed with the Securities and Exchange Commission
and mailed to shareholders of the Company on or about March 27, 1998, and is
incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required under this Item was included in the Company's 1998
Proxy Statement under the heading "Certain Relationships and Related
Transactions," was filed with the Securities and Exchange Commission and mailed
to shareholders of the Company on or about March 27, 1998, and is incorporated
herein by reference.

                                       10
<PAGE>   13

                          FORWARD LOOKING INFORMATION

     This Annual Report on Form 10-KSB contains certain forward-looking
statements and information relating to the Company that are based on the beliefs
of Management, as well as assumptions made by and information currently
available to the Company. When used in this document, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions, as they relate to
the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including those described in this Annual Report on Form 10-KSB. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  3.1     Certificate of Incorporation of the Company(1)
  3.2     By-Laws of the Company(1)
 10.1     Amended and Restated 1996 Stock Option Plan(2)
 10.2     Employment Agreement by and between the Company and Gary
          Katz(1)
 10.3*    Employment Agreement by and between the Company and Lisa J.
          Sklar
 10.4*    Employment Agreement by and between the Company and Michael
          Sklar
 10.5     Employment Agreement by and between the Company and Geoffrey
          Barsky(1)
 10.6.1   Lease of the Company's offices at Twenty-One Penn Plaza, New
          York, New York(1)
 10.6.2*  Amendment to Exhibit 10.6.1.
  21*     Subsidiaries of the Company
   27     Financial Data Schedule(3)
</TABLE>

---------------
 *  Filed herewith.

(1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
    dated March 25, 1996 (File No. 333-1190), and the amendments thereto, and
    incorporated herein by reference.

(2) Filed as an Exhibit to the Company's 1997 Proxy Statement, filed with the
    Commission on Form 14A on March 26, 1997, and incorporated herein by
    reference.

(3) Filed as an Exhibit to the Company's Current Report on Form 8-K/A, filed
    with the Commission on March 24, 1998.

     (b) Reports on Form 8-K

     On October 14, 1997, the Company filed a Current Report on Form 8-K/A,
providing the requisite financial information in connection with the July 31,
1997 merger of Advanced Digital Services, Inc. ("ADSI") with and into Katz
Digital Acquisition, Inc., a wholly-owned subsidiary of the Company ("KDAI"),
pursuant to a Plan and Agreement of Merger by and among the Company, ADSI, the
former shareholders of ADSI and KDAI. The Company filed no other Current Reports
on Form 8-K during the fourth quarter of the fiscal year ended December 31,
1997.

                                       11
<PAGE>   14

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                          KATZ DIGITAL TECHNOLOGIES, INC.

                                          By:         /s/ GARY KATZ

                                            ------------------------------------
                                                         Gary Katz
                                                      Chairman and CEO

Dated: March 31, 1998

     In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Issuer and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                     DATE
                     ---------                                     -----                     ----
<C>                                                  <S>                                <C>

                   /s/ GARY KATZ                     Chairman and Chief Executive       March 31, 1998
---------------------------------------------------    Officer (Principal Executive
                     Gary Katz                         Officer)

                /s/ DONALD L. FLAMM                  Vice President -- Finance and      March 31, 1998
---------------------------------------------------    Chief Financial Officer
                  Donald L. Flamm                      (Principal Financial and
                                                       Accounting Officer)

               /s/ MICHAEL D. SKLAR                  Vice President -- Business         March 31, 1998
---------------------------------------------------    Development and Director
                 Michael D. Sklar

                /s/ MURRAY L. SKALA                  Director                           March 31, 1998
---------------------------------------------------
                  Murray L. Skala

              /s/ RONALD B. GRUDBERG                 Director                           March 31, 1998
---------------------------------------------------
                Ronald B. Grudberg

               /s/ BURTT R. EHRLICH                  Director                           March 31, 1998
---------------------------------------------------
                 Burtt R. Ehrlich
</TABLE>

                                       12
<PAGE>   15

                        KATZ DIGITAL TECHNOLOGIES, INC.

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of
Katz Digital Technologies, Inc.

     We have audited the accompanying consolidated balance sheets of Katz
Digital Technologies, Inc. at December 31, 1997 and 1996 and the consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Katz Digital
Technologies, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

                                                /s/ GRANT THORNTON LLP

New York, New York
February 20, 1998
(except for Note O as to which the date is March 6, 1998)

                                       13
<PAGE>   16

                        KATZ DIGITAL TECHNOLOGIES, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 1997           1996
                                                              -----------    -----------
<S>                                                           <C>            <C>
                                         ASSETS
  Cash and cash equivalents.................................  $ 1,651,930    $ 3,428,175
  Accounts receivable, net of allowance for doubtful
     accounts of $140,238 and $94,738 at December 31, 1997
     and 1996, respectively.................................    4,723,183      3,216,386
  Work-in-process inventory.................................      100,483         69,328
  Prepaid expenses and other current assets.................      106,651        163,514
  Prepaid income taxes......................................      185,554             --
                                                              -----------    -----------
          Total current assets..............................    6,767,801      6,877,403
  Property and Equipment -- Net (Note D)....................    3,893,006      3,568,853
  Other Assets..............................................      288,508         80,333
  Goodwill -- Net (Notes B and I)...........................    2,627,485      1,140,819
                                                              -----------    -----------
                                                              $13,576,800    $11,667,408
                                                              ===========    ===========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
  Accounts payable and accrued expenses.....................  $ 1,732,277    $ 1,160,254
  Current portion of obligations under capital leases (Note
     E).....................................................      739,603        699,029
  Income taxes payable......................................           --         66,151
  Deferred taxes payable (Note F)...........................      186,000        114,000
  Due to stockholders (Note H)..............................           --        339,912
                                                              -----------    -----------
          Total current liabilities.........................    2,657,880      2,379,346
  Deferred credits (Note E).................................      410,774        265,520
  Deferred taxes payable....................................       85,000        265,000
  Pension liability.........................................                     191,258
  Notes payable.............................................      300,000             --
  Obligations under capital leases, net of current portion
     (Note E)...............................................    1,351,568      1,490,323
                                                              -----------    -----------
          Total liabilities.................................    4,805,222      4,591,447
                                                              -----------    -----------
COMMITMENTS AND CONTINGENCIES (NOTE E)

STOCKHOLDERS' EQUITY (NOTES A, H, I AND K)
  Preferred stock, $.001 par value; 5,000 shares authorized;
     no shares issued.......................................           --             --
  Common stock, $.001 par value; 25,000,000 shares
     authorized; 4,705,202 and 4,425,000 shares issued and
     outstanding at December 31, 1997 and 1996,
     respectively...........................................        4,705          4,425
  Additional paid-in capital................................    7,687,621      6,860,267
  Retained earnings.........................................    1,079,252        211,269
                                                              -----------    -----------
          Total stockholders' equity........................    8,771,578      7,075,961
                                                              -----------    -----------
                                                              $13,576,800    $11,667,408
                                                              ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.
                                       14
<PAGE>   17

                        KATZ DIGITAL TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1997           1996           1995
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net sales...........................................  $19,839,689    $15,565,919    $10,643,738
Cost of goods sold..................................    9,159,226      6,988,499      4,096,862
                                                      -----------    -----------    -----------
     Gross profit...................................   10,680,463      8,577,420      6,546,876
Operating expenses
     Selling, general and administrative............    9,116,431      7,434,815      4,528,251
                                                      -----------    -----------    -----------
Operating income....................................    1,564,032      1,142,605      2,018,625
Settlement (gain), curtailment loss (Note G)........     (154,450)       332,179
Interest expense, net...............................      111,738         67,421        105,379
                                                      -----------    -----------    -----------
     Earnings before provision for income taxes.....    1,606,744        743,005      1,913,246
Provision for income taxes (Notes B and F)
  Current...........................................    1,049,519        771,181        202,503
  Deferred..........................................     (310,758)       169,000          2,000
                                                      -----------    -----------    -----------
                                                          738,761        940,181        204,503
                                                      -----------    -----------    -----------
     Net earnings (loss)............................  $   867,983    $  (197,176)   $ 1,708,743
                                                      ===========    ===========    ===========
Pro forma data (Note J)
  Historical income before income taxes.............                 $   743,005    $ 1,913,246
  Provision for income taxes........................                     396,442        936,905
                                                      -----------    -----------    -----------
  Net earnings......................................                 $   346,563    $   976,341
                                                      ===========    ===========    ===========
Basic Earnings Per Share............................                 $       .08    $       .33
                                                      ===========    ===========    ===========
Diluted Earnings Per Share..........................                 $       .08    $       .33
                                                      ===========    ===========    ===========
Historical
  Basic Earnings (Loss) Per Share...................  $       .19    $      (.05)   $       .57
                                                      ===========    ===========    ===========
  Diluted Earnings (Loss) Per Share.................  $       .19    $      (.05)   $       .57
                                                      ===========    ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.
                                       15
<PAGE>   18

                        KATZ DIGITAL TECHNOLOGIES, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                      COMMON STOCK                       MINIMUM     ADDITIONAL       TOTAL
                                  ---------------------    RETAINED      PENSION      PAID IN     STOCKHOLDERS'
                                   SHARES     PAR VALUE    EARNINGS     ADJUSTMENT    CAPITAL        EQUITY
                                  ---------   ---------   -----------   ----------   ----------   -------------
<S>                               <C>         <C>         <C>           <C>          <C>          <C>
BALANCE AT DECEMBER 31, 1994....  2,800,000    $2,800     $ 2,139,220    $(94,136)                 $ 2,047,884
Net earnings....................         --        --       1,708,743          --                    1,708,743
Distributions to stockholders...         --        --      (1,353,173)         --                   (1,353,173)
Minimum pension liability
  adjustment (Note G)...........         --        --              --      94,136                       94,136
                                  ---------    ------     -----------    --------    ----------    -----------
BALANCE AT DECEMBER 31, 1995....  2,800,000     2,800       2,494,790          --                    2,497,590
                                  ---------    ------     -----------    --------    ----------    -----------
Net loss........................         --        --        (197,176)         --                     (197,176)
Distributions to stockholders...         --        --      (1,586,345)         --                   (1,586,345)
Net proceeds from public
  offering......................  1,625,000     1,625                                $6,360,267      6,361,892
Transfer of S Corp. retained
  earnings to additional paid-in
  capital.......................         --        --        (500,000)         --       500,000             --
                                  ---------    ------     -----------    --------    ----------    -----------
BALANCE AT DECEMBER 31, 1996....  4,425,000     4,425         211,269          --     6,860,267      7,075,961
                                  ---------    ------     -----------    --------    ----------    -----------
Net earnings....................                              867,983                                  867,983
Stock issued for acquisitions...    220,106       220                                   627,415        627,635
Stock issued on partial
  conversion of note payable....     60,096        60                                   199,939        199,999
                                  ---------    ------     -----------    --------    ----------    -----------
BALANCE AT DECEMBER 31, 1997....  4,705,202    $4,705     $ 1,079,252          --    $7,687,621    $ 8,771,578
                                  =========    ======     ===========    ========    ==========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.
                                       16
<PAGE>   19

                        KATZ DIGITAL TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1997           1996           1995
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net earnings (loss)...............................  $   867,983    $  (197,176)   $ 1,708,743
  Adjustments to reconcile net earnings (loss) to
     net cash provided by operating activities
     Depreciation and amortization..................    1,384,606      1,085,718        554,051
     Deferred credits...............................      145,254        265,520
     Interest payable to stockholders...............                      49,034
     Settlement (gain), curtailment loss............     (154,450)       332,179
     Deferred taxes.................................     (310,758)       169,000          2,000
     Increase (decrease) in cash flows from changes
       in operating assets and liabilities, net of
       acquisitions in 1997 and 1996
       Accounts receivable..........................   (1,083,728)    (1,236,384)      (138,274)
       Work-in-process inventory....................      (31,155)       (62,038)        (1,754)
       Prepaid expenses and other current assets....       78,954        (16,481)       (44,028)
       Other assets.................................     (208,175)        10,579        (61,566)
       Accounts payable and accrued expenses........      285,696        642,624        156,060
       Income taxes.................................     (346,904)         6,986        (14,941)
       Net pension liability........................      (36,808)       (32,257)       (78,969)
                                                      -----------    -----------    -----------
     Net cash provided by operating activities......      590,515      1,017,304      2,081,322
                                                      -----------    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment-net............     (759,026)    (1,057,787)      (394,290)
  Purchase (release from escrow) of Certificate of
     Deposit........................................                     233,600       (233,600)
  Cash paid for acquisitions........................     (529,223)    (1,297,948)
                                                      -----------    -----------    -----------
     Net cash used in investing activities..........   (1,288,249)    (2,122,135)      (627,890)
                                                      -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Distributions to stockholders.....................     (339,912)    (1,295,467)    (1,353,173)
  Payments of obligations under capital leases......     (738,599)      (734,148)      (356,172)
  Net proceeds from public offering.................           --      6,361,892             --
                                                      -----------    -----------    -----------
     Net cash (used in) provided by financing
       activities...................................   (1,078,511)     4,332,277     (1,709,345)
                                                      -----------    -----------    -----------
     Net Increase (Decrease) in Cash and Cash
       Equivalents..................................   (1,776,245)     3,227,446       (255,913)
Cash and cash equivalents -- beginning of period....    3,428,175        200,729        456,642
                                                      -----------    -----------    -----------
Cash and cash equivalents -- end of period..........  $ 1,651,930    $ 3,428,175    $   200,729
                                                      ===========    ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the year for Interest............  $   248,841    $   196,567    $   115,394
     Income taxes...................................  $ 1,303,820    $   762,899    $   217,444
                                                      ===========    ===========    ===========
</TABLE>

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

     Capital lease obligations of $858,875, $1,848,931, and $792,986 were
incurred in December 31, 1997, 1996 and 1995, respectively, when the Company
entered into new leases for equipment.

     During the year ended December 31, 1997, $500,000 of convertible promissory
notes were issued in connection with the 1996 acquisition of Sarabande of which
$199,939 was converted into 60,096 shares of common stock.

        The accompanying notes are an integral part of these statements.
                                       17
<PAGE>   20

                        KATZ DIGITAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- DESCRIPTION OF BUSINESS

     Katz Digital Technologies, Inc. (the "Company") was formed in December 1995
and is incorporated in the state of Delaware as a result of a merger between
Katz Graphics Corporation, which was formed in August 1991, and Katz Digital
Technologies, Inc., which was formed in November 1986, and which were both New
York corporations. The merger was accounted for in a manner similar to a pooling
of interests, and, accordingly, the accompanying financial statements include
the accounts of Katz Graphics Corporation and Katz Digital Technologies for all
periods presented. Assets and liabilities were recorded at net book value.

     The Company operates in a single business segment and provides a broad
range of digital prepress and digital short-run printing services to produce
full-color and black and white printed materials to a wide variety of market
segments, principally in the New York City area.

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.  REVENUE RECOGNITION

     Revenue is recognized upon the shipment of finished merchandise to
customers.

2.  INCOME TAXES

     Prior to the consummation of a public offering on March 26, 1996, the
Company filed its Federal and state income tax returns under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, no provision had been
made in the accompanying financial statements for Federal and certain state
income taxes for the S Corporation periods, since the income of the Company was
taxable directly to its stockholders. The Company was, however, liable for
certain state and local taxes, which are reflected in the accompanying financial
statements. Upon closing of the public offering, the Company's income tax status
as an S Corporation terminated. The Company converted to a C Corporation,
adopting the accrual basis of accounting, and is subject to both Federal and
state income taxes. Deferred income taxes are recognized because of differences
between financial and tax reporting.

3.  PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost. Depreciation of the fixed
assets is computed principally by the straight-line method for financial
reporting purposes over 5-7-year periods. Capital leases are recorded at the
lower of fair market value or the present value of future minimum lease
payments. These leases are amortized on the straight-line method over 3-7 years.

4.  WORK-IN-PROCESS INVENTORY

     Inventories are stated at the lower of cost (first-in, first-out) or
market.

5.  CONCENTRATIONS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, and trade accounts
receivable. The Company places its cash and cash equivalents with high credit
quality institutions. In general, such investments exceed the FDIC insurance
limit. The Company provides credit, in the normal course of business, to a
significant number of advertising firms in New York City. The Company routinely
assesses the financial strength of its customers and, as a consequence, believes
that its trade accounts receivable exposure is limited. The carrying value of
financial instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable and accounts
payable) approximate fair market value.

                                       18
<PAGE>   21
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     The Company is dependent upon a limited amount of third parties for certain
supplies and equipment used in its operations. Although the Company believes
that alternatives are available for most of the supplies, one product is
available from a sole source. The Company's inability to obtain these supplies
could have a severe impact in the near term.

6.  USE OF ESTIMATES

     In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could affect those estimates.

7.  GOODWILL

     Goodwill represents the excess of purchase price over net assets of
businesses acquired and is being amortized by the straight-line method over its
estimated useful lives ranging from 5 to 20 years. At December 31, 1997, and
1996, accumulated amortization amounted to $91,361 and $67,859, respectively.

     The Company considers goodwill impairment by applying a number of factors
as of each balance sheet date including (i) current operating results of the
applicable business, (ii) projected future operating results of the applicable
business, (iii) the occurrence of any significant regulatory changes which may
have an impact on the continuity of the business, and (iv) any other material
factors that affect the continuity of the applicable business. The amortization
period for goodwill is determined on a case-by-case basis for each acquisition
from which goodwill arises based on a review of the nature of the business
acquired as well as the factors cited above.

8.  CASH EQUIVALENTS

     The Company considers all highly liquid securities, including certificates
of deposit, with an original maturity of three months or less to be cash
equivalents.

9.  EARNINGS PER SHARE

     The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
public companies to present basic earnings per share and, if applicable, diluted
earnings per share. In accordance with SFAS No. 128, all comparative periods
have been restated as of December 31, 1997. Basic EPS is based on the weighted
average number of common shares outstanding without consideration of potential
common stock. Diluted earnings per share is based on the weighted average number
of common and potential common shares outstanding.

10.  PRINCIPLES OF CONSOLIDATION

     The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions have
been eliminated.

11.  RECLASSIFICATIONS

     Certain amounts have been reclassified to conform to the 1997 presentation.

NOTE C -- LINE OF CREDIT

     The Company entered into an agreement with a bank providing for a
$3,000,000 line of credit. Borrowings under the line of credit bear interest at
the prime rate (8.5% on December 31, 1997), are

                                       19
<PAGE>   22
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

collateralized by trade receivables of the Company and becomes due on June 30,
1998. The line of credit contains certain covenants including minimum net worth
and tangible net worth requirements and was terminated in January 1998 in
connection with a new loan agreement (see Note 0). There was no balance
outstanding at December 31, 1997.

NOTE D -- PROPERTY AND EQUIPMENT

     Property and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1997           1996
                                                            -----------    -----------
<S>                                                         <C>            <C>
Furniture and fixtures....................................  $   206,594    $   137,765
Equipment.................................................    6,195,395      4,956,455
Leasehold improvements....................................      576,366        493,932
                                                            -----------    -----------
                                                              6,978,355      5,588,152
                                                            -----------    -----------
Less: accumulated depreciation and amortization...........   (3,085,349)    (2,019,299)
                                                            -----------    -----------
                                                            $ 3,893,006    $ 3,568,853
                                                            ===========    ===========
</TABLE>

NOTE E -- LEASE COMMITMENTS

1.  CAPITAL LEASE AGREEMENTS

     The Company has entered into various capital lease agreements for computers
and other equipment, carried at $4,115,661 and $3,549,408 at 1997 and 1996,
respectively. The leases expire at various times through 2001. Accumulated
amortization amounted to $2,094,394 and $1,438,406 at 1997 and 1996,
respectively. The related future minimum lease payments, as of December 31,
1997, are as follows:

<TABLE>
<CAPTION>
                                                              LEASE PAYMENTS
                                                              --------------
<S>                                                           <C>
Fiscal year
  1998......................................................    $  897,778
  1999......................................................       791,190
  2000......................................................       565,363
  2001......................................................       101,405
                                                                ----------
Net minimum lease payments..................................     2,355,736
Amount representing interest................................       264,565
                                                                ----------
Obligations under capital lease agreements..................    $2,091,171
                                                                ==========
Current portion.............................................       739,603
Long-term portion...........................................     1,351,568
                                                                ----------
                                                                $2,091,171
                                                                ==========
</TABLE>

2.  OPERATING LEASE COMMITMENTS

     The Company leases office space and various equipment under operating lease
arrangements which run through 2008. The rent expense under these operating
leases for the years ended December 31, 1997, 1996 and

                                       20
<PAGE>   23
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

1995 was $1,027,000, $765,000 and $296,000, respectively. The future minimum
rentals for operating leases are as follows:

<TABLE>
<CAPTION>
                YEAR ENDING DECEMBER 31,                     AMOUNT
                ------------------------                   ----------
<S>                                                        <C>
1998.....................................................  $  984,508
1999.....................................................     854,832
2000.....................................................     770,261
2001.....................................................     692,789
2002.....................................................     581,366
Thereafter...............................................   3,149,900
                                                           ----------
                                                           $7,033,656
                                                           ==========
</TABLE>

     On September 27, 1995, the Company entered into a lease for office space
which expires in June 2008. In order to secure the lease, the Company entered
into a letter of credit agreement for $467,200. Rent expense under this lease is
accounted for on the straight-line basis. At December 31, 1997 and 1996 deferred
rent totaled approximately $411,000 and $266,000, respectively.

NOTE F -- INCOME TAXES

     Prior to the consummation of a public offering, the Company filed its
Federal and state income tax returns under the provisions of Subchapter S of the
Internal Revenue Code utilizing the cash basis of accounting. Accordingly, no
provision was recorded in the accompanying financial statements for Federal and
certain state income taxes for the S Corporation periods, since the income of
the Company was taxable directly to its stockholders. On March 26, 1996, the
Company converted to a C Corporation, adopted the accrual basis of accounting
and became subject to both Federal and state income taxes. Accordingly, $660,000
of additional Federal and state income taxes, applicable to temporary
differences in the recognition of income and expenses for financial accounting
and income tax reporting purposes existing at March 26, 1996, have been recorded
and charged to operations in connection with the breaking of the S Corporation
election. Such charge is solely due to the termination of the Subchapter S
status and is nonrecurring.

     The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

     Deferred income taxes arise principally from differences between the
accrual method of accounting used for financial reporting and the cash method of
accounting used for income tax purposes through March 26, 1996 and differences
in amounts deducted for pension expense for income tax purposes and amounts
deducted for financial reporting purposes (Note J). The effect of the change to
the accrual method of accounting for income tax purposes will be included in
taxable income ratably over a four year-period.

                                       21
<PAGE>   24
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     Components of the Company's deferred tax liability are as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ----------------------
                                                         1997         1996
                                                       ---------    ---------
<S>                                                    <C>          <C>
Difference between accrual and cash basis of
  accounting.........................................  $ 551,000    $ 611,000
Accrued pension curtailment (loss)...................                 (78,000)
Tax over financial statement depreciation............     52,000      (13,000)
Deferred rent........................................   (189,000)    (125,000)
Goodwill amortization................................    (47,000)      (4,000)
Capital leases.......................................    (31,000)
Allowance for doubtful accounts......................    (65,000)     (12,000)
                                                       ---------    ---------
                                                       $ 271,000    $ 379,000
                                                       ---------    ---------
Short-term...........................................  $ 186,000    $ 114,000
Long-term............................................     85,000      265,000
                                                       ---------    ---------
                                                       $ 271,000    $ 379,000
                                                       =========    =========
</TABLE>

     The provision for income taxes in 1997 consists of the following:

<TABLE>
<S>                                                           <C>
Current
  Federal...................................................  $  649,653
  State.....................................................     399,866
                                                              ----------
                                                              $1,049,519
Deferred (benefit)..........................................    (310,758)
                                                              ----------
                                                              $  738,761
                                                              ==========
</TABLE>

     The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the 1997 financial statements:

<TABLE>
<CAPTION>
                                                                      PERCENT
                                                          AMOUNT     OF INCOME
                                                         --------    ---------
<S>                                                      <C>         <C>
Provision for Federal income taxes at the statutory
  rate.................................................  $546,293     34.0%
State and local income taxes, net of Federal income tax
  benefit..............................................   178,412      11.1
State ITC credits......................................   (24,750)     (1.5)
Permanent differences..................................    38,806       2.4
                                                         --------      ----
                                                         $738,761     46.0%
                                                         ========      ====
</TABLE>

NOTE G -- PENSION PLAN

     On December 30, 1993, the Company adopted a qualified defined benefit plan
(the "Plan") which replaced a weighted profit-sharing plan. The Plan covered all
employees with at least one year of service who are at least 21 years of age.
Pension plan benefits are based on participants' compensation. The annual
contribution was based on the minimum amounts as determined under the Employee
Retirement Income Security Act of 1974 ("ERISA"). The pension expense for the
years ended December 31, 1995, 1996 and 1997 was $249,000, $155,000 and $69,000,
respectively. The Plan's assets were invested in guaranteed investment contracts
and life insurance policies.

     On February 20, 1997, the Board of Directors adopted a resolution to
terminate the Company's defined benefit plan as of March 20, 1997. Under the
provisions of SFAS No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the
Company

                                       22
<PAGE>   25
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

recognized a $332,179 ($.04 per share after tax) net curtailment loss in 1996
and a $154,450 settlement gain in 1997 ($.02 per share after tax).

     Net pension cost for the Company-sponsored pension plan prior to the
curtailment consists of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           -------------------
                                                             1996       1995
                                                           --------   --------
<S>                                                        <C>        <C>
Normal service cost......................................  $151,799   $194,088
Interest cost............................................    37,083     50,312
Actual return on plan assets.............................   (35,270)    17,954
Net amortization and deferral............................     1,000    (12,868)
                                                           --------   --------
Net pension cost.........................................  $154,612   $249,486
                                                           ========   ========
</TABLE>

     The reconciliation of the funded status of the plan to the amount reported
in the Company's balance sheet is as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1996        1995
                                                              ---------   ---------
<S>                                                           <C>         <C>
Actuarial present value of benefit obligations
  Estimated present value of vested benefits................  $ 429,661   $ 285,499
  Estimated present value of nonvested benefits.............    106,295      87,254
                                                              ---------   ---------
     Accumulated benefit obligation.........................    535,956     372,753
  Value of future pay increases.............................    140,833     150,285
                                                              ---------   ---------
     Projected benefit obligation...........................    676,789     523,038
Estimated market value of plan assets.......................    719,476     497,455
                                                              ---------   ---------
     Excess (deficiency) of plan assets over projected
      benefit obligation....................................     42,687     (25,583)
Prior service costs.........................................    438,389     457,449
Unrecognized net gain.......................................   (340,155)   (323,202)
                                                              ---------   ---------
     Pension asset before curtailment loss..................  $ 140,921   $ 108,664
                                                              =========   =========
Curtailment loss............................................   (332,179)
                                                              ---------
Pension liability...........................................  $(191,258)
                                                              =========
</TABLE>

     The assumptions used as of December 31, 1996 and 1995 in determining
pension expense and funded status shown above were as follows:

<TABLE>
<S>                                                           <C>
Discount rate...............................................   7.09%
Rate of salary progression..................................   3.00
Long-term rate of return on assets..........................   7.09
</TABLE>

NOTE H -- STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

     On March 26, 1996, the Company consummated an initial public offering of
1,600,000 shares of its common stock at a price of $5.00 per share. The net
proceeds to the Company from the offering were $6,361,892. In connection with
the public offering, the Company declared to its principal stockholders an S
Corporation dividend of retained earnings in excess of $500,000. To the extent
that the Company did not have sufficient cash to pay such distribution, it
issued promissory notes payable in an aggregate monthly

                                       23
<PAGE>   26
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

amount of $100,000, which payments commenced in April and were payable through
March 25, 1997 with interest at 9% per annum.

     In connection with the December 1995 merger as described in Note A, the
Board of Directors declared a 14,000-to-1 stock split of the Company's common
stock, resulting in outstanding shares of 2,800,000. An amount equal to $2,800
was transferred from retained earnings to the common stock account retroactively
reflect the split.

     The Certificate of Incorporation authorizes the Board of Directors to issue
preferred stock, from time to time, in one or more series, with such voting
powers, designations, preferences, and relative, participating, optional,
conversion or other special rights, and such qualifications, limitations and
restrictions, as the Board of Directors may, in its sole discretion, determine.

NOTE I -- ACQUISITIONS

THE SARABANDE PRESS, INC.

     On August 1, 1996, the Company completed the acquisition of certain of the
assets of The Sarabande Press, Inc. ("Sarabande"), a digital pre-press firm
located in New York City. The purchase price for the acquired assets was subject
to adjustment based on the performance of Sarabande. At closing, the Company
paid Sarabande one million dollars in cash.

     The $900,000 balance of the purchase price, which was subject to adjustment
based on the gross revenue of Sarabande in the twelve (12) months following the
acquisition, was accounted for as contingent purchase price for financial
accounting purposes and consisted of: (i) a five hundred thousand dollar
($500,000) promissory note with interest at the prime rate, payable to
Sarabande, and convertible at Sarabande's option into shares of the Company's
common stock (the "Note"), and (ii) 78,745 shares of the Company's common stock
(the "Shares"). The 1996 financial statements reflect the $1,000,000 in cash
paid at the closing and the 1997 financial statements reflect an additional
$767,000 of contingent purchase price which was recorded in the 1997 financial
statements when the contingency was resolved.

     The acquisition of Sarabande has been treated as a "purchase" for the
purposes of generally accepted accounting principles, with the purchase price
plus acquisition expenses allocated based on the fair value of the assets
acquired and liabilities assumed. Approximately $1,734,000 has been allocated to
goodwill. The results of Sarabande have been included from its date of
acquisition.

ADVANCED DIGITAL SERVICES, INC.

     On July 31, 1997, The Company completed its acquisition of Advanced Digital
Services, Inc. (ADS), a digital prepress company located in New York City. The
purchase price of $1,585,673 was composed of $500,000 in cash, $250,000 in 7%
five year notes and 301,818 restricted shares of the Company's stock held in
escrow at December 31, 1997. The final purchase price is subject to adjustment
based on defined net worth, based on an audit of ADS's financial statements, the
collectability of certain accounts receivable and revenues generated by the ADS
operations during the twelve month period following the merger. The 1997
financial statements reflect a purchase price of $891,399 and the remaining
purchase price will be recorded when the contingency is resolved. In addition,
concurrent with the merger, the former shareholders of ADS each entered into
five year employment agreements, as well as agreements imposing certain
non-competition and confidentiality restrictions.

     The acquisition of ADS has been accounted for as a "purchase" for the
purposes of generally accepted accounting principles, with the purchase price
allocated based on the fair value of the assets acquired and liabilities
assumed. Approximately $648,000 was allocated to goodwill. The results of ADS
have been included from its date of acquisition.

                                       24
<PAGE>   27
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

PRO FORMA INFORMATION

     The unaudited pro forma results of operations, which reflect the purchase
of ADS and Sarabande into the Company as if the combination occurred as of the
beginning of each period, are as follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                       1997           1996
                                                    -----------    -----------
<S>                                                 <C>            <C>
Net sales.........................................  $21,340,028    $19,181,131
Net earnings......................................  $   821,167    $   389,779
Pro forma net earnings(1).........................  $   821,167    $   780,265
Pro forma net earnings per share -- basic(1)......  $       .18    $       .19
Pro forma net earnings per share -- diluted(1)....  $       .17    $       .19
                                                    ===========    ===========
</TABLE>

---------------
(1) Also adjusted in 1996 to reflect additional income taxes, which the Company
    was not subject to because of its status as an S corporation.

     The pro forma information should be read in conjunction with the related
historical information.

NOTE J -- PRO FORMA INFORMATION

1.  PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)

     The pro forma adjustment in the 1996 and 1995 Statements of Operations
reflect a provision for income taxes based upon pro forma pretax earnings as if
the Company had been subject to Federal and additional state and local income
taxes which it was not subject to until March 26, 1996.

     The pro forma provision for income taxes in 1996 and 1995 after giving
effect to the Federal statutory rate of 34% and an approximate state and local
tax provision of 14% after reflecting the Federal tax benefit, consists of the
following:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                 ------------------------
                                                    1996          1995
                                                 ----------    ----------
<S>                                              <C>           <C>
Federal........................................   $225,505      $553,482
State and local................................    170,937       383,423
                                                  --------      --------
                                                  $396,442      $936,905
                                                  ========      ========
</TABLE>

     The differences between pro forma income tax expense in 1996 and 1995 shown
in the Statements of Operations and the pro forma computed income tax expense
based on the Federal statutory corporate tax rate are as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                         ------------------------
                                                            1996          1995
                                                         ----------    ----------
<S>                                                      <C>           <C>
Computed income taxes based on Federal statutory
  corporate rate of 34%................................   $252,622      $650,504
State and local income taxes, net of Federal benefit...    112,819       253,059
Permanent differences..................................     31,001        33,342
                                                          --------      --------
                                                          $396,442      $936,905
                                                          ========      ========
</TABLE>

2.  PRO FORMA EARNINGS PER SHARE

     Pro forma earnings per share are based on the weighted average number of
common shares outstanding during the period. The shares outstanding for the
period give retroactive effect to the merger and

                                       25
<PAGE>   28
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

recapitalization of the Company as well as shares deemed to be outstanding,
which represent the approximate number of shares deemed to be sold by the
Company (at an assumed initial public offering price of $5.00 per share) to fund
the portion of the shareholder distribution in excess of 1995 undrawn earnings
and shares contingently issuable in connection with the Sarabande acquisition.
Stock options have not been included in the calculation as their inclusion would
be antidilutive.

NOTE K -- STOCK OPTIONS AND STOCK PURCHASE WARRANTS

     In February 1996, the Board of Directors and stockholders approved the
adoption of a stock option plan (the "Plan"). The Plan, as amended on March 25,
1997, provides for the grant of options to purchase up to 650,000 shares of the
Company's common stock. These options may be granted to employees, officers of
the Company, nonemployee directors of the Company and consultants to the
Company. The Plan provides for granting of options to purchase the Company's
common stock at not less than the fair value of such shares on the date of the
grant.

     The Plan provides for a one-time automatic grant of an option to purchase
20,000 shares of common stock at the market value of the common stock on the
date of the grant to those directors serving on the Board of Directors on the
date that the Plan was adopted and also to those persons who become nonemployee
directors of the Company in the future, upon their appointment or election as
directors of the Company. The Plan also provides for quarterly grants to each
nonemployee director of the Company of options to purchase 5,000 shares at the
market value of the common stock of the Company on the date of each grant.

     The Company granted options to purchase an aggregate of 241,000 shares of
common stock under the Plan as of the effective date of its public offering at
$5.00 per share, the initial public offering price.

     The following table summarizes option activity for the years ended December
31, 1997 and 1996, respectively:

<TABLE>
<CAPTION>
                                                                       WEIGHTED
                                                        NUMBER         AVERAGE
                                                       OF SHARES    EXERCISE PRICE
                                                       ---------    --------------
<S>                                                    <C>          <C>
BALANCE, DECEMBER 31, 1995...........................        --            --
Granted..............................................   308,500         $4.99
Exercised............................................        --            --
Forfeited............................................   (40,000)        $4.69
                                                        -------         -----
BALANCE AT DECEMBER 31, 1996.........................   268,500         $5.04
Granted..............................................   347,500         $3.87
Exercised............................................        --            --
Forfeited............................................   (56,000)        $2.99
                                                        -------         -----
BALANCE AT DECEMBER 31, 1997.........................   560,000         $4.52
                                                        =======         =====
</TABLE>

     The following table summarizes option data as of December 31, 1997:

<TABLE>
<CAPTION>
                                     NUMBER            WEIGHTED       WEIGHTED       NUMBER
                                 OUTSTANDING AS        AVERAGE        AVERAGE    EXERCISABLE AS       WEIGHTED
RANGE OF                         OF DECEMBER 31,      REMAINING       EXERCISE   OF DECEMBER 31,      AVERAGE
EXERCISE PRICES                       1997         CONTRACTUAL LIFE    PRICE          1997         EXERCISE PRICE
---------------                  ---------------   ----------------   --------   ---------------   --------------
<S>                              <C>               <C>                <C>        <C>               <C>
$2.63 to $5.75.................      560,000             4.9           $4.52         173,176           $5.00
</TABLE>

     The Company applies APB Opinion No. 25 in measuring stock compensation.
Accordingly, no compensation cost has been recorded for options granted to
employees or directors in the years ended

                                       26
<PAGE>   29
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

December 31, 1997 and 1996. The fair value of each option granted has been
estimated on the grant date using the Black-Scholes Option Valuation Model. The
following assumptions were made in estimating fair value:

<TABLE>
<CAPTION>
                                                             1997       1996
                                                            -------    -------
<S>                                                         <C>        <C>
Dividend yield............................................       0%         0%
Risk-free interest rate...................................    6.22%      6.03%
Expected life
  Directors and officers..................................  5 years    5 years
  Others..................................................  4 years    4 years
Expected volatility.......................................      40%        57%
</TABLE>

     Had compensation cost been determined under SFAS No. 123 for the years
ended December 31, 1997 and 1996, net income and earnings per share would have
been reduced as follows:

<TABLE>
<CAPTION>
                                                           1997        1996
                                                         --------    --------
<S>                                                      <C>         <C>
Net earnings
  As reported..........................................  $867,983    $346,563
  Pro forma for stock options..........................   613,685     153,497
Pro forma earnings per share
  As reported (basic and diluted)......................  $    .19    $    .08
  Pro forma for stock options
     (basic and diluted)...............................  $    .13    $    .04
</TABLE>

     During the initial phase-in period of SFAS No. 123, such compensation
expense may not be representative of the future effects of applying this
statement.

NOTE L -- EMPLOYMENT AGREEMENTS

     The Company has entered into employment agreements with certain officers
and employees.

     Amounts due under such employment agreements are as follows:

<TABLE>
<S>                                                        <C>
1998...................................................    $1,727,408
1999...................................................     1,689,273
2000...................................................       890,471
2001...................................................       944,239
2002...................................................       736,995
                                                           ----------
                                                           $5,988,386
                                                           ==========
</TABLE>

NOTE M -- INTEREST EXPENSE, NET

     Interest expense, net is composed of the following:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                             --------------------------------
                                               1997        1996        1995
                                             --------    --------    --------
<S>                                          <C>         <C>         <C>
Interest expense...........................  $250,967    $245,601    $115,394
Interest income............................  (139,229)   (178,180)    (10,015)
                                             --------    --------    --------
                                             $111,738    $ 67,421    $105,379
                                             ========    ========    ========
</TABLE>

                                       27
<PAGE>   30
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE N -- EARNINGS PER SHARE

     The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation.

<TABLE>
<CAPTION>
                                                            FOR THE YEAR ENDED DECEMBER 31,
                                                         --------------------------------------
                                                            1997          1996          1995
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
HISTORICAL
Basic shares...........................................   4,531,819     4,179,907     2,990,644
Dilution
  Convertible notes....................................     140,278
  Stock options........................................      52,289
  Acquisition contingent earnout.......................      17,319
                                                         ----------    ----------    ----------
Diluted shares.........................................   4,741,705     4,179,907     2,990,644
                                                         ==========    ==========    ==========
Basic income (loss) available to common shareholders...  $  867,983    $ (197,176)   $1,708,743
  Interest saved on convertible notes..................      18,952            --            --
                                                         ----------    ----------    ----------
Diluted income available to common shareholders........  $  886,935    $ (197,176)   $1,708,743
                                                         ==========    ==========    ==========
Basic earnings (loss) per share........................  $      .19    $     (.05)   $      .57
                                                         ==========    ==========    ==========
Diluted earnings (loss) per share......................  $      .19    $     (.05)   $      .57
                                                         ==========    ==========    ==========
PRO FORMA
Basic shares...........................................                 4,179,907     2,990,644
Dilution
  Convertible..........................................
  Stock options........................................                     8,082
  Acquisition contingent earnout.......................
                                                                       ----------    ----------
Diluted shares.........................................                 4,187,989     2,990,644
                                                                       ==========    ==========
Basic income available to common shareholders..........                $  346,563    $  976,341
  Interest saved on convertible notes..................                        --            --
                                                                       ----------    ----------
Diluted income available to common shareholders........                $  346,563    $  976,341
                                                                       ==========    ==========
Basic earnings per share...............................                $      .08    $      .33
                                                                       ==========    ==========
Diluted earnings per share.............................                $      .08    $      .33
                                                                       ==========    ==========
</TABLE>

     Options to purchase 429,000 and 268,500 shares of common stock at an
average price of $5.01 and $5.04 per share were outstanding during the years
ended December 31, 1997 and 1996, respectively. They were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares. The options,
which expire at various dates through October 1, 2007 were still outstanding at
December 31, 1997.

NOTE O -- SUBSEQUENT EVENT

     On January 9, 1998, as amended on March 6, 1998, a wholly-owned subsidiary
of the Company acquired substantially all of the assets of Speed Graphics, Inc.
(Speed) and DDP, Inc. an affiliate of Speed. Speed is based in New York City and
provides commercial photo lab, prepress, photo imaging and digital short-run
printing services.

                                       28
<PAGE>   31
                        KATZ DIGITAL TECHNOLOGIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     As aggregate consideration for the acquisition, Speed received cash in the
amount of 10,964,000 and 173,913 shares of the Company's common stock valued at
$750,000.

     Concurrently with the acquisition, the Company entered into a loan
agreement with a commercial bank whereby the bank agreed to loan the Company (i)
$6,000,000 in the form of a secured term loan note and (ii) $7,000,000 in the
form of a secured revolving credit facility note. The term loan note is payable
in sixteen (16) quarterly installments and bears interest at either the bank's
Alternate Base Rate or the adjusted LIBOR rate plus the Application Margin, at
the Company's option. The revolving credit loans, which are available at the
lesser of $7,000,000 or the Adjusted Borrowing Base, are payable on December 31,
2002 and each revolving credit loan may be designated by the Company as an
Alternate Base Rate Loan or a Eurodollar Loan. The Company used a portion of the
available financing to fund the cash portion of the acquisition consideration.
The loan agreement contains certain restrictive covenants including minimum
tangible net worth, fixed charge coverage and funded debt ratio.

NOTE P -- FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for the Company's fiscal year ending
December 31, 1998. The statement addresses the reporting and displaying of
comprehensive income and its components. Earnings per share will only be
reported for net income and not for comprehensive income. Adoption of SFAS No.
130 is not expected to have a material effect on the Company's financial
statement disclosures.

     In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for the
Company's fiscal year ending December 31, 1998. The statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 is not expected
to have a material effect on the Company's financial statement disclosures.

                                       29
<PAGE>   32

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                            DESCRIPTION
  -------                           -----------
  <S>       <C>
   3.1      Certificate of Incorporation of the Company(1)
   3.2      By-Laws of the Company(1)
  10.1      Amended and Restated 1996 Stock Option Plan(2)
  10.2      Employment Agreement by and between the Company and Gary
            Katz(1)
  10.3*     Employment Agreement by and between the Company and Lisa J.
            Sklar
  10.4*     Employment Agreement by and between the Company and Michael
            Sklar
  10.5      Employment Agreement by and between the Company and Geoffrey
            Barsky(1)
  10.6.1    Lease of the Company's offices at Twenty-One Penn Plaza, New
            York, New York(1)
  10.6.2*   Amendment to Exhibit 10.6.1.
  21*       Subsidiaries of the Company
  27        Financial Data Schedule(3)
</TABLE>

---------------
  * Filed herewith.

(1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
    dated March 25, 1996 (File No. 333-1190), and the amendments thereto, and
    incorporated herein by reference.

(2) Filed as an Exhibit to the Company's 1997 Proxy Statement, filed with the
    Commission on Form 14A on March 26, 1997, and incorporated herein by
    reference.

(3) Filed as an Exhibit to the Company's Current Report on Form 8-K/A, filed
    with the Commission on March 24, 1998.

                                       30